Back to GetFilings.com



Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2004

 

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

incorporation or organization)

  

(IRS Employer

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   Ö   No       .

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes   Ö   No       .

 

As of May 6, 2004, 44,726,365 shares of Common Stock of the registrant were issued and outstanding.

 



Table of Contents

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

 

March 31, 2004 FORM 10-Q

 

TABLE OF CONTENTS

 

          Page

     PART I— FINANCIAL INFORMATION     

Item 1.

  

Financial Statements

    
    

    Condensed Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003

   3
    

    Condensed Consolidated Statements of Operations for the three months ended March 31, 2004 and 2003

   4
    

    Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003

   5
    

    Notes to Condensed Consolidated Financial Statements

   6

Item 2.

  

Management’s Discussion and Analysis of Financial Position and Results of Operations

   15

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

   24

Item 4.

  

Controls and Procedures

   25
     PART II—OTHER INFORMATION     

Item 1.

  

Legal Proceedings

   25

Item 6.

  

Exhibits and Reports on Form 8-K

   26
    

Signatures

   27

 

 

2


Table of Contents

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

In thousands, except shares and par value    Unaudited
March 31,
2004


    December 31,
2003


 
Assets                 
Current Assets                 

Cash

   $ 58,065     $ 70,328  

Accounts receivable

     130,094       129,074  

Inventories

     98,085       91,809  

Deferred income taxes

     23,245       23,457  

Other current assets

     12,029       7,424  
    


 


Total current assets

     321,518       322,092  

Property, plant and equipment

     335,005       332,619  

Accumulated depreciation

     (181,819 )     (178,780 )
    


 


Property, plant and equipment, net

     153,186       153,839  

Other Assets

                

Goodwill, net

     109,450       109,450  

Other intangibles, net

     37,202       37,776  

Deferred income taxes

     19,036       20,315  

Other noncurrent assets

     13,645       12,833  
    


 


Total other assets

     179,333       180,374  
    


 


Total Assets

   $ 654,037     $ 656,305  
    


 


Liabilities and Shareholders’ Equity                 

Current Liabilities

                

Accounts payable

   $ 79,591     $ 79,747  

Customer deposits

     17,945       16,818  

Accrued compensation

     17,949       18,131  

Accrued warranty

     13,880       13,307  

Other accrued liabilities

     17,605       24,777  
    


 


Total current liabilities

     146,970       152,780  

Long-term debt

     190,211       190,225  

Reserve for postretirement and pension benefits

     40,313       39,055  

Deferred income taxes

     10,879       11,631  

Other long-term liabilities

     13,707       14,321  
    


 


Total liabilities

     402,080       408,012  

Shareholders’ Equity

                

Preferred stock, 1,000,000 shares authorized, no shares issued

     —         —    

Common stock, $.01 par value; 100,000,000 shares authorized: 66,174,767 shares issued and 44,687,830 and 44,631,733 outstanding at March 31, 2004 and December 31, 2003, respectively.

     662       662  

Additional paid-in capital

     282,866       282,872  

Treasury stock, at cost, 21,486,937 and 21,543,034 shares, at March 31, 2004 and December 31, 2003, respectively

     (266,887 )     (267,586 )

Retained earnings

     256,592       252,234  

Accumulated other comprehensive loss

     (21,276 )     (19,889 )
    


 


Total shareholders’ equity

     251,957       248,293  
    


 


Total Liabilities and Shareholders’ Equity

   $ 654,037     $ 656,305  
    


 


 

The accompanying notes are an integral part of these statements.

 

3


Table of Contents

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Unaudited Three Months
Ended March 31,


 
In thousands, except per share data    2004

    2003

 

Net sales

   $ 188,228     $ 169,523  

Cost of sales

     (140,710 )     (124,247 )
    


 


Gross profit

     47,518       45,276  

Selling, general and administrative expenses

     (26,440 )     (23,874 )

Engineering expenses

     (8,812 )     (8,268 )

Amortization expense

     (783 )     (1,000 )
    


 


Total operating expenses

     (36,035 )     (33,142 )

Income from operations

     11,483       12,134  

Other income and expenses

                

Interest expense

     (3,003 )     (2,579 )

Other expense, net

     (910 )     (789 )
    


 


Income from continuing operations before income taxes

     7,570       8,766  

Income tax expense

     (2,763 )     (3,200 )
    


 


Income from continuing operations

     4,807       5,566  

Discontinued operations, net of tax

                

Income from discontinued operations

     —         117  
    


 


Net income

   $ 4,807     $ 5,683  
    


 


Earnings Per Common Share

                

Basic

                

Income from continuing operations

   $ 0.11     $ 0.13  

Income from discontinued operations

     —         —    
    


 


Net income

   $ 0.11     $ 0.13  
    


 


Diluted

                

Income from continuing operations

   $ 0.11     $ 0.13  

Income from discontinued operations

     —         —    
    


 


Net income

   $ 0.11     $ 0.13  
    


 


Weighted average shares outstanding

                

Basic

     44,661       43,453  

Diluted

     45,336       43,599  
    


 


 

The accompanying notes are an integral part of these statements.

 

4


Table of Contents

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    

Unaudited Three Months

Ended March 31,


 
In thousands    2004

    2003

 

Operating Activities

                

Net income

   $ 4,807     $ 5,683  

Adjustments to reconcile net income to net cash used for operations:

                

Depreciation and amortization

     6,253       5,717  

Discontinued operations

     —         (74 )

Changes in operating assets and liabilities

                

Accounts receivable

     (990 )     (19,889 )

Inventories

     (6,833 )     (1,675 )

Accounts payable

     (28 )     7,898  

Accrued income taxes and income tax receivable

     (956 )     1,116  

Accrued liabilities and customer deposits

     (5,422 )     238  

Other assets and liabilities

     (5,578 )     (119 )
    


 


Net cash used for operating activities

     (8,747 )     (1,105 )

Investing Activities

                

Purchase of property, plant and equipment

     (4,213 )     (2,804 )

Discontinued operations

     —         (62 )
    


 


Net cash used for investing activities

     (4,213 )     (2,866 )

Financing Activities

                

Repayments of loans under credit agreement

     —         (2,700 )

Other repayments

     (10 )     (190 )

Proceeds from the issuance of treasury stock for stock options and other benefit plans

     693       229  

Cash dividends

     (449 )     (435 )
    


 


Net cash provided by/(used for) financing activities

     234       (3,096 )

Effect of changes in currency exchange rates

     463       705  
    


 


Decrease in cash

     (12,263 )     (6,362 )

Cash, beginning of year

     70,328       19,210  
    


 


Cash, end of period

   $ 58,065     $ 12,848  
    


 


 

 

The accompanying notes are an integral part of these statements.

 

5


Table of Contents

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Quarterly Period Ended March 31, 2004 (Unaudited)

 

1. BUSINESS

 

Wabtec is one of the world’s largest providers of value-added, technology-based products and services for the global rail industry. Our products are found on virtually all U.S. locomotives, freight cars and passenger transit vehicles, as well as in certain markets throughout the world. Our products enhance safety, improve productivity and reduce maintenance costs for customers, and many of our core products and services are essential in the safe and efficient operation of freight rail and passenger transit vehicles.

 

Wabtec is a global company with operations in nine countries. In the first quarter of 2004, about 78 percent of the Company’s revenues came from its North American operations, but Wabtec also sold products or services in 71 countries around the world.

 

2. ACCOUNTING POLICIES

 

Basis of Presentation    The unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles and the rules and regulations of the Securities and Exchange Commission and include the accounts of Wabtec and its majority owned subsidiaries. These condensed interim financial statements do not include all of the information and footnotes required for complete financial statements. In management’s opinion, these financial statements reflect all adjustments of a normal, recurring nature necessary for a fair presentation of the results for the interim periods presented. Results for these interim periods are not necessarily indicative of results to be expected for the full year.

 

The Company operates on a four-four-five week accounting quarter, and accordingly, the quarters end on or about March 31, June 30, September 30 and December 31.

 

The notes included herein should be read in conjunction with the audited consolidated financial statements included in Wabtec’s Annual Report on Form 10-K for the year ended December 31, 2003. The December 31, 2003 information has been derived from the Company’s December 31, 2003 Annual Report on Form 10-K.

 

Revenue Recognition    Revenue is recognized in accordance with Staff Accounting Bulletin (SAB) 101, “Revenue Recognition in Financial Statements.” Wabtec recognizes revenue upon the passage of title, ownership and risk of loss to the customer.

 

The Company recognizes revenues on certain long-term contracts based on the percentage of completion method of accounting. Contract revenues and cost estimates are reviewed and revised quarterly, at a minimum, and adjustments are reflected in the accounting period as known. Provisions are made for estimated losses on uncompleted contracts as known, if necessary.

 

Use of Estimates    The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from the estimates. On an ongoing basis, management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.

 

Stock-Based Compensation    Effective January 1, 2003, the Company adopted SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” SFAS No. 184 amends SFAS

 

6


Table of Contents

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

For the Quarterly Period Ended March 31, 2004 (Unaudited)

 

No. 123, “Accounting for Stock-Based Compensation,” to provide alternate methods of transition to SFAS No. 123’s fair value method of accounting for stock-based compensation. The statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures about the method of accounting for compensation cost associated with employee stock option plans, as well as the effect of the method used on reported results. The Company adopted the disclosure requirements of SFAS No. 148 and has not changed its method for measuring the compensation cost of stock options.

 

The Company continues to use the intrinsic value based method and does not recognize compensation expense for the issuance of options with an exercise price equal to or greater than the market price of the stock at the time of grant. As a result, the adoption of SFAS No. 148 had no impact on our results of operations or financial position.

 

Had compensation expense for these plans been determined based on the fair value at the grant dates for awards, the Company’s net income and earnings per share would be as set forth in the following table. For purposes of pro forma disclosures, the estimated fair value is amortized to expense over the options’ vesting period.

 

     Three months ended
March 31,


In thousands, except per share    2004

     2003

Net income as reported

   $ 4,807      $ 5,683

Stock based compensation under FAS123

     1,460        1,389
    

    

Pro forma

     3,347        4,294

Basic earnings per share

               

As reported

   $ 0.11      $ 0.13

Pro forma

     0.07        0.10

Diluted earnings per share

               

As reported

   $ 0.11      $ 0.13

Pro forma

     0.07        0.10
    

    

 

For purposes of presenting pro forma results, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

 

     Three months ended
March 31,


 
     2004

    2003

 

Dividend yield

   .3 %   .3 %

Risk-free interest rate

   5.1 %   5.3 %

Stock price volatility

   45.9     43.4  

Expected life (years)

   5.0     5.0  

 

The Black-Scholes option valuation model was developed for use in estimating fair value of traded options, which are significantly different than employee stock options. Although this valuation model is an acceptable method for use in presenting pro forma information, because of the differences in traded options and employee stock options, the Black-Scholes model does not necessarily provide a single measure of the fair value of employee stock options.

 

7


Table of Contents

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

For the Quarterly Period Ended March 31, 2004 (Unaudited)

 

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 recognized as interest expense.

 

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 (loss) on the balance sheet. At March 31, 2004, and as a result of entering into these interest rate swaps, the Company is expected to incur $450,000 in additional interest expense in 2004.

 

The Company also entered into foreign currency options and forward contracts to reduce the impact of changes in currency exchange rates. A currency option gives the Company the right but not the obligation to exchange currency at a pre-determined exchange rate either on a specific date or within a specific period of time. Forward contracts are agreements with a counterparty to exchange two distinct currencies at a set exchange rate for delivery on a set date at some point in the future. There is no exchange of funds until the delivery date. At the delivery date the Company can either take delivery of the currency or settle on a net basis. All outstanding forward contracts and option agreements are for the sale of U.S. Dollars and the purchase of Canadian Dollars (CAD). As of March 31, 2004, the Company has outstanding option agreements with a notional value of $10.5 million CAD resulting in the recording of a current asset of $66,000 and an increase in comprehensive income of $42,000, net of tax and has forward contracts with a notional value of $82 million CAD, resulting in the recording of a current asset of $920,000 and an increase in comprehensive income of $584,000, net of tax.

 

Subsequent to March 31, 2004, the Company entered into additional forward contracts to hedge its exposure to Canadian currency risk. Including the forwards outstanding at March 31, 2004, the forward contracts currently have a total notional value of $114 million CAD (or $85 million U.S.), with an average exchange rate of $0.743 USD per $1 CAD.

 

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 and balances 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. Foreign exchange loss was $756,000 and $414,000 for the three months ended March 31, 2004, and 2003, respectively.

 

Other Comprehensive Income (Loss)    Comprehensive income (loss) is defined as net income and all other non-owner changes in shareholders’ equity. The Company’s accumulated other comprehensive income (loss) consists of foreign currency translation adjustments, unrealized gains and losses on derivatives designated and

 

8


Table of Contents

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

For the Quarterly Period Ended March 31, 2004 (Unaudited)

 

qualified as cash flow hedges, foreign currency hedges and pension related adjustments. Total comprehensive income was:

 

     Three Months Ended
March 31,


In thousands    2004

     2003

Net income

   $ 4,807      $ 5,683

Foreign currency translation

     (789 )      3,576

Unrealized (loss) gain on derivatives designated and qualified as cash flow hedges, net of tax

     (179 )      298

Unrealized gains on other derivatives, net of tax

     391        —  

Additional minimum pension liability, net of tax

     (810 )      —  
    


  

Total comprehensive income

   $ 3,420      $ 9,557
    


  

 

The components of accumulated other comprehensive income (loss) consisted of the following:

 

In thousands    March 31,
2004


    December 31,
2003


 

Foreign currency translation

   $ (4,314 )   $ (3,525 )

Unrealized loss on hedges, net of tax

     (386 )     (207 )

Unrealized gains on other derivatives, net of tax

     626       235  

Additional minimum pension liability, net of tax

     (17,202 )     (16,392 )
    


 


Total accumulated comprehensive loss

   $ (21,276 )   $ (19,889 )
    


 


 

Recent Accounting Pronouncements    In April 2003, the Financial Accounting Standards Board issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The provisions of this statement are effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003 and should be applied prospectively. SFAS No. 149 has no impact on the Company’s financial statements or results of operations.

 

In May 2003, the Financial Accounting Standards Board issued SFAS No. 150, “Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 requires that certain financial instruments embodying an obligation to transfer assets or to issue equity securities be classified as liabilities. It is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective July 1, 2003. SFAS No. 150 has no impact on the Company’s financial statements or results of operations.

 

Effective December 31, 2003, Wabtec adopted SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Post-retirement Benefits—an Amendment of FASB Statements No. 87, 88 and 106” for its U.S. pension plans. This standard requires the disclosure of the components of net periodic benefit cost recognized during interim periods. See Note 7 to the Consolidated Financial Statements for the required additional disclosures.

 

During 2003, the Company adopted FASB Interpretation No. (“FIN”) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees.” FIN 45 requires increased disclosure of guarantees, including those for

 

9


Table of Contents

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

For the Quarterly Period Ended March 31, 2004 (Unaudited)

 

which likelihood of payment is remote, and product warranty information (see Note 9). FIN 45 also requires that guarantors recognize a liability for certain types of guarantees equal to the fair value of the guarantee upon its issuance. The adoption of FIN 45 had no impact on the Company’s financial statements or results of operations.

 

In January 2004, the Company adopted FASB Interpretation No. 46, “Consolidation of Variable Interest Entities.” A variable interest entity (“VIE”) is one where the contractual or ownership interests in an entity change with changes in the entity’s net asset value. This interpretation requires the consolidation of a VIE by the primary beneficiary, and also requires disclosure about VIEs where an enterprise has a significant variable interest but is not the primary beneficiary. The adoption of FASB Interpretation No. 46 had no impact on the Company’s financial statements or results of operations.

 

On December 8, 2003, President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act). The Act expanded Medicare to include, for the first time, coverage for prescription drugs. In January 2004, the FASB issued Staff Position 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” (FSP FAS 106-1). This position permits a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Act. As permitted by FSP FAS 106-1, the Company has elected to defer financial recognition of this legislation until the FASB issues final accounting guidance. In accordance with FSP FAS 106-1, appropriate disclosures related to the deferral election have been made in Note 7 to the consolidated financial statements.

 

Reclassifications    Certain prior year amounts have been reclassified, where necessary, to conform to the current year presentations.

 

3. DISCONTINUED OPERATIONS

 

In the fourth quarter of 2001, the Company decided to exit a business and put this business up for sale. As of December 31, 2003, this business had not sold. The Company actively solicited but did not receive any reasonable offers to purchase the asset. The asset is no longer being actively marketed and as a result, the Company reclassed the business to continuing operations in the fourth quarter of 2003. Such reclassification had no material impact on the financial statements.

 

In accordance with SFAS 144, the operating results of this business have been classified as discontinued operations as follows:

 

In thousands    Three months ended
March 31, 2003


Net sales

   $ 2,311

Income before income taxes

     184

Income tax expense

     67
    

Income from discontinued operations

   $ 117
    

 

10


Table of Contents

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

For the Quarterly Period Ended March 31, 2004 (Unaudited)

 

4. INVENTORIES

 

The components of inventory, net of reserves, were:

 

In thousands    March 31,
2004


   December 31,
2003


Raw materials

   $ 32,133    $ 28,711

Work-in-process

     49,484      45,559

Finished goods

     16,468      17,539
    

  

Total inventory

   $ 98,085    $ 91,809
    

  

 

5. INTANGIBLES

 

The Company has adopted SFAS No. 142, “Goodwill and Other Intangible Assets” effective January 1, 2002. Under its provisions, all goodwill and other intangible assets with indefinite lives are no longer amortized under a straight-line basis over the assets’ estimated useful life. Instead, they will be subject to periodic assessments for impairment by applying a fair-value-based test. The fair value of these reporting units was determined using a combination of discounted cash flow analysis and market multiples based upon historical and projected financial information. The Company performed the required impairment test in 2003 which resulted in no additional impairment charge. Goodwill remaining on the balance sheet is $109.5 million at March 31, 2004.

 

As of March 31, 2004 and December 31, 2003, the Company’s trademarks had a net carrying amount of $19.6 million and the Company believes these intangibles have an indefinite life. Intangible assets of the Company, other than goodwill and trademarks, consist of the following:

 

In thousands    March 31,
2004


   December 31,
2003


Patents and other, net of accumulated amortization of $21,580 and $21,053

   $ 13,148    $ 13,675

Covenants not to compete, net of accumulated amortization of $9,483 and $9,437

     91      137

Intangible pension asset

     4,401      4,401
    

  

Total

   $ 17,640    $ 18,213
    

  

 

In connection with the adoption of SFAS No. 142, the Company reassessed the useful lives and the classification of its identifiable assets and determined that they continue to be appropriate. The weighted average useful live of patents was 13 years and covenants not to compete was five years.

 

Amortization expense for intangible assets was $558,000 and $801,000 for the three months ended March 31, 2004, and 2003, respectively. Estimated amortization expense for the remainder of 2004 and the five succeeding years are as follows (in thousands):

 

2004

   $ 1,492

2005

     2,062

2006

     1,898

2007

     1,789

2008

     1,718

2009

     1,543

 

11


Table of Contents

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

For the Quarterly Period Ended March 31, 2004 (Unaudited)

 

There was no change in the carrying amount of goodwill for the three months ended March 31, 2004. Goodwill for the Freight Group and Transit Group is $92.6 million and $16.9 million, respectively.

 

6. LONG-TERM DEBT

 

Long-term debt consisted of the following:

 

In thousands    March 31,
2004


   December 31,
2003


Credit agreement

   $ 40,000    $ 40,000

6.875% Senior notes due 2013

     150,000      150,000

Other

     211      225
    

  

Total

   $ 190,211    $ 190,225

Less—current portion

     —        —  
    

  

Long—term portion

   $ 190,211    $ 190,225
    

  

 

Credit Agreement

 

In January 2004, the Company refinanced its existing unsecured revolving credit agreement with a consortium of commercial banks. This “Credit Agreement” provides a $175 million five-year revolving credit facility expiring in January 2009. At March 31, 2004, the Company had available borrowing capacity, net of letters of credit, of approximately $118.4 million, subject to certain financial covenant restrictions. Under the Credit Agreement, the Company may elect a base rate or an interest rate based on London Interbank Offered Rates of Interest (“LIBOR”). The base rate is the greater of LaSalle Bank National Association’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 100 to 200 basis points depending on the Company’s consolidated total indebtedness to cash flow ratios. The current margin is 175 basis points.

 

To reduce the impact of the variable interest rates described above, the Company entered into interest rate swaps which effectively convert the debt to fixed rate borrowings during the term of the swaps. On March 31, 2004, the notional value of the interest rate swaps outstanding totaled $40 million and effectively changed the Company’s interest rate on bank debt from a variable rate to a fixed rate of 4.103%.

 

The Credit Agreement contains customary events of default, including payment defaults, failure of representations or warranties to be true in any material respect, covenant defaults, defaults with respect to other indebtedness of the Company, bankruptcy, certain judgments against the Company, ERISA defaults and “change of control” of the Company.

 

6 7/8% Senior Notes Due August 2013

 

In August 2003, the Company issued $150 million of Senior Notes due in 2013 (the “Notes”). The Notes were issued at par. Interest on the notes will accrue at a rate of 6.875 percent per annum and will be payable semi-annually on January 31 and July 31 of each year, commencing on January 31, 2004. The proceeds were used to repay debt outstanding under the Company’s existing credit agreement, and for general corporate purposes.

 

The Notes are senior unsecured obligations of the Company and rank pari passu with all existing and future senior debt and senior to all our existing and future subordinated indebtedness of the Company. The indenture

 

12


Table of Contents

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

For the Quarterly Period Ended March 31, 2004 (Unaudited)

 

under which the Notes were issued contains covenants and restrictions which limit among other things, the following: the incurrence of indebtedness, payment of dividends and certain distributions, sale of assets, change in control, mergers and consolidations and the incurrence of liens.

 

In 2001, the Company sold a small non-core operating unit to that unit’s management team. As part of the sale, Wabtec guaranteed approximately $3 million of bank debt of the buyer, which was used for the purchase financing. In the event that the purchaser cannot repay or refinance the debt without a guarantee by Wabtec, the business would be returned to Wabtec. This debt is due in June 2004. The Company has no reason to believe that this debt will not be repaid or refinanced.

 

7. EMPLOYEE BENEFIT PLANS

 

The Company sponsors defined benefit pension plans that cover certain U.S., Canadian and United Kingdom employees and which provide benefits of stated amounts for each year of service of the employee.

 

     Pension Plans

    Postretirement Plan

 
     Three months ended
March 31,


    Three months ended
March 31,


 
In thousands, except percentages    2004

    2003

    2004

     2003

 

Net periodic benefit cost

                                 

Service cost

   $ 735     $ 606     $ 96      $ 82  

Interest cost

     1,694       1,619       437        429  

Expected return on plan assets

     (1,660 )     (1,644 )     —          —    

Net amortization/deferrals

     470       351       196        122  
    


 


 


  


Net periodic benefit cost

   $ 1,239     $ 932     $ 729      $ 633  
    


 


 


  


Assumptions

                                 

Discount rate

     6.25 %     6.75 %     6.25 %      6.25 %

Expected long-term rate of return

     7.75 %     8.25 %     NA        NA  

Rate of compensation increase

     3.75 %     4 %     NA        NA  

 

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.

 

The Company expects to contribute $6.4 million to the pension plan during 2004 and further expects that this level of funding will continue in future periods. Rebalancing of the asset allocation occurs on a quarterly basis.

 

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 January 1995 the postretirement health care and life insurance benefits for salaried employees was 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.

 

On December 8, 2003, President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act). The Act expanded Medicare to include, for the first time, coverage for

 

13


Table of Contents

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

For the Quarterly Period Ended March 31, 2004 (Unaudited)

 

prescription drugs. The Company sponsors retiree medical programs for certain of its locations and expects that this legislation will reduce the Company’s costs for some of these programs in the future.

 

In January 2004, FASB Staff Position 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (FSP FAS 106-1) was issued which permits a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Act. The Company is awaiting guidance from various governmental and regulatory agencies concerning the requirements that must be met to obtain these cost reductions as well as the manner in which such savings should be measured. Based on this preliminary analysis, it appears that some of the Company’s retiree medical plans may need to be revised in order to qualify for beneficial treatment under the Act, while other plans can continue unchanged.

 

8. EARNINGS PER SHARE

 

The computation of earnings per share from continuing operations is as follows:

 

     Three Months Ended
March 31,


In thousands, except per share    2004

   2003

Basic earnings per share

             

Income from continuing operations applicable to common shareholders

   $ 4,807    $ 5,566

Divided by

             

Weighted average shares outstanding

     44,661      43,453

Basic earnings from continuing operations per share

   $ 0.11    $ 0.13
    

  

Diluted earnings per share

             

Income from continuing operations applicable to common shareholders

   $ 4,807    $ 5,566

Divided by sum of the

             

Weighted average shares outstanding

     44,661      43,453

Conversion of dilutive stock options

     675      146
    

  

Diluted shares outstanding

     45,336      43,599

Diluted earnings from continuing operations per share

   $ 0.11    $ 0.13
    

  

 

9. WARRANTIES

 

The following table reconciles the changes in the Company’s product warranty reserve:

 

     Three Months Ended
March 31,


 
In thousands    2004

    2003

 

Balance at beginning of period

   $ 13,307     $ 17,407  

Warranty expense

     2,638       3,615  

Warranty payments

     (2,065 )     (4,315 )
    


 


Balance at end of period

   $ 13,880     $ 16,707  
    


 


 

14


Table of Contents

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

For the Quarterly Period Ended March 31, 2004 (Unaudited)

 

10. COMMITMENTS AND CONTINGENCIES

 

Actions have been filed against the Company and certain of its affiliates in various jurisdictions across the United States by persons alleging bodily injury as a result of exposure to asbestos-containing products. Since 2000, the number of such claims has increased. Most of these claims have been made against our wholly owned subsidiary, Railroad Friction Products Corporation (RFPC), and are based on a product sold by RFPC before we acquired American Standard, Inc.’s (ASI) 50% interest in RFPC in 1990. We acquired the remaining interest in RFPC in 1992. These claims include a suit against RFPC by ASI seeking contribution and indemnity for asbestos claims brought against ASI that ASI alleges claim exposure to RFPC’s product.

 

Most of these claims, including all of the RFPC claims, are submitted to insurance carriers for defense and indemnity or to non-affiliated companies that retain the liabilities for the asbestos-containing products at issue. Neither the Company nor its affiliates have to date incurred material costs related to these asbestos claims. We cannot, however, assure that all these claims will be fully covered by insurance or that the indemnitors will remain financially viable. Our ultimate legal and financial liability with respect to these claims, as is the case with other pending litigation, cannot be estimated with certainty.

 

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, 2003, filed on March 15, 2004. During the first three months of 2004, there were no material changes to the information described in Note 19 therein.

 

11. SEGMENT INFORMATION

 

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

 

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

 

Transit Group consists of products for passenger transit vehicles (typically subways, commuter rail and buses) that include braking, coupling, and monitoring systems, climate control and door equipment engineered to meet individual customer specifications. Revenues are derived from OEM and aftermarket sales as well as from repairs and services.

 

The Company evaluates its business segments’ operating results based on income from operations. Corporate activities include general corporate expenses, elimination of intersegment transactions, interest income and expense and other unallocated charges. Since certain administrative and other operating expenses and other items have not been allocated to business segments, the results in the following tables are not necessarily a measure computed in accordance with generally accepted accounting principles and may not be comparable to other companies.

 

15


Table of Contents

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

For the Quarterly Period Ended March 31, 2004 (Unaudited)

 

Segment financial information for the three months ended March 31, 2004 is as follows:

 

In thousands    Freight
Group


   Transit
Group


   Corporate
Activities


    Total

 

Sales to external customers

   $ 134,000    $ 54,228    $ —       $ 188,228  

Intersegment sales/(elimination)

     2,956      46      (3,002 )     —    
    

  

  


 


Total sales

   $ 136,956    $ 54,274    $ (3,002 )   $ 188,228  
    

  

  


 


Income (loss) from operations

   $ 16,591    $ 1,778    $ (6,886 )   $ 11,483  

Interest expense and other

     —        —        (3,913 )     (3,913 )
    

  

  


 


Income (loss) from continuing operations before income taxes

   $ 16,591    $ 1,778    $ (10,799 )   $ 7,570  
    

  

  


 


 

Segment financial information for the three months ended March 31, 2003 is as follows:

 

In thousands    Freight
Group


   Transit
Group


   Corporate
Activities


    Total

 

Sales to external customers

   $ 122,634    $ 46,889    $ —       $ 169,523  

Intersegment sales/(elimination)

     1,963      167      (2,130 )     —    
    

  

  


 


Total sales

   $ 124,597    $ 47,056    $ (2,130 )   $ 169,523  
    

  

  


 


Income (loss) from operations

   $ 15,705    $ 2,219    $ (5,790 )   $ 12,134  

Interest expense and other

     —        —        (3,368 )     (3,368 )
    

  

  


 


Income (loss) from continuing operations before income taxes

   $ 15,705    $ 2,219    $ (9,158 )   $ 8,766  
    

  

  


 


 

12. OTHER EXPENSE

 

The components of other expense are as follows:

 

     Three Months
Ended
March 31,


In thousands    2004

   2003

Foreign currency translation

   $ 756    $ 414

Other miscellaneous

     154      375
    

  

Total other expense

   $ 910    $ 789
    

  

 

13. RESTRUCTURING CHARGES

 

In 2001, the Company completed a merger and restructuring plan with charges totaling $71 million pre-tax, with approximately $2 million of the charge expensed in 2001, $20 million in 2000 and $49 million in 1999. The plan involved the elimination of duplicate facilities and excess capacity, operational realignment and related workforce reductions, and the evaluation of certain assets as to their perceived ongoing benefit to the Company. As of March 31, 2004, there were no merger and restructuring charges still accrued on the balance sheet.

 

 

16


Table of Contents

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 2003 Annual Report on Form 10-K, filed March 15, 2004.

 

OVERVIEW

 

Wabtec is one of the world’s largest providers of value-added, technology-based products and services for the global rail industry. Our products are found on virtually all locomotives, freight cars and passenger transit vehicles in the U.S., as well as in certain markets throughout the world. Our products enhance safety, improve productivity and reduce maintenance costs for customers, and many of our core products and services are essential in the safe and efficient operation of freight rail and passenger transit vehicles.

 

Wabtec is a global company with operations in nine countries. In the first quarter of 2004, about 78 percent of the Company’s revenues came from its North American operations, but Wabtec also sold products or services in 71 countries around the world.

 

Management Review and Outlook

 

Wabtec’s long-term financial goals are to generate free cash flow, maintain a strong credit profile while minimizing our overall cost of capital, increase margins through strict attention to cost controls, and increase revenues through a focused growth strategy. In addition, management monitors the Company’s short-term operational performance through measures such as quality and on-time delivery.

 

In the first quarter of 2004, Wabtec’s sales increased 11% compared to the first quarter of 2003, but net income decreased 16% due to several factors discussed below in “Results of Operations.”

 

Freight rail industry statistics, such as carloadings and orders for new freight cars, have shown substantial growth in 2004. For example, in the first quarter of 2004, carloadings grew 3.1% compared to the prior year quarter, as the freight railroads began to benefit from the strengthening economy in the U.S. As shown below, orders for new freight cars increased to 17,962 in the first quarter of 2004, the highest quarterly order rate since the third quarter of 1998. As a result, the backlog of freight cars ordered was 41,392, its highest level since the second quarter of 1999. Sales in our freight segment have demonstrated that trend. Following are quarterly freight car statistics for the past two years:

 

     Orders

   Deliveries

   Backlog

1Q02

   2,637    3,855    24,055

2Q02

   6,973    4,155    9,281

3Q02

   10,135    4,925    14,491

4Q02

   8,712    4,801    18,402

1Q03

   11,767    6,614    24,055

2Q03

   16,693    7,365    33,383

3Q03

   6,726    8,251    31,858

4Q03

   12,063    9,170    33,967

1Q04

   17,962    10,012    41,392

 

Source: Railway Supply Institute

 

17


Table of Contents

Looking beyond 2004, we expect freight car, locomotive and transit car deliveries to trend upwards providing an expanding market for the Company:

 

     Actual

   Forecast

     2002

   2003

   2004

   2005

   2006

Freight car

   17,714    31,400    41,000    45,000    48,000

Transit

   1,322    669    754    540    798

Locomotive

   969    749    1,209    770    980

 

Based on company estimates

 

In addition to this cyclical rebound in orders, we expect to generate increases in sales and earnings from executing our four-point growth strategy:

 

  Expand sales of systems offerings as “Tier 1” supplier;

 

  Accelerate new product and service development;

 

  Expand globally;

 

  Continuous improvement through lean principles.

 

In 2004 and beyond, we will continue to face many challenges, including increased costs for raw materials, especially metals; higher costs for medical and insurance premiums; and foreign currency fluctuations. In addition, we face general economic risks, as well as the risk that our customers could curtail spending on new and existing equipment. Risks associated with our four-point growth strategy include the level of investment that customers are willing to make in new technologies developed by the industry and the Company, and risks inherent in global expansion. When necessary, we will modify our financial and operating strategies to reflect changes in market conditions and risks.

 

RESULTS OF OPERATIONS

 

The following table shows our Consolidated Statements of Operations for the years indicated.

 

     Three Months Ended
March 31,


 
In millions    2004

    2003

 

Net sales

   $ 188.2     $ 169.5  

Cost of sales

     (140.7 )     (124.2 )
    


 


Gross profit

     47.5       45.3  

Selling, general and administrative expenses

     (26.4 )     (23.8 )

Engineering expenses

     (8.8 )     (8.3 )

Amortization expenses

     (0.8 )     (1.0 )
    


 


Total operating expenses

     (36.0 )     (33.1 )

Income from operations

     11.5       12.2  

Interest expense

     (3.0 )     (2.6 )

Other expense, net

     (0.9 )     (0.8 )
    


 


Income from continuing operations before income taxes

     7.6       8.8  

Income tax expense

     (2.8 )     (3.2 )
    


 


Income from continuing operations

     4.8       5.6  

Discontinued operations

                

Income from discontinued operations (net of tax)

     —         0.1  
    


 


Net income

   $ 4.8     $ 5.7  
    


 


 

18


Table of Contents

FIRST QUARTER 2004 COMPARED TO FIRST QUARTER 2003

 

The following table summarizes the results of operations for the period:

 

     Three months ended March 31,

 
In thousands    2004

   2003

   Percent
Change


 

Net sales

   $ 188,228    $ 169,523    11.0 %

Income from operations

     11,483      12,134    (5.4 )%

Net income

     4,807      5,683    (15.4 )%

 

Net sales increased by 11% from $169.5 million in the first three months of 2003 to $188.2 million in the same period in 2004, primarily the result of improving industry conditions, and improved contract performance. Net income for the first three months of 2004 was $4.8 million or $0.11 per diluted share, while net income for the first three months of 2003 was $5.7 million or $0.13 per diluted share. This decrease in net income was primarily due to increased operating expenses and higher interest expense.

 

The following table shows the Company’s net sales by business segment:

 

     For the three months
ended March 31,


In thousands    2004

   2003

Freight Group

   $ 134,000    $ 122,634

Transit Group

     54,228      46,889
    

  

Net sales

   $ 188,228    $ 169,523
    

  

 

Net sales    Net sales for the first quarter of 2004 increased $18.7 million, or 11%, as compared to the same period of 2003. Sales increased in both the Freight Group and the Transit Group. The Freight Group’s increased sales reflected higher sales of certain components to international markets; higher demand for pneumatic air brake components because of increased deliveries of freight cars; and greater demand for friction products due to overall increased rail traffic in the first quarter. Industry deliveries of new freight cars for the first quarter of 2004 increased to 17,962 units as compared to 11,767 in the same period of 2003. The Transit Group’s increased sales were due to a greater number of shipments and deliveries of rail door assemblies under existing contracts.

 

Gross profit    Gross profit increased to $47.5 million in the first three months of 2004 compared to $45.3 million in the same period of 2003. 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 26.7% in 2003. The decrease in gross profit percentage is primarily due to increased manufacturing costs because of higher steel prices, the negative impact of foreign currency exchange rates on the Company’s Canadian operations, inefficiencies relating to the closing and relocation of an electronics plant from Canada to the U.S., and the ramp-up of low-margin rail door contracts in the Transit Group. The Company is taking action to improve margins in future quarters, including price increases and ongoing initiatives to increase productivity and efficiency.

 

The following table shows our operating expenses:

 

     For the three months ended
March 31,


 
In thousands    2004

   2003

   Percent
Change


 

Selling, general and administrative expenses

   $ 26,440    $ 23,874    10.7 %

Engineering expenses

     8,812      8,268    6.6 %

Amortization expense

     783      1,000    (21.7 )%
    

  

  

Total operating expenses

   $ 36,035    $ 33,142    8.7 %
    

  

  

 

19


Table of Contents

Operating expenses    Operating expenses increased $2.9 million in the first quarter of 2004 as compared to the same period of 2003 due to higher medical and insurance premiums, foreign exchange costs and overall higher costs from inflation and sales activity. These increases were partially offset by reduced amortization expense. Amortization expense decreased due to certain intangible assets having been fully amortized.

 

Income from operations    Income from operations totaled $11.5 million (or 6.1% of sales) in the first three months of 2004 compared with $12.1 million (or 7.2% of sales) in the same period of 2003. Lower operating income resulted from increased operating expenses, but was partially offset by increased sales and gross profit in 2004.

 

Interest expense    Interest expense increased 16.4% in the first quarter of 2004 as compared to the same period of 2003 primarily due to the Company’s sale of senior notes in August 2003. The notes enabled the Company to convert short-term, variable-rate debt into fixed-rate debt at an attractive long-term interest rate.

 

Other expense    The Company recorded foreign exchange losses from the translation of balance sheet accounts of $756,000 and $414,000, respectively, in the first three months of 2004 and 2003.

 

Income taxes    The effective income tax rate remains unchanged and was 36.5% for the first quarter of 2004 and 2003.

 

Net income    Net income for the first three months of 2004 decreased $876,000, compared with the same period of 2003. The decrease was due to increased operating expenses and higher interest expense.

 

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.

 

     For the three months
ended March 31,


 
In thousands    2004

    2003

 

Cash (used) provided by:

                

Operating activities

   $ (8,747 )   $ (1,105 )

Investing activities

     (4,213 )     (2,866 )

Financing activities

     234       (3,096 )

Earnings before interest, taxes, depreciation and amortization (EBITDA)

     16,826       17,179  

 

Management utilizes EBITDA as a measure of liquidity. The following is a reconciliation of EBITDA to net cash used by operating activities:

 

     For the three months
ended March 31,


 
In thousands    2004

    2003

 

Net cash used by operating activities

   $ (8,747 )   $ (1,105 )

Change in operating assets and liabilities

     19,807       12,431  

Change from discontinued operations

     —         74  

Interest expense

     3,003       2,579  

Income tax expense

     2,763       3,200  
    


 


Earnings before interest, taxes, depreciation and amortization (EBITDA)

   $ 16,826     $ 17,179  
    


 


 

EBITDA is defined as earnings before deducting interest expense, income taxes and depreciation and amortization. Although EBITDA is not a measure of performance calculated in accordance with generally

 

20


Table of Contents

accepted accounting principles, management believes that it is useful to an investor in evaluating Wabtec because it is widely used as a measure to evaluate a company’s operating performance and ability to service debt. Financial covenants in our credit facility include ratios based on EBITDA. EBITDA does not purport to represent cash generated by operating activities and should not be considered in isolation or as substitute for measures of performance in accordance with generally accepted accounting principles. In addition, because EBITDA is not calculated identically by all companies, the presentation here may not be comparable to other similarly titled measures of other companies. Management’s discretionary use of funds depicted by EBITDA may be limited by working capital, debt service and capital expenditure requirements, and by restrictions related to legal requirements, commitments and uncertainties.

 

Operating activities    Cash used by operations in the first quarter of 2004 was $8.7 million as compared to $1.1 million in the same period of 2003. Working capital increased $13.5 million, as inventory increased $6.3 million, accounts payable and accruals decreased $3.5 million and other current assets increased $2.7 million. Inventory values increased due to the cost of steel and other metals. Accounts payable and accruals decreased because of efforts by the Company to take advantage of discount payment terms. The change in other current assets is because of a $1.8 million increase in income tax receivable.

 

Investing activities    In the first quarter of 2004 and 2003, cash used in investing activities was $4.2 and $2.9 million, respectively, consisting almost entirely of capital expenditures. Capital expenditures for continuing operations were $4.2 million and $2.8 million in the first three months of 2004 and 2003, respectively. The majority of capital expenditures for these periods relates to upgrades to and replacement of existing equipment.

 

Financing activities    In the first quarter of 2004, cash provided by financing activities was $234,000 compared to cash used by financing activities of $3.1 million in the same period of 2003. Cash used in 2003 was almost exclusively payments of $2.7 million to repay outstanding indebtedness

 

The following table shows our outstanding indebtedness at March 31, 2004 and 2003. The revolving credit note and other term loan interest rates are variable and dependent on market conditions.

 

In thousands    March 31,
2004


   December 31,
2003


Revolving credit agreement

   $ 40,000    $ 40,000

6.875% Senior notes due 2013

     150,000      150,000

Other

     211      225
    

  

Total

   $ 190,211    $ 190,225

Less-current portion

     —        —  
    

  

Long-term portion

   $ 190,211    $ 190,225
    

  

 

Cash balance at March 31, 2004 and December 31, 2003 was $58.1 million and $70.3 million, respectively.

 

Credit Agreement

 

In January 2004, we refinanced the credit agreement with a consortium of commercial banks. This “Credit Agreement” currently provides a $175 million five-year revolving credit facility expiring in January 2009. At March 31, 2004, the Company had available borrowing capacity, net of letters of credit, of approximately $118.4 million, subject to certain financial covenant restrictions.

 

Under the Credit Agreement, the Company may elect a base rate or an interest rate based on London Interbank Offered Rates of Interest (“LIBOR”). The base rate is the greater of LaSalle Bank National Association’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 100 to 200 basis points depending on the Company’s consolidated total indebtedness to cash flow ratios. The current margin is 175 basis points.

 

21


Table of Contents

To reduce the impact of the variable interest rates described above, the Company entered into interest rate swaps which effectively convert the debt to fixed rate borrowings during the term of the swaps. On March 31, 2004, the notional value of the interest rate swaps outstanding totaled $40 million and effectively changed the Company’s interest rate on bank debt from a variable rate to a fixed rate of 4.103%.

 

6 7/8% Senior Notes Due August 2013

 

In August 2003, the Company issued $150 million of Senior Notes due in 2013 (the “Notes”). The Notes were issued at par. Interest on the notes will accrue at a rate of 6.875 percent per annum and will be payable semi-annually on January 31 and July 31 of each year, commencing on January 31, 2004. The proceeds were used to repay debt outstanding under the Company’s existing credit agreement, and for general corporate purposes.

 

In 2001, we sold a subsidiary to that unit’s management team. As part of the sale, we guaranteed approximately $3 million of bank debt of the buyer, which was used for the purchase financing. In the event that the purchaser cannot repay or refinance the debt without a guarantee by us, the subsidiary would be returned to us. This debt is due in June 2004. We have no reason to believe that this debt will not be repaid or refinanced.

 

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 to meet its 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;

 

22


Table of Contents

Operating Factors

 

  supply disruptions;

 

  technical difficulties;

 

  changes in operating conditions and costs;

 

  successful introduction of new products;

 

  labor relations;

 

  completion and integration of additional acquisitions;

 

  the development and use of new technology;

 

Competitive Factors

 

  the actions of competitors;

 

Political/Governmental Factors

 

  political stability in relevant areas of the world;

 

  future regulation/deregulation of our customers and/or the rail industry;

 

  governmental funding for some of our customers;

 

  political developments and laws and regulations, such as forced divestiture of assets, restrictions on production, imports or exports, price controls, tax increases and retroactive tax claims, expropriation of property, cancellation of contract rights, and environmental regulations; and

 

Transaction or Commercial Factors

 

  the outcome of negotiations with partners, governments, suppliers, customers or others.

 

The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

Critical Accounting Policies

 

The preparation of the financial statements in accordance with generally accepted accounting principles requires management to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Areas of uncertainty that require judgments, estimates and assumptions include the accounting for derivatives, environmental matters, the testing of goodwill and other intangibles for impairment, proceeds on assets to be sold, pensions and other postretirement benefits, and tax matters.

 

Management uses historical experience and all available information to make these judgments and estimates, and actual results will inevitably differ from those estimates and assumptions that are used to prepare the Company’s financial statements at any given time. Despite these inherent limitations, management believes that Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and the financial statements and related footnotes provide a meaningful and fair perspective of the Company. A discussion of the judgments and uncertainties associated with accounting for derivatives and environmental matters can be found in the “Notes to Consolidated Financial Statements” included elsewhere in this report.

 

A summary of the Company’s significant accounting policies is included in Note 2 in the “Notes to Consolidated Financial Statements” included elsewhere in this report. Management believes that the application

 

23


Table of Contents

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 allowance for doubtful accounts receivable reflects our best estimate of probable losses inherent in our receivable portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other currently available evidence.

 

The Company provides warranty reserves to cover expected costs from repairing or replacing products with durability, quality or workmanship issues occurring during established warranty periods. In general, reserves are provided for as a percentage of sales, based on historic experience. In addition, specific reserves are established for known warranty issues and their estimable losses.

 

Inventory is reviewed to ensure that an adequate provision is recognized for excess, slow moving and obsolete inventories. The Company compares inventory components to prior year sales history and current backlog requirements. To the extent that inventory parts exceed estimated usage and demand, a reserve is recognized to reduce the carrying value of inventory. Also, specific reserves are established for known inventory obsolescence.

 

Other areas of significant judgments and estimates include the liabilities and expenses for pensions and other postretirement benefits. These amounts are determined using actuarial methodologies and incorporate significant assumptions, including the rate used to discount the future estimated liability, the long-term rate of return on plan assets and several assumptions relating to the employee workforce (salary increases, medical costs, retirement age and mortality). The rate used to discount future estimated liabilities is determined considering the rates available at year-end on debt instruments that could be used to settle the obligations of the plan. The long-term rate of return is estimated by considering historical returns and expected returns on current and projected asset allocations and is generally applied to a five-year average market value of assets.

 

As a global company, Wabtec records an estimated liability or benefit for income and other taxes based on what it determines will likely be paid in various tax jurisdictions in which it operates. Management uses its best judgment in the determination of these amounts. However, the liabilities ultimately realized and paid are dependent on various matters including the resolution of the tax audits in the various affected tax jurisdictions and may differ from the amounts recorded. An adjustment to the estimated liability would be recorded through income in the period in which it becomes probable that the amount of the actual liability differs from the recorded amount. Management does not believe that such a charge would be material.

 

Recent Accounting Pronouncements

 

See Notes 2 and 5 of “Notes to Condensed Consolidated Financial Statements” included elsewhere in this report.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Interest Rate Risk

 

In the ordinary course of business, Wabtec is exposed to risks that increases in interest rates may adversely affect funding costs associated with its variable-rate debt. After considering the effects of interest rate swaps, further described below, the Company’s has no variable-rate debt at March 31, 2004. Management has entered into pay-fixed, receive-variable interest rate swap contracts that partially mitigate the impact of variable-rate debt interest rate increases. An instantaneous 100 basis point increase in interest rates would have no impact on the Company’s annual earnings.

 

See Note 2 of the Company’s Notes to Condensed Consolidated Financial Statements for the Quarterly Period Ended March 31, 2004 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.

 

24


Table of Contents

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.

 

We entered into foreign currency options and forward contracts to reduce the impact of changes in currency exchange rates. A currency option gives us the right but not the obligation to exchange currency at a pre-determined exchange rate either on a specific date or within a specific period of time. Forward contracts are agreements with a counterparty to exchange two distinct currencies at a set exchange rate for delivery on a set date at some point in the future. There is no exchange of funds until the delivery date. At the delivery date we can either take delivery of the currency or settle on a net basis. All outstanding forward contracts and option agreements are for the sale of U.S. Dollars (USD) and the purchase of Canadian Dollars (CAD). As of March 31, 2004, we had outstanding option agreements with a notional value of $10.5 million CAD resulting in the recording of a current asset of $66,000 and an increase in comprehensive income of $42,000, net of tax and have forward contracts with a notional value of $82 million CAD, resulting in the recording of a current asset of $920,000 and an increase in comprehensive income of $584,000, net of tax.

 

Subsequent to March 31, 2004, The Company entered into additional forward contracts to hedge its exposure to Canadian currency risk. Including the forwards outstanding at March 31, 2004, the forward contracts currently have a total notional value of $114 million CAD (or $85 million USD), with an average exchange rate of $0.743 USD per $1 CAD.

 

Wabtec is also subject to certain risks associated with changes in foreign currency exchange rates to the extent its operations are conducted in currencies other than the U.S. dollar. For the first three months of 2004, approximately 68% of Wabtec’s net sales are in the United States, 9% in Canada, 1% in Mexico, and 22% in other international locations, primarily Europe. At March 31, 2004, the Company does not believe changes in foreign currency exchange rates represent a material risk to results of operations, financial position, or liquidity.

 

CONTROLS AND PROCEDURES

 

Wabtec’s principal executive officer and its principal financial officer have evaluated the effectiveness of Wabtec’s “disclosure controls and procedures,” (as defined in Exchange Act Rule 13a-15(e)) as of March 31, 2004. Based upon their evaluation, the principal executive officer and principal financial officer concluded that Wabtec’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by Wabtec in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide reasonable assurance that information required to be disclosed by Wabtec in such reports is accumulated and communicated to Wabtec’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

There was no change in Wabtec’s “internal control over financial reporting” (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2004, that has materially affected, or is reasonably likely to materially affect, Wabtec’s internal control over financial reporting.

 

LEGAL PROCEEDINGS AND COMMITMENTS AND CONTINGENCIES

 

There have been no material changes to report regarding the Company’s commitments and contingencies as described in Note 20 of the Company’s Annual Report on Form 10-K for the Year Ended December 31, 2003.

 

25


Table of Contents

EXHIBITS AND REPORTS ON FORM 8-K

 

(a) The following exhibits are being filed with this report:

 

3.1    Restated Certificate of Incorporation of the Company dated January 30, 1995, as amended March 30, 1995, filed as an exhibit to the Company’s Registration Statement on Form S-1 (No. 33-90866), and incorporated herein by reference.
3.2    Restated By-Laws of the Company, effective November 19, 1999, filed as part of the Company’s Registration Statement on Form S-4 (No. 333-88903), and incorporated herein by reference.
31.1    Rule 13a-14(a) Certification of Chairman of the Board
31.2    Rule 13a-14(a) Certification of Chief Financial Officer
32.1    Section 1350 Certification of Chairman of the Board and Chief Financial Officer

 

(b) During the first quarter of 2004, the Company filed or furnished the following Current Reports on Form 8-K pertaining to the following items:

 

A Current Report on Form 8-K dated January 12, 2004, which included under Items 5 and 7, the press release providing earnings guidance for the fourth quarter of 2003 and for fiscal 2004.

 

A Current Report on Form 8-K dated February 20, 2004, which included under Items 5 and 7, the press releases announcing the signing of certain contracts, and under Items 7 and 12, the press release announcing Wabtec’s fourth quarter 2003 earnings.

 

A Current Report on Form 8-K dated March 23, 2004, which included under Items 5 and 7, the press release announcing that Gregory T. H. Davies, President and CEO, will undergo treatment for cancer.

 

26


Table of Contents

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

     WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
     By:   

/s/ ALVARO GARCIA-TUNON


          Alvaro Garcia-Tunon
          Chief Financial Officer
     Date: May 7, 2004

 

27


Table of Contents

EXHIBIT INDEX

 

Exhibit
Number


  

Description and Method of Filing


3.1    Restated Certificate of Incorporation of the Company dated January 30, 1995, as amended March 30, 1995, filed as an exhibit to the Company’s Registration Statement on Form S-1 (No. 33-90866), and incorporated herein by reference
3.2    Restated By-Laws of the Company, effective November 19, 1999, filed as part of the Company’s Registration Statement on Form S-4 (No. 333-88903), and incorporated by reference
31.1    Rule 13a-14(a) Certification of Chairman of the Board, filed herewith
31.2    Rule 13a-14(a) Certification of Chief Financial Officer, filed herewith
32.1    Section 1350 Certification of Chairman of the Board and Chief Financial Officer, filed herewith

 

 

28