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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
from ______ to ______
Commission file number 1-13782
WESTINGHOUSE AIR BRAKE TECHNOLOGIES
CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 25-1615902
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1001 AIR BRAKE AVENUE
WILMERDING, PENNSYLVANIA 15148 (412) 825-1000
(Address of principal executive offices) (Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for at least the past 90 days. Yes _X_ No ___.
As of May 1, 2000, 51,752,591 shares of Common Stock of the registrant
were issued and outstanding, of which 8,303,836 shares were unallocated ESOP
shares.
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WESTINGHOUSE AIR BRAKE TECHNOLOGIES
CORPORATION
MARCH 31, 2000 FORM 10-Q
TABLE OF CONTENTS
Page
---------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2000
and December 31, 1999 3
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Position and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31 DECEMBER 31
In thousands, except shares and par value 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 14,731 $ 7,056
Accounts receivable 179,688 179,734
Inventories 222,700 211,396
Other current assets 38,334 39,062
--------------------------
Total current assets 455,453 437,248
Property, plant and equipment 400,471 395,687
Accumulated depreciation (179,448) (172,996)
--------------------------
Property, plant and equipment, net 221,023 222,691
OTHER ASSETS
Contract underbillings 26,406 27,710
Goodwill 232,004 233,760
Other intangibles 42,119 43,287
Other noncurrent assets 31,170 31,980
--------------------------
Total other assets 331,699 336,737
--------------------------
Total Assets $1,008,175 $ 996,676
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $749 $743
Accounts payable 82,414 87,388
Accrued merger and restructuring costs 7,462 8,705
Customer deposits 31,016 31,827
Accrued income taxes 10,225 5,155
Accrued interest 6,391 2,470
Other accrued liabilities 57,599 57,924
--------------------------
Total current liabilities 195,856 194,212
Long-term debt 562,857 567,844
Reserve for postretirement and pension benefits 20,888 19,918
Other long-term liabilities 33,352 32,824
--------------------------
Total liabilities 812,953 814,798
SHAREHOLDERS' EQUITY
Preferred stock, 1,000,000 shares authorized, no shares issued - -
Common stock, $.01 par value; 100,000,000 shares authorized: 65,447,867 shares issued and
51,739,642 outstanding at March 31, 2000 and 51,529,331 outstanding at December 31, 1999 654 654
Additional paid-in capital 314,132 318,357
Treasury stock, at cost, 13,708,225 and 13,918,536 shares, respectively (198,448) (201,711)
Unearned ESOP shares, at cost, 8,319,396 and 8,366,076 shares, respectively (124,791) (125,491)
Retained earnings 210,755 194,772
Deferred compensation 6,614 6,595
Accumulated other comprehensive income (loss) (13,694) (11,298)
--------------------------
Total shareholders' equity 195,222 181,878
--------------------------
Total Liabilities and Shareholders' Equity $1,008,175 $ 996,676
==========================
The accompanying notes are an integral part of these statements.
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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
THREE MONTHS ENDED
MARCH 31
In thousands, except per share data 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
Net sales $ 258,859 $ 298,478
Cost of sales (182,366) (209,410)
------------------------
Gross profit 76,493 89,068
Selling, general and administrative expenses (29,481) (33,078)
Merger and restructuring charges (2,348) -
Engineering expenses (8,236) (8,907)
Amortization expense (3,689) (3,381)
------------------------
Total operating expenses (43,754) (45,366)
Income from operations 32,739 43,702
Other income and expenses
Interest expense (11,170) (11,290)
Other income (expense), net 4,071 (267)
------------------------
Income before income taxes and extraordinary item 25,640 32,145
Income tax expense (9,230) (11,878)
------------------------
Income before extraordinary item 16,410 20,267
Extraordinary loss on extinguishment of debt, net of tax - (469)
------------------------
Net income $ 16,410 $ 19,798
========================
EARNINGS PER COMMON SHARE
Basic
Income before extraordinary item $0.38 $0.47
Extraordinary item - (0.01)
------------------------
Net income $0.38 $0.46
========================
Diluted
Income before extraordinary item $0.38 $0.46
Extraordinary item - (.01)
------------------------
Net income $0.38 $0.45
========================
Weighted average shares outstanding
Basic 43,259 43,182
Diluted 43,350 44,352
------------------------
The accompanying notes are an integral part of these statements.
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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
THREE MONTHS ENDED
MARCH 31
In thousands 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 16,410 $ 19,798
Adjustments to reconcile net income to cash provided by operations:
Extraordinary loss on extinguishment of debt - 469
Depreciation and amortization 11,203 10,599
Provision for ESOP contribution 700 1,380
Gain on sale of product line (4,375) -
Changes in operating assets and liabilities, net
of acquisitions
Accounts receivable (783) 1,294
Inventories (11,795) (4,998)
Contract underbillings 1,304 (93)
Accounts payable (4,583) (13,055)
Accrued income taxes 5,070 4,683
Accrued liabilities and customer deposits 2,084 (3,112)
Other assets and liabilities 3,600 2,119
-----------------------
Net cash provided by operating activities 18,835 19,084
INVESTING ACTIVITIES
Purchase of property, plant and equipment, net (6,910) (10,302)
Acquisitions of businesses, net of cash acquired - (33,584)
Cash received from disposition of product line 4,500 -
Other - 243
-----------------------
Net cash used for investing activities (2,410) (43,643)
FINANCING ACTIVITIES
Proceeds from (repayments of) credit agreements 12,200 (3,589)
Proceeds from senior notes offering - 75,000
Repayments of other borrowings (17,181) (40,372)
Purchase of treasury stock (4,369) -
Cash dividends (427) (246)
Proceeds from exercise of stock options and other benefit plans 3,338 1,562
Other (911)
-----------------------
Net cash (used for) provided by financing activities (6,439) 31,444
Effect of changes in currency exchange rates (2,311) (71)
-----------------------
Increase in cash 7,675 6,814
Cash, beginning of year 7,056 8,983
-----------------------
Cash, end of period $ 14,731 $ 15,797
=======================
The accompanying notes are an integral part of these statements.
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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000 (UNAUDITED)
1. BUSINESS
Westinghouse Air Brake Technologies Corporation (the "Company", "Wabtec") is
North America's largest manufacturer of value-added equipment for locomotives,
railway freight cars and passenger transit vehicles. Our major products are
intended to enhance safety, improve productivity and reduce maintenance costs
for our customers and include electronic controls and monitors, air brakes,
traction motors, cooling equipment, turbochargers, low-horsepower locomotives,
couplers, door controls, draft gears and brake shoes. We aggressively pursue
technological advances with respect to both new product development and product
enhancements.
The Company has two reporting segments: Freight Group and Transit Group.
Although approximately 60% of the Company's sales are to the aftermarket, a
significant portion of the Freight Group's operations and revenue base is
generally dependent on the capital replacement cycles for locomotives and
freight cars of the large North American-based railroad companies. The Transit
Group's operations are dependent on the budgeting and expenditure appropriation
process of federal, state and local governmental units for mass transit needs
established by public policy.
2. ACCOUNTING POLICIES
BASIS OF PRESENTATION The unaudited condensed consolidated interim financial
statements have been prepared in accordance with generally accepted accounting
principles and the rules and regulations of the Securities and Exchange
Commission and include the accounts of Wabtec and its majority owned
subsidiaries. These condensed interim financial statements do not include all of
the information and footnotes required for complete financial statements. In
management's opinion, these financial statements reflect all adjustments, which
are of a normal, recurring nature, necessary for a fair presentation of the
results for the interim periods presented. Results for these interim periods are
not necessarily indicative of results to be expected for the full year. Certain
prior period amounts have been reclassified, where necessary, to conform to the
current period presentation.
The Company operates on a four-four-five week accounting quarter, and
accordingly, the quarters end on or about March 31, June 30, September 30 and
December 31.
The notes included herein should be read in conjunction with the audited
consolidated financial statements included in Wabtec's Annual Report on Form
10-K for the year ended December 31, 1999.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires the Company to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual amounts could differ from the
estimates.
OTHER COMPREHENSIVE INCOME Comprehensive income is defined as net income and all
nonowner changes in shareholders' equity. The Company's accumulated other
comprehensive income (loss) consists entirely of foreign currency translation
adjustments. Total comprehensive income for the quarters ended March 31, 2000
and 1999 was $14 million and $20.3 million, respectively.
3. MERGERS AND ACQUISITIONS
On November 19, 1999, Westinghouse Air Brake Company (WABCO) merged with
MotivePower Industries, Inc. to form Wabtec. The Company issued approximately 18
million shares of the Company's Common Stock to former MotivePower shareholders
and reserved approximately 2 million shares for the contingent exercise of stock
options. The transaction was valued at approximately $354 million and was
accounted for by the pooling-of-interests accounting method. Accordingly, the
condensed consolidated financial statements have been restated giving effect to
this transaction as if it had occurred as of the beginning of the earliest
period presented.
The combined results of the Company and separate results of WABCO and
MotivePower for the three months ended March 31, 1999 were as follows:
EXTRAORDINARY NET
In thousands SALES ITEM INCOME
----------------------------------------------------------
WABCO $191,204 $469 $11,920
MotivePower 107,274 - 7,878
---------------------------------------
Combined $298,478 $469 $19,798
----------------------------------------------------------
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During 1999, the Company completed the following acquisitions:
i) In January 1999, the Company acquired certain assets of G&G
Locotronics, a privately held designer of high voltage electrical
cabinets and control stands for locomotives, for total consideration of
$17.8 million.
ii) In January 1999, the Company acquired 100% of the Common Stock of
Q-Tron, Ltd., a privately held designer and manufacturer of locomotive
electronics equipment, for total consideration of $14.9 million.
iii) In February 1999, the Company acquired the mass transit electrical
inverter and converter product line of AGC System & Technologies, Inc.
of Canada for approximately $960,000.
The 1999 acquisitions were accounted for under the purchase method. Accordingly,
the results of operations of the applicable acquisition are included in the
Company's financial statements prospectively from the acquisition date.
3. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined under
the first-in, first-out (FIFO) method. Inventory costs include material, labor
and overhead. Cores inventory is defined as inventory units designated for unit
exchange programs. The components of inventory, net of reserves, were:
MARCH 31 DECEMBER 31
In thousands 2000 1999
- ----------------------------------------------------------------
Cores $29,796 $29,999
Raw materials 97,720 99,948
Work-in-process 50,017 47,319
Finished goods 45,167 34,130
------------------------
Total inventory $222,700 $211,396
- ----------------------------------------------------------------
4. EARNINGS PER SHARE
The computation of earnings per share is as follows:
THREE MONTHS ENDED
MARCH 31
In thousands, except per share 2000 1999
- -----------------------------------------------------------------
BASIC EARNINGS PER SHARE
Income before extraordinary item
applicable to common
shareholders $16,410 $20,267
Divided by
Weighted average shares
outstanding 43,259 43,182
Basic earnings per share before
extraordinary item $0.38 $0.47
- -----------------------------------------------------------------
DILUTED EARNINGS PER SHARE
Income before extraordinary item
applicable to common
shareholders $16,410 $20,267
Divided by sum of
Weighted average shares
outstanding 43,259 43,182
Conversion of dilutive stock
options 91 1,170
--------------------
Diluted shares outstanding 43,350 44,352
Diluted earnings per share
before extraordinary item $0.38 $0.46
- -----------------------------------------------------------------
5. COMMITMENTS AND CONTINGENCIES
The Company is subject to a RCRA Part B Closure Permit ("the Permit") issued by
the Environmental Protection Agency (EPA) and the Idaho Department of Health and
Welfare, Division of Environmental Quality relating to the monitoring and
treatment of groundwater contamination on, and adjacent to, the Boise Locomotive
Company facility. In compliance with the Permit, the Company has drilled wells
onsite to retrieve and treat contaminated groundwater, and onsite and offsite to
monitor the amount of hazardous constituents. The Company has estimated the
expected aggregate discounted liability at March 31, 2000, using a discount rate
of 6% for remediation costs to be approximately $4 million, which has been
accrued. The Company was in compliance with the Permit at March 31, 2000.
On February 12, 1999, GE Harris Railway Electronics, LLC and GE Harris Railway
Electronic Services, LLC (collectively, "GE Harris") brought suit against the
Company for alleged patent infringement and unfair competition related to a
communications system installed in one of the Company's products. GE Harris is
seeking to prohibit the Company from future infringement and is seeking an
unspecified amount of money damages to recover, in part, royalties. As this
lawsuit is in the earliest stages, the Company is unable to estimate the cost,
if any, of resolving litigation and thus, no costs have been provided for this
matter.
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6. 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. Financial information for these segments has
been restated in conjunction with the operational realignment of our
organization pursuant to the merger of WABCO and MotivePower. The business
segments are:
FREIGHT GROUP manufactures products and services geared to the production and
operation of freight cars and locomotives, including braking control equipment,
engines, traction motors, on-board electronic systems and train coupler
equipment. Revenues are derived from aftermarket and OEM component sales,
locomotive overhauls and from freight car repairs and services.
TRANSIT GROUP consists of products for passenger transit vehicles (typically
subways, rail and buses) that include braking and monitoring systems, climate
control and door equipment that are engineered to meet individual customer
specifications. Revenues are derived from OEM component sales and aftermarket
sales as well as from repairs and services.
The Company evaluates its business segments' operating results based on income
from operations before merger and restructuring charges. Corporate activities
include general corporate expenses, elimination of intersegment transactions,
interest income and expense and other unallocated charges. Since certain
administrative and other operating expenses and other items have not been
allocated to business segments, the results in the below tables are not
necessarily a measure computed in accordance with generally accepted accounting
principles and may not be comparable to other companies.
Segment financial information for the three months ended March 31, 2000 is as
follows:
FREIGHT TRANSIT CORPORATE MERGER AND
In thousands GROUP GROUP ACTIVITIES RESTRUCTURING TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
Sales to external customers $194,048 $64,811 - - $258,859
Intersegment sales/(elimination) 2,876 43 $(2,919) - -
--------------------------------------------------------------------
Total sales $196,924 $64,854 $(2,919) - $258,859
====================================================================
Income from operations $33,222 $6,691 $(4,826) $(2,348) $32,739
Interest expense and other - - (7,099) - (7,099)
--------------------------------------------------------------------
Income before income taxes and extraordinary item $33,222 $6,691 $(11,925) $(2,348) $25,640
====================================================================
Segment financial information for the three months ended March 31, 1999 is as
follows:
FREIGHT TRANSIT CORPORATE MERGER AND
In thousands GROUP GROUP ACTIVITIES RESTRUCTURING TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
Sales to external customers $243,616 $54,862 - - $298,478
Intersegment sales/(elimination) 2,255 41 $(2,296) - -
--------------------------------------------------------------------
Total sales $245,871 $54,903 $(2,296) - $298,478
====================================================================
Income from operations $ 45,492 $4,370 $(6,160) - $43,702
Interest expense and other - - (11,557) - (11,557)
--------------------------------------------------------------------
Income before income taxes and extraordinary item $ 45,492 $4,370 $(17,717) - $32,145
====================================================================
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7. MERGER AND RESTRUCTURING CHARGES
The Company estimates the charges to complete the merger and restructuring plan
will total $70 million pre-tax with approximately $50 million of the charge
previously expensed. The Company incurred additional merger and
restructuring-related charges of approximately $2.3 million in the first quarter
of 2000 and expects to incur an additional $18 million of merger and
restructuring-related expenses later in 2000.
The $2.3 million charge included the following actions:
o Costs associated with the transaction for items such as legal fees and
consulting.
o Marketing and corporate reorganization expenses.
o Employee severance and relocation payments related to closing certain
plants and consolidating others.
As of March 31, 2000, $7.5 million of the $50 million merger and
restructuring-related charge incurred in 1999, remained accrued on the balance
sheet. The table below identifies the significant components of the accrual.
TRANSACTION
COSTS, SEVERANCE
AND TERMINATION LEASE
In thousands BENEFITS IMPAIRMENTS OTHER TOTAL
- ---------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $2,119 $5,738 $848 $8,705
Amounts paid (707) (110) (426) (1,243)
---------------------------------------------------------------
Balance at March 31, 2000 $1,412 $5,628 $422 $7,462
- ---------------------------------------------------------------------------------------------------------------
The transaction, severance and termination benefits accrual is for approximately
173 employees. The remaining employees are expected to be laid-off in the second
and third quarter of 2000 as planned. This accrual represents the calculation of
the severance package based on the employee's salary and tenure with the
Company. The lease impairment charges relate to the relocation of the corporate
headquarters, and the Company's evaluation of certain assets. The other category
represents other related costs that have been incurred and not yet paid as of
March 31, 2000.
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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 1999 Annual Report on Form 10-K.
OVERVIEW
Net income for the first quarter of 2000 was $16.4 million, or $0.38 per diluted
share, as compared to $19.8 million, or $0.45 per diluted share in the same
period of 1999. The results for the first quarter of 2000 include a $2.3 million
merger and restructuring charge and a $4.4 million gain on the disposition of a
product line. Net sales decreased 13.3% in the first quarter of 2000 as compared
to the same quarter in 1999. Operating margins in the first quarter of 2000
decreased to 12.6% as compared to 14.6% in the first quarter of 1999. After
excluding the merger and restructuring charges that effect operating income,
operating margins would have been 13.6%.
MERGER AND RESTRUCTURING PLAN
The Company previously announced a merger and restructuring plan pursuant to the
merger of the Company and MotivePower Industries, Inc., which is anticipated to
yield synergies of $15 million pre-tax in 2000 and produce an ongoing annualized
benefit of $25 million pre-tax, by year-end 2000. The Company expects the
benefits to be realized through reduced cost of sales and reduced selling,
general and administrative expenses. The merger and restructuring plan involves
the elimination of duplicate facilities and excess capacity, operational
realignment and related workforce reductions, and the evaluation of certain
assets as to their perceived ongoing benefit to the Company. The Company
estimates the charges to complete the merger and restructuring plan will total
$70 million pre-tax with approximately $52 million of the charge previously
expensed. Of the $18 million charge left to be incurred, the Company expects the
majority of this charge to occur in the second and third quarter of 2000 with
the cash portion being approximately $10 million to $11 million of the charge.
The accrual on the balance sheet is discussed in greater detail in Note 7 to
"Notes to Condensed Consolidated Financial Statements" included in this report.
FIRST QUARTER 2000 COMPARED TO
FIRST QUARTER 1999
A number of events have occurred over the comparative period that impacted the
Company's results of operations and financial condition including:
o Expected decreases in component sales due to a slowdown in U.S. freight
car and locomotive deliveries, and a downturn in the locomotive
overhauling market.
o Improved sales and backlog in the transit business due to increased
governmental spending for transit equipment.
The following table sets forth the Company's net sales by business segment:
THREE MONTHS ENDED
MARCH 31
-------------------------
In thousands 2000 1999
- -----------------------------------------------------------------
Freight Group $194,048 $243,616
Transit Group 64,811 54,862
-------------------------
Net sales $258,859 $298,478
- -----------------------------------------------------------------
Net sales for the first quarter of 2000 decreased $39.6 million, or 13.3%, to
$258.9 million. This decrease was attributable to decreased OEM freight car and
locomotive volumes and lower locomotive overhauls both within the Freight Group.
Partially offsetting these decreases were higher Transit Group sales. Sales
volumes within the Freight Group reflect a softening OEM market for freight
cars, with 16,867 freight cars delivered in the first quarter of 2000 compared
to 21,560 in the same period of 1999. In 2000, the Company expects the OEM
freight car and locomotive industries to deliver approximately 50,000 and 1,100
new freight cars and locomotives, respectively.
Gross profit decreased to $76.5 million in the first quarter of 2000 compared to
$89.1 million in the same period of 1999. Gross margin, as a percentage of
sales, was 29.6% compared to 29.8% in 1999. Gross margin is dependent on a
number of factors including sales volume and product mix. Favorable sales
volumes in the Transit Group were offset by decreases in volumes within the
Freight Group.
Total operating expenses as a percentage of net sales were 16.9% in the first
quarter of 2000 as compared to 15.2% in the same period a year ago. After
excluding the first quarter 2000 $2.3 million merger and restructuring charge,
operating expenses would have been 16% of net sales. Total operating expenses
decreased $1.6 million, or $4 million without the merger and restructuring
charge, in the quarter-to-quarter comparison. This reduction was primarily due
to continuing cost cutting programs and synergies from the merger.
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Operating income totaled $32.7 million in the first quarter of 2000 compared
with $43.7 million in the same period of 1999. After excluding the merger and
restructuring charges that effect operating income, operating income would have
been $35.1 million. Lower operating income resulted from decreased sales
volumes. (See Note 6 - "Notes to Condensed Consolidated Financial Statements"
regarding segment-specific information, included elsewhere in this report).
In February 2000, the Company disposed a product line for $4.5 million in
cash and $1 million to be received upon the completion of other conditions and
recognized a gain of $4.4 million, which is reported as other income.
In the first quarter of 2000, the effective tax rate improved to an annual rate
of 36% from 37% a year ago, primarily from additional benefits through our
Foreign Sales Corporation.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is provided primarily by operating cash flow and borrowings under the
Company's credit facilities with a consortium of commercial banks ("credit
agreement"). The following is a summary of selected cash flow information and
other relevant data.
THREE MONTHS ENDED
MARCH 31
-------------------------
In thousands 2000 1999
- ---------------------------------------------------------------
Cash provided (used) by:
Operating activities $18,835 $19,084
Investing activities-business
acquisitions - (33,584)
Investing activities-sale of
product line 4,500 -
Investing activities-other (6,910) (10,059)
Financing activities (6,439) 31,444
Earnings before interest, taxes,
depreciation and amortization
(EBITDA) 43,942 54,301
Adjusted EBITDA (before merger and
restructuring charges) $46,290 $54,301
- ---------------------------------------------------------------
Operating cash flow in the first quarter of 2000 was $18.8 compared to $19.1
million in the same period a year ago. Working capital increased 7% since
December 31, 1999, primarily due to an increase in inventories. During the first
quarter of 2000, cash outlays for merger and restructuring activities were
approximately $3.3 million and are reported as a reduction to cash provided by
operating activities. Excluding these cash outlays, cash provided by operating
activities would have been approximately $22.2 million. Adjusted EBITDA,
excluding the merger and restructuring charge, was $46.3 million in the first
quarter of 2000 as compared to $54.3 million in the same period in 1999.
Cash used for investing activities declined in the first quarter of 2000 to $2.4
million from $43.6 million a year ago. In the first quarter of 2000, cash
received from the sale of a product line was $4.5 million. In the first quarter
of 1999, $33.6 million was used for certain business acquisitions. Capital
expenditures were $6.9 million and $10.3 million in the first quarter of 2000
and 1999, respectively. The majority of capital expenditures for these periods
relates to upgrades to existing equipment, replacement of existing equipment and
purchases of new equipment due to expansion of Wabtec's operations, where the
Company believes overall cost savings can be achieved through increasing
efficiencies. The Company expects 2000 capital expenditures for equipment
purchased for similar purposes to approximate $40 million to $45 million.
Cash used for financing activities was $6.4 million in the first quarter of 2000
versus cash provided by financing activities of $31.4 million in the same period
a year ago. In the first quarter of 2000, the Company reduced long-term debt by
approximately $5 million. The Company issued $75 million of senior notes in the
first quarter of 1999 to repay amounts outstanding on certain unsecured bank
term debt and repaid a portion of the Company's previous revolving credit
facility. Historically, the Company has financed the purchase of significant
businesses utilizing the amounts available under its credit facilities.
The Company estimates the charges to complete the merger and restructuring plan
will total $70 million pre-tax with approximately $52 million of the charge
expensed to date. Of the $18 million charge yet to be incurred, the Company
expects the majority of this charge to occur in the second and third quarter of
2000 with the cash portion being approximately $10 million to $11 million of the
charge.
Based on anticipated cash flow provided by operations, forecasted results and
credit available under the credit agreement, the Company believes it will be
able to make planned capital expenditures and required debt payments over the
next twelve months.
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The following table sets forth the Company's outstanding indebtedness and
average interest rates at March 31, 2000. The revolving credit note and other
term loan interest rates are variable and dependent on market conditions.
MARCH 31 DECEMBER 31
In thousands 2000 1999
- ---------------------------------------------------------------
Revolving credit, 7.3% $380,200 $368,000
9 3/8% Senior notes 175,000 175,000
Pulse note, 9.5% - 16,990
5.5% Industrial revenue bond
due 2008 6,607 6,749
Other 1,799 1,848
------------------------
Total 563,606 568,587
Less-current portion 749 743
------------------------
Long-term portion $562,857 $567,844
- ---------------------------------------------------------------
Credit Agreement
In November 1999, in connection with the merger, WABCO terminated its then
existing credit agreement and refinanced the then existing MotivePower credit
agreement with a consortium of commercial banks. The credit agreement provides
for a $275 million five-year revolving credit facility and a 364-day $275
million convertible revolving credit facility. At March 31, 2000, the Company
had available borrowing capacity, net of letters of credit, of approximately
$145 million.
9 3/8% Senior Notes Due June 2005
In June 1995, the Company issued $100 million of 9 3/8% Senior Notes due in 2005
(the "1995 Notes"). In January 1999, the Company issued an additional $75
million of 9 3/8% Senior Notes which are due in 2005 (the "1999 Notes"; the 1995
Notes and the 1999 Notes are collectively, the "Notes"). The 1999 Notes were
issued at a premium resulting in an effective rate of 8.5%. The terms of the
1995 Notes and the 1999 Notes are substantially the same, and the 1995 Notes and
the 1999 Notes were issued pursuant to indentures that are substantially the
same. The issuance of the 1999 Notes improved the Company's financial liquidity
by i) using a portion of the proceeds to repay $30 million of debt associated
with the Rockwell acquisition that bore interest at 9.56%; ii) using a portion
of the proceeds to repay variable-rate revolving credit borrowings thereby
increasing amounts available under the revolving credit facility; and iii)
repaying the remaining unpaid principal of $10.2 million from the Comet
acquisition. As result of this issuance, the Company wrote off previously
capitalized debt issuance costs of $469,000, net of tax, or approximately $.01
per diluted share, in the first quarter of 1999.
Pulse Note
As partial payment for the Pulse acquisition, the Company issued a $17 million
note due January 31, 2004, with interest at 9.5%. In January 2000, this note was
repaid with our revolving credit facility.
Principal repayments of outstanding loan balances are due at various intervals
until maturity.
Management believes, based upon current levels of operations and forecasted
earnings, that cash flow from operations, together with borrowings under the
credit agreement, will be adequate to make payments of principal and interest on
debt, including the Notes, to permit anticipated capital expenditures, and to
fund working capital requirements and other cash needs for the foreseeable
future, including 2001. The increase in financial liquidity was primarily the
result of changing the base available for borrowing under the November 1999
refinanced credit agreement. The issuance of the 1999 Notes also increased the
Company's liquidity by reducing its outstanding revolving credit borrowings and
thereby increasing its available borrowing capacity.
Nevertheless, the Company will remain leveraged to a significant extent and its
debt service obligations will continue to be substantial. The debt of the
Company requires the dedication of a substantial portion of future cash flows to
the payment of principal and interest on indebtedness, thereby reducing funds
available for capital expenditures and future business opportunities that the
Company believes are available. The Company believes cash flow and liquidity
will be sufficient to meet its debt service requirements. If the Company's
sources of funds were to fail to satisfy the Company's cash requirements, the
Company may need to refinance its existing debt or obtain additional financing.
There is no assurance that such new financing alternatives would be available,
and, in any case, such new financing, if available, would be expected to be more
costly and burdensome than the debt agreements currently in place.
FORWARD LOOKING STATEMENTS
We believe that all statements other than statements of historical facts
included in this report, including certain statements under "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," may constitute forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. Although we believe that our assumptions made in connection with
the forward-looking statements are reasonable, we cannot assure you that our
assumptions and expectations are correct.
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These forward-looking statements are subject to various risks, uncertainties and
assumptions about us, including, among other things:
Economic and Industry Conditions
- materially adverse changes in economic or industry conditions generally
or in the markets served by us, including North America, South America,
Europe, Australia and Asia;
- demand for services in the freight and passenger rail industry;
- consolidations in the rail industry;
- demand for our products and services;
- continued outsourcing by our customers;
- demand for freight cars, locomotives, passenger transit cars and buses;
- industry demand for faster and more efficient braking equipment;
- fluctuations in interest rates.
Operating Factors
- supply disruptions;
- technical difficulties;
- changes in operating conditions and costs;
- successful introduction of new products;
- labor relations;
- completion and integration of additional acquisitions;
- the development and use of new technology.
Competitive Factors
- the actions of competitors.
Political/Governmental Factors
- political stability in relevant areas of the world;
- future regulation/deregulation of our customers and/or the rail
industry;
- governmental funding for some of our customers;
- political developments and laws and regulations, such as forced
divestiture of assets, restrictions on production, imports or exports,
price controls, tax increases and retroactive tax claims, expropriation
of property, cancellation of contract rights, and environmental
regulations.
Transaction or Commercial Factors
- the outcome of negotiations with partners, governments, suppliers,
customers or others; and
- our ability to complete the integration of the Westinghouse Air Brake
and MotivePower businesses so to achieve the stated synergies.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
EFFECTS OF YEAR 2000
The Company has not experienced any significant events attributable to Year 2000
issues.
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 $332 million of variable-rate debt (considering the effects of
existing interest rate swaps), which represents 59% of total long-term debt at
March 31, 2000. At March 31, 2000, an instantaneous 100 basis point increase in
interest rates would reduce the Company's net income annually by approximately
$2.1 million, net of tax, assuming no additional intervention strategies by
management.
FOREIGN CURRENCY EXCHANGE RISK The Company periodically enters into several
types of financial instruments for the purpose of managing its exposure to
foreign currency exchange rate fluctuations in countries in which the Company
has significant operations. As of March 31, 2000, the Company had no such
instruments outstanding.
Wabtec is also subject to certain risks associated with changes in foreign
currency exchange rates to the extent its operations are conducted in currencies
other than the U.S. dollar. For the first quarter of 2000, approximately 73% of
net sales are in the United States, 11% in Canada, 6% in Mexico and 10% in other
international locations, primarily Europe. At March 31, 2000, the Company does
not believe changes in foreign currency exchanges rates represent a material
risk to results of operations, financial position or liquidity.
LEGAL PROCEEDINGS AND COMMITMENTS AND CONTINGENCIES
There were no significant changes to report regarding the Company's legal
proceedings and commitments and contingencies.
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EXHIBITS AND REPORTS ON FORM 8-K
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
10.32 Westinghouse Air Brake Technologies Corporation 2000 Stock
Incentive Plan as amended through March 22, 2000
27 Financial Data Schedule as of and for the Three Months ended
March 31, 2000
There were no Current Reports on Form 8-K filed during the quarter ended March
31, 2000.
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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/ ROBERT J. BROOKS
-----------------------------------
Robert J. Brooks
Chief Financial Officer
Date: May 10, 2000
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