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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, 2010

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)

 

(I.R.S. Employer

Identification No.)

1001 Air Brake Avenue

Wilmerding, PA

  15148
(Address of principal executive offices)   (Zip Code)

 

 

412-825-1000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

  

Outstanding at May 3, 2010

Common Stock, $.01 par value per share    47,978,263 shares

 

 

 


Table of Contents

WESTINGHOUSE AIR BRAKE

TECHNOLOGIES CORPORATION

March 31, 2010 FORM 10-Q

TABLE OF CONTENTS

 

         Page
 

PART I—FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements

  
 

Condensed Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009

   3
 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009

   4
 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009

   5
 

Notes to Condensed Consolidated Financial Statements

   6

Item 2.

 

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

   24

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

   31

Item 4.

 

Controls and Procedures

   32
 

PART II—OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

   33

Item 1A.

 

Risk Factors

   33

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

   33

Item 6.

 

Exhibits

   34
 

Signatures

   35

 

2


Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

In thousands, except shares and par value

   Unaudited
March 31,
2010
    December 31,
2009
 
Assets     

Current Assets

    

Cash and cash equivalents

   $ 178,900      $ 188,659   

Accounts receivable

     247,949        208,260   

Inventories

     241,086        239,333   

Deferred income taxes

     36,093        40,533   

Other current assets

     12,421        12,724   
                

Total current assets

     716,449        689,509   

Property, plant and equipment

     453,578        451,996   

Accumulated depreciation

     (253,423     (250,289
                

Property, plant and equipment, net

     200,155        201,707   

Other Assets

    

Goodwill

     506,284        482,978   

Other intangibles, net

     190,467        187,630   

Deferred income taxes

     5,831        4,964   

Other noncurrent assets

     19,054        19,047   
                

Total other assets

     721,636        694,619   
                

Total Assets

   $ 1,638,240      $ 1,585,835   
                
Liabilities and Shareholders’ Equity     

Current Liabilities

    

Accounts payable

   $ 122,349      $ 119,895   

Customer deposits

     42,276        44,251   

Accrued compensation

     29,846        30,423   

Accrued warranty

     19,388        20,025   

Current portion of long-term debt

     34,457        32,741   

Other accrued liabilities

     61,675        58,013   
                

Total current liabilities

     309,991        305,348   

Long-term debt

     384,990        359,039   

Reserve for postretirement and pension benefits

     62,200        64,078   

Deferred income taxes

     52,223        52,156   

Accrued warranty

     9,986        9,182   

Other long term liabilities

     17,593        17,119   
                

Total liabilities

     836,983        806,922   

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 47,966,542 and 47,688,695 outstanding at March 31, 2010 and December 31, 2009, respectively

     662        662   

Additional paid-in capital

     329,613        329,707   

Treasury stock, at cost, 18,208,225 and 18,486,072 shares, at March 31, 2010 and December 31, 2009, respectively

     (286,678     (289,137

Retained earnings

     796,117        766,221   

Accumulated other comprehensive loss

     (40,596     (30,546
                

Total Westinghouse Air Brake Technologies Corporation shareholders’ equity

     799,118        776,907   

Non-controlling interest

     2,139        2,006   
                

Total shareholders’ equity

     801,257        778,913   
                

Total Liabilities and Shareholders’ Equity

   $ 1,638,240      $ 1,585,835   
                

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

   2010     2009  

Net sales

   $ 363,927      $ 377,960   

Cost of sales

     (255,538     (270,785
                

Gross profit

     108,389        107,175   

Selling, general and administrative expense

     (44,631     (38,553

Engineering expense

     (10,695     (10,559

Amortization expense

     (1,887     (2,315
                

Total operating expenses

     (57,213     (51,427

Income from operations

     51,176        55,748   

Other income and expenses

    

Interest (expense) income, net

     (3,912     (4,936

Other (expense) income, net

     (721     389   
                

Income from operations before income taxes

     46,543        51,201   

Income tax expense

     (16,179     (18,535
                

Net income attributable to Wabtec shareholders

   $ 30,364      $ 32,666   
                

Earnings Per Common Share

    

Basic

    

Net income attributable to Wabtec shareholders

   $ 0.64      $ 0.68   
                

Diluted

    

Net income attributable to Wabtec shareholders

   $ 0.63      $ 0.68   
                

Weighted average shares outstanding

    

Basic

     47,461        47,645   

Diluted

     47,895        48,131   
                

 

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

   2010     2009  

Operating Activities

    

Net income attributable to Wabtec shareholders

   $ 30,364      $ 32,666   

Adjustments to reconcile net income to net cash provided by operations:

    

Depreciation and amortization

     8,400        9,326   

Stock-based compensation expense

     2,491        797   

Loss (gain) on disposal of property, plant and equipment

     27        (2,688

Excess income tax benefits from exercise of stock options

     (1,374     —     

Changes in operating assets and liabilities

    

Accounts receivable

     (34,856     10,629   

Inventories

     (3,810     8,286   

Accounts payable

     2,541        (35,025

Accrued income taxes

     841        7,903   

Accrued liabilities and customer deposits

     1,227        (43,647

Other assets and liabilities

     6,516        6,015   
                

Net cash provided by (used for) operating activities

     12,367        (5,738

Investing Activities

    

Purchase of property, plant and equipment and other

     (3,601     (3,439

Proceeds from disposal of property, plant and equipment

     1        3,638   

Acquisitions of business, net of cash acquired

     (39,943     —     

Acquisition purchase price adjustment

     2,368        —     
                

Net cash (used for) provided by investing activities

     (41,175     199   

Financing Activities

    

Proceeds from debt

     111,000        6,000   

Payments of debt

     (83,333     (31,058

Proceeds from exercise of stock options and other benefit plans

     1,596        (180

Stock repurchase

     (3,096     (7,272

Excess income tax benefits from exercise of stock options

     1,374        —     

Cash dividends ($0.01 per share for the three months ended March 31, 2010 and 2009)

     (468     (480
                

Net cash provided by (used for) financing activities

     27,073        (32,990

Effect of changes in currency exchange rates

     (8,024     (5,184
                

Decrease in cash

     (9,759     (43,713

Cash, beginning of year

     188,659        141,805   
                

Cash, end of period

   $ 178,900      $ 98,092   
                

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, 2010 (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 approximately 100 countries 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 17 countries. In the first three months of 2010, about 49% of the Company’s revenues came from customers outside the U.S.

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, 2009. The December 31, 2009 information has been derived from the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

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

Accounting Standards Codification The Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) became effective on July 1, 2009. At that date, the ASC became FASB’s officially recognized source of authoritative U.S. generally accepted accounting principles (GAAP) applicable to all public and non-public non-governmental entities, superseding existing FASB, American Institute of Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF) and related literature. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch to the ASC affects the way companies refer to U.S. GAAP in financial statements and accounting policies. Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.

Revenue Recognition Revenue is recognized in accordance with ASC 605 “Revenue Recognition”. Revenue is recognized when products have been shipped to the respective customers, title has passed and the price for the product has been determined.

The Company recognizes revenues on long-term contracts based on the percentage of completion method of accounting. The units-of-delivery method or other input-based or output-based measures, as appropriate, are used

 

6


Table of Contents

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010 (UNAUDITED)

 

to measure the progress toward completion of individual contracts. Contract revenues and cost estimates are reviewed and revised at a minimum quarterly and adjustments are reflected in the accounting period as such amounts are determined. Provisions are made currently for estimated losses on uncompleted contracts.

Certain pre-production costs relating to long-term production and supply contracts have been deferred and will be recognized over the life of the contracts. Deferred pre-production costs were $11.8 million and $12.1 million at March 31, 2010 and December 31, 2009, respectively.

Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles 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 The Company recognizes compensation expense for stock-based compensation based on the grant date fair value ratably over the requisite service period following the date of grant.

Financial Derivatives and Hedging Activities The Company has entered into foreign currency forward contracts to reduce the impact of changes in currency exchange rates. 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.

At March 31, 2010, the Company had forward contracts for the sale of South African Rand (ZAR) and the purchase of U.S. Dollars (USD). The Company concluded that these foreign currency forward contracts qualify for cash flow hedge accounting which permits the recording of the fair value of the forward contract and corresponding adjustment to other comprehensive income (loss), net of tax, on the balance sheet. As of March 31, 2010, the Company had forward contracts with a notional value of 5.8 million ZAR (or $728,000 USD), with an average exchange rate of 7.95 ZAR per $1 USD, resulting in the recording of a current liability of $57,000 and a corresponding offset in accumulated other comprehensive loss of $36,000, net of tax.

To reduce the impact of interest rate changes on a portion of its variable-rate debt, the Company entered into interest rate swaps which effectively convert a portion of the debt from variable to fixed-rate borrowings during the term of the swap contracts. The Company is exposed to credit risk in the event of nonperformance by the counterparties. However, since only the cash interest payments are exchanged, exposure is significantly less than the notional amount. The counterparties are large financial institutions and the Company does not anticipate nonperformance. The Company concluded that these interest rate swap agreements qualify for special cash flow hedge accounting which permits the recording of the fair value of the interest rate swap agreements and corresponding adjustment to other comprehensive income (loss), net of tax, on the balance sheet. As of March 31, 2010, the Company had interest rate swap agreements with a notional value of $137.0 million and which effectively changed the Company’s interest rate on bank debt at March 31, 2010 from a variable rate to a fixed rate of 2.22%. The interest rate swap agreements mature at various times through December 2012. As of March 31, 2010, the Company recorded a current liability of $809,000 and a corresponding offset in accumulated other comprehensive loss of $489,000, net of tax.

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

 

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Table of Contents

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010 (UNAUDITED)

 

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 ASC 830 “Foreign Currency Matters.” 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 transactions that are denominated in a currency other than an entity’s functional currency are charged or credited to earnings. Foreign exchange transaction losses recognized in other (expense) income, net were $597,000 for the three months ended March 31, 2010 and foreign exchange transaction gains recognized in other (expense) income, net were $422,000 for the three months ended March 31, 2009.

Noncontrolling Interests On January 1, 2009, the Company adopted the amendment under ASC 810 “Consolidation” related to noncontrolling interests in consolidated financial statements. This amendment establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The amendment clarifies that a noncontrolling interest should be reported as equity in the consolidated financial statements and requires net income attributable to both the parent and the noncontrolling interest to be disclosed separately on the face of the consolidated statement of income. The presentation and disclosure requirements of the amendment require retrospective application to all prior periods presented. In accordance with ASC 810, the Company classified noncontrolling interests as equity on our condensed consolidated balance sheets as of March 31, 2010 and December 31, 2009. Net income attributable to noncontrolling interests for the three months ended March 31, 2010 and 2009 was not material.

Other Comprehensive Income Comprehensive income is defined as net income and all other non-owner changes in shareholders’ equity. The Company’s accumulated other comprehensive income consists of foreign currency translation adjustments, foreign currency hedges, foreign exchange contracts, interest rate swaps, and pension and post retirement related adjustments. Total comprehensive income was:

 

     Three Months Ended
March 31,
 

In thousands

   2010     2009  

Net income attributable to Wabtec shareholders

   $ 30,364      $ 32,666   

Foreign currency translation loss

     (9,928     (11,565

Unrealized gain (loss) on foreign exchange contracts, net of tax

     34        (81

Unrealized loss on interest rate swap contracts, net of tax

     (451     (194

Change in pension and post retirement benefit plans, net of tax

     295        361   
                

Total comprehensive income

   $ 20,314      $ 21,187   
                

The components of accumulated other comprehensive loss were:

 

In thousands

   March 31,
2010
    December 31,
2009
 

Foreign currency translation gain

   $ 2,972      $ 12,900   

Unrealized loss on foreign exchange contracts, net of tax

     (36     (70

Unrealized loss on interest rate swap contracts, net of tax

     (489     (38

Pension benefit plans and post retirement benefit plans, net of tax

     (43,043     (43,338
                

Total accumulated comprehensive loss

   $ (40,596   $ (30,546
                

 

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Table of Contents

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010 (UNAUDITED)

 

3. ACQUISITIONS AND DISCONTINUED OPERATIONS

On March 12, 2010, the Company acquired Xorail LLC (“Xorail”), a leading provider of signal engineering and design services. The purchase price was $39.9 million, net of cash received, resulting in preliminary additional goodwill of $28.9 million, of which none will be deductible for tax purposes. Xorail will operate as a business of Wabtec’s Freight Group.

On October 1, 2009, the Company used cash on hand to acquire Unifin International LP, and its affiliate, Cardinal Pumps and Exchangers, Inc. (“Unifin”), a manufacturer of cooling systems and related equipment for the power generation and transmission industry. The purchase price was $92.9 million, net of cash received, resulting in preliminary additional goodwill of $54.8 million, of which $31.3 million will be deductible for tax purposes. Unifin will operate as a business of Wabtec’s Freight Group. On July 22, 2009, the Company acquired certain assets for $3.4 million.

Operating results have been included in the consolidated statement of operations from the acquisition dates forward.

For the Xorail and Unifin acquisition, the following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of the acquisition:

 

     Xorail     Unifin  

In thousands

   March 12,
2010
    October 1,
2009
 

Current assets

   $ 11,358      $ 8,769   

Property, plant & equipment

     2,905        5,552   

Goodwill and other intangible assets

     34,803        88,294   

Other assets

     226        4,027   
                

Total assets acquired

     49,292        106,642   

Total liabilities assumed

     (9,349     (13,717
                

Net assets acquired

   $ 39,943      $ 92,925   
                

Of the preliminary allocation of $5.9 million of acquired intangible assets for Xorail, exclusive of goodwill, $4.1 million was assigned to customer relationships, $426,000 was assigned to intellectual property, $470,000 was assigned to non-compete agreements and $900,000 was assigned to customer backlog. The customer relationships’ average useful life is 20 years, the intellectual property’s average useful life is six years and the non-compete agreements’ average useful life is six years. Of the preliminary allocation of $33.5 million of acquired intangible assets for Unifin, exclusive of goodwill, $14.8 million was assigned to trade names, $16.2 million was assigned to customer relationships, $278,000 was assigned to patents and $2.2 million was assigned to customer backlog. The trade names are considered to have an indefinite useful life while the customer relationships’ average useful life is 10 years and patents’ average useful life is three years.

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010 (UNAUDITED)

 

The following unaudited pro forma financial information presents income statement results as if the acquisitions listed above had occurred on January 1, 2009:

 

In thousands

   Three Months Ended
March 31, 2010
   Three Months Ended
March 31, 2009

Net sales

   $ 371,959    $ 397,682

Gross profit

     112,310      116,303

Net income attributable to Wabtec shareholders

     30,666      36,258

Diluted earnings per share

     

As Reported

   $ 0.63    $ 0.68

Pro forma

   $ 0.64    $ 0.75

4. INVENTORIES

The components of inventory, net of reserves, were:

 

In thousands

   March 31,
2010
   December 31,
2009

Raw materials

   $ 97,191    $ 98,196

Work-in-process

     87,630      87,155

Finished goods

     56,265      53,982
             

Total inventories

   $ 241,086    $ 239,333
             

5. INTANGIBLES

Goodwill was $506.3 million and $483.0 million at March 31, 2010 and December 31, 2009, respectively. The adjustment of $2.4 million to Goodwill for preliminary purchase allocation is due to Unifin and Ricon. The change in the carrying amount of goodwill by segment for the three months ended March 31, 2010 is as follows:

 

In thousands

   Freight
Group
    Transit
Group
    Total  

Balance at December 31, 2009

   $ 311,230      $ 171,748      $ 482,978   

Adjustment to preliminary purchase allocation

     (25     (2,368     (2,393

Acquisition

     28,906        —        $ 28,906   

Foreign currency impact

     2,144        (5,351     (3,207
                        

Balance at March 31, 2010

   $ 342,255      $ 164,029      $ 506,284   
                        

As of March 31, 2010 and December 31, 2009, the Company’s trademarks had a net carrying amount of $95.2 million and $96.0 million, respectively, 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,
2010
   December 31,
2009

Patents and other, net of accumulated amortization of $26,211 and $26,135

   $ 13,023    $ 10,832

Customer relationships, net of accumulated amortization of $8,775 and $7,122

     82,254      80,806
             

Total

   $ 95,277    $ 91,638
             

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010 (UNAUDITED)

 

The weighted average remaining useful life of patents, customer relationships and intellectual property were eight years, 17 years and 17 years, respectively. Amortization expense for intangible assets was $1.9 million and $2.3 million for the three months ended March 31, 2010 and 2009, respectively.

6. LONG-TERM DEBT

Long-term debt consisted of the following:

 

In thousands

   March 31,
2010
   December 31,
2009

6.875% Senior Notes, due 2013

   $ 150,000    $ 150,000

Term Loan Facility

     153,750      170,000

Revolving Credit Facility

     115,000      71,000

Capital Leases

     697      780
             

Total

     419,447      391,780

Less—current portion

     34,457      32,741
             

Long-term portion

   $ 384,990    $ 359,039
             

2008 Refinancing Credit Agreement

On November 4, 2008, the Company refinanced its existing unsecured revolving credit agreement with a consortium of commercial banks. This “2008 Refinancing Credit Agreement” provides the company with a $300 million five-year revolving credit facility and a $200 million five-year term loan facility. The Company incurred $2.9 million of deferred financing cost related to the 2008 Refinancing Credit Agreement. Both facilities expire in January 2013. The 2008 Refinancing Credit Agreement borrowings bear variable interest rates indexed to the indices described below. At March 31, 2010, the Company had available bank borrowing capacity, net of $27.0 million of letters of credit, of approximately $158.0 million, subject to certain financial covenant restrictions.

Under the 2008 Refinancing Credit Agreement, the Company may elect a Base Rate of interest or an interest rate based on the London Interbank Offered Rate (“LIBOR”) of interest (“the Alternate Rate”). The Base Rate adjusts on a daily basis and is the greater of the PNC, N.A. prime rate, 30-day LIBOR plus 150 basis points or the Federal Funds Effective Rate plus 0.5% per annum, plus a margin that ranges from 25 to 50 basis points. The Alternate rate is based on quoted LIBOR rates plus a margin that ranges from 125 to 200 basis points. Both the Base Rate and Alternate Rate margins are dependent on the Company’s consolidated total indebtedness to cash flow ratios. The initial Base Rate margin is 25 basis points and the Alternate Rate margin is 125 basis points. At March 31, 2010 the weighted average interest rate on the Company’s variable rate debt was 1.52%. To reduce the impact of interest rate changes on a portion of this variable-rate debt, the Company entered into interest rate swaps which effectively convert a portion of the debt from variable to fixed-rate borrowings during the term of the swap contracts. On March 31, 2010, the notional value of interest rate swaps outstanding totaled $137.0 million and effectively changed the Company’s interest rate on bank debt at March 31, 2010 from a variable rate to a fixed rate of 2.22%. The interest rate swap agreements mature at various times through December 2012. The Company is exposed to credit risk in the event of nonperformance by the counterparties. However, since only the cash interest payments are exchanged, exposure is significantly less than the notional amount. The counterparties are large financial institutions and the Company does not anticipate nonperformance.

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010 (UNAUDITED)

 

The 2008 Refinancing Credit Agreement limits the Company’s ability to declare or pay cash dividends and prohibits the Company from declaring or making other distributions, subject to certain exceptions. The 2008 Refinancing Credit Agreement contains various other covenants and restrictions including the following limitations: incurrence of additional indebtedness; mergers, consolidations, sales of assets and acquisitions; additional liens; sale and leasebacks; permissible investments, loans and advances; certain debt payments; and imposes a minimum interest expense coverage ratio of 3.0 and a maximum debt to cash flow ratio of 3.25. The Company is in compliance with these measurements and covenants and expects that these measurements will not be any type of limiting factor in executing our operating activities.

6.875% 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 accrues at a rate of 6.875% per annum and is payable semi-annually on January 31 and July 31 of each year. The proceeds were used to repay debt outstanding under the Company’s existing credit agreement, and for general corporate purposes. The principal balance is due in full at maturity.

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

7. EMPLOYEE BENEFIT PLANS

Defined Benefit Pension Plans

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

The Company uses a December 31 measurement date for the U.S., Canadian, German and U.K. plans. The following tables provide information regarding the Company’s defined benefit pension plans summarized by U.S. and international components.

 

     U.S.     International  
     Three months ended
March 31,
    Three months ended
March 31,
 

In thousands, except percentages

       2010             2009             2010             2009      

Net periodic benefit cost

        

Service cost

   $ 80      $ 75      $ 738      $ 631   

Interest cost

     648        693        1,882        1,578   

Expected return on plan assets

     (776     (808     (1,941     (1,439

Net amortization/deferrals

     479        391        453        485   

Curtailment Loss recognized

     —          —          88        —     

Settlement loss recognized

     —          —          241        437   
                                

Net periodic benefit cost

   $ 431      $ 351      $ 1,461      $ 1,692   
                                

Assumptions

        

Discount rate

     5.75     6.25     6.11     6.69

Expected long-term rate of return

     8.00     8.00     6.94     7.34

Rate of compensation increase

     3.00     3.00     3.28     3.47

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010 (UNAUDITED)

 

Post Retirement Benefit Plans

In addition to providing pension benefits, the Company has provided certain unfunded postretirement health care and life insurance benefits for a portion of North American employees. The Company is not obligated to pay health care and life insurance benefits to individuals who had retired prior to 1990.

 

     U.S.     International  
     Three months ended
March 31,
    Three months ended
March 31,
 

In thousands, except percentages

       2010             2009             2010             2009      

Net periodic benefit cost

        

Service cost

   $ 12      $ 62      $ 17      $ 9   

Interest cost

     404        470        75        50   

Net amortization/deferrals

     (263     (221     (61     (57
                                

Net periodic benefit cost

   $ 153      $ 311      $ 31      $ 2   
                                

Assumptions

        

Discount rate

     5.75     6.25     6.40     7.50

8. STOCK-BASED COMPENSATION

As of March 31, 2010, the Company maintains employee stock-based compensation plans for stock options, restricted stock, and incentive stock awards as governed by the 2000 Stock Incentive Plan, as amended (the 2000 Plan). The Company also maintains a Non-Employee Directors’ Fee and Stock Option Plan (Directors Plan).

Stock-based compensation expense was $2.5 million and $0.8 million for the three months ended March 31, 2010 and 2009, respectively. Included in the stock-based compensation expense for 2010 above is $506,000 of expense related to stock options, $825,000 related to restricted stock, $935,000 related to incentive stock awards and $225,000 as compensation for Directors’ fees. At March 31, 2010, unamortized compensation expense related to those stock options, restricted shares and incentive stock awards expected to vest totaled $19.5 million and will be recognized over a weighted average period of 1.9 years.

Stock Options Under the 2000 Plan, stock options are granted to eligible employees at the fair market value, which is the average of the high and low Wabtec stock price on the date of grant. Generally, the options become exercisable over a three or four year vesting period and expire 10 years from the date of grant. Options issued under the Directors Plan become exercisable over a three-year vesting period and expire 10 years from the date of grant.

The following table summarizes the Company’s stock option activity and related information for both the 2000 Plan and Directors Plan for the three months ended March 31, 2010:

 

     Options     Weighted
Average
Exercise
Price
   Weighted Average
Remaining
Contractual Life
   Aggregate
intrinsic value
(in thousands)
 

Outstanding at December 31, 2009

   1,119,253      $ 23.89    6.1    $ 16,136   

Granted

   120,125        38.21         534   

Exercised

   (126,404     12.62         (3,795

Canceled

   (1,500     34.85         (12
                          

Outstanding at March 31, 2010

   1,111,474      $ 26.71    6.7    $ 17,720   
                          

Exercisable at March 31, 2010

   643,923      $ 21.46    5.3    $ 13,646   

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010 (UNAUDITED)

 

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,
 
     2010     2009  

Dividend yield

   .10   .13

Risk-free interest rate

   3.16   2.05

Stock price volatility

   46.1   43.8

Expected life (years)

   5.0      5.0   

The dividend yield is based on the Company’s dividend rate and the current market price of the underlying common stock at the date of grant. Expected life in years is determined from historical stock option exercise data. Expected volatility is based on the historical volatility of the Company’s stock. The risk-free interest rate is based on the U.S. Treasury bond rates for the expected life of the option.

Restricted Stock and Incentive Stock Awards Under the 2000 Plan, the Company adopted a restricted stock plan in 2006. Eligible employees are granted restricted stock that generally vests over three or four years from the date of grant.

In addition, the Company has issued incentive stock awards to eligible employees that vest upon attainment of certain cumulative three year performance goals. The incentive stock awards included in the table below represent the number of shares that may ultimately vest. As of March 31, 2010, based on the Company’s performance, we estimate that these stock awards will vest and have recorded compensation expense accordingly. If our estimate of the number of these stock awards expected to vest changes in a future accounting period, compensation expense could be reduced or increased and will be recognized over the remaining vesting period.

Compensation expense for the restricted stock and incentive stock awards is based on the closing price of the Company’s common stock on the date of grant and recognized over the applicable vesting period.

The following table summarizes the restricted stock and incentive stock awards activity and related information for the three months ended March 31, 2010:

 

     Restricted
Stock
    Incentive
Stock
Awards
    Weighted
Average Grant
Date Fair
Value

Outstanding at December 31, 2009

   241,284      267,792      $ 31.65

Granted

   127,125      158,492        38.21

Vested

   (111,009   (99,318     33.17
                  

Outstanding at March 31, 2010

   257,400      326,966      $ 34.30
                  

9. INCOME TAXES

The overall effective income tax rate was 34.8% and 36.2% for the three months ended March 31, 2010 and 2009, respectively. The decrease in effective rate is primarily due to a higher ratio of income earned in low tax rate foreign jurisdictions during the three months ended March 31, 2010.

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010 (UNAUDITED)

 

As of March 31, 2010 the liability for income taxes associated with uncertain tax positions is $9.5 million. As of December 31, 2009, the liability for income taxes associated with uncertain tax positions was $10.0 million. If the benefits of the uncertain tax positions are realized, $2.3 million would favorably affect the Company’s effective tax rate. The remaining $7.2 million is recorded as a deferred tax asset and would not impact the Company’s effective rate. The Company includes interest and penalties related to uncertain tax positions in income tax expense.

As of March 31, 2010 the Company has accrued interest and penalties of approximately $3.2 million and $1.7 million, respectively. As of December 31, 2009, the Company had accrued interest and penalties related to uncertain tax positions of approximately $3.1 million and $1.7 million, respectively.

With limited exception, the Company is no longer subject to examination by various U.S. and foreign taxing authorities for years before 2007. At this time, the Company believes that it is reasonably possible that unrecognized tax benefits of approximately $3.2 million may change within the next twelve months due to the expiration of statutory review periods and current examinations.

10. EARNINGS PER SHARE

The computation of basic and diluted earnings per share for net income attributable to Wabtec shareholders is as follows:

 

     Three Months Ended
March 31,
 

In thousands, except per share

   2010     2009  

Numerator

    

Numerator for basic and diluted earnings per common share—net income attributable to Wabtec shareholders

   $ 30,364      $ 32,666   

Less: dividends declared—common shares and non-vested restricted stock

     (468     (480
                

Undistributed earnings

     29,896        32,186   

Percentage allocated to common shareholders(1)

     99.5     99.5
                
     29,747        32,024   

Add: dividends declared—common shares

     466        478   
                

Numerator for basic and diluted earnings per common share

   $ 30,213      $ 32,502   
                

Denominator

    

Denominator for basic earnings per common share—weighted-average shares

     47,461        47,645   

Effect of dilutive securities:

    

Assumed conversion of dilutive stock-based compensation plans

     434        486   
                

Denominator for diluted earnings per common share—adjusted weighted-average shares and assumed conversion

     47,895        48,131   
                

Per common share net income attributable to Wabtec shareholders

    

Basic

   $ 0.64      $ 0.68   

Diluted

   $ 0.63      $ 0.68   

(1) Basic weighted-average common shares outstanding

     47,461        47,645   

Basic weighted-average common shares outstanding and non-vested restricted stock expected to vest

     47,678        47,887   

Percentage allocated to common shareholders

     99.5     99.5

 

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\WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010 (UNAUDITED)

 

The Company’s non-vested restricted stock contains rights to receive nonforfeitable dividends, and thus, are participating securities requiring the two-class method of computing earnings per share. The calculation of earnings per share for common stock shown above excludes the income attributable to the non-vested restricted stock from the numerator and excludes the dilutive impact of those shares from the denominator.

11. WARRANTIES

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

 

     Three Months Ended
March 31,
 

In thousands

   2010     2009  

Balance at December 31, 2009 and 2008, respectively

   $ 29,207      $ 30,676   

Warranty provision

     3,977        4,909   

Warranty claim payments

     (3,810     (4,169
                

Balance at March 31, 2010 and 2009, respectively

   $ 29,374      $ 31,416   
                

12. FAIR VALUE MEASUREMENT

ASC 820 “Fair Value Measurements and Disclosures” defines fair value, establishes a framework for measuring fair value and explains the related disclosure requirements. ASC 820 indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability and defines fair value based upon an exit price model.

Valuation Hierarchy. ASC 820 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The following table provides the liabilities carried at fair value measured on a recurring basis as of March 31, 2010, which are included in other current liabilities on the Condensed Consolidated Balance sheet:

 

     Total Carrying
Value at
March 31,
2010
    Fair Value Measurements at March 31, 2010 Using

In thousands

     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   Significant Other
Observable Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)

Foreign currency forward contracts

   $ (57   $ —      $ (57   $ —  

Interest rate swap agreements

     (809     —        (809     —  
                             

Total

   $ (866   $ —      $ (866   $ —  

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010 (UNAUDITED)

 

The following table provides the liabilities carried at fair value measured on a recurring basis as of December 31, 2009, which is included in other current liabilities on the Condensed Consolidated Balance sheet:

 

     Total Carrying
Value at
December 31,
2009
    Fair Value Measurements at December 31, 2009 Using

In thousands

     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   Significant Other
Observable Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)

Foreign currency forward contracts

   $ (110   $ —      $ (110   $ —  

Interest rate swap agreements

     (63     —        (63     —  
                             

Total

   $ (173   $ —      $ (173   $ —  

As a result of our global operating activities, the Company is exposed to market risks from changes in foreign currency exchange rates, which may adversely affect our operating results and financial position. When deemed appropriate, the Company minimizes these risks through entering into foreign currency forward contracts. The foreign currency forward contracts are valued using broker quotations, or market transactions in either the listed or over-the counter markets. As such, these derivative instruments are classified within level 2.

13. COMMITMENTS AND CONTINGENCIES

Claims 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. 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 prior to the time that the Company acquired any interest in RFPC.

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. We cannot, however, assure that all these claims will be fully covered by insurance or that the indemnitors or insurers 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.

It is Management’s belief that the potential range of loss for asbestos-related bodily injury cases is not reasonably determinable at present due to a variety of factors, including: (1) the asbestos case settlement history of the Company’s wholly owned subsidiary, RFPC; (2) the unpredictable nature of personal injury litigation in general; and (3) the uncertainty of asbestos litigation in particular. Despite this uncertainty, and although the results of the Company’s operations and cash flows for any given period could be adversely affected by asbestos-related lawsuits, Management believes that the final resolution of the Company’s asbestos-related cases will not be material to the Company’s overall financial position, results of operations and cash flows. In general, this belief is based upon: (1) Wabtec’s and RFPC’s history of settlements and dismissals of asbestos-related cases to date; (2) the inability of many plaintiffs to establish any exposure or causal relationship to RFPC’s product; and (3) the inability of many plaintiffs to demonstrate any identifiable injury or compensable loss.

More specifically, as to RFPC, Management’s belief that any losses due to asbestos-related cases would not be material is also based on the fact that RFPC owns insurance which provides coverage for asbestos-related bodily injury claims. To date, RFPC’s insurers have provided RFPC with defense and indemnity in these actions. The overall number of new claims being filed against RFPC has dropped significantly in recent years; however, these new claims, and all previously filed claims, may take a significant period of time to resolve. As to Wabtec

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010 (UNAUDITED)

 

and its divisions, Management’s belief that asbestos-related cases will not have a material impact is also based on its position that it has no legal liability for asbestos-related bodily injury claims, and that the former owners of Wabtec’s assets retained asbestos liabilities for the products at issue. To date, Wabtec has been able to successfully defend itself on this basis, including two arbitration decisions and a judicial opinion, all of which confirmed Wabtec’s position that it did not assume any asbestos liabilities from the former owners of certain Wabtec assets. Although Wabtec has incurred defense and administrative costs in connection with asbestos bodily injury actions, these costs have not been material, and the Company has no information that would suggest these costs would become material in the foreseeable future.

On October 18, 2007, Faiveley Transport Malmo AB filed a request for arbitration with the International Chamber of Commerce alleging breach of contract and trade secret violations relating to the Company’s manufacture and sale of certain components. The components at issue are limited in number and used in the transit industry. On that same day, Faiveley also filed a related proceeding against the Company in the United States District Court for the Southern District of New York (“Federal Court”), requesting a preliminary injunction in aid of the arbitration. In both forums, Faiveley seeks to prevent the Company from manufacturing and selling the subject components until the arbitration panel decides Faiveley’s claim. In the arbitration, Faiveley also sought monetary damages.

In the Federal Court action, Faiveley Malmo’s request for a preliminary injunction was initially granted, in part, on August 22, 2008. That injunction was vacated by the appellate court on March 9, 2009, and the case was remanded to the District Court for further proceedings. On remand, Faiveley Malmo renewed its request for injunctive relief. The District Court denied that request on August 31, 2009, and Faiveley Malmo appealed that denial to the appellate court. Faiveley Malmo later voluntarily dismissed that appeal.

In the international arbitration proceeding, Faiveley Malmo originally alleged $128 million in damages, but later reduced its claim to $91 million in damages. The Company has stated that Faiveley Malmo’s claims were grossly overstated, not supported by the facts or circumstances surrounding the case, and frivolous in most respects. An ICC International Court of Arbitration Arbitral Tribunal heard the case during the first half of 2009 and issued an award dated December 21, 2009. Pursuant to the Award, the Company was required to make a $3.9 million royalty payment to Faiveley Malmo, with respect to Faiveley Malmo’s claims against the Company alleging breach of contract and trade secret violations. Faiveley Malmo’s parent company, Faiveley Transport, has stated that other Faiveley entities are considering filing claims against the Company arising from the same allegations. The Company will vigorously contest any such claims and does not believe that they would result in any material legal liability.

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, 2009, filed on February 24, 2010. During the first three months of 2010, there were no material changes to the information described in Note 19 therein.

14. 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 primarily to the production and operation of freight cars and locomotives, including braking control equipment, on-board electronic components and train coupler equipment.

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010 (UNAUDITED)

 

Transit Group consists of products for passenger transit vehicles and locomotives (typically subways, commuter rail and buses) that include braking, coupling, monitoring systems, climate control and door equipment engineered to meet individual customer specifications, as well as commuter rail locomotives.

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.

Segment financial information for the three months ended March 31, 2010 is as follows:

 

In thousands

   Freight
Group
   Transit
Group
   Corporate
Activities and
Elimination
    Total  

Sales to external customers

   $ 165,144    $ 198,783    $ —        $ 363,927   

Intersegment sales/(elimination)

     6,900      540      (7,440     —     
                              

Total sales

   $ 172,044    $ 199,323    $ (7,440   $ 363,927   
                              

Income (loss) from operations

   $ 21,374    $ 33,231    $ (3,429   $ 51,176   

Interest expense and other, net

     —        —        (4,633     (4,633
                              

Income (loss) from operations before income taxes

   $ 21,374    $ 33,231    $ (8,062   $ 46,543   
                              

Segment financial information for the three months ended March 31, 2009 is as follows:

 

In thousands

   Freight
Group
   Transit
Group
   Corporate
Activities and
Elimination
    Total  

Sales to external customers

   $ 179,947    $ 198,013    $ —        $ 377,960   

Intersegment sales/(elimination)

     6,612      1,044      (7,656     —     
                              

Total sales

   $ 186,559    $ 199,057    $ (7,656   $ 377,960   
                              

Income (loss) from operations

   $ 25,546    $ 34,103    $ (3,901   $ 55,748   

Interest expense and other, net

     —        —        (4,547     (4,547
                              

Income (loss) from operations before income taxes

   $ 25,546    $ 34,103    $ (8,448   $ 51,201   
                              

Sales by product are as follows:

 

     Three Months Ended
March 31,

In thousands

   2010    2009

Brake products

   $ 121,998    $ 126,748

Freight electronics & specialty products

     89,760      102,078

Remanufacturing, overhaul & build

     72,361      69,151

Transit products

     59,474      59,867

Other

     20,334      20,116
             

Total sales

   $ 363,927    $ 377,960
             

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010 (UNAUDITED)

 

15. GUARANTOR SUBSIDIARIES FINANCIAL INFORMATION

Effective August 2003, the Company issued $150 million of Senior Notes due in 2013 (“Notes”). The obligations under the Notes are fully and unconditionally guaranteed by all U.S. subsidiaries as guarantors. In accordance with positions established by the Securities and Exchange Commission, the following shows separate financial information with respect to the parent, the guarantor subsidiaries and the non-guarantor subsidiaries. The principal elimination entries eliminate investment in subsidiaries and certain intercompany balances and transactions.

Balance Sheet as of March 31, 2010:

 

In thousands

   Parent     Guarantors     Non-Guarantors    Elimination     Consolidated

Cash and cash equivalents

   $ 8,694      $ 548      $ 169,658    $ —        $ 178,900

Accounts receivable

     358        153,109        94,482      —          247,949

Inventories

     —          167,655        73,431      —          241,086

Other current assets

     38,777        3,170        6,567      —          48,514
                                     

Total current assets

     47,829        324,482        344,138      —          716,449

Property, plant and equipment

     2,095        120,266        77,794      —          200,155

Goodwill

     7,980        364,122        134,182      —          506,284

Investment in subsidiaries

     2,187,892        452,654        378,067      (3,018,613     —  

Other intangibles

     —          132,072        58,395      —          190,467

Other long term assets

     (3,687     (6,004     34,576      —          24,885
                                     

Total Assets

   $ 2,242,109      $ 1,387,592      $ 1,027,152    $ (3,018,613   $ 1,638,240
                                     

Current liabilities

   $ 59,344      $ 159,136      $ 91,511    $ —        $ 309,991

Intercompany

     938,065        (1,021,427     83,362      —          —  

Long-term debt

     384,375        300        315      —          384,990

Other long term liabilities

     59,068        20,886        62,048      —          142,002
                                     

Total liabilities

     1,440,852        (841,105     237,236      —          836,983

Stockholders’ equity

     801,257        2,228,697        789,916      (3,018,613     801,257
                                     

Total Liabilities and Stockholders’ Equity

   $ 2,242,109      $ 1,387,592      $ 1,027,152    $ (3,018,613   $ 1,638,240
                                     

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010 (UNAUDITED)

 

Balance Sheet as of December 31, 2009:

 

In thousands

   Parent     Guarantors     Non-Guarantors    Elimination     Consolidated

Cash and cash equivalents

   $ 12,026      $ 12,124      $ 164,509    $ —        $ 188,659

Accounts receivable

     522        121,203        86,535      —          208,260

Inventories

     —          166,638        72,695      —          239,333

Other current assets

     38,038        5,040        10,179      —          53,257
                                     

Total current assets

     50,586        305,005        333,918      —          689,509

Property, plant and equipment, net

     2,232        119,195        80,280      —          201,707

Goodwill

     7,980        337,603        137,395      —          482,978

Investment in Subsidiaries

     2,102,458        452,653        382,942      (2,938,053     —  

Other intangibles, net

     —          127,705        59,925      —          187,630

Other long term assets

     (1,416     (7,360     32,787      —          24,011
                                     

Total assets

   $ 2,161,840      $ 1,334,801      $ 1,027,247    $ (2,938,053   $ 1,585,835
                                     

Current liabilities

   $ 55,907      $ 158,077      $ 91,364    $ —        $ 305,348

Intercompany

     907,149        (986,903     79,754      —          —  

Long-term debt

     358,500        316        223      —          359,039

Other long term liabilities

     61,371        18,575        62,589      —          142,535
                                     

Total liabilities

     1,382,927        (809,935     233,930      —          806,922

Stockholders’ equity

     778,913        2,144,736        793,317      (2,938,053     778,913
                                     

Total Liabilities and Stockholders’ Equity

   $ 2,161,840      $ 1,334,801      $ 1,027,247    $ (2,938,053   $ 1,585,835
                                     

Income Statement for the Three Months Ended March 31, 2010:

 

In thousands

   Parent     Guarantors     Non-Guarantors     Elimination(1)     Consolidated  

Net sales

   $ —        $ 262,678      $ 119,508      $ (18,259   $ 363,927   

Cost of sales

     180        (177,132     (92,221     13,635        (255,538
                                        

Gross profit (loss)

     180        85,546        27,287        (4,624     108,389   

Operating expenses

     (8,691     (33,370     (15,152     —          (57,213
                                        

Operating (loss) profit

     (8,511     52,176        12,135        (4,624     51,176   

Interest (expense) income, net

     (5,645     1,605        128        —          (3,912

Other income (expense), net

     1,089        979        (2,789     —          (721

Equity earnings

     54,041        4,826        —          (58,867     —     
                                        

Income (loss) from operations before income tax

     40,974        59,586        9,474        (63,491     46,543   

Income tax expense

     (10,610     (3,590     (1,979     —          (16,179
                                        

Net income (loss) attributable to Wabtec shareholders

   $ 30,364      $ 55,996      $ 7,495      $ (63,491   $ 30,364   
                                        

 

(1) Includes elimination of gross profit realized with certain intercompany transactions between Guarantor and Non-Guarantor subsidiaries.

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010 (UNAUDITED)

 

Income Statement for the Three Months Ended March 31, 2009:

 

In thousands

   Parent     Guarantors     Non-Guarantors     Elimination(1)     Consolidated  

Net sales

   $ —        $ 293,529      $ 109,699      $ (25,268   $ 377,960   

Cost of sales

     833        (194,670     (88,971     12,023        (270,785
                                        

Gross profit (loss)

     833        98,859        20,728        (13,245     107,175   

Operating expenses

     (8,182     (30,175     (13,070     —          (51,427
                                        

Operating (loss) profit

     (7,349     68,684        7,658        (13,245     55,748   

Interest (expense) income, net

     (6,169     1,100        133        —          (4,936

Other (expense) income, net

     (168     (645     1,202        —          389   

Equity earnings

     56,195        (808     —          (55,387     —     
                                        

Income (loss) from operations before income tax

     42,509        68,331        8,993        (68,632     51,201   

Income tax expense

     (9,843     (2,946     (5,746     —          (18,535
                                        

Net income (loss) attributable to Wabtec shareholders

   $ 32,666      $ 65,385      $ 3,247      $ (68,632   $ 32,666   
                                        

 

(1) Includes elimination of gross profit realized with certain intercompany transactions between Guarantor and Non-Guarantor subsidiaries.

Condensed Statement of Cash Flows for the Three Months Ended March 31, 2010:

 

In thousands

   Parent     Guarantors     Non-Guarantors     Elimination     Consolidated  

Net cash (used for) provided by operating activities

   $ (30,443   $ 84,358      $ 21,943      $ (63,491   $ 12,367   

Net cash used for investing activities

     (45     (39,917     (1,213     —          (41,175

Net cash provided by (used for) financing activities

     27,156        (56,017     (7,557     63,491        27,073   

Effect of changes in currency exchange rates

     —          —          (8,024     —          (8,024
                                        

(Decrease) increase in cash

     (3,332     (11,576     5,149        —          (9,759

Cash, beginning of year

     12,026        12,124        164,509        —          188,659   
                                        

Cash, end of period

   $ 8,694      $ 548      $ 169,658      $ —        $ 178,900   
                                        

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010 (UNAUDITED)

 

Condensed Statement of Cash Flows for the Three Months Ended March 31, 2009:

 

In thousands

   Parent     Guarantors     Non-Guarantors     Elimination     Consolidated  

Net cash provided by (used for) operating activities

   $ 1,160      $ 63,280      $ (1,546   $ (68,632   $ (5,738

Net cash (used for) provided by investing activities

     (178     (1,757     2,134        —          199   

Net cash (used for) provided by financing activities

     (33,169     (65,406     (3,047     68,632        (32,990

Effect of changes in currency exchange rates

     —          —          (5,184     —          (5,184
                                        

Decrease in cash

     (32,187     (3,883     (7,643     —          (43,713

Cash, beginning of year

     37,941        4,272        99,592        —          141,805   
                                        

Cash, end of period

   $ 5,754      $ 389      $ 91,949      $ —        $ 98,092   
                                        

16. OTHER EXPENSE, NET

The components of other expense are as follows:

 

     Three Months Ended
March 31,
 

In thousands

       2010             2009      

Foreign currency (losses) gains , net

   $ (597   $ 422   

Other miscellaneous expense

     (124     (33
                

Total other (expense) income, net

   $ (721   $ 389   
                

 

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Item 2. 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 Annual Report on Form 10-K for the year ended December 31, 2009, filed with the Securities and Exchange Commission on February 24, 2010.

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 U.S. locomotives, freight cars and passenger transit vehicles, as well as in approximately 100 countries 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 17 countries. In the first three months of 2010, about 49% of the Company’s revenues came from customers outside the U.S.

Management Review and Future Outlook

Wabtec’s long-term financial goals are to generate cash flow in excess of net income, 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, including global and market expansion, new products and technologies, aftermarket products and services, and acquisitions. In addition, Management evaluates the Company’s short-term operational performance through measures such as quality and on-time delivery.

The Company monitors a variety of factors and statistics to gauge market activity. The freight rail industry is largely driven by general economic conditions, which can cause fluctuations in rail traffic. Based on those fluctuations, railroads can increase or decrease purchases of new locomotives and freight cars. In 2010, U.S. freight rail traffic has increased due to the improving overall economy. Through mid-April, revenue ton-miles were 4% higher than the year-ago period, and railroads have started to pull freight cars and locomotives out of storage and return them to the active fleet. This activity has led to an increase in sales of aftermarket components and services. Deliveries of new locomotives and freight cars, however are still expected to be about half of 2009 levels, due to the large number of these vehicles that are in storage. Although less than 15% of the Company’s revenues are directly related to deliveries of new freight locomotives and freight cars, the decline in those markets has had a negative impact on the Company’s financial results. To mitigate this impact, Wabtec initiated a series of cost savings initiatives in recent quarters.

In 2008, the U.S. government enacted rail safety legislation that requires certain freight and passenger railroads to equip certain locomotives with positive train control technology by the end of 2015. This technology includes an on-board locomotive computer and related software, which are being developed by Wabtec. As the industry leader, Wabtec expects to benefit from increased sales of train control-related products as the technology is deployed throughout the industry.

The North American transit industry is driven by government spending and ridership. Spending under SAFETEA-LU, the federal government’s transportation funding bill, increased about 6% in 2009, while ridership decreased about 4% due to the recession and its impact on employment levels. Although SAFETEA-LU expired in September 2009, the bill has been extended through December 2010, with funding at about 2009 levels. In early 2009, the U.S. federal government passed new spending legislation designed to stimulate the U.S. economy, with up to $20 billion to be spent on freight and passenger transportation, as follows: $8.4 billion for public transportation, $8 billion for high-speed rail, $1.5 billion for discretionary intermodal projects, and $1.3

 

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billion for AMTRAK. Most of this funding has already been allocated to specific projects, and Wabtec expects to benefit from a portion of this additional spending, as transit authorities invest in expansion and new equipment.

In the passenger transit market, the Company believes that increases in federal funding over time and stable ridership will continue to have a beneficial effect on demand for the Company’s products and services over the long term. In the short term, however, many transit agencies are facing budget issues and some are electing to defer purchases of new equipment and aftermarket parts. In response to these market conditions, Wabtec may continue to take certain actions to reduce costs, including plant consolidations, work force reductions and general spending cuts. Management believes these actions will not affect the company’s ability to continue to invest in its strategic growth initiatives.

Wabtec continues to expand its presence in freight rail and passenger transit markets outside the U.S., particularly in Europe, Asia-Pacific and South America. In Europe, the majority of the rail system serves the passenger transit market, which is much larger than the transit market in the U.S. Asia-Pacific is the fastest-growing market segment, led by China’s plans to spend a record $120 billion in 2010.

In 2010 and beyond, general economic and market conditions in the United States and internationally will have an impact on our sales and operations. If the world economy does not continue to improve, this could result in renewed instability of capital markets, longer sales cycles, deferral or delay of customer orders or an inability to market our products effectively. Any of these factors could materially adversely affect our business and results of operations. In addition, we face risks associated with our growth strategies including 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 periods indicated.

 

     Three Months Ended
March 31,
 

In millions

       2010             2009      

Net sales

   $ 363.9      $ 378.0   

Cost of sales

     (255.5     (270.8
                

Gross profit

     108.4        107.2   

Selling, general and administrative expenses

     (44.6     (38.6

Engineering expenses

     (10.7     (10.6

Amortization expense

     (1.9     (2.3
                

Total operating expenses

     (57.2     (51.5

Income from operations

     51.2        55.7   

Interest income (expense), net

     (3.9     (4.9

Other income (expense), net

     (0.7     0.4   
                

Income from operations before income taxes

     46.6        51.2   

Income tax expense

     (16.2     (18.5
                

Net income attributable to Wabtec shareholders

   $ 30.4      $ 32.7   
                

 

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FIRST QUARTER 2010 COMPARED TO FIRST QUARTER 2009

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

 

     Three months ended March 31,  

In thousands

   2010    2009    Percent
Change
 

Freight Group

   $ 165,144    $ 179,947    (8.2 )% 

Transit Group

     198,783      198,013    0.4
                    

Net sales

     363,927      377,960    (3.7 )% 

Income from operations

     51,176      55,748    (8.2 )% 

Net income attributable to Wabtec shareholders

   $ 30,364    $ 32,666    (7.0 )% 

Net sales decreased by $14.1 million to $363.9 million from $378.0 million for the three months ended March 31, 2010 and 2009, respectively. The decrease is primarily due to lower Freight Group original equipment sales. Sales related to acquisitions of $12.7 million, partially offset the decrease. The Company realized a net sales increase of $11.4 million due to favorable effects of foreign exchange, but net earnings were generally not impacted by foreign exchange. Net income for the three months ended March 31, 2010 was $30.4 million or $0.63 per diluted share. Net income for the three months ended March 31, 2009 was $32.7 million or $0.68 per diluted share. The decrease in net income is primarily due to lower Freight Group sales and increased selling, general and administrative expense, partially offset by higher operating margins and cost-saving initiatives.

Freight Group sales decreased by $14.8 million, or 8.2%, due to lower sales of $26.8 million for specialty products, $4.8 million for brake products and $2.9 million for other products. Offsetting those reductions was an increase in sales of $12.7 million from acquisitions. For the Freight Group, net sales were increased by $6.6 million due to favorable effects of foreign exchange on sales mentioned above.

Transit Group sales increased by $0.8 million, or 0.4%, due to favorable effects of foreign exchange on sales of $4.8 million, partially offset by decreased brake product sales of $4.2 million.

Gross profit Gross profit, which is dependent on a number of factors including pricing, sales volume and product mix, increased to $108.4 million in the first quarter of 2010 compared to $107.2 million in the same period of 2009. Gross profit, as a percentage of sales, was 29.8% for the first quarter of 2010 compared to 28.4%, for the first quarter of 2009. The gross profit percentage increased due to realized cost savings from downsizing and consolidation actions initiated in 2009. The provision for warranty expense is generally established for specific losses, along with historical estimates of customer claims as a percentage of sales. The provision for warranty expense was $0.9 million lower in 2010 compared to the same period of 2009 due primarily to lower specific reserves on certain transit products. The warranty reserve decreased at March 31, 2010 compared to March 31, 2009 by $2.0 million primarily due to adjustments to reserves for certain acquisitions.

Operating expenses The following table shows our operating expenses:

 

     Three months ended March 31,  

In thousands

   2010    2009    Percent
Change
 

Selling, general and administrative expenses

   $ 44,631    $ 38,553    15.8

Engineering expenses

     10,695      10,559    1.3

Amortization expense

     1,887      2,315    (18.5 )% 
                    

Total operating expenses

   $ 57,213    $ 51,427    11.3
                    

Selling, general, and administrative expenses increased $6.1 million in the first quarter of 2010 compared to the same period of 2009 primarily due to acquisitions and non-cash compensation. Amortization expense

 

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decreased in the first quarter of 2010 compared to the same period in 2009 due to higher acquisition related charges in the first quarter of 2009. Total operating expenses were 15.7% and 13.6% of sales for the first quarter of 2010 and 2009, respectively.

Income from operations Income from operations totaled $51.2 million (or 14.1% of sales) in the first quarter of 2010 compared with $55.7 million (or 14.7% of sales) in the same period of 2009. The decrease in income from operations is primarily due to lower Freight Group sales and increased selling, general and administrative expense, partially offset by higher operating margins and cost-saving initiatives.

Interest expense, net Interest expense, net decreased $1.0 million in the first quarter of 2010 compared to the same period of 2009 due to lower interest rates.

Other expense, net The Company recorded foreign exchange losses of $0.6 million in the first quarter of 2010 and foreign exchange gains of $0.4 million in the first quarter of 2009, due to the effect of currency exchange rate changes on intercompany transactions that are non U.S. dollar denominated and charged or credited to earnings.

Income taxes The effective income tax rate was 34.8% and 36.2% for the first quarter of 2010 and 2009, respectively. The decrease in effective rate is primarily due to a higher ratio of income earned in foreign jurisdictions with lower tax rates than the U.S. during the first quarter of 2010.

Net income Net income for the first quarter of 2010 decreased $2.3 million, compared with the same period of 2009. The decrease in net income is primarily due to lower sales and increased operating costs.

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. The following is a summary of selected cash flow information and other relevant data:

 

 

     Three months ended
March 31,
 

In thousands

   2010     2009  

Cash provided by (used for):

    

Operating activities

   $ 12,367      $ (5,738

Investing activities

     (41,175     199   

Financing activities

     27,073        (32,990

Decrease in cash

   $ (9,759   $ (43,713

Operating activities Cash provided by operations in the first three months of 2010 was $12.4 million as compared to cash used for operations of $5.7 million for the same period of 2009. This $18.1 million increase in cash provided by operations resulted from a net decrease in working capital. The accrued liabilities and customer deposits increase resulted in a $44.9 million improvement. The accounts payable increase resulted in a $37.6 million improvement. The accounts receivables increase resulted in a $45.5 million unfavorable impact on working capital. The inventory increase resulted in a $12.1 million unfavorable impact on working capital. Other assets and liabilities, including accrued income taxes, used cash of $6.5 million.

Investing activities Cash used for investing activities in the first three months of 2010 was $41.2 million as compared to cash provided by investing activities of $0.2 million for the same period of 2009. Capital expenditures were $3.6 million and $3.4 million in the first three months of 2010 and 2009, respectively. During the first three months of 2010 the Company received $2.4 million as part of the working capital settlement for the Ricon acquisition. During the first three months of 2010, Wabtec acquired Xorail, a provider of signal

 

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engineering and design services for $39.9 million, net of cash received. During the first three months of 2009 the Company sold a facility for net cash proceeds of $3.6 million to an unrelated third party. While certain portions of the building are being leased back, this transaction resulted in a gain of $2.1 million and deferred gain of $0.6 million. The deferred gain will be recognized over five years.

Financing activities In the first three months of 2010, cash provided by financing activities was $27.1 million, which included $111.0 million in proceeds from debt and $67.0 million of repayments of debt on the revolving credit facility, $16.3 million of debt repayments on the term loan and other debt, $0.5 million of dividend payments and $3.1 million for the repurchase of 75,000 shares of stock. In the first three months of 2009, cash used for financing activities was $33.0 million, which included $23.0 million of debt repayments and $6.0 million in proceeds from debt on the revolving credit facility, $8.1 million of debt repayments on the term loan and other debt, $0.5 million of dividend payments and $7.3 million for the repurchase of 290,000 shares of stock.

The following table shows outstanding indebtedness at March 31, 2010 and December 31, 2009.

 

In thousands

   March 31,
2010
   December 31,
2009

6.875% Senior Notes, due 2013

   $ 150,000    $ 150,000

Term Loan Facility

     153,750      170,000

Revolving Credit Facility

     115,000      71,000

Capital Leases

     697      780
             

Total

     419,447      391,780

Less—current portion

     34,457      32,741
             

Long-term portion

   $ 384,990    $ 359,039
             

Cash balance at March 31, 2010 and December 31, 2009 was $178.9 million and $188.7 million, respectively.

2008 Refinancing Credit Agreement

On November 4, 2008, the Company refinanced its existing unsecured revolving credit agreement with a consortium of commercial banks. This “2008 Refinancing Credit Agreement” provides the company with a $300 million five-year revolving credit facility and a $200 million five-year term loan facility. The Company incurred $2.9 million of deferred financing cost related to the 2008 Refinancing Credit Agreement. Both facilities expire in January 2013. The 2008 Refinancing Credit Agreement borrowings bear variable interest rates indexed to the indices described below. At March 31, 2010, the Company had available bank borrowing capacity, net of $27.0 million of letters of credit, of approximately $158.0 million, subject to certain financial covenant restrictions.

Under the 2008 Refinancing Credit Agreement, the Company may elect a Base Rate of interest or an interest rate based on the London Interbank Offered Rate (“LIBOR”) of interest (“the Alternate Rate”). The Base Rate adjusts on a daily basis and is the greater of the PNC, N.A. prime rate, 30-day LIBOR plus 150 basis points or the Federal Funds Effective Rate plus 0.5% per annum, plus a margin that ranges from 25 to 50 basis points. The Alternate rate is based on quoted LIBOR rates plus a margin that ranges from 125 to 200 basis points. Both the Base Rate and Alternate Rate margins are dependent on the Company’s consolidated total indebtedness to cash flow ratios. The initial Base Rate margin is 25 basis points and the Alternate Rate margin is 125 basis points. At March 31, 2010 the weighted average interest rate on the Company’s variable rate debt was 1.52%. To reduce the impact of interest rate changes on a portion of this variable-rate debt, the Company entered into interest rate swaps which effectively convert a portion of the debt from variable to fixed-rate borrowings during the term of the swap contracts. On March 31, 2010, the notional value of interest rate swaps outstanding totaled $137.0

 

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million and effectively changed the Company’s interest rate on bank debt at March 31, 2010 from a variable rate to a fixed rate of 2.22%. The interest rate swap agreements mature at various times through December 2012. The Company is exposed to credit risk in the event of nonperformance by the counterparties. However, since only the cash interest payments are exchanged, exposure is significantly less than the notional amount. The counterparties are large financial institutions and the Company does not anticipate nonperformance.

The 2008 Refinancing Credit Agreement limits the Company’s ability to declare or pay cash dividends and prohibits the Company from declaring or making other distributions, subject to certain exceptions. The 2008 Refinancing Credit Agreement contains various other covenants and restrictions including the following limitations: incurrence of additional indebtedness; mergers, consolidations, sales of assets and acquisitions; additional liens; sale and leasebacks; permissible investments, loans and advances; certain debt payments; and imposes a minimum interest expense coverage ratio of 3.0 and a maximum debt to cash flow ratio of 3.25. The Company is in compliance with these measurements and covenants and expects that these measurements will not be any type of limiting factor in executing our operating activities.

6.875% 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 accrues at a rate of 6.875% per annum and is payable semi-annually on January 31 and July 31 of each year. The proceeds were used to repay debt outstanding under the Company’s existing credit agreement, and for general corporate purposes. The principal balance is due in full at maturity.

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 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. The Company is in compliance with these measurements and covenants and expects that these measurements will not be any type of limiting factor in executing our operating activities.

Management believes that based on current levels of operations and forecasted earnings, cash flow and liquidity will be sufficient to fund working capital and capital equipment needs as well as meeting debt service requirements. If sources of funds were to fail to satisfy the Company’s cash requirements, the Company may need to refinance our 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.

Company Stock Repurchase Plan

On July 31, 2006, the Board of Directors authorized the repurchase of up to $50 million of the Company’s outstanding shares. On February 20, 2008, the Board of Directors authorized the repurchase of up to an additional $100 million of the Company’s outstanding shares. During the first quarter of 2008, the Company completed the $50 million authorization made in 2006. Cumulative purchases under both plans have totaled $105.3 million, leaving $44.7 million under the authorization.

The Company intends to purchase these shares on the open market or in negotiated or block trades. No time limit was set for the completion of the program which conforms to the requirements under the 2008 Refinancing Credit Agreement, as well as the 6.875 % Senior Notes currently outstanding.

During the first three months of 2010, the Company repurchased 75,000 shares at an average price of $41.28 per share. During 2009, the Company repurchased 669,700 shares of its stock at an average price of $29.35 per share. All purchases were on the open market.

 

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Contractual Obligations and Off-Balance Sheet Arrangements

As of March 31, 2010, the Company has recognized a total liability of $9.5 million for unrecognized tax benefits related to uncertain tax positions. At this time, the Company is unable to make a reasonably reliable estimate of the timing of cash settlement for any of the unrecognized tax benefits due to the uncertainty of the timing and outcome of its audits and other factors.

Since December 31, 2009, there have been no other significant changes in the total amount of the Company’s contractual obligations or the timing of cash flows in accordance with those obligations, as reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

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 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

 

   

prolonged unfavorable economic and industry conditions in the markets served by us, including North America, South America, Europe, Australia, Asia and South Africa;

 

   

further decline in demand for freight cars, locomotives, passenger transit cars, buses and related products and services;

 

   

reliance on major original equipment manufacturer customers;

 

   

original equipment manufacturers’ program delays;

 

   

demand for services in the freight and passenger rail industry;

 

   

demand for our products and services;

 

   

orders either being delayed, cancelled, not returning to historical levels, or reduced or any combination of the foregoing;

 

   

consolidations in the rail industry;

 

   

continued outsourcing by our customers; industry demand for faster and more efficient braking equipment;

 

   

fluctuations in interest rates and foreign currency exchange rates; or

 

   

availability of credit;

Operating factors

 

   

supply disruptions;

 

   

technical difficulties;

 

   

changes in operating conditions and costs;

 

   

increases in raw material costs;

 

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successful introduction of new products;

 

   

performance under material long-term contracts;

 

   

labor relations;

 

   

completion and integration of acquisitions; or

 

   

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;

 

   

levels of governmental funding on transit projects, including for some of our customers;

 

   

political developments, laws and regulations and federal and state income tax legislation; or

 

   

the outcome of our existing or any future legal proceedings, including litigation involving our principal customers and any litigation with respect to environmental, asbestos-related matters and pension liabilities; and

Transaction or commercial factors

 

   

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

Statements in this 10-Q apply only as of the date on which such statements are made, and we undertake no obligation to update any statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

Critical Accounting Policies

A summary of critical accounting policies is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. In particular, judgment is used in areas such as accounts receivable and the allowance for doubtful accounts, inventories, goodwill and indefinite-lived intangibles, warranty reserves, pensions and postretirement benefits, income taxes and revenue recognition. There have been no significant changes in accounting policies since December 31, 2009.

 

Item 3. 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. The Company’s variable rate debt represents 31% and 38% of total long-term debt at March 31, 2010 and December 31, 2009, respectively. On an annual basis a 1% change in the interest rate for variable rate debt at March 31, 2010 would increase or decrease interest expense by $1.3 million.

To reduce the impact of interest rate changes on a portion of this variable-rate debt, the Company entered into interest rate swaps which effectively convert a portion of the debt from variable to fixed-rate borrowings during the term of the swap contracts. The Company is exposed to credit risk in the event of nonperformance by the counterparties. However, since only the cash interest payments are exchanged, exposure is significantly less

 

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than the notional amount. The counterparties are large financial institutions and the Company does not anticipate nonperformance. The Company concluded that these interest rate swap agreements qualify for special cash flow hedge accounting which permits the recording of the fair value of the interest rate swap agreements and corresponding adjustment to other comprehensive income (loss), net of tax, on the balance sheet. As of March 31, 2010, the Company had interest rate swap agreements with a notional value of $137.0 million and which effectively changed the Company’s interest rate on bank debt at March 31, 2010 from a variable rate to a fixed rate of 2.22%. The interest rate swap agreements mature at various times through December 2012. As of March 31, 2010, the Company recorded a current liability of $809,000 and a corresponding offset in accumulated other comprehensive loss of $489,000, net of tax.

Foreign Currency Exchange Risk

The Company has entered into foreign currency forward contracts to reduce the impact of changes in currency exchange rates. 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.

At March 31, 2010, the Company had forward contracts for the sale of South African Rand (ZAR) and the purchase of U.S. Dollars (USD). The Company concluded that these foreign currency forward contracts qualify for cash flow hedge accounting which permits the recording of the fair value of the forward contract and corresponding adjustment to other comprehensive income (loss), net of tax, on the balance sheet. As of March 31, 2010, the Company had forward contracts with a notional value of 5.8 million ZAR (or $728,000 USD), with an average exchange rate of 7.95 ZAR per $1 USD, resulting in the recording of a current liability of $57,000 and a corresponding offset in accumulated other comprehensive loss of $36,000, net of tax.

We are also subject to certain risks associated with changes in foreign currency exchange rates to the extent our operations are conducted in currencies other than the U.S. dollar. For the first three months of 2010, approximately 51% of Wabtec’s net sales were to customers in the United States, 15% in Canada, 9% in the United Kingdom, 5% in Australia, 2% in Germany, 1% in Mexico and 17% in other international locations.

 

Item 4. 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, 2010. 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, 2010, that has materially affected, or is reasonably likely to materially affect, Wabtec’s internal control over financial reporting.

 

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PART II—OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

Except as described in Note 13, there have been no material changes regarding the Company’s commitments and contingencies as described in Note 19 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

 

Item 1A. RISK FACTORS

There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009.

 

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On July 31, 2006, the Board of Directors authorized the repurchase of up to $50 million of the Company’s outstanding shares. On February 20, 2008, the Board of Directors authorized the repurchase of up to an additional $100 million of the Company’s outstanding shares. During the first quarter of 2008, the Company completed the $50 million authorization made in 2006.

The Company intends to purchase these shares on the open market or in negotiated or block trades. No time limit was set for the completion of the repurchase program which conforms to the requirements under the Refinancing Credit Agreement and the 2008 Refinancing Credit Agreement, as well as the 6.875 % Senior Notes currently outstanding.

During the first three months of 2010, the Company repurchased 75,000 shares at an average price of 41.28 per share. During 2009, the Company repurchased 669,700 shares at an average price of $29.35 per share. All purchases were on the open market.

 

Period

   Total
Number
of Shares
Purchased
   Average
Price
Paid per
Share
   Number of
Shares
Purchased
for
Announced
Program
   Approximate
Dollar Value
of Shares that
May Yet Be
Purchased

January 1, 2010 to January 30, 2010

   75,000      41.28    75,000    $ 44,691,651

January 31, 2010 to February 27, 2010

   —        —      —      $ 44,691,651

February 28, 2010 to April 3, 2010

   —        —      —      $ 44,691,651
                       

Total

   75,000    $ 41.28    75,000    $ 44,691,651
                       

 

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Item 6. EXHIBITS

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.
  3.2    Amended and Restated By-Laws of the Company, effective December 13, 2007.
31.1    Rule 13a-14(a) Certification of Chief Executive Officer.
31.2    Rule 13a-14(a) Certification of Chief Financial Officer.
32.1    Section 1350 Certification of Chief Executive Officer and Chief Financial Officer.

 

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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,
  Senior Vice President,
  Chief Financial Officer and Secretary

(Duly Authorized Officer and Principal Financial Officer)

DATE: May 6, 2010

 

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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    Amended and Restated By-Laws of the Company, effective December 13, 2007, filed as Exhibit 3.1 to Form 8-K filed on December 14, 2007, and incorporated herein by reference.
31.1    Rule 13a-14(a) Certification of Chief Executive Officer, filed herewith.
31.2    Rule 13a-14(a) Certification of Chief Financial Officer, filed herewith.
32.1    Section 1350 Certification of Chief Executive Officer and Chief Financial Officer, filed herewith.

 

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