================================================================================
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 SEPTEMBER 30, 2001
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
from ______ to ______
Commission file number 1-13782
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 25-1615902
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1001 AIR BRAKE AVENUE
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 November 13, 2001, 43,117,924 shares of Common Stock of the
registrant were issued and outstanding.
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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
SEPTEMBER 30, 2001 FORM 10-Q
TABLE OF CONTENTS
Page
---------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30,
2001 and December 31, 2000 3
Condensed Consolidated Statements of Operations for the
three months and nine months ended September 30, 2001 and
2000 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2001 and 2000 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Position and
Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
2
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
SEPTEMBER 30 DECEMBER 31
In thousands, except shares and par value 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 61 $ 6,071
Accounts receivable 162,229 194,379
Inventories 186,617 202,828
Other current assets 40,620 44,277
------------------------
Total current assets 389,527 447,555
Property, plant and equipment 394,656 407,322
Accumulated depreciation (192,554) (192,677)
------------------------
Property, plant and equipment, net 202,102 214,645
OTHER ASSETS
Contract underbillings 16,462 23,898
Goodwill, net 220,315 226,597
Other intangibles, net 43,294 38,797
Other noncurrent assets 25,504 32,555
------------------------
Total other assets 305,575 321,847
------------------------
Total Assets $ 897,204 $ 984,047
========================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 775 $ 751
Accounts payable 77,048 86,316
Accrued merger and restructuring costs 3,606 6,257
Customer deposits 14,783 25,125
Accrued income taxes 15,745 8,758
Accrued interest 7,417 2,104
Other accrued liabilities 57,463 61,345
------------------------
Total current liabilities 176,837 190,656
Long-term debt 454,237 539,446
Reserve for postretirement and pension benefits 20,456 19,387
Other long-term liabilities 30,788 38,187
------------------------
Total liabilities 682,318 787,676
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
43,085,007 outstanding at September 30, 2001 and 42,841,985 outstanding at December 31, 2000 654 654
Additional paid-in capital 272,880 273,494
Treasury stock, at cost, 22,362,860 and 22,605,882 shares, respectively (278,345) (281,665)
Retained earnings 241,927 218,470
Deferred compensation 619 900
Accumulated other comprehensive income (loss) (22,849) (15,482)
------------------------
Total shareholders' equity 214,886 196,371
------------------------
Total Liabilities and Shareholders' Equity $ 897,204 $ 984,047
========================
The accompanying notes are an integral part of these statements.
3
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED UNAUDITED
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
In thousands, except per share data 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------
Net sales $ 228,532 $ 255,163 $ 736,745 $ 763,186
Cost of sales (171,814) (187,587) (546,756) (551,847)
-----------------------------------------------------------
Gross profit 56,718 67,576 189,989 211,339
Selling, general and administrative expenses (28,226) (28,894) (84,415) (86,090)
Restructuring charges (1,719) (11,452) (4,418) (19,391)
Engineering expenses (8,364) (7,813) (25,256) (24,100)
Amortization expense (3,660) (3,584) (11,208) (10,850)
-----------------------------------------------------------
Total operating expenses (41,969) (51,743) (125,297) (140,431)
Income from operations 14,749 15,833 64,692 70,908
Other income and expenses
Interest expense (8,287) (11,812) (28,537) (33,843)
Other income (expense), net 322 (1,619) (1,184) 3,514
-----------------------------------------------------------
Income before income taxes 6,784 2,402 34,971 40,579
Income tax expense (391) (5,931) (10,256) (19,675)
-----------------------------------------------------------
Net income (loss) $ 6,393 $ (3,529) $ 24,715 $ 20,904
===========================================================
EARNINGS PER COMMON SHARE
Basic $ 0.15 $ (0.08) $ 0.58 $ 0.48
===========================================================
Diluted $ 0.15 $ (0.08) $ 0.57 $ 0.48
===========================================================
Weighted average shares outstanding
Basic 42,999 43,415 42,923 43,352
Diluted 43,304 43,439 43,205 43,433
-----------------------------------------------------------
The accompanying notes are an integral part of these statements.
4
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
NINE MONTHS ENDED
SEPTEMBER 30
In thousands 2001 2000
- -------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 24,715 $ 20,904
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization 31,362 31,654
Provision for ESOP contribution -- 1,315
Loss (gain) on sale of product line 521 (4,375)
Write-off deferred income tax asset -- 5,067
Other, primarily non-cash restructuring related charges 160 1,895
Changes in operating assets and liabilities, net
of acquisition and disposition of product line
Accounts receivable 35,406 (32,409)
Inventories 12,049 (8,979)
Accounts payable (8,062) 2,143
Accrued income taxes 6,993 2,103
Accrued liabilities and customer deposits (17,943) (3,041)
Other assets and liabilities 1,725 9,595
----------------------------
Net cash provided by operating activities 86,926 25,872
INVESTING ACTIVITIES
Purchase of property, plant and equipment, net (11,307) (17,833)
Cash received from disposition of product line 4,120 5,500
Cash paid for acquisition of product line (743) (650)
----------------------------
Net cash used for investing activities (7,930) (12,983)
FINANCING ACTIVITIES
(Repayments of) proceeds from credit agreement (84,500) 22,200
Repayments of other borrowings (634) (18,193)
Purchase of treasury stock (585) (10,361)
Proceeds from the issuance of treasury stock from stock
options and other benefit plans 2,790 3,922
Cash dividends (1,258) (1,277)
----------------------------
Net cash used for financing activities (84,187) (3,709)
Effect of changes in currency exchange rates (819) (5,119)
----------------------------
(Decrease) increase in cash (6,010) 4,061
Cash, beginning of year 6,071 7,056
----------------------------
Cash, end of period $ 61 $ 11,117
============================
The accompanying notes are an integral part of these statements.
5
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 (UNAUDITED)
1. BUSINESS
Westinghouse Air Brake Technologies Corporation (the "Company", "Wabtec") is one
of North America's largest providers of value-added, technology-based equipment
and services for the rail industry. 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, cooling equipment,
low-horsepower locomotives, couplers, door controls, draft gears and brake
shoes. The Company aggressively pursues technological advances with respect to
both new product development and product enhancements.
The Company has two reporting segments: Freight Group and Transit Group.
Although approximately 57% 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, 2000.
REVENUE RECOGNITION Revenue is recognized when products have been shipped to the
respective customers and the price for the product has been determined.
The Company recognizes revenues on long-term contracts based on the percentage
of completion method of accounting. Contract revenues and cost estimates are
reviewed and revised at a minimum quarterly and adjustments are reflected in the
accounting period as known. Provisions are made if estimated losses on
uncompleted contracts are projected.
Costs and estimated earnings in excess of billings ("contract underbillings")
and billings in excess of costs and estimated earnings ("contract overbillings")
on a contract in progress are recorded on the balance sheet and are classified
as non-current.
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.
FINANCIAL DERIVATIVES AND HEDGES ACTIVITY The Company has adopted Statement of
Financial Accounting Standards ("SFAS") No. 133, and as amended by SFAS 138,
"Accounting for Derivative Instruments and Hedging Activities" effective January
1, 2001. In the application, the Company has concluded its interest rate swap
contracts qualify for "special cash flow hedge accounting" which permit
recording the fair value of the swap and corresponding adjustment to other
comprehensive income on the balance sheet while creating some volatility in
future earnings, due to market sensitivity and ineffectiveness in offsetting
changes in interest rates of the Company's variable rate borrowings.
RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting
Standards Board issued SFAS No. 142, "Goodwill and Other Intangible Assets."
Under its provisions, all goodwill and other intangible assets with indefinite
lives will no longer be routinely amortized under a straight-line basis of
estimated useful life. Instead, they will be subject to assessments for
impairment by applying a fair-value-based test. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001. The Company has not completed
the process of evaluating the impact that will result from adopting it.
6
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." Under its
provisions, all tangible long-lived assets, whether to be held and used or to be
disposed of by sale or other means, will be tested for recoverability whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable. SFAS No. 144 is effective for fiscal years beginning after December
15, 2001. The Company has not completed the process of evaluating the impact
that will result from adopting it.
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 of foreign currency translation adjustments
and cumulative adjustment relating to the fair value of cash flow hedge
derivatives. Prior to the adoption of SFAS 133, the company's accumulated other
comprehensive income (loss) consisted solely of foreign currency translation
adjustments. Total comprehensive income for the three and nine months ended
September 30 was:
NINE MONTHS ENDED
SEPTEMBER 30
In thousands 2001 2000
- ----------------------------------------------------------------
Net Income $ 24,715 $ 20,904
Foreign Currency
Translation (4,870) (7,652)
Unrealized losses on hedges, net of
tax (2,497) -
------------------------
Total Comprehensive Income $ 17,348 $ 13,252
- ----------------------------------------------------------------
THREE MONTHS ENDED
SEPTEMBER 30
In thousands 2001 2000
- ----------------------------------------------------------------
Net Income/(loss) $ 6,393 $ (3,529)
Foreign Currency Translation (2,470) (89)
Unrealized losses on hedges, net of
tax (824) -
------------------------
Total Comprehensive Income/(loss) $ 3,099 $ (3,618)
- ----------------------------------------------------------------
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:
SEPTEMBER 30 DECEMBER 31
In thousands 2001 2000
- ----------------------------------------------------------------
Cores $ 28,780 $ 28,213
Raw materials 92,968 95,430
Work-in-process 37,672 53,240
Finished goods 27,197 25,945
---------------------------
Total inventory $186,617 $202,828
- ----------------------------------------------------------------
4. EARNINGS PER SHARE
The computation of earnings per share is as follows:
THREE MONTHS ENDED
SEPTEMBER 30
In thousands, except per share 2001 2000
- -----------------------------------------------------------------
BASIC EARNINGS PER SHARE
Income (loss) applicable to
common shareholders $6,393 $(3,529)
Divided by
Weighted average shares
outstanding 42,999 43,415
Basic earnings (loss) per share $ 0.15 $ (0.08)
- -----------------------------------------------------------------
DILUTED EARNINGS PER SHARE
Income (loss) applicable to
common shareholders $6,393 $(3,529)
Divided by sum of the
Weighted average shares
outstanding 42,999 43,415
Conversion of dilutive stock
options 305 24
---------------------
Diluted shares outstanding 43,304 43,439
Diluted earnings (loss) per share $ 0.15 $ (0.08)
- -----------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30
In thousands, except per share 2001 2000
- -----------------------------------------------------------------
BASIC EARNINGS PER SHARE
Income applicable to common
shareholders $24,715 $20,904
Divided by
Weighted average shares
outstanding 42,923 43,352
Basic earnings per share $ 0.58 $ 0.48
- -----------------------------------------------------------------
DILUTED EARNINGS PER SHARE
Income applicable to common
shareholders $24,715 $20,904
Divided by sum of the
Weighted average shares
outstanding 42,923 43,352
Conversion of dilutive stock
options 282 81
---------------------
Diluted shares outstanding 43,205 43,433
Diluted earnings per share $ 0.57 $ 0.48
- -----------------------------------------------------------------
7
5. COMMITMENTS AND CONTINGENCIES
Under the terms of the purchase agreement and related documents for the 1990
Acquisition, American Standard, Inc. ("ASI"), has indemnified the Company for
certain items including, among others, environmental claims. The indemnification
provisions of the agreement expired at various dates through 2000, except for
those claims, which were timely asserted, which continue until resolved. If ASI
was unable to honor or meet these indemnifications, the Company would be
responsible for such items. In the opinion of management, ASI currently has the
ability to meet its indemnification obligations.
The Company's operations do not use and its products do not contain any
asbestos. Asbestos actions have been filed against the Company and certain of
its affiliates. These cases involve products manufactured prior to the time the
Company was formed. The Company has not incurred any significant costs related
to these asbestos claims as the claims are indemnified or the liabilities are
retained by the companies who manufactured the products in question or the
claims are covered by insurance. Management believes that these claims will not
be material; and accordingly, the financial statements do not reflect any costs
or reserves for such claims.
The Company is subject to a number of other commitments and contingencies as
described in its Annual Report on Form 10-K for the Year Ended December 31,
2000. During the third quarter, there were no material changes to the
information described in Note 15 therein.
Also, as described in Note 15 of the Form 10-K, the Company is subject to a RCRA
Part B Closure Permit ("the Permit") issued by the Environmental Protection
Agency (EPA) and the Idaho Department of Health and Welfare, Division of
Environmental Quality relating to the monitoring and treatment of groundwater
contamination on, and adjacent to, the Boise Locomotive Company facility. In
compliance with the Permit, the Company has completed the first phase of an
accelerated plan for the treatment of contaminated groundwater, and continues
onsite and offsite monitoring for the amount of hazardous constituents. At
September 30, 2001, the Company has accrued $1.4 million representing the
estimated remaining costs for remediation. The Company was in compliance with
the Permit at September 30, 2001.
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. The business segments are:
FREIGHT GROUP manufactures products and provides services geared to the
production and operation of freight cars and locomotives, including braking
control equipment, engines, on-board electronic components and train coupler
equipment. Revenues are derived from OEM sales and locomotive overhauls,
aftermarket sales and 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 and aftermarket sales as well as
from repairs and services.
The Company evaluates its business segments' operating results based on income
from operations before merger and restructuring charges. Corporate activities
include general corporate expenses, elimination of intersegment transactions,
interest income and expense and other unallocated charges. Since certain
administrative and other operating expenses and other items have not been
allocated to business segments, the results in the following tables are not
necessarily a measure computed in accordance with generally accepted accounting
principles and may not be comparable to other companies.
Segment financial information for the three months ended September 30, 2001 is
as follows:
FREIGHT TRANSIT CORPORATE
In thousands GROUP GROUP ACTIVITIES RESTRUCTURING TOTAL
- --------------------------------------------------------------------------------------------------------------
Sales to external customers $ 158,258 $ 70,274 -- -- $ 228,532
Intersegment sales/(elimination) 2,425 189 (2,614) -- --
------------------------------------------------------------------------
Total sales $ 160,683 $ 70,463 $ (2,614) -- $ 228,532
========================================================================
Income from operations $ 14,061 $ 7,744 $ (5,337) $ (1,719) $ 14,749
Interest expense and other -- -- (7,965) -- (7,965)
------------------------------------------------------------------------
Income before income taxes $ 14,061 $ 7,744 $ (13,302) $ (1,719) $ 6,784
========================================================================
Segment financial information for the three months ended September 30, 2000 is
as follows:
8
FREIGHT TRANSIT CORPORATE
In thousands GROUP GROUP ACTIVITIES RESTRUCTURING TOTAL
- -----------------------------------------------------------------------------------------------------------------
Sales to external customers $184,313 $70,850 - - $255,163
Intersegment sales/(elimination) 2,376 149 (2,525) - -
--------------------------------------------------------------------------
Total sales $186,689 $70,999 $(2,525) - $255,163
==========================================================================
Income from operations $27,596 $6,701 $(7,012) $(11,452) $15,833
Interest expense and other - - (13,431) - (13,431)
--------------------------------------------------------------------------
Income before income taxes $27,596 $6,701 $(20,443) $(11,452) $2,402
==========================================================================
</Table>
Segment financial information for the nine months ended September 30, 2001 is as
follows:
FREIGHT TRANSIT CORPORATE
In thousands GROUP GROUP ACTIVITIES RESTRUCTURING TOTAL
- ------------------------------------------------------------------------------------------------------
Sales to external customers $ 517,011 $ 219,734 -- -- $ 736,745
Intersegment sales/(elimination) 8,350 634 (8,984) -- --
------------------------------------------------------------------------
Total sales $ 525,361 $ 220,368 $ (8,984) -- $ 736,745
========================================================================
Income from operations $ 60,129 $ 23,686 $ (14,705) $ (4,418) $ 64,692
Interest expense and other -- -- (29,721) -- (29,721)
------------------------------------------------------------------------
Income before income taxes $ 60,129 $ 23,686 $ (44,426) $ (4,418) $ 34,971
========================================================================
Segment financial information for the nine months ended September 30, 2000 is as
follows:
FREIGHT TRANSIT CORPORATE
In thousands GROUP GROUP ACTIVITIES RESTRUCTURING TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
Sales to external customers $ 559,039 $ 204,147 -- -- $ 763,186
Intersegment sales/(elimination) 8,410 400 (8,810) -- --
------------------------------------------------------------------------
Total sales $ 567,449 $ 204,547 $ (8,810) -- $ 763,186
========================================================================
Income from operations $ 86,018 $ 20,162 $ (15,881) $ (19,391) $ 70,908
Interest expense and other -- -- (30,329) -- (30,329)
------------------------------------------------------------------------
Income before income taxes and extraordinary item $ 86,018 $ 20,162 $ (46,210) $ (19,391) $ 40,579
========================================================================
7. RESTRUCTURING CHARGES
The Company previously announced a merger and restructuring plan pursuant to the
merger of the Company and MotivePower Industries, Inc. ("the merger"). The
Company estimates synergies from the plan yielded approximately $20 million of
pre-tax cost savings in 2000 and reached an ongoing annualized savings of $25
million pre-tax, with such benefits 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 now total $84 million pre-tax, due to an acceleration
and refinement of the plan, with approximately $50 million of the charge
previously expensed in 1999 and $29 million in 2000. The Company expects to
incur $5 million in 2001, of which $3 million has been incurred through
September 30.
The $82 million charge to date included the following announced actions:
- - Costs associated with the transaction for items such as investment bankers,
legal fees, accountant fees, SEC fees, etc.
- - Consolidation of the corporate headquarters to Wilmerding, PA and the
elimination of duplicate corporate functions.
- - Closing and moving of Young Radiator's Centerville, IA plant and
consolidating the Young administrative offices into the Company's Jackson,
TN facility from Racine, WI.
- - Closing and relocation of several production operations to San Luis Potosi,
Mexico.
- - Closing and relocation of several additional manufacturing operations.
- - Eliminating duplicate sales functions.
The Company began a new restructuring plan for the Transit rail business in the
third quarter of 2001. The Company estimates synergies from the plan will yield
approximately $3 million of pre-tax cost savings in 2002 and beyond, with such
benefits realized through reduced cost of sales and reduced selling, general and
administrative expenses. The restructuring plan involves operational realignment
and related workforce reductions. The Company estimates the charges to complete
the restructuring plan will total $3 million pre-tax, with
9
approximately $1 million of the charge expensed in 2001 year to date.
The $1 million charge to date includes costs associated with relocating several
production operations from Chicago to Montreal.
As of September 30, 2001, $3.6 million of the merger and restructuring charge
was still remaining as accrued on the balance sheet. The table below identifies
the significant components of the charge and reflects the accrual balance at
that date.
LEASE
IMPAIRMENTS
AND
ASSET
In thousands WRITEDOWNS OTHER TOTAL
- --------------------------------------------------------------------------
Beginning balance, January 1, 2001 $5,961 $296 $6,257
Increase to accrual - 525 525
Amounts paid (3,050) (126) (3,176)
------------------------------------
Balance at September 30, 2001 $2,911 $695 $3,606
- --------------------------------------------------------------------------
The lease impairment charges and asset writedowns are associated with the
Company's closing of the plants noted, the relocation of the corporate
headquarters, and the Company's evaluation of certain assets where projected
cash flows from such assets over their remaining lives are estimated to be less
than their carrying values. The other category represents other related costs
that have been incurred and not yet paid as of September 30, 2001.
8. DISPOSITION OF ASSETS
On November 1, 2001, the Company completed the sale of certain assets to GE
Transportation Systems for $240 million in cash. The assets sold primarily
included locomotive aftermarket products and services for which Wabtec is not
the original equipment manufacturer. The Company will use the net proceeds from
the sale to reduce debt.
Pro forma information related to the sale for the nine months ended September
30, 2001 is as follows:
DISPOSITION PROFORMA ADJUSTED
In thousands REPORTED OF BUSINESS ADJUSTMENT FINANCIALS
Net sales $736,745 $(125,752) $9,105 $620,098
Gross profit 189,989 (25,283) - 164,706
Income from operations 64,692 (12,172) - 52,520
Interest expense 28,537 (1,193) (10,145) 17,199
Net income 24,715 (6,665) 6,594 24,644
Diluted earnings per share $0.57 $(0.15) $0.15 $0.57
- ------------------------------------------------------------------------------------
Pro forma information related to the sale for the year ended December 31, 2000
is as follows:
DISPOSITION PROFORMA ADJUSTED
In thousands REPORTED OF BUSINESS ADJUSTMENT FINANCIALS
Net sales $1,027,976 $(187,264) $10,939 $851,651
Gross profit 277,800 (37,720) - 240,080
Income from operations 89,480 (20,415) - 69,065
Interest expense 45,505 (2,286) (15,714) 27,505
Net income 25,393 (11,934) 10,057 23,516
Diluted earnings per share $0.59 $(0.27) $0.23 $0.54
- --------------------------------------------------------------------------------------
Proforma adjustments to net sales reflect the fact that intercompany sales to
the disposed businesses would have been recorded as external sales.
Proforma adjustments to interest expense reflect the decreased interest from the
use of the proceeds of the sale to pay down debt.
10
Pro forma balance sheet as of September 30, 2001 related to the sale is as
follows:
DISPOSITION PROFORMA ADJUSTED
In thousands REPORTED OF BUSINESS ADJUSTMENT FINANCIALS
Accounts receivable $162,229 $(32,136) $- $130,093
Inventory 186,617 (60,935) - 125,682
Other current assets 40,681 (716) - 39,965
Property, plant and equipment, net 202,102 (29,715) - 172,387
Other noncurrent assets 305,575 (35,241) - 270,334
Current liabilities 176,837 (24,895) - 151,942
Debt 454,237 - (200,000) 254,237
Other long term liabilities 51,244 (8,675) - 42,569
Equity $214,886 $(125,173) $200,000 $289,713
- -------------------------------------------------------------------------------------------
Pro forma balance sheet as of December 31, 2000 related to the sale is as
follows:
DISPOSITION PROFORMA ADJUSTED
In thousands REPORTED OF BUSINESS ADJUSTMENT FINANCIALS
Accounts receivable $194,379 $(41,949) $- $152,430
Inventory 202,828 (64,123) - 138,705
Other current assets 50,348 (1,164) - 49,184
Property, plant and equipment, net 214,645 (34,579) - 180,066
Other noncurrent assets 321,847 (46,564) - 275,283
Current liabilities 190,656 (29,263) - 161,393
Debt 539,446 - (200,000) 339,446
Other long term liabilities 57,574 (9,800) - 47,774
Equity $196,371 $(149,316) $200,000 $247,055
- -------------------------------------------------------------------------------------------
Proforma adjustments to debt and equity reflect the use of the cash proceeds,
net of tax, to pay down debt.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the information in
the unaudited condensed consolidated financial statements and notes thereto
included herein and Westinghouse Air Brake Technologies Corporation's Financial
Statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations included in its 2000 Annual Report on Form 10-K.
OVERVIEW
Net income for the first nine months of 2001 was $24.7 million, or $0.57 per
diluted share, as compared to $20.9 million, or $0.48 per diluted share in the
same period in 2000. The results for the first nine months of 2001 include a
$4.4 million restructuring-related charge and a $2 million tax benefit from
research and development tax credits. The results for the same period in 2000
include a $19.4 million restructuring-related charge, a $1.4 million foreign
exchange loss, a $4.4 million gain on the disposition of a product line and a
$5.1 million write-off of a deferred tax asset relating to the termination of
the ESOP. Without the effect of the aforementioned items, net income for the
first nine months of 2001 would have been $25.6 million or $0.59 per diluted
share as compared to $37.4 million or $0.86 per diluted share in the same period
in 2000. Net sales decreased to $736.7 million in the first nine months of 2001
as compared to $763.2 million in the same period in 2000. Operating margins for
the first nine months of 2001 decreased to 8.8% as compared to 9.3% in the same
period in 2000. After excluding the restructuring-related charges that affect
operating income, operating margins in the first nine months of 2001 would have
been 9.4% compared to 12% in the same period in 2000. The drop in net income was
thus volume and mix change on lower sales.
MERGER AND RESTRUCTURING PLAN
The Company previously announced a merger and restructuring plan pursuant to the
merger of the Company and MotivePower Industries, Inc. ("the merger"). The
Company estimates synergies from the plan yielded approximately an ongoing
annualized savings of $25 million pre-tax, with such benefits 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 now total $84 million pre-tax, $82 million incurred
through the end of the third quarter 2001 with the remaining charge of $2
million to be incurred in 2001.
The Company began a new restructuring plan for the Transit rail business in the
third quarter of 2001. The Company estimates synergies from the plan will yield
approximately $3 million of pre-tax cost savings in 2002 and beyond, with such
benefits realized through reduced cost of sales and reduced selling, general and
administrative expenses. The restructuring plan involves operational realignment
and related workforce reductions. The Company estimates the charges to complete
the restructuring plan will total $3 million pre-tax, with approximately $1
million of the charge expensed in 2001 year to date.
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.
THIRD QUARTER 2001 COMPARED TO THIRD QUARTER 2000
The following table sets forth the Company's net sales by business segment:
THREE MONTHS ENDED
SEPTEMBER 30
-------------------------
In thousands 2001 2000
- -----------------------------------------------------------------
Freight Group $158,258 $184,313
Transit Group 70,274 70,850
----------------------------
Net sales $228,532 $255,163
- -----------------------------------------------------------------
Net sales for the third quarter of 2001 decreased $26.6 million, or 10.4%, to
$228.5 million as compared to the prior year period. This decrease was
attributable to lower Freight Group sales, reflecting lower OEM freight car and
locomotive component sales volumes and lower locomotive overhauls. Sales volumes
within the Freight Group reflect a softening OEM market for freight cars, with
7,175 freight cars delivered in the third quarter of 2001 compared with 12,782
in the same period in 2000.
Gross profit decreased to $56.7 million in the third quarter of 2001 compared to
$67.6 million in the same period of 2000. Gross profit is dependent on a number
of factors including pricing, sales volume and product mix. Gross profit, as a
percentage of sales, was 24.8% compared to 26.5% in the same period of 2000. The
decrease in gross profit is primarily attributed to the effect of a decrease in
sales volumes of OEM freight car components.
Total operating expenses as a percentage of net sales were 18.4% in the third
quarter of 2001 and 20.3% in the same period a year ago. After excluding
restructuring charges of $1.7 million and $11.5 million in the third quarter of
2001 and 2000, operating expenses would have been $40.3 million in the third
quarter of both 2001 and 2000, with higher
12
engineering expenses offset by lower selling, general and administrative
expenses.
Operating income totaled $14.7 million (or 6.5% of sales) in the third quarter
of 2001 compared with $15.8 million (or 6.2% of sales) in the same period in
2000. After excluding the restructuring-related charges that affect operating
income in both periods, operating income would have been $16.5 million (or 7.2%
of sales) and $27.3 million (or 10.7% of sales). Lower operating income resulted
from decreased sales volumes of OEM freight car components in the Freight Group
and overall changes to product mix. (See Note 6 - "Notes to Condensed
Consolidated Financial Statements" regarding segment-specific information,
included elsewhere in this report).
Interest expense decreased 29.8% in the third quarter of 2001 as compared to the
prior year quarter primarily due to a decrease in debt and interest rates.
Other income/expense includes approximately $598,000 recorded in the third
quarter of 2001 representing a foreign exchange gain as compared to a $1.4
million foreign exchange loss in the prior year period.
Income tax expense decreased to $391,000 in the third quarter of 2001 compared
to $5.9 million in the same period of 2000. The third quarter of 2001 included a
$2 million tax benefit from research and development tax credits while the third
quarter of 2000 included a $5.1 million non cash charge for the write-off of
deferred tax benefits relating to the termination of the ESOP. The effective tax
rate dropped from 36% in the third quarter of 2000 to 35% in the third quarter
of 2001.
NINE MONTH PERIOD OF 2001 COMPARED TO NINE MONTH PERIOD OF 2000
The following table sets forth the Company's net sales by business segment:
NINE MONTHS ENDED
SEPTEMBER 30
----------------------------
In thousands 2001 2000
- -----------------------------------------------------------------
Freight Group $517,011 $559,039
Transit Group 219,734 204,147
----------------------------
Net sales $736,745 $763,186
- -----------------------------------------------------------------
Net sales for the first nine months of 2001 decreased $26.4 million to $736.7
million as compared to the prior year period. This decrease was attributable to
lower OEM freight car and locomotive component sales volumes and lower
locomotive overhauls, both in the Freight Group, partially offset by higher
Transit Group sales, reflecting continued significant shipments of product under
a contract to supply components for new subway cars in New York City. Sales
volumes within the Freight Group reflect a softening OEM market for freight cars
by 38%, with 27,227 freight cars delivered in the first nine months of 2001
compared with 43,828 in the same period in 2000.
Gross profit decreased to $190 million in the first nine months of 2001 compared
to $211.3 million in the same period of 2000. Gross profit is dependent on a
number of factors including pricing, sales volume and product mix. Gross profit,
as a percentage of sales, was 25.8% compared to 27.7% in the same period of
2000. The decrease in gross profit is primarily attributed to the effect of a
decrease in sales volumes of OEM freight car components.
Total operating expenses as a percentage of net sales were 17% in the first nine
months of 2001 and 18.4% in the same period a year ago. After excluding
restructuring charges of $4.4 million and $19.4 million in the first nine months
of 2001 and 2000, operating expenses would have been $120.9 million and $121
million, respectively, with higher engineering expenses offset by lower selling,
general and administrative expenses
Operating income totaled $64.7 million (or 8.8% of sales) in the first nine
months of 2001 compared with $70.9 million (or 9.3% of sales) in the same period
in 2000. After excluding the restructuring-related charges that affect operating
income in both periods, operating income would have been $69.1 million (or 9.4%
of sales) and $91.9 million (or 12% of sales). Lower operating income resulted
from decreased sales volumes of OEM freight car components in the Freight Group
and overall changes to product mix. (See Note 6 - "Notes to Condensed
Consolidated Financial Statements" regarding segment-specific information,
included elsewhere in this report).
Interest expense decreased 15.7% in the first nine months of 2001 as compared to
the same period in 2000 primarily due to a decrease in debt and interest rates.
Other income/expense includes approximately $873,000 recorded in the first nine
months of 2001 representing a foreign exchange loss as compared to a $1.4
million foreign exchange loss in the prior year period. Also, in 2000, a product
line was disposed of resulting in a gain of $4.4 million.
Income tax expense decreased to $10.3 million in the first nine months of 2001
compared to $19.7 million in the same period of 2000. The first nine months of
2001 included a $2 million tax benefit from research and development tax credits
while the same period in 2000 included a $5.1 million non cash charge for the
write-off of deferred tax benefits relating to the termination of the ESOP. The
effective tax rate dropped from 36% in the first nine months of 2000 to 35% in
the same period in 2001.
In June 2001, the Company acquired certain assets from a company that provides
repair billings systems in the rail industry for $0.7 million in cash.
13
In March 2001, the Company disposed of its Vapor Power product line for $4.1
million in cash and a note receivable, and recognized a loss of $0.5 million,
which is reported as other expense.
In February 2000, the Company disposed its transit electrification product line
for $5.5 million in cash, and recognized a gain of $4.4 million, which is
reported as other income.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is provided primarily by operating cash flow and borrowings under the
Company's credit facility with a consortium of commercial banks ("credit
agreement"). The following is a summary of selected cash flow information and
other relevant data.
NINE MONTHS ENDED
SEPTEMBER 30
-------------------------
In thousands 2001 2000
- ---------------------------------------------------------------
Cash provided (used) by:
Operating activities $86,926 $25,872
Investing activities (7,930) (12,983)
Financing activities (84,187) (3,709)
Earnings before interest, taxes,
depreciation and amortization
(EBITDA) 96,054 102,562
Adjusted EBITDA (before
restructuring-related charges) $100,472 $123,553
- ---------------------------------------------------------------
Operating cash flow in the first nine months of 2001 was $86.9 million compared
to $25.9 million in the same period a year ago. Working capital decreased 8.3%
since December 31, 2000, primarily due to a decrease in inventories and accounts
receivable. During the first nine months of 2001 and 2000, cash outlays for
restructuring-related activities were approximately $6.7 million and $23
million, respectively, and are reported as a reduction to cash provided by
operating activities.
Cash used for investing activities dropped in the first nine months of 2001 to
$7.9 million from $13 million a year ago. In the first nine months of 2001, cash
received from the sale of a product line was $4.1 million, compared to $5.5
million in the first nine months of 2000. Also, in the first nine months of
2001, fixed assets were sold for $4.3 million in cash. Capital expenditures in
the first nine months of 2001 were $16.8 million compared to $17.8 million in
the same period a year ago. The majority of capital expenditures for these
periods relates to upgrades to existing equipment and replacement of existing
equipment to improve the overall cost savings through efficiencies.
Cash used for financing activities was $84.2 million in the first nine months of
2001 versus $3.7 million in the same period a year ago. In the first nine months
of 2001, the Company reduced long term debt, specifically outstanding borrowings
on its credit facility, by approximately $84.5 million.
The Company estimates the charges at completion of the merger and restructuring
plan will total approximately $84 million pre-tax with approximately $82 million
of the charge expensed to date and the remaining $2 million to be incurred in
the remainder of 2001.
The Company estimates the charges at completion of the restructuring plan for
the Transit rail business will total approximately $3 million pre-tax with
approximately $1 million of the charge expensed to date and the remaining $2
million to be incurred in the remainder of 2001.
The following table sets forth the Company's outstanding indebtedness and
average interest rates at September 30, 2001. The revolving credit note and
other term loan interest rates are variable and dependent on market conditions.
SEPTEMBER DECEMBER
30 31
In thousands 2001 2000
- ----------------------------------------------------------------
Revolving credit agreement, 6.53% $273,500 $358,000
9.375% Senior notes due 2005 175,000 175,000
5.5% Industrial revenue bond due 2008 5,713 6,169
Other 799 1,028
------------------------
Total $455,012 $540,197
Less-current portion 775 751
------------------------
Long-term portion $454,237 $539,446
- ----------------------------------------------------------------
Credit Agreement
The company currently has an unsecured credit agreement that provides a $275
million five-year revolving credit facility expiring in 2004 and a 364-day $213
million convertible revolving credit facility to be reconfirmed in November
2001. At September 30, 2001, the Company had available borrowing capacity, net
of letters of credit, of approximately $187 million.
9 3/8% Senior Notes Due June 2005
In June 1995, the Company issued $100 million of 9.375% Senior Notes due in 2005
(the "1995 Notes"). In January 1999, the Company issued an additional $75
million of 9.375% Senior Notes which are due in 2005 (the "1999 Notes"; the 1995
Notes and the 1999 Notes are collectively, the "Notes"). The 1999 Notes were
issued at a premium resulting in an effective rate of 8.5%. The terms of the
1995 Notes and the 1999 Notes are substantially the same, and the 1995 Notes and
the 1999 Notes were issued pursuant to indentures that are substantially the
same.
Principal repayments of outstanding loan balances are due at various intervals
until maturity, with 2004 as the primary payment date.
14
As a result of the transaction discussed in Note 8 to "Notes to Condensed
Consolidated Financial Statements" included in this report, the Company's
outstanding debt obligation has been reduced by approximately $200 million. The
Company is leveraged and its debt service obligations will continue to be
significant. The debt of the Company requires the dedication of a significant
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, based on current levels of operations and forecasted earnings,
cash flow and liquidity will be sufficient to fund its working capital and
capital equipment needs as well as meeting the debt service requirements. If the
Company's sources of funds were to fail to satisfy the Company's cash
requirements, the Company may need to refinance its existing debt or obtain
additional financing. There is no assurance that such new financing alternatives
would be available, and, in any case, such new financing, if available, would be
expected to be more costly and burdensome than the debt agreements currently in
place.
FORWARD LOOKING STATEMENTS
We believe that all statements other than statements of historical facts
included in this report, including certain statements under "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," may constitute forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. Although we believe that our assumptions made in connection with
the forward-looking statements are reasonable, we cannot assure you that our
assumptions and expectations are correct.
These forward-looking statements are subject to various risks, uncertainties and
assumptions about us, including, among other things:
Economic and Industry Conditions
- materially adverse changes in economic or industry conditions generally
or in the markets served by us, including North America, South America,
Europe, Australia and Asia;
- demand for services in the freight and passenger rail industry;
- consolidations in the rail industry;
- demand for our products and services;
- continued outsourcing by our customers;
- demand for freight cars, locomotives, passenger transit cars and buses;
- industry demand for faster and more efficient braking equipment;
- fluctuations in interest rates;
Operating Factors
- supply disruptions;
- technical difficulties;
- changes in operating conditions and costs;
- successful introduction of new products;
- labor relations;
- completion and integration of additional acquisitions;
- the development and use of new technology;
Competitive Factors
- the actions of competitors;
Political/Governmental Factors
- political stability in relevant areas of the world;
- future regulation/deregulation of our customers and/or the rail
industry;
- governmental funding for some of our customers;
- political developments and laws and regulations, such as forced
divestiture of assets, restrictions on production, imports or exports,
price controls, tax increases and retroactive tax claims, expropriation
of property, cancellation of contract rights, and environmental
regulations; and
Transaction or Commercial Factors
- the outcome of negotiations with partners, governments, suppliers,
customers or others.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting
Standards Board issued SFAS No. 142, "Goodwill and Other Intangible Assets."
Under its provisions, all goodwill and other intangible assets with indefinite
lives will no longer be routinely amortized under a straight-line basis of
estimated useful life. Instead, they will be subject to assessments for
impairment by applying a fair-value-based test. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001. The Company has not completed
the process of evaluating the impact that will result from adopting it.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." Under its
provisions, all tangible long-lived assets, whether to be held and used or to be
disposed of by sale or other means, will be tested for recoverability whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable. SFAS No. 144 is effective for fiscal years beginning after December
15, 2001. The Company has not completed the process of evaluating the impact
that will result from adopting it.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
15
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 $214 million of variable-rate debt (after considering the
effects of interest rate swaps, further described below), which represent 47% of
total long-term debt at September 30, 2001. Management has entered into
pay-fixed, receive-variable interest rate swap contracts that partially mitigate
the impact of variable-rate debt interest rate increases. At September 30, 2001,
an instantaneous 100 basis point increase in interest rates would reduce the
Company's annual earnings by $1.4 million, assuming no additional intervention
strategies by management.
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
133, and as amended by SFAS 138, "Accounting for Derivative Instruments and
Hedging Activities" effective January 1, 2001. In the application, the Company
has concluded that its swap contracts qualify for "special cash flow hedge
accounting" which permit recording the fair value of the swap and corresponding
adjustment to other comprehensive income on the balance sheet while creating
some volatility in future earnings, due to market sensitivity and
ineffectiveness in offsetting changes in interest rates of Wabtec's variable
rate borrowings. This fluctuation is not expected to have a material effect on
the Company's financial condition, results of operations or liquidity.
FOREIGN CURRENCY EXCHANGE RISK
The Company occasionally enters into several types of financial instruments for
the purpose of managing its exposure to foreign currency exchange rate
fluctuations in countries in which the Company has significant operations. As of
September 30, 2001, the Company had no such instruments outstanding.
Wabtec is also subject to certain risks associated with changes in foreign
currency exchange rates to the extent its operations are conducted in currencies
other than the U.S. dollar. For the first nine months of 2001, approximately 74%
of Wabtec's net sales are in the United States, 10% in Canada, 4% in Mexico, and
12% in other international locations, primarily Europe. At September 30, 2001,
the Company does not believe changes in foreign currency exchange rates
represent a material risk to results of operations, financial position, or
liquidity.
LEGAL PROCEEDINGS AND COMMITMENTS AND CONTINGENCIES
There have been no material changes to report regarding the Company's
commitments and contingencies as described in Note 15 of the Company's Annual
Report on Form 10-K for the Year Ended December 31, 2000.
EXHIBITS AND REPORTS ON FORM 8-K
None.
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WESTINGHOUSE AIR BRAKE TECHNOLOGIES
CORPORATION
By: /s/ ROBERT J. BROOKS
-----------------------------------
Robert J. Brooks
Chief Financial Officer
Date: November 14, 2001
17