1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
MARK ONE
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Act of
1934
For the Fiscal Year Ended December 31, 1998
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 COMPANY
(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 (412) 825-1000
WILMERDING, PENNSYLVANIA 15148 (Registrant's telephone number)
(Address of principal executive offices,
including zip code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF CLASS NAME OF EXCHANGE ON WHICH REGISTERED
-------------- ------------------------------------
COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: None
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 _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of February 24, 1999, 33,926,819 shares of Common Stock of the registrant
were issued and outstanding, of which 8,533,691 shares were unallocated ESOP
shares. The registrant estimates that as of February 24, 1999, the aggregate
market value of the voting shares held by non-affiliates of the registrant was
approximately $294.3 million based on the closing price on the New York Stock
Exchange for such stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the registrant's Annual Meeting of
Stockholders to be held on May 19, 1999 are incorporated by reference into Part
III of this Form 10-K.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 9
Item 3. Legal Proceedings........................................... 10
Item 4. Submission of Matters to a Vote of Security Holders......... 10
Executive Officers of the Company........................... 10
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters................................................... 11
Item 6. Selected Financial Data..................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 13
Item Quantitative and Qualitative Disclosures About Market
7A. Risk...................................................... 21
Item 8. Financial Statements and Supplementary Data................. 21
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 21
PART III
Item Directors and Executive Officers of the Registrant..........
10. 21
Item Executive Compensation......................................
11. 21
Item Security Ownership of Certain Beneficial Owners and
12. Management................................................ 21
Item Certain Relationships and Related Transactions..............
13. 21
PART IV
Item Exhibits, Financial Statement Schedules, and Reports on Form
14. 8-K....................................................... 22
1
3
PART I
ITEM 1. BUSINESS
GENERAL
Westinghouse Air Brake Company is North America's largest manufacturer of
value-added equipment for locomotives, railway freight cars and passenger
transit vehicles. We believe that we maintain a market share in North America in
excess of 50% for our primary braking related equipment and a significant market
share in North America for our other principal products. We also sell our
products in Europe, Africa, Australia, South America and Asia. Our major
products are intended to enhance safety, improve productivity and reduce
maintenance costs for our customers. Our major product offerings include
electronic controls and monitors, air brakes, couplers, door controls, draft
gears and brake shoes. We aggressively pursue technological advances with
respect to both new product development and product enhancements.
All references to "we", "our", "us", the "Company" and "WABCO" refer to
Westinghouse Air Brake Company, a Delaware corporation, and its subsidiaries.
INDUSTRY OVERVIEW
Rail traffic, in terms of both freight and passengers, is a key factor
underlying the demand for the Company's products. Government investment in
public rail transportation also plays a significant role. Additionally,
railroads continuously seek to increase the efficiency and productivity of their
rail operations in order to improve profitability. We design an array of
products to meet this goal and believe that through our products and service
offerings, we are well positioned to contribute to and benefit from the railroad
industry's drive to improve efficiency and productivity. For example, our end of
train device, automated single car tester and electro-pneumatic brake all
provide significant cost saving opportunities for our customers.
Demand for North American locomotive and freight car products remains strong due
to:
-- continued growth in revenue ton-miles in the United States (defined as
weight times distance traveled by Class 1 railroads), of 1,296 billion in
1997 as compared to 1,067 billion in 1992;
-- continued strong delivery of new freight cars:
-- aging freight car fleet, with an average age of 17.8 years in 1997 with
approximately 25% over 25 years old; and
-- the desire of railroads to gain efficiency improvements from larger, more
efficient aluminum cars;
-- aging locomotive fleet, with more than 52% of the fleet over 17 years old;
and
-- newer AC locomotives, which are more powerful and efficient than DC
locomotives.
Demand for passenger transit original equipment manufacturer ("OEM") and
aftermarket products is driven by:
-- replacement, building and/or expansion programs by transit authorities;
these programs are funded in part by federal and state governments,
including the recently reauthorized Intermodal Surface Transportation and
Efficiency Act (providing up to $42 billion to be made available, subject
to appropriations, for transit-related infrastructure between 1998 and
2003); and
-- aging United States passenger transit car fleet, with an average age of
21.6 years in 1997 as compared to 19.3 years in 1995.
BUSINESS SEGMENTS AND PRODUCTS
Approximately half of our net sales in 1998 were derived from products sold
directly to North American OEMs of locomotives, railway freight cars and
passenger transit vehicles. The balance of our net sales were generated from the
sale of replacement parts, repair services and upgrade work purchased by
operators of rail vehicles such as railroads, transit authorities, utilities and
leasing companies (collectively, "end-users" or the "aftermarket"). We believe
that our substantial installed base of OEM products is a significant competitive
advantage in providing products and services in the aftermarket in that end-
users will likely purchase our high quality replacement products especially when
they are safety and performance related. We believe that we are less adversely
affected than our competitors by fluctuations in domestic demand for new
railroad vehicles because of our substantial aftermarket and international
sales.
Through our business segments, we also provide outsourced value-added services
to the railroad and passenger transit aftermarkets, operating 15 service and
upgrade sites in North America and the United
2
4
Kingdom. Our service and upgrade centers enable us to capitalize on the
increased outsourcing of repair business by railroads and transit authorities.
Our acquisition in April 1998 of RFS (E), Ltd., a United Kingdom refurbisher of
locomotives and freight cars, and the October 1998 acquisition of the railroad
service center business of Comet Industries, Inc., have significantly increased
our repair and service offerings.
Our products and services are delivered through three principal business
segments. Within each group, our new product development programs provide us
with an array of product upgrades that strengthen our OEM and aftermarket sales.
Our products and services, by business group, include:
RAILROAD GROUP -- Includes products geared to the production of freight cars and
locomotives, including braking control equipment and train coupler systems.
Revenues are derived principally from OEM and aftermarket sales and to a lesser
extent, repairs and services. Revenues from these products, as a percentage of
total consolidated revenues, have decreased from 65% in 1996 to 58% in 1998.
Specific product lines within the Railroad Group are:
-- FREIGHT CAR -- We manufacture, sell and service air brake equipment, brake
valves, draft gears, hand brakes and slack adjusters for freight cars. Net
sales for typical freight cars can vary considerably based upon the type
and purpose of the freight platform with articulated or intermodal cars
generally having the highest WABCO product content. The Company's
traditional freight products include the ABDX Freight Brake Valve, the Mark
Series draft gears, hand brakes and slack adjusters, and SAC-1(TM)
Articulated Coupler.
-- LOCOMOTIVE -- We manufacture, sell and service air brake equipment,
compressors, air dryers, slack adjusters, brake cylinders, and monitoring
and control equipment. Historically, our most significant locomotive
products have been the 26-C and 30-A pneumatic control equipment and
air-cooled compressors.
-- ELECTRONICS -- We manufacture, sell and service high-quality electronics
for the railroads in the form of on-board systems and braking for
locomotives and freight cars. We are an industry leader in insulating or
"hardening" electronic components to protect them from severe conditions,
including extreme temperatures and high/shock vibration environments. Our
new product development effort has focused on electronic technology for
brakes and controls, and over the past several years, we introduced a
number of significant new products including the EPIC(R) Electronic Brake,
PowerLink(TM), compressor aftercoolers, Train Trax(TM), Trainlink(TM),
Train Sentry III(R), Fuellink(TM) and Armadillo(TM). Our acquisition of
Rockwell's Railroad Electronics division ("Rockwell") in October 1998
significantly strengthened our capabilities by expanding our freight
electronic air brake capability and broadening our electronics product line
to display and positioning systems, data communications and monitoring
products, all in line with the railroads' desire to increase productivity
and safety by the application of electronic equipment.
TRANSIT GROUP -- Includes products for passenger transit vehicles (typically
subways, rail and busses). Revenues are derived primarily from OEM and
aftermarket sales. Revenues from these products, as a percentage of total
consolidated revenues, increased to 32% in 1998 from 22% in 1996.
We manufacture, sell and service electronic brake equipment, pneumatic control
equipment, air compressors, tread brakes and disc brakes, couplers, collection
equipment, overhead electrification, monitoring systems, wheels, climate control
and door equipment and other components for passenger transit vehicles. In 1997,
we received contracts valued at $150 million to provide equipment for 1,080
passenger transit cars for the Metropolitan Transportation Authority/New York
City Transit (the "MTA"). We expect deliveries to commence in the second half of
1999.
Substantially all of our principal passenger transit products are engineered to
customer specifications. Consequently, there is less standardization among these
products than there is with the Railroad Group products. Because the market for
OEM orders has been at a cyclical low during the past several years, we believe
the OEM market presents an opportunity for improved growth during the next
several years.
MOLDED PRODUCTS GROUP -- We manufacture and sell brake shoes, disc brake pads
and other rubber products. Many rubber components produced by this group are
used in the manufacturing process by our other business groups. Molded Products
Group revenues represent, as a percentage of total consolidated revenues,
slightly over 10% for the last three years. Approximately 90% of Molded Products
Group's revenue are derived from aftermarket sales.
3
5
For additional information on our business segments, see Note 17 to the "Notes
to Consolidated Financial Statements" included elsewhere in this report.
STRATEGY
We are committed to enhancing our position as a producer of value-added
equipment for the rail industry and will continue to seek ways to increase our
content per rail vehicle. Building on our leading market share, strong
aftermarket presence and technological leadership, we are pursuing a strategy
involving five key elements:
Expand Technology-Driven New Product
Development and Product Lines
-- We plan to continue to emphasize research and development to create new and
improved products to increase our market share and profitability.
-- We are focusing on technological advances, especially in the areas of
electronics, braking products and other on-board systems as a means of new
product growth.
Increase Repair and Upgrade Services
-- By continuing to leverage our broad product offering and our large
installed product base, we intend to expand our presence in the repair and
upgrade services market.
-- We believe our services are more cost effective than, and we offer product
upgrades not available in, most independent repair shops.
-- To capitalize on the growing aftermarket, we are developing and marketing
retrofit and upgrade products that serve as a platform for offering
additional installation, replacement parts and repair services to
customers.
Grow International Presence
-- We believe that international sales represent a significant opportunity for
further growth.
-- Our net sales outside of the United States and Canada comprised
approximately 17% of our net sales for the year ended December 31, 1998,
compared to 4% in 1995 (See Note 17 to "Notes to Consolidated Financial
Statements"). We intend to increase our existing international sales by:
-- acquisitions,
-- direct sales of products through our subsidiaries and licensees; and
-- forming joint ventures with railway suppliers having a strong presence in
their local markets.
Pursue Strategic Acquisitions
-- We intend to pursue strategic acquisitions that expand our product lines,
increase our aftermarket business, increase international sales and
increase our technical capabilities.
-- An integral component of our acquisition strategy is to realize revenue
growth and cost savings through the integration of the acquired business.
Further Improve Manufacturing Efficiency and
Quality
We intend to retain what we consider to be a leading position as a low-cost
producer in the industry while maintaining world-class product quality,
technology and customer responsiveness. We are dedicated to continuous
improvement across all phases of our business through:
-- our proven Kaizen employee-directed initiatives (a Japanese-developed team
concept used to continuously improve quality, lead time and productivity
and to reduce costs); and
-- our total Quality Improvement Program (an ongoing program to continuously
improve the manufacturing process by encouraging feedback from work
"teams", continuing worker training, statistical engineering, monitoring
systems and evaluation of the process); and
-- the WABCO Performance System model to identify 'lean manufacturing'
principles and roadmap to drive customer satisfaction and enterprise value
to world class levels.
These efforts enable us to streamline processes, improve product quality and
customer satisfaction, reduce product cycle times and respond more rapidly to
market developments. We believe our management and employees are appropriately
incentivized to carry out our strategy. Management owns approximately 31% of our
Common Stock and our employees own Common Stock through an Employee Stock
Ownership Plan ("ESOP").
4
6
BACKLOG
As of December 31, 1998, the Company had a total backlog of firm orders with an
aggregate sales price of approximately $460.9 million, compared to $376.3
million as of December 31, 1997. Of the December 31, 1998 amount, $325.0 million
was attributable to passenger transit products, including products for cars
deliverable to the MTA, and the balance was attributable to railway and other
products. Other than the transit market, backlog is not a significant component
of the Company's business, and management believes it is not an important
indicator of future business performance. Because of the Company's quick
turnaround time, the Company's locomotive and freight customers tend to order
products from the Company on an as-needed basis.
With respect to OEM passenger transit products, there is a longer lead-time for
car deliveries and, accordingly, the Company carries a larger backlog of orders.
The Company's contracts are subject to standard industry cancellation
provisions, including cancellations on short notice or upon completion of
designated stages, including, without limitation, contracts relating to the MTA.
Substantial scope-of-work adjustments are common. For these and other reasons,
work in the Company's backlog may be delayed or cancelled and backlog should not
be relied upon as an indicator of the Company's future performance.
The railroad industry, in general, has historically been subject to fluctuations
due to overall economic conditions and the level of use of alternate methods of
transportation. Based upon widely available industry data concerning freight and
locomotive OEM backlog and projected 1999 freight car deliveries (that indicate
a possible decline from 1998 production), the Company believes demand for its
products will remain reasonably strong for the foreseeable future.
ENGINEERING AND DEVELOPMENT
In furtherance of its strategy of using technology to develop new products, the
Company is actively engaged in a variety of engineering and development
activities. For the fiscal years ended December 31, 1998, 1997 and 1996, the
Company incurred costs of approximately $30.4 million, $24.4 million, and $18.2
million, respectively, on product development and improvement activities
(exclusive of manufacturing support). Such expenditures represented 4.5%, 4.3%,
and 4.0% of net sales for the same periods, respectively. From time to time, the
Company conducts specific research projects in conjunction with universities,
customers and other railroad product suppliers.
The Company's engineering and development program is largely focused upon new
braking technologies, with an emphasis on the application of electronics to
traditional pneumatic equipment. Electronic actuation of braking has long been a
part of the Company's transit product line but interchangeability, connectivity
and durability have presented problems to the industry in establishing
electronics in freight railway applications. Efforts are under way to develop
the major components of both hard-wired and radio-activated braking equipment.
INTELLECTUAL PROPERTY
The Company has numerous U.S. patents, patent applications pending and
trademarks as well as foreign patents and trademarks throughout the world. The
Company also relies on a combination of trade secrets and other intellectual
property laws, nondisclosure agreements and other protective measures to
establish and protect its proprietary rights in its intellectual property.
Certain trademarks, among them the name WABCO(R), were acquired or licensed by
the Company from American Standard Inc. in 1990 pursuant to its acquisition of
the North American operations of the Railway Products Group of American Standard
(the "1990 Acquisition").
The Company is a party, as licensor and licensee, to a variety of license
agreements. The Company does not believe that any single agreement, other than
the SAB License discussed in the following paragraph, is of material importance
to its business as a whole.
The Company and SAB WABCO Holdings B.V. ("SAB WABCO") entered into a license
agreement (the "SAB License") on December 31, 1993, pursuant to which SAB WABCO
granted the Company a license to the intellectual property and know-how related
to the manufacturing and marketing of certain disc brakes, tread brakes and low
noise and resilient wheel products. SAB WABCO is a Swedish corporation that was
a former affiliate of the Company, both having been owned by the same parent
prior to 1990. The Company is authorized to manufacture and sell the licensed
products in North America (including to OEM manufacturers located outside North
America if such licensed products are incorporated into a final
5
7
product to be sold in North America). SAB WABCO has a right of first refusal to
supply the Company with bought-in components of the licensed products on
commercially competitive terms. To the extent SAB WABCO files additional patent
or trademark applications, or develops additional know-how in connection with
the licensed products, such additional intellectual property and know-how are
also subject to the SAB License. The Company may, at its expense, request the
service of SAB WABCO in manufacturing, installing, testing and maintaining the
licensed products and providing customer support. SAB WABCO is entitled to a
free, nonexclusive license of the use of any improvements to the licensed
products developed by the Company. If any such improvements are patented by the
Company, SAB WABCO has the right to request the transfer of such patents upon
payment of reasonable compensation therefor; in such cases, the Company is
entitled to a free, nonexclusive license to use the patented product. The
Company is required to pay a lump sum fee for certain licensed products as well
as royalties based on specified percentages of sales. The license expires
December 31, 2003, but may be renewed for additional one-year terms.
In connection with the Company's recapitalization in January 1995, the Company
and SAB WABCO agreed (i) to use their best efforts to negotiate an agreement to
distribute each other's products, (ii) to explore the feasibility of a joint
venture to expand into regions where neither is currently represented, (iii)
that the SAB License will be amended to include additional disc brake and tread
brake technology, (iv) that SAB WABCO will in the future grant to the Company a
license for the manufacture and sale of electronic brake equipment that it
designs, (v) that SAB WABCO will grant to the Company the right to purchase SAB
WABCO's option on 40% of the shares in SAB WABCO de Brasil, and (vi) that the
Company will have a right of first refusal to purchase SAB WABCO if prior to
December 31, 1999 the current owner decides to sell more than 50% of its
interest in SAB WABCO to a third party, subject to certain exceptions. There is
no assurance that the Company and SAB WABCO will reach agreement on issues
relating to future cooperation or that the Company will be able to acquire SAB
WABCO. Accordingly, the Company and SAB WABCO could be competitors in
international markets.
CUSTOMERS
A few customers within each business segment represent a significant portion of
the Company's net sales; however, no one customer represented more than 10% of
the Company's consolidated revenues in 1998. The loss of a few key customers
within the Company's Railroad and Transit Group could have an adverse effect on
the Company's financial condition, results of operations and liquidity.
COMPETITION
The Company operates in a competitive marketplace. Price competition is strong
and the existence of cost conscious purchasers of a limited number has
historically limited WABCO's ability to increase prices. In addition to price,
competition is based on product performance and technological leadership,
quality, reliability of delivery and customer service and support. The Company's
principal competitors vary to some extent across its principal product lines.
However, within North America, New York Air Brake Company, a subsidiary of the
German air brake producer Knorr-Bremse AG (collectively, "NYAB/ Knorr"), is the
Company's principal overall OEM competitor. The Company's competition for
locomotive, freight and passenger transit service and repair business is
primarily from the railroads' and passenger transit authorities' in-house
operations and NYAB/Knorr.
EMPLOYEES
As of December 31, 1998, we employed approximately 4,300 employees,
approximately 1,200 of whom were unionized. The majority of employees subject to
collective bargaining agreements are within North America and these agreements
are generally effective through 2001 and 2002.
The majority of non-union employees in the United States (approximately 2,000
employees) participate in the ESOP.
REGULATION
In the course of its operations, the Company is subject to various regulations,
agencies and entities. In the United States, these include principally the
Federal Railroad Administration ("FRA") and the Association of American
Railroads ("AAR").
The FRA administers and enforces federal laws and regulations relating to
railroad safety. These regulations govern equipment and safety standards for
6
8
freight cars and other rail equipment used in interstate commerce.
The AAR promulgates a wide variety of rules and regulations governing safety and
design of equipment, relationships among railroads with respect to railcars in
interchange and other matters. The AAR also certifies railcar builders and
component manufacturers that provide equipment for use on railroads in the
United States. New products generally must undergo AAR testing and approval
processes.
As a result of these regulations and regulations in other countries in which the
Company derives its revenues, we must maintain certain certifications as a
component manufacturer and for products we sell.
ENVIRONMENTAL MATTERS
We are subject to a variety of environmental laws and regulations governing
discharges to air and water, the handling, storage and disposal of hazardous or
solid waste materials and the remediation of contamination associated with
releases of hazardous substances. The Company believes its operations currently
comply in all material respects with all of the various environmental laws and
regulations applicable to our business; however, there can be no assurance that
environmental requirements will not change in the future or that we will not
incur significant costs to comply with such requirements.
Under the terms of the purchase agreement and related documents for the 1990
Acquisition, American Standard indemnified the Company for certain items
including environmental claims. American Standard has indemnified the Company
for any claims, losses, costs and expenses arising from (i) claims made in
connection with any of the environmental matters disclosed by American Standard
to the Company at the time of the 1990 Acquisition, (ii) any pollution or threat
to human health or the environment related to American Standard's (or any
previous owner's or operator's) ownership or operation of the properties
acquired by WABCO in the 1990 Acquisition, which pollution or threat was caused
or arises out of conditions existing prior to the 1990 Acquisition (limited to
environmental laws in effect as of December 31, 1991), and (iii) any material
claim ("Environmental Claim") alleging potential liability for the release of
pollutants or the violation of any federal, state or local laws or regulations
relating to pollution or protection of human health or the environment, for
which American Standard has retained liability. Such indemnity covers
investigatory costs only if the investigation is undertaken pursuant to a larger
Environmental Claim and to the extent of American Standard's pro-rata liability
for such larger Environmental Claim. American Standard has no obligation to
indemnify for investigatory costs incurred by the Company independently or
otherwise unrelated to an indemnifiable event. American Standard's
indemnification obligations are limited to aggregate amounts in excess of
$500,000. The Company has exceeded this deductible.
In addition, American Standard's indemnification obligation with respect to
friction product related claims only extends to 50% of the amount claimed, up to
a maximum of $14 million (provided liability is asserted directly and solely
against the Company's friction products subsidiary, RFPC).
The indemnification obligations with respect to third party claims survive until
2000, except those claims which are timely asserted continue until resolved. If
American Standard should be unable to meet its obligations under this indemnity,
the Company will be responsible for such items. In the opinion of management,
American Standard has the present ability to meet its indemnification
obligations.
The Company, through RFPC, has been named, along with other parties, as a
potentially responsible party under the North Carolina Inactive Sites Response
Act because of an alleged release or threat of release of hazardous substances
at the "Old James Landfill" site in Laurinburg, NC. The Company believes that
any cleanup costs for which it may be held responsible are covered by (i) the
American Standard indemnity discussed above and (ii) an insurance policy for
environmental claims provided by Manville Corporation, the former 50% owner of
RFPC, in connection with the Company's 1992 acquisition of Manville
Corporation's interest in RFPC. Pursuant to the terms of the purchase agreement
for the acquisition of Manville Corporation's interest in RFPC, Rocky Mountain
International Insurance, Ltd., an affiliate of Manville Corporation, provided an
insurance policy to cover any claims, losses, costs and expenses relating to,
among other things, environmental liabilities arising from conditions existing
at the former Manville site used by RFPC prior to the acquisition (limited to
environmental laws in effect as of July 1992).
This insurance policy is the sole remedy for the Company with respect to covered
claims. The insurance policy survives until July 2002. Active claims for
conditions existing prior to July 1992 will con-
7
9
tinue to be covered beyond July 2002. The aggregate limit of coverage under the
insurance policy provided by Manville Corporation is $12.5 million. The Company
has submitted claims and has received recoveries under the policy for costs of
clean up imposed on or incurred by the Company in connection with the "Old James
Landfill", and Rocky Mountain has acknowledged coverage under the policy,
subject to the stated policy exclusions. In addition to the insurance policy
provided by Manville Corporation, American Standard's indemnification
obligations described above cover 50% of RFPC-related claims. In January 1998,
the Company discovered petroleum contaminated soils in the vicinity of the
oil-water separator at the Laurinburg facility. The Company has filed a notice
of claim requesting coverage under the insurance policy for clean up costs
associated with removal of the contaminated soils, which were less than $30,000.
The Company believes that the indemnification agreements and insurance policy
referred to above are adequate to cover any potential liabilities during their
respective terms arising in connection with the above-described environmental
conditions. None of the insurance or indemnification agreements is currently the
subject of any dispute.
8
10
ITEM 2. PROPERTIES
The following table provides certain summary information with respect to the
principal facilities owned or leased by the Company. The Company believes that
its facilities and equipment are in good condition and that, together with
scheduled capital improvements, they are adequate for its present and
immediately projected needs. The Greensburg, PA, Germantown, MD, Niles, IL and
Chicago, IL properties are subject to mortgages to secure the Company's
indebtedness under the Credit Agreement. The Company's corporate headquarters
are located in the Wilmerding, PA site.
APPROXIMATE
LOCATION PRIMARY USE PRIMARY SEGMENT OWN/LEASE SQUARE FEET
- ------------------------------------------------------------------------------------------------------
DOMESTIC
Wilmerding, PA Manufacturing/Service Railroad Group Own 850,000(1)
Chicago, IL Manufacturing Railroad Group Own 111,500
Germantown, MD Manufacturing/Service Railroad Group Own 80,000
Kansas City, MO Service Center Railroad Group Lease 55,891
Bossier City, LA Service Center Railroad Group Lease 40,000
Carson City, NV Service Center Railroad Group Lease 22,000
Columbia, SC Service Center Railroad Group Lease 12,250
Chicago, IL Service Center Railroad Group Lease 19,200
Niles, IL Manufacturing Transit Group Own 355,300
Spartanburg, SC Manufacturing/Service Transit Group Lease 183,600
Plattsburgh, NY Manufacturing Transit Group Lease 64,000
Elmsford, NY Service Center Transit Group Lease 28,000
Sun Valley, CA Service Center Transit Group Lease 4,000
Atlanta, GA Service Center Transit Group Lease 1,200
Laurinburg, NC Manufacturing Molded Products Group Own 105,000
Greensburg, PA Manufacturing Molded Products Group Own 97,830
Ball Ground, GA Manufacturing Molded Products Group Lease 30,000
INTERNATIONAL
Doncaster, UK Manufacturing/Service Railroad Group Own 330,000
Stoney Creek, Ontario Manufacturing/Service Railroad Group Own 189,170
Wallaceburg, Ontario Foundry Railroad Group Own 127,555
Burlington, Ontario Manufacturing Railroad Group Own 46,209
Burlington, Ontario Manufacturing Railroad Group Own 28,165
Winnipeg, Manitoba Service Center Railroad Group Lease 20,000
St-Laurent, Quebec Manufacturing Transit Group Own 106,000
Sassuolo, Italy Manufacturing Transit Group Lease 30,000
Burton on Trent, UK Manufacturing Transit Group Lease 18,000
Etobicoke, Ontario Service Center Transit Group Lease 3,800
Wetherill Park, NSW Manufacturing Molded Products Group Lease 73,141
Schweighouse, France Manufacturing Molded Products Group Lease 30,000
Tottenham, VIC Manufacturing Molded Products Group Lease 26,910
- ------------------------------------------------------------------------------------------------------
(1) Approximately 250,000 square feet are currently used in connection with the
Company's operations.
The above information does not include certain facilities scheduled to be closed
during 1999. Leases on the above facilities are long-term and generally include
options to renew.
9
11
ITEM 3. LEGAL PROCEEDINGS
There are various pending lawsuits and claims arising out of the conduct of the
Company's business. These include claims by employees of third parties who
allege they were exposed to asbestos while handling American Standard products
manufactured prior to the 1990 Acquisition. American Standard discontinued the
use of asbestos in its products in 1980. American Standard has indemnified the
Company against these claims and is defending them. Under the terms of the
purchase agreement and related documents for the 1990 Acquisition, American
Standard has indemnified the Company for any claims, losses, costs and expenses
arising from, among other things, product liability claims by third parties,
intellectual property infringement actions and any other claims or proceedings,
in each case to the extent they related to events occurring, products sold or
services rendered prior to the 1990 Acquisition and affect the properties
acquired by the Company. American Standard's indemnification obligations are
limited to aggregate amounts in excess of $500,000 and, as described in Item 1,
this deductible has already been exceeded. In addition, American Standard's
indemnification obligation with respect to RFPC-related claims only extends to
50% of the amount claimed, up to a maximum of $14 million (provided liability is
asserted directly and solely against RFPC). The indemnification obligations with
respect to third party claims survive until 2000. An insurance policy provided
by Manville Corporation, the former 50% owner of RFPC, covers the other 50% of
RFPC related claims up to a maximum of $12.5 million.
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. While this
lawsuit is in the earliest stages, the Company believes the technology developed
by the Company does not infringe on the GE Harris patents. The Company plans to
contest the infringement claims vigorously, in order to present alternative
product lines to customers in the rail industry.
From time to time the Company is involved in litigation relating to claims
arising out of its operations in the ordinary course of business. As of the date
hereof, the Company is involved in no litigation that the Company believes will
have a material adverse effect on its financial condition, results of
operations, or liquidity. The Company historically has not been required to pay
any material liability claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company during
the fiscal quarter ended December 31, 1998.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with respect to executive
officers of the Company as of March 2, 1999.
NAME AGE OFFICE WITH THE COMPANY
- ----------------------------------------------------
William E. Kassling 55 Director, Chairman and
Chief Executive Officer
Gregory T. H. Davies 52 Director, President and
Chief Operating Officer
Robert J. Brooks 54 Director and Chief
Financial Officer
Emilio A. Fernandez 54 Director and Vice
Chairman
John M. Meister 51 Executive Vice
President and General
Manager, Transit
Product Group
Timothy J. Logan 46 Vice President,
International
George A. Socher 50 Vice President and
Corporate Controller
Kevin P. Conner 41 Vice President, Human
Resources
Alvaro Garcia-Tunon 46 Vice President and
Treasurer
- ----------------------------------------------------
WILLIAM E. KASSLING has been a director, Chairman and Chief Executive Officer of
the Company since the 1990 Acquisition. Mr. Kassling was also President of WABCO
from 1990 through February 1998. From 1984 until 1990 he headed the Railway
Products Group of American Standard Inc. Between 1980 and 1984 he headed
American Standard's Building Specialties Group and between 1978 and 1980 he
headed Business Planning for American Standard. Mr. Kassling is a director of
Aearo Corporation, Scientific Atlanta, Inc. and Commercial Intertech, Inc.
10
12
GREGORY T. H. DAVIES joined the Company in March 1998 as President and Chief
Operating Officer and in February 1999 became a director. Mr. Davies was
formerly with Danaher Corporation since 1988, where he was Vice President and
Group Executive responsible for its Jacobs Vehicle Systems, Delta Consolidated
Industries and A.L. Hyde Corporation operating units. Prior to that, he held
executive positions at Cummins Engine Company and Ford Motor Company.
ROBERT J. BROOKS has been a director and Chief Financial Officer of the Company
since the 1990 Acquisition. From 1986 until 1990 he served as worldwide Vice
President, Finance for the Railway Products Group of American Standard. Mr.
Brooks is a director of Crucible Materials Corp.
EMILIO A. FERNANDEZ was named Vice Chairman in March 1998. He has been a
Director and was Executive Vice President of the Company since the Company's
January 1995 acquisition of Pulse Electronics, Inc. which he co-founded in 1975.
From 1996 to February 1998 he was Executive Vice President -- Integrated Railway
Systems. Mr. Fernandez is a director of PMI, Inc., a private corporation.
JOHN M. MEISTER has been Vice President and General Manager of the Company's
Passenger Transit Unit since the 1990 Acquisition. In 1997, he was appointed to
the newly created position of Executive Vice President and General Manager,
Transit Products Group. From 1985 until 1990 he was General Manager of the
passenger transit business unit for the Railway Products Group of American
Standard.
TIMOTHY J. LOGAN has been Vice President, International since August 1996.
Previously, from 1987 until August 1996, Mr. Logan was Vice President,
International Operations for Ajax Magnethermic Corporation and from 1983 until
1987 he was President of Ajax Magnethermic Canada, Ltd.
GEORGE A. SOCHER has been Vice President and Corporate Controller of the Company
since July 1995. From 1994 until June 1995, Mr. Socher was Corporate Controller
and Chief Accounting Officer of Sulcus Computer Corp. From 1988 until 1994 he
was Corporate Controller of Stuart Medical Inc.
KEVIN P. CONNER has been Vice President of Human Resources of the Company since
the 1990 Acquisition. From 1986 until 1990, Mr. Conner was Vice President of
Human Resources of the Railway Products Group of American Standard.
ALVARO GARCIA-TUNON has been Vice President and Treasurer of the Company since
August 1995. From 1990 until August 1995 Mr. Garcia-Tunon was Vice President of
Business Development of Pulse Electronics, Inc.
The executive officers are elected annually by the Board of Directors of the
Company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S
COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company is listed on the New York Stock Exchange. As of
February 24, 1999, there were 33,937,528 shares of Common Stock outstanding held
by 335 holders of record. The high and low sales price of the shares and
dividends paid per share were as follows:
QUARTER HIGH LOW DIVIDEND
- ----------------------------------------------------
1998
Fourth $24.8125 $19.250 $.01
Third 26.7500 17.125 .01
Second 29.8125 24.000 .01
First 29.8125 23.000 .01
- ----------------------------------------------------
1997
Fourth $ 27.875 $21.875 $.01
Third 23.125 17.875 .01
Second 20.000 12.750 .01
First 14.250 12.250 .01
- ----------------------------------------------------
The Company's Credit Agreement restricts the ability to make dividend payments.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 5 to the "Notes to Consolidated Financial Statements."
11
13
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial
information of the Company and has been derived from financial statements
audited by Arthur Andersen LLP, independent public accountants. This financial
information should be read in conjunction with, and is qualified by reference
to, "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company and the
Notes thereto included elsewhere in this Form 10-K.
YEAR ENDED DECEMBER 31
-----------------------------------------------------
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA
Net sales................................. $670,909 $564,441 $453,512 $ 424,959 $347,469
Cost of sales............................. 451,730 378,323 300,163 278,901 229,544
-----------------------------------------------------
Gross profit............................ 219,179 186,118 153,349 146,058 117,925
Operating expenses........................ 114,513 96,143 73,631 56,756 44,287
-----------------------------------------------------
Income from operations.................. 104,666 89,975 79,718 89,302 73,638
Interest expense and other, net........... 32,136 29,385 26,070 30,793 11,184
-----------------------------------------------------
Income before taxes and extraordinary
item................................. 72,530 60,590 53,648 58,509 62,454
Income taxes.............................. 27,561 23,327 20,923 23,402 25,613
-----------------------------------------------------
Income before extraordinary item........ 44,969 37,263 32,725 35,107 36,841
(Loss) on early extinguishment of debt.... (3,315) (1,382)
-----------------------------------------------------
Net income.............................. $ 41,654 $ 37,263 $ 32,725 $ 33,725 $ 36,841
=====================================================
DILUTED EARNINGS PER COMMON SHARE
Income before extraordinary item.......... $ 1.75 $ 1.42 $ 1.15 $ 1.32 $ .92
Loss on early extinguishment of debt...... (.13) (.05)
-----------------------------------------------------
Net income.............................. $ 1.62 $ 1.42 $ 1.15 $ 1.27 $ .92
=====================================================
Cash dividends per share.................. $ .04 $ .04 $ .04 $ .01 --
Weighted average diluted shares
outstanding............................. 25,708 26,173 28,473 26,639 40,000
-----------------------------------------------------
AS OF DECEMBER 31
-----------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------
BALANCE SHEET DATA
Working capital........................... $ 95,411 $ 48,719 $ 48,176 $ 36,674 $ 46,640
Property, plant and equipment, net........ 124,981 108,367 95,844 72,758 67,346
Total assets.............................. 596,184 410,879 363,236 263,407 187,728
Total debt................................ 467,817 364,934 341,690 305,935 78,060
Shareholders' equity (deficit)............ (33,853) (79,263) (76,195) (108,698) 46,797
- -------------------------------------------------------------------------------------------------
12
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Westinghouse Air Brake Company was formed in 1990 through the acquisition of the
Railway Products Group of American Standard Inc. The Company is North America's
largest manufacturer of value-added equipment for locomotives, railway freight
cars and passenger transit vehicles. The Company's primary manufacturing
operations are in the United States and Canada and revenues have historically
been predominantly from North America. In recent years, the proportion of
international sales has increased significantly, in line with the Company's
strategy to expand its business outside North America.
The Company's customer base consists of freight transportation companies,
locomotive and freight car original equipment manufacturers, transit car
builders and public transit systems.
The Company's business is comprised of three principal business segments:
Railroad, Transit and Molded Products. See Note 17 to the "Notes to Consolidated
Financial Statements".
The Company's strategy for growth is focused on using technological advancements
to develop new products, expanding the range of aftermarket products and
services and penetrating international markets. In addition, management
continually evaluates acquisition opportunities that meet the Company's criteria
and complement the Company's operating strategies and product offerings.
The Company has completed a number of strategic acquisitions since 1995. The
following is a summary of these acquisitions:
-- In October 1998, the Company purchased the railroad electronics business
from Rockwell Collins, Inc. ("Rockwell") for a total purchase price of
approximately $80.0 million.
-- In October 1998, the Company purchased the air brake repair business of
Comet Industries, Inc. ("Comet") for a total purchase price of
approximately $13.2 million.
-- In July 1998, the Company acquired the assets of Lokring Corporation
("Lokring") for a total purchase price of $5.1 million. The acquired
products include a fitting that connects non-welded joints.
-- In April 1998, the Company completed the acquisition of the transit coupler
product line of Hadady Corporation ("Hadady") for a total purchase price of
$4.6 million, which included amounts for designs and drawings.
-- In April 1998, the Company acquired the railway repair business in the
United Kingdom of RFS(E) Limited ("RFS(E)") for a total purchase price of
approximately $10.0 million.
-- In October 1997, the Company purchased the rail products business and
related assets of Sloan Valve Company ("Sloan") for $2.5 million. The
acquired products included slack adjusters, angle cocks and retainer
valves.
-- During July 1997, the Company acquired 100% of the stock of HP s.r.l.
("HP") for a total purchase price of $5.8 million, which included the
assumption of $2.3 million in debt. HP s.r.l. is a leading supplier of door
controls for transit rail cars and buses in the Italian market.
-- In May 1997, the Company purchased Stone Safety Services Corporation and
Stone U.K. Limited (collectively, "Stone"). Stone is one of the world's
leading suppliers of air conditioning equipment for the transit industry
with an established product base in North America, Europe and the Far East.
In connection with this acquisition, in June 1997, the Company acquired the
heavy rail air conditioning business of Thermo King Corporation ("Thermo
King"). The aggregate purchase price for these acquisitions was
approximately $7.7 million.
-- In September 1996, the Company acquired the Vapor Group ("Vapor"), a
passenger transit door manufacturer in the United States and Europe, for
$63.9 million.
-- In January 1996, the Company acquired Futuris Industrial Products Pty. Ltd.
("Futuris") an Australian friction products manufacturer, for approximately
$15.0 million.
-- In January 1995, the Company acquired Pulse Electronics ("Pulse"), a
privately-held manufacturer of end-of-train monitors and other electronic
products for the railway industry for $54.9 million.
Also in March 1997, an agreement was reached with one of the Company's major
shareholders, Scandina-
13
15
vian Incentive Holding B.V. ("SIH"), whereby the Company repurchased 4 million
shares of its common stock held by SIH for $44 million, or $11 per share. In
conjunction with this transaction, SIH also sold its remaining 6 million shares
of the Company's Common Stock to Vestar Equity Partners, L.P. ("Vestar"),
Charlesbank Capital Partners, LLC, f/k/a Harvard Private Capital Holdings, Inc.
("Charles"), American Industrial Partners Capital Fund II, L.P. ("AIP") and
certain members of senior management.
FISCAL YEAR 1998 COMPARED TO
FISCAL YEAR 1997
Summary Results of Operations
YEAR ENDED
DECEMBER 31
DOLLARS IN MILLIONS, --------------- PERCENT
EXCEPT PER SHARE 1998 1997 CHANGE
- ------------------------------------------------
Income before
extraordinary item $ 45.0 $ 37.3 20.6
Extraordinary item,
net of tax 3.3 -- nm
Net income 41.7 37.3 11.8
Diluted earnings per
share, before
extraordinary item 1.75 1.42 20.7
Diluted earnings per
share 1.62 1.42 14.1
Net sales 670.9 564.4 18.9
Income from
operations 104.7 90.0 16.3
Earnings before
interest, taxes,
depreciation and
amortization 129.0 114.9 12.3
Gross profit margin 32.7% 33.0% nm
- ------------------------------------------------
nm-not meaningful
Income before extraordinary item for 1998 increased $7.7 million, or 20.6%,
compared with the same period a year ago. Because of the $3.3 million
extraordinary charge to write-off certain previously capitalized debt issuance
costs, net income increased only $4.4 million compared to 1997. Diluted earnings
per share before extraordinary item increased 20.7% to $1.75 and diluted
earnings per share increased 14.1% to $1.62. Income from operations and earnings
before interest, taxes, depreciation and amortization increased in the
comparison primarily due to revenue growth and related gross profit.
A number of events have occurred over the comparative period that impacted the
Company's results of operations and financial condition including:
-- The Company completed several acquisitions that complement and enhance the
mix of existing products and markets. Acquisitions completed during this
timeframe were Rockwell, Comet, Lokring, Hadady, RFS(E), Sloan, H.P., Stone
and Thermo King. Aggregate incremental revenues from all of the above
acquisitions was $63.7 million in 1998.
-- In June 1998, the Company refinanced its credit agreement and subsequently
amended the agreement in October 1998. This resulted in a write off of
previously deferred financing costs of approximately $3.3 million, net of
tax, ($.13 per share) which has been reported as an extraordinary item.
-- In March 1997, the Company repurchased 4 million shares of its common stock
held by a major shareholder for $44 million plus $2 million in related
fees.
Net Sales
The following table sets forth the Company's net sales by business segment:
YEAR ENDED
DECEMBER 31
-------------------
DOLLARS IN THOUSANDS 1998 1997
- ---------------------------------------------
Railroad Group $388,797 $310,295
Transit Group 211,801 189,541
Molded Products Group 70,311 64,605
-------------------
Net sales $670,909 $564,441
- ---------------------------------------------
Net sales for 1998 increased $106.5 million, or 18.9%, to $670.9 million. This
increase was primarily attributable to incremental revenue in 1998 of
approximately $43.2 million from the acquisitions referred to above within the
Railroad Group. Increased sales volumes in the Railroad Group also reflect a
strong OEM market for freight cars, with approximately 76,000 freight cars
delivered in 1998 compared to 50,000 in 1997. These increases were partially
offset by lower sales in the electronics portion of the Railroad Group, where in
the prior year period, product sales benefited from a federal mandate that
certain monitoring equipment be installed in trains by July 1997. Incremental
revenue in 1998 for the acquisitions referred to above, of approximately $20.5
million, was the primary reason for the increase in revenues in the Transit
Group. The
14
16
Company anticipates new freight car deliveries in 1999 to be lower than that of
1998; however, railroad OEM and aftermarket sales are expected to be reasonably
strong for the foreseeable future.
Gross Profit
Gross profit increased 17.8% to $219.2 million in 1998 compared to $186.1
million in 1997. Gross margin, as a percentage of sales, was 32.7% compared to
33.0%. Gross margin is dependent on a number of factors including sales volume
and product mix. Incremental revenue from recent acquisitions at lower margins
as compared to the Company's historical results, was the primary reason for the
lower margins in the period-to-period comparison. These lower margins were
partially offset by favorable margins on increased sales in the Railroad and
Molded Product Groups.
Operating Expenses
YEAR ENDED
DECEMBER 31
------------------ PERCENT
DOLLARS IN THOUSANDS 1998 1997 CHANGE
- ---------------------------------------------------
Selling and marketing $ 30,711 $25,364 21.1
General and
administrative 45,337 38,153 18.8
Engineering 30,436 24,386 24.8
Amortization 8,029 8,240 (2.6)
------------------
Total $114,513 $96,143 19.1
- ---------------------------------------------------
Total operating expenses as a percentage of net sales were 17.1% in 1998
compared with 17.0% in 1997. Total operating expenses increased in 1998 by $18.4
million in the period-to-period comparison. Incremental expenses from acquired
businesses totaled $10.2 million or 55% of the increase. In addition, higher
operating expenses reflect costs associated with computer system upgrades which
includes Year 2000 compliant computer software of approximately $3.5 million and
additional engineering efforts associated with new product development. The
Company anticipates cost savings in 1999 from the consolidation of several
facilities and a related net reduction of employees as recently acquired
businesses are integrated into the Company's core operations.
Income from Operations
Operating income totaled $104.7 million in 1998 compared with $90.0 million in
1997. Higher operating income results from higher sales volume and related
higher gross profit. As a percentage of revenue, operating income was 15.6% and
is substantially consistent with that of the prior year. Favorable volume
changes in the Railroad and the Molded Products Groups were partially offset by
lower profits, as a percentage of sales, in the Transit Group.
Interest and Other Expense
Interest expense increased $1.5 million to $31.2 million during 1998, primarily
due to financing costs of recent acquisitions, partially offset by debt
repayments.
Other expense for 1998 totaled $0.9 million primarily reflecting the effects of
changes in foreign currency exchange rates associated with a loan to a wholly
owned subsidiary of the Company. The effect of subsequent changes in exchange
rates will be reflected in future periods.
Income Taxes
The provision for income taxes increased $4.2 million to $27.6 million in 1998
compared with 1997. The effective tax rate declined to 38% in 1998 from 38.5% a
year ago, resulting from additional benefits through our Foreign Sales
Corporation and lower overall effective state tax rates.
15
17
FISCAL YEAR 1997 COMPARED TO
FISCAL YEAR 1996
Summary Results of Operations
YEAR ENDED
DECEMBER 31
DOLLARS IN MILLIONS, --------------- PERCENT
EXCEPT PER SHARE 1997 1996 CHANGE
- ------------------------------------------------
Net income $ 37.3 $ 32.7 14.1
Diluted earnings per
share 1.42 1.15 23.5
Net sales 564.4 453.5 24.5
Income from
operations 90.0 79.7 12.9
Earnings before
interest, taxes,
depreciation and
amortization 114.9 102.0 12.6
Gross profit margin 33.0% 33.8% nm
- ------------------------------------------------
nm -- not meaningful
Net income for 1997 increased $4.6 million, or 14.1% compared with 1996. Diluted
earnings per share increased 23.5% to $1.42 per diluted share. The higher
earnings base reflects the benefits associated with acquisitions and new
products and the 4 million share repurchase. Income from operations and earnings
before interest, taxes, depreciation and amortization increased in the
comparison primarily due to revenue growth and related gross profit.
Net Sales
The following table sets forth the Company's net sales by business segment:
YEAR ENDED
DECEMBER 31
-------------------
DOLLARS IN THOUSANDS 1997 1996
- ---------------------------------------------
Railway Group $310,295 $294,021
Transit Group 189,541 100,902
Molded Products Group 58,589 64,605
-------------------
Net sales $564,441 $453,512
- ---------------------------------------------
Net sales for the year ended December 31, 1997 increased $110.9 million, or
24.5%, to $564.4 million. The Transit Group acquisitions of Vapor, Stone, Thermo
King and HP contributed $85.5 million of the increase. In addition, increased
volumes in all groups favorably affected the comparison.
Gross Profit
Gross profit increased 21.4% to $186.1 million in 1997 compared to $153.3
million in 1996. Gross margin, as a percentage of sales, was 33.0% in 1997 and
33.8% in 1996. The effect of lower margins of the recently acquired businesses
was the primary factor for the change.
Operating Expenses
YEAR ENDED
DECEMBER 31
----------------- PERCENT
DOLLARS IN THOUSANDS 1997 1996 CHANGE
- --------------------------------------------------
Selling and marketing $25,364 $18,643 36.1
General and
administrative 38,153 28,890 32.1
Engineering 24,386 18,244 33.7
Amortization 8,240 7,854 4.9
-----------------
Total $96,143 $73,631 30.6
- --------------------------------------------------
Total operating expenses increased $22.5 million in the year-to-year comparison
primarily reflecting the effect of acquisitions completed in 1997 and 1996.
Incremental expenses in 1997 from acquired businesses totaled $15.3 million. In
addition, higher operating expenses reflect costs associated with certain
strategic initiatives including expanded international marketing activities and
additional engineering efforts associated with new product development.
Income from Operations
Operating income totaled $90.0 million in 1997 compared with $79.7 million a
year ago. Higher operating income reflects higher sales volume and related gross
profit.
Interest Expense
Interest expense increased $3.6 million to $29.7 million during 1997, primarily
due to funding costs associated with repurchases of common stock and
acquisitions, partially offset by debt repayments.
Income Taxes
The provision for income taxes increased $2.4 million to $23.3 million in 1997
compared with $20.9 million in 1996. The effective tax rate declined to 38.5% in
1997 from 39.0% in 1996, due to the establishment of a Foreign Sales Corporation
in the latter part of 1996.
16
18
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is provided primarily by operating cash flow and borrowings under the
Company's credit facilities. The Company's cash flow from operating activities
was approximately $42 million, $67 million and $59 million in 1998, 1997 and
1996, respectively. The decrease in operating cash flow from 1997 to 1998 is
primarily related to an increase in working capital due to higher accounts
receivables and increased inventory levels which are associated with increased
sales growth and acquired businesses which have large working capital
requirements. These additional working capital requirements have resulted in
increased borrowings under the Company's credit facilities. The Company's
acquisitions of businesses have also resulted in increased borrowing.
Based on cash flow provided by operations during 1998, forecasted 1999 results
and credit available under the credit agreement, the Company believes it will be
able to make 1999 planned capital expenditures and required debt payments.
In 1998, the Company completed the Rockwell, Comet, Lokring, RFS(E) and Hadady
acquisitions for an aggregate purchase price of $112.9 million consisting of
debt and cash. In 1997, the Company completed the Stone, Thermo King, Sloan and
HP acquisitions for an aggregate purchase price of $16.0 million, including $2.3
million of assumed debt. In 1996, the Company acquired Vapor and Futuris for an
aggregate purchase price of $78.9 million. These transactions utilized
borrowings for the purchase price. Also, in 1995, the Company acquired Pulse for
$54.9 million, consisting of $20 million in bank borrowings, a $17.0 million
note payable and the Company's Common Stock valued at $17.9 million at the time
of the acquisition.
In March 1997, SIH sold its 10 million shares of the Company's Common Stock. The
Company purchased 4 million shares at $11 per share for a total of $44 million
(plus $2 million in related fees), and investors consisting of Vestar, Charles,
AIP and certain members of the Company's management acquired the remaining 6
million shares at the same price. The Company financed the 4 million share
repurchase through borrowings under its credit facility.
Gross capital expenditures were $29.0 million, $29.6 million and $13.2 million
in 1998, 1997 and 1996, respectively. The majority of capital expenditures
reflect spending for replacement equipment as well as increased capacity and
efficiency. The Company expects capital expenditures in 1999 to approximate $25
to $30 million.
The following table sets forth the Company's outstanding indebtedness:
YEAR ENDED
DECEMBER 31
-------------------
DOLLARS IN THOUSANDS 1998 1997
- ---------------------------------------------
Credit Agreement
Revolving credit $105,555 $100,880
Term loan 202,500 145,500
9 3/8% Senior notes due
June 5, 2005 100,000 100,000
Unsecured credit
facility 30,000
Pulse note 16,990 16,990
Comet notes 10,200
Other 2,572 1,564
-------------------
Total 467,817 364,934
Less-current
portion 30,579 32,600
-------------------
Long-term portion $437,238 $332,334
- ---------------------------------------------
Credit Agreement
In June 1998, the Company refinanced its credit facility with a consortium of
commercial banks and amended it in October 1998 in connection with the Rockwell
acquisition (as amended, the "Credit Agreement"). The Credit Agreement provides
for an aggregate credit facility of $350 million, consisting of up to $170
million of June 1998 term loans, up to $40 million of September 1998 term loans,
and up to $140 million of revolving loans. In addition, the Credit Agreement
provides for swingline loans of up to an aggregate amount of $5 million, and for
the issuance of letters of credit in an aggregate face amount of up to $50
million. Swingline loans and the issuance of letters of credit will reduce the
amount of revolving loans which may be incurred under the revolving credit
facility.
At December 31, 1998, the Company had available borrowing capacity, net of
letters of credit, of approximately $12 million. The Company repaid a portion of
its borrowings under the Credit Agreement in January 1999 with proceeds of the
offering of $75 million of 9 3/8 Senior Notes, as further described below,
resulting in increased borrowing capacity of $47 million.
Credit Agreement borrowings bear variable interest rates indexed to common
indexes such as LIBOR. The weighted-average contractual interest rate on Credit
Agreement borrowings was 6.71% on
17
19
December 31, 1998. To reduce the impact of interest rate changes on a portion of
this variable-rate debt, the Company entered into interest rate swaps which
effectively convert a portion of the debt from variable to fixed-rate borrowings
during the term of the swap contracts. On December 31 1998, the notional value
of interest rate swaps outstanding totaled $50 million and effectively changed
the Company's interest rate from a variable rate to a fixed rate of 7.09%. The
interest rate swap agreements mature in 2000 and 2001.
Principal repayments of term loan borrowings are due in semi-annual installments
until maturity in December 2003. See Note 5 to "Notes to Consolidated Financial
Statements."
The Credit Agreement limits the Company with respect to declaring or making cash
dividend payments and prohibits the Company from declaring or making other
distributions whether in cash, property, securities or a combination thereof,
with respect to any shares of the Company's capital stock subject to certain
exceptions, including an exception pursuant to which the Company will be
permitted to pay cash dividends on its Common Stock in any fiscal year in an
aggregate amount up to $15 million minus the aggregate amount of prepayments of
the Pulse note during such fiscal year so long as no default in the payment of
interest or fees has occurred thereunder. The Credit Agreement contains various
other covenants and restrictions including, without limitation, the following: a
limitation on the incurrence of additional indebtedness; a limitation on
mergers, consolidations and sales of assets and acquisitions (other than mergers
and consolidations with certain subsidiaries, sales of assets in the ordinary
course of business, and acquisitions for which the consideration paid by the
Company does not exceed $50 million individually or $150 million in the
aggregate); a limitation on liens; a limitation on sale and leasebacks; a
limitation on investments, loans and advances; a limitation on certain debt
payments; a limitation on capital expenditures; a minimum interest expense
coverage ratio; and a maximum leverage ratio. All debt incurred under the Credit
Agreement is secured by substantially all of the assets of the Company and its
domestic subsidiaries and is guaranteed by the Company's domestic subsidiaries.
The Credit Agreement contains customary events of default, including payment
defaults, failure of representations to be true in any material respect,
covenant defaults, defaults with respect to other indebtedness of the Company,
bankruptcy, certain judgments against the Company, ERISA defaults and "change of
control" of the Company.
9 3/8% Senior Notes Due June 2005
In June 1995 the Company issued $100 million of 9 3/8% Senior Notes due June
2005 (the "Existing Notes"). In January 1999, the Company issued an additional
$75 million of 9 3/8% Senior Notes due June 2005 (the "Additional Notes"; the
Existing Notes and the Additional Notes are, collectively, the "Notes"). See
"Subsequent Event" below.
The terms of the Existing Notes and the Additional Notes are substantially the
same, and the Existing Notes and the Additional Notes were issued pursuant to
indentures that are substantially the same. The Notes bear interest at the rate
of 9 3/8% and mature in June 2005. The net proceeds of the Existing Notes were
used to prepay term loans outstanding under the then existing credit agreement.
The net proceeds of the Additional Notes were used to repay the unsecured credit
facility and to reduce revolving credit borrowings.
The Notes are senior unsecured obligations of the Company and rank pari passu in
right of payment with all existing and future indebtedness under (i) capitalized
lease obligations, (ii) the Credit Agreement, (iii) indebtedness of the Company
for money borrowed and (iv) indebtedness evidenced by notes, debentures, bonds
or other similar instruments for the payment of which the Company is responsible
or liable unless, in the case of clause (iii) or (iv), in the instrument
creating or evidencing the same or pursuant to which the same is outstanding, it
is provided that such obligations are subordinate in right of payment to the
Notes.
The indentures pursuant to which the Notes were issued contain certain
restrictive covenants which, among other things, limit the ability of the
Company and certain of its subsidiaries to incur indebtedness, pay dividends on
and redeem capital stock, create restrictions on investments in unrestricted
subsidiaries, make distributions from certain subsidiaries, use proceeds from
the sale of assets and subsidiary stock, enter into transactions with
affiliates, create liens and enter into sale/leaseback transactions. The
Company's indenture also restricts, subject to certain exceptions, the Company's
ability to consolidate and merge with, or to transfer all or substantially all
of its assets to, another person.
18
20
Unsecured Credit Facility
In October 1998, the Company obtained a $30 million unsecured credit facility
from a group of commercial banks for the purpose of financing the Rockwell
acquisition. At December 31, 1998, the interest rate on the note was 9.75% per
annum. In January 1999, this facility was repaid with proceeds of the Additional
Note offering.
Pulse Note
As partial payment for the Pulse acquisition, the Company issued a $17.0 million
note due January 31, 2004. Interest is payable semiannually and accrues at 9.5%
until February 1, 2001; and from February 1, 2001 until January 31, 2004,
interest will accrue at the prime rate charged by Chase Manhattan Bank on
December 31, 2000 plus 1% (with a maximum adjustment of 2%).
Comet Notes
In connection with the Comet acquisition, the Company issued notes totaling
$12.2 million, of which unsecured notes totaling $6.2 million were delivered by
the Company and a note in the amount of $6 million was delivered by a subsidiary
of the Company and secured by the acquired assets. The notes bore interest at
the rate of 10% per annum and were scheduled to mature on October 8, 1999. These
notes were repaid in January 1999. See "Subsequent Event" below.
ESOP
In connection with the establishment of the ESOP in January 1995, the Company
made a $140 million loan to the ESOP (the "ESOP Loan"), which was used to
purchase 9,336,000 shares of the Company's outstanding common stock. The ESOP
Loan had an original term of 50 years, with annual payments of principal and
interest of approximately $12 million. The ESOP Loan bears interest at 8.5% per
annum. The ESOP will repay the ESOP Loan using contributions from the Company.
The Company is obligated to contribute amounts sufficient to repay the ESOP
Loan. The net effect of the ESOP is that the Company's Common Stock is allocated
to employees in lieu of a retirement plan that was previously a cash-based
defined benefit plan and, accordingly, results in reduced annual cash outlays by
an estimated $3 to $4 million.
Subsequent Event
In January 1999, the Company issued the Additional Notes at a premium resulting
in an effective rate of 8.5%. As a result of the issuance and payoff of the
unsecured credit facility, the Company will write off previously capitalized
debt issuance costs of approximately $.02 per diluted share in the first quarter
of 1999.
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 make required contributions to the ESOP, to permit
anticipated capital expenditures, and to fund working capital requirements and
other cash needs for the foreseeable future, including 1999. The issuance of the
Additional Notes 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. 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. The Company intends in
1999 to reduce its indebtedness through generating operating income and by
reducing working capital requirements and other measures.
EFFECTS OF YEAR 2000
The Company has information system improvement initiatives in process that
include both new computer hardware and software applications. The new system is
substantially operational and is year 2000 compliant. The estimated cost of the
project is expected to be in the $8 to $10 million range with the majority of
costs (approximately $8 million)
19
21
previously incurred. The majority of the expenditures incurred for hardware and
purchased software related to this project have been capitalized and are
amortized over their estimated useful lives. Other costs, such as training and
advisory consulting, are expensed as incurred. These expenditures are not
expected to have a significant impact on the Company's future results of
operations or financial condition.
The Company has identified other equipment it uses in its operations that have
non-information system characteristics and have embedded technology components,
such as those items with internal clocks. The Company will need to replace this
type of equipment but does not believe a possible year 2000 failure will have a
significant impact on the Company's operations. The estimated cost of
replacement equipment is not considered significant.
The Company has received written assurances from some of its suppliers and
customers and other providers acknowledging year 2000 issues and stating their
present intention to be compliant; however, not all customers, vendors and
providers have provided such assurances. The Company will evaluate on an ongoing
basis whether it is necessary and practical to establish contingency plans with
respect to year 2000 issues. However, if large scale systems failures occur, it
could have a significant adverse effect on the Company's financial condition,
future results of operations and liquidity.
The Company's products are generally sold with a limited warranty for defects.
The Company has reviewed its products currently in use by its customers or being
sold and does not believe that there will be material increases in warranty or
liability claims arising out of year 2000 non-compliance. However, a material
increase in such claims could have a material adverse effect on the Company's
financial condition, future results of operations and liquidity.
EFFECTS OF INFLATION; SEASONALITY
General price inflation has not had a material impact on the Company's results
of operations. Some of the Company's labor contracts contain negotiated salary
and benefit increases and others contain cost of living adjustment clauses,
which would cause the Company's cost automatically to increase if inflation were
to become significant. The Company's business is not seasonal, although the
third quarter results generally tend to be slightly lower than other quarters,
reflecting vacation and down time at its major customers during this period.
CONVERSION TO THE EURO CURRENCY
On January 1, 1999, certain members of the European Union established fixed
conversion rates between their existing currencies and the European Union's
common currency (the "Euro"). The Company conducts business in member countries.
The transition period for the introduction of the Euro is from January 1, 1999
through June 30, 2002. The Company is assessing the issues involved with the
introduction of the Euro; however, it does not expect conversion to the Euro to
have a material impact on its operations or financial results.
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 will prove to have been correct.
These forward-looking statements are subject to various risks, uncertainties and
assumptions about us, including, among other things:
-- Interest rates;
-- Demand for services in the freight and passenger rail industry;
-- Consolidations in the rail industry;
-- Demand for our products and services;
-- Gains and losses in market share;
-- Demand for freight cars, locomotives, passenger transit cars and buses;
-- Industry demand for faster and more efficient braking equipment;
-- Continued outsourcing by our customers;
-- Governmental funding for some of our customers;
-- Future regulation/deregulation of our customers and/or the rail industry;
20
22
-- General economic conditions in the markets which we compete, including
North America, South America, Europe and Australia;
-- Successful introduction of new products;
-- Successful integration of newly acquired companies;
-- Year 2000 concerns;
-- Labor relations;
-- Completion of additional acquisitions; and
-- Other factors.
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 PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities". This Statement establishes accounting and reporting standards
requiring that every derivative instrument be measured at its fair value and the
changes in fair value be recorded currently in earnings unless specific hedge
accounting criteria are met. Statement No. 133 is effective for fiscal years
beginning after June 15, 1999, and accordingly, the Company anticipates adopting
this standard January 1, 2000. Management continues to evaluate the impact this
standard will have on results of operations and financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK In the ordinary course of business, WABCO is exposed to risks
that increases in interest rates may adversely affect funding costs associated
with $308 million of variable-rate debt (including the effects of interest rate
swaps), which represents 66% of total long-term debt at December 31, 1998.
Management has entered into pay-fixed, receive-variable interest rate swap
contracts that partially mitigate the impact on variable-rate debt of interest
rate increases (see Note 5 to the "Notes to Consolidated Financial Statements"
included elsewhere in this report). At December 31, 1998, an instantaneous 100
basis point increase in interest rates would reduce the Company's earnings by
$2.2 million, assuming no additional intervention strategies by management.
In January 1999, the Company converted a portion of its variable-rate debt to
fixed rate debt through the issuance of $75 million Senior Notes. As of February
28, 1999, variable-rate debt represents 52% (including the effects of interest
rate swaps) of total long-term debt.
FOREIGN CURRENCY EXCHANGE RISK The Company routinely 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 December 31, 1998, the Company had no significant
instruments outstanding.
WABCO 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. At December 31, 1998, approximately 72% of WABCO's
net sales are in the United States, 11% in Canada and 17% in other international
locations, primarily Europe.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data are set forth in Item 14 of Part IV
hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10 THROUGH 13.
In accordance with the provisions of General Instruction G to Form 10-K, the
information required by Item 10 (Directors and Executive Officers of the
Registrant), Item 11 (Executive Compensation), Item 12 (Security Ownership of
Certain Beneficial Owners and Management) and Item 13 (Certain Relationships and
Related Transactions) is incorporated herein by reference to the Company's
definitive Proxy Statement for its Annual Meeting of Stockholders to be held on
May 19, 1999. The definitive Proxy Statement will be filed with the Securities
and Exchange Commission not later than 120 days after December 31, 1998.
Information relating to the executive officers of the Company is set forth in
Part I.
21
23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The financial statements, financial statement schedules and exhibits listed
below are filed as part of this annual report:
PAGE
----
(a) (1) FINANCIAL STATEMENTS
Report of Independent Public Accountants 25
Consolidated Balance Sheet as of December 31, 1998 and 1997 26
Consolidated Statement of Operations for the three years
ended December 31, 1998, 1997 and 1996 27
Consolidated Statement of Cash Flows for the three years
ended December 31, 1998, 1997 and 1996 28
Consolidated Statement of Shareholders' Equity for the three
years ended December 31, 1998, 1997 and 1996 29
Notes to Consolidated Financial Statements 30
(2) FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants 43
Schedule II -- Valuation and Qualifying Accounts 44
(b) REPORTS ON FORM 8-K
None
FILING METHOD
-------------
(c) EXHIBITS
3.1 Restated Certificate of Incorporation of the Company dated
January 30, 1995, as amended March 30, 1995 2
3.2 Amended and Restated By-Laws of the Company, effective March
31, 1997 5
4.1 Form of Indenture between the Company and The Bank of New
York with respect to the public offering of $100,000,000 of
9 3/8% Senior Notes due 2005 2
4.2 Form of Note (included in Exhibit 4.1)
4.3 First Supplemental Indenture dated as of March 21, 1997
between the Company and The Bank of New York 6
4.4 Indenture dated as of January 12, 1999 by and between the
Company and The Bank of New York with respect to the private
offering of $75,000,000 of 9 3/8% Senior Notes due 2005,
Series B 1
4.5 Form of Note (included in Exhibit 4.4) 1
9 Second Amended WABCO Voting Trust/Disposition Agreement
dated as of December 13, 1995 among the Management Investors
(Schedules and Exhibits omitted) 3
10.1 Westinghouse Air Brake Company Employee Stock Ownership Plan
and Trust, effective January 31, 1995 2
10.2 ESOP Loan Agreement dated January 31, 1995 between
Westinghouse Air Brake Company Employee Stock Ownership
Trust ("ESOT") and the Company (Exhibits omitted) 2
10.3 Employee Stock Ownership Trust Agreement dated January 31,
1995 between the Company and U.S. Trust Company of
California, N.A. 2
10.4 Pledge Agreement dated January 31, 1995 between ESOT and the
Company 2
22
24
FILING METHOD
-------------
10.5 Credit Agreement dated as of June 30, 1998, and Amended and
Restated as of October 2, 1998 among the Company, various
financial institutions, The Chase Manhattan Bank, Chase
Manhattan Bank Delaware, and The Bank of New York (Schedules
and Exhibits omitted) 1
10.6 Amended and Restated Stockholders Agreement dated as of
March 5, 1997 among the RAC Voting Trust ("Voting Trust"),
Vestar Equity Partners, L.P., Charlesbank Capital Partners
f/k/a Harvard Private Capital Holdings, Inc. ("Charles"),
American Industrial Partners Capital Fund II, L.P. ("AIP")
and the Company 6
10.7 Common Stock Registration Rights Agreement dated as of
January 31, 1995 among the Company, Scandinavian Incentive
Holding B.V. ("SIH"), Voting Trust, Vestar Capital, Pulse
Electronics, Inc., Pulse Embedded Computer Systems, Inc.,
the Pulse Shareholders and ESOT (Schedules and Exhibits
omitted) 2
10.8 Indemnification Agreement dated January 31, 1995 between the
Company and the Voting Trust trustees 2
10.9 Agreement of Sale and Purchase of the North American
Operations of the Railway Products Group, an operating
division of American Standard Inc., dated as of 1990 between
Rail Acquisition Corp. and American Standard Inc. (only
provisions on indemnification are reproduced) 2
10.10 Letter Agreement (undated) between the Company and American
Standard Inc. on environmental costs and sharing 2
10.11 Purchase Agreement dated as of June 17, 1992 among the
Company, Schuller International, Inc., Manville Corporation
and European Overseas Corporation (only provisions on
indemnification are reproduced) 2
10.12 Asset Purchase Agreement dated as of January 23, 1995 among
the Company, Pulse Acquisition Corporation, Pulse
Electronics, Inc., Pulse Embedded Computer Systems, Inc. and
the Pulse Shareholders (Schedules and Exhibits omitted) 2
10.13 License Agreement dated as of December 31, 1993 between SAB
WABCO Holdings B.V. and the Company 2
10.14 Letter Agreement dated as of January 19, 1995 between the
Company and Vestar Capital Partners, Inc. 2
10.15 Westinghouse Air Brake Company 1995 Stock Incentive Plan, as
amended 1
10.16 Westinghouse Air Brake Company 1995 Non-Employee Directors'
Fee and Stock Option Plan 1
10.17 Form of Employment Agreement between William E. Kassling and
the Company 2
10.18 Letter Agreement dated as of January 1, 1995 between the
Company and Vestar Capital Partners, Inc. 2
10.19 Form of Indemnification Agreement between the Company and
Authorized Representatives 2
10.20 Share Purchase Agreement between Futuris Corporation Limited
and the Company (Exhibits omitted) 2
10.21 Purchase Agreement dated as of September 19, 1996 by and
among Mark IV Industries, Inc., Mark IV PLC, and W&P Holding
Corp. (Exhibits and Schedules omitted) (Originally filed as
Exhibit No. 2.01) 4
10.22 Purchase Agreement dated as of September 19,1996 by and
among Mark IV Industries Limited and Westinghouse Railway
Holdings (Canada) Inc. (Exhibits and Schedules omitted)
(Originally filed as Exhibit No. 2.02) 4
23
25
FILING METHOD
-------------
10.23 Amendment No. 1 to Amended and Restated Stockholders
Agreement dated as of March 5, 1997 among the Voting Trust,
Vestar, Charles, AIP and the Company 6
10.24 Common Stock Registration Rights Agreement dated as of March
5, 1997 among the Company, Charles, AIP and the Voting Trust 6
10.25 1998 Employee Stock Purchase Plan 1
10.26 Sale Agreement dated as of August 7, 1998 by and between
Rockwell Collins, Inc. and the Company (Schedules and
Exhibits omitted) (Originally filed as Exhibit No. 2.01) 7
10.27 Amendment No. 1 dated as of October 5, 1998 to Sale
Agreement dated as of August 7, 1998 by and between Rockwell
Collins, Inc. and the Company (Originally filed as Exhibit
No. 2.02) 7
21 List of subsidiaries of the Company 1
23 Consent of Arthur Andersen LLP 1
27 Financial Data Schedule 1
99 Annual Report on Form 11-K for the year ended December 31,
1998 of the Westinghouse Air Brake Company Employee Stock
Ownership Plan and Trust 1
FILING METHOD
1 Filed herewith
2 Filed as an exhibit to the Company's Registration Statement
on Form S-1 (No. 33-90866)
3 Filed as an exhibit to the Company's Annual Report on Form
10-K for the period ended December 31, 1995
4 Filed as an exhibit to the Company's Current Report on Form
8-K, dated October 3, 1996
5 Filed as an exhibit to the Company's Registration Statement
on Form S-8 (No. 333-39159)
6 Filed as an exhibit to the Company's Annual Report on Form
10-K for the period ended December 31, 1997
7 Filed as an exhibit to the Company's Current Report on Form
8-K, dated October 5, 1998
24
26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS OF
WESTINGHOUSE AIR BRAKE COMPANY:
We have audited the accompanying consolidated balance sheet of Westinghouse Air
Brake Company (a Delaware corporation) and subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Westinghouse Air Brake Company
and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania
February 17, 1999
25
27
WESTINGHOUSE AIR BRAKE COMPANY
CONSOLIDATED BALANCE SHEET
DECEMBER 31
---------------------
DOLLARS IN THOUSANDS, EXCEPT PAR VALUE 1998 1997
- -----------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash........................................................ $ 3,323 $ 836
Accounts receivable......................................... 132,901 91,438
Inventories................................................. 103,560 69,297
Deferred taxes.............................................. 13,006 11,169
Other....................................................... 10,171 7,759
---------------------
Total current assets.................................... 262,961 180,499
Property, plant and equipment............................... 214,461 186,534
Accumulated depreciation.................................... (89,480) (78,167)
---------------------
Property, plant and equipment, net...................... 124,981 108,367
OTHER ASSETS
Prepaid pension costs....................................... 5,724 5,061
Goodwill.................................................... 151,658 66,599
Other intangibles........................................... 46,021 42,466
Other noncurrent assets..................................... 4,839 7,887
---------------------
Total other assets...................................... 208,242 122,013
---------------------
Total Assets....................................... $ 596,184 $ 410,879
=====================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt........................... $ 30,579 $ 32,600
Accounts payable............................................ 62,974 37,582
Accrued income taxes........................................ 8,352 488
Customer deposits........................................... 20,426 21,210
Accrued compensation........................................ 12,769 13,080
Accrued warranty............................................ 12,657 12,851
Accrued interest............................................ 1,616 3,038
Other accrued liabilities................................... 18,177 10,931
---------------------
Total current liabilities............................... 167,550 131,780
Long-term debt.............................................. 437,238 332,334
Reserve for postretirement benefits......................... 16,238 14,860
Accrued pension costs....................................... 3,631 4,700
Deferred income taxes....................................... 3,463 5,561
Other long-term liabilities................................. 1,917 907
---------------------
Total liabilities....................................... 630,037 490,142
SHAREHOLDERS' EQUITY
Preferred stock, 1,000,000 shares authorized, no shares
issued.................................................... -- --
Common stock, $.01 par value; 100,000,000 shares authorized:
47,426,600 shares issued................................ 474 474
Additional paid-in capital.................................. 107,720 105,522
Treasury stock, at cost, 13,532,092 and 13,743,924 shares... (187,654) (190,657)
Unearned ESOP shares, at cost, 8,564,811 and 8,751,531
shares.................................................... (128,472) (131,273)
Retained earnings........................................... 182,291 141,617
Unamortized restricted stock award.......................... (162) --
Accumulated other comprehensive income (loss)............... (8,050) (4,946)
---------------------
Total shareholders' equity.............................. (33,853) (79,263)
---------------------
Liabilities and Shareholders' Equity.................... $ 596,184 $ 410,879
=====================
The accompanying notes are an integral part of this statement.
26
28
WESTINGHOUSE AIR BRAKE COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31
---------------------------------
IN THOUSANDS, EXCEPT PER SHARE DATA 1998 1997 1996
- -----------------------------------------------------------------------------------------------
Net sales................................................... $670,909 $564,441 $453,512
Cost of sales............................................... 451,730 378,323 300,163
---------------------------------
Gross profit........................................... 219,179 186,118 153,349
Selling and marketing expenses.............................. 30,711 25,364 18,643
General and administrative expenses......................... 45,337 38,153 28,890
Engineering expenses........................................ 30,436 24,386 18,244
Amortization expense........................................ 8,029 8,240 7,854
---------------------------------
Total operating expenses............................... 114,513 96,143 73,631
Income from operations................................. 104,666 89,975 79,718
Other income and expenses
Interest expense.......................................... 31,217 29,729 26,152
Other expense (income), net............................... 919 (344) (82)
---------------------------------
Income before income taxes and extraordinary item...... 72,530 60,590 53,648
Income taxes................................................ 27,561 23,327 20,923
---------------------------------
Income before extraordinary item....................... 44,969 37,263 32,725
Loss on early extinguishment of debt, net of tax............ 3,315 -- --
---------------------------------
Net income............................................. $ 41,654 $ 37,263 $ 32,725
=================================
EARNINGS PER COMMON SHARE
Basic
Income before extraordinary item....................... $ 1.79 $ 1.45 $ 1.15
Extraordinary item..................................... (.13) -- --
---------------------------------
Net income............................................. $ 1.66 $ 1.45 $ 1.15
=================================
Diluted
Income before extraordinary item....................... $ 1.75 $ 1.42 $ 1.15
Extraordinary item..................................... (.13) -- --
---------------------------------
Net income............................................. $ 1.62 $ 1.42 $ 1.15
=================================
Weighted Average Shares Outstanding
Basic.................................................. 25,081 25,693 28,473
Diluted................................................ 25,708 26,173 28,473
---------------------------------
The accompanying notes are an integral part of this statement.
27
29
WESTINGHOUSE AIR BRAKE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31
-----------------------------
IN THOUSANDS 1998 1997 1996
- -------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income.................................................. $ 41,654 $37,263 $32,725
Adjustments to reconcile net income to cash provided by
operations
Extraordinary loss on extinguishment of debt.............. 3,315
Depreciation and amortization............................. 25,208 24,624 22,249
Provision for ESOP contribution........................... 4,472 3,229 2,870
Deferred income taxes..................................... (3,935) (3,506) 2,456
Changes in operating assets and liabilities, net of
acquisitions
Accounts receivable.................................... (26,161) (6,623) (9,868)
Inventories............................................ (16,957) 1,817 8,100
Accounts payable....................................... 20,385 5,900 (6,574)
Accrued income taxes................................... 12,025 (1,349) (411)
Accrued liabilities and customer deposits.............. (11,856) 5,522 9,740
Other assets and liabilities........................... (6,083) 97 (2,376)
-----------------------------
Net cash provided by operating activities............ 42,067 66,974 58,911
INVESTING ACTIVITIES
Purchase of property, plant and equipment, net......... (28,957) (29,196) (12,855)
Acquisitions of businesses, net of cash acquired....... (112,514) (13,492) (78,890)
-----------------------------
Net cash used for investing activities............ (141,471) (42,688) (91,745)
FINANCING ACTIVITIES
Proceeds from term debt obligations.................... 64,500 65,000
Repayments of term debt................................ (7,500) (18,200) (26,300)
Net proceeds from (repayments of) revolving credit
arrangements......................................... 4,675 39,880 (2,935)
Proceeds from other borrowings......................... 43,208
Repayments of other borrowings......................... (2,000) (555) (10)
Debt issuance fees..................................... (2,251) (2,068) (492)
Purchase of treasury stock............................. (44,000) (1,629)
Cash dividends......................................... (980) (1,009) (1,127)
Proceeds from exercise of stock options and employee
stock purchases...................................... 2,546 3,513
-----------------------------
Net cash provided by (used for) financing
activities...................................... 102,198 (22,439) 32,507
Effect of changes in currency exchange rates................ (307) (1,629) 735
-----------------------------
Increase in cash.......................................... 2,487 218 408
Cash, beginning of year................................ 836 618 210
-----------------------------
Cash, end of year...................................... $ 3,323 $ 836 $ 618
=============================
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid during the year.......................... $ 32,639 $30,223 $25,624
Income taxes paid during the year...................... 19,471 28,182 20,452
-----------------------------
The accompanying notes are an integral part of this statement.
28
30
WESTINGHOUSE AIR BRAKE COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
ACCUMULATED
OTHER
ADDITIONAL UNAMORTIZED COMPREHENSIVE
In thousands, except per COMPREHENSIVE COMMON PAID-IN TREASURY UNALLOCATED RETAINED RESTRICTED INCOME
share INCOME STOCK CAPITAL STOCK ESOP SHARES EARNINGS STOCK AWARD (LOSS)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31,
1995.................... $474 $104,776 $(147,702) $(137,239) $ 73,765 $ -- $(2,772)
Cash dividends ($.04 per
share).................. (1,127)
Purchase of treasury
stock................... (1,629)
Allocation of ESOP
shares.................. (455) 3,325
Net income................ $32,725 32,725
Translation adjustment.... (336) (336)
------------------------------------------------------------------------------------------------
$32,389
=======
BALANCE, DECEMBER 31,
1996.................... 474 104,321 (149,331) (133,914) 105,363 -- (3,108)
Cash dividends ($.04 per
share).................. (1,009)
Purchase of treasury
stock................... (44,000)
Stock issued under option,
benefit and other
plans................... 839 2,674
Allocation of ESOP
shares.................. 362 2,641
Net income................ $37,263 37,263
Translation adjustment.... (1,838) (1,838)
------------------------------------------------------------------------------------------------
$35,425
=======
BALANCE, DECEMBER 31,
1997.................... 474 105,522 (190,657) (131,273) 141,617 -- (4,946)
Cash dividends ($.04 per
share).................. (980)
Stock issued under option,
benefit and other
plans................... 1,162 3,003 (162)
Allocation of ESOP
shares.................. 1,036 2,801
Net income................ $41,654 41,654
Translation adjustment.... (3,104) (3,104)
-------
$38,550
======= -----------------------------------------------------------------------------------
BALANCE, DECEMBER 31,
1998.................... $474 $107,720 $(187,654) $(128,472) $182,291 $(162) $(8,050)
===================================================================================
The accompanying notes are an integral part of the financial statements.
29
31
WESTINGHOUSE AIR BRAKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Westinghouse Air Brake Company (the Company) is North America's largest
manufacturer of value-added equipment for locomotives, railway freight cars and
passenger transit vehicles. The Company's products, which are sold to both the
original equipment manufacturer market and the aftermarket, are intended to
enhance safety, improve productivity and reduce maintenance costs for its
customers. The Company's products include electronic controls and monitors, air
brakes, couplers, door controls, draft gears and brake shoes. The Company's
primary manufacturing operations are in the United States and Canada, and the
Company's revenues have been primarily from North America. The Company's
customer base consists of railroad transportation companies, locomotive and
freight car original equipment manufacturers, railroads and transit car builders
and public transit systems.
A portion of the Company's Railroad 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 Company's
passenger transit 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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of the Company and its majority owned subsidiaries. Such statements
have been prepared in accordance with generally accepted accounting principles.
All intercompany accounts and transactions have been eliminated in
consolidation. Certain prior year amounts have been reclassified, where
necessary, to conform to the current year presentation.
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.
INVENTORIES Inventories are stated at the lower of cost or market. Cost is
determined under the first-in, first-out (FIFO) method. Inventory costs include
material, labor and overhead. The components of inventory, net of reserves,
were:
DECEMBER 31
DOLLARS IN THOUSANDS 1998 1997
- ---------------------------------------------
Raw materials $ 47,853 $27,395
Work-in-process 29,965 26,640
Finished goods 25,742 15,262
------------------
Total inventory $103,560 $69,297
- ---------------------------------------------
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment additions are stated
at cost. Expenditures for renewals and betterments are capitalized. Expenditures
for ordinary maintenance and repairs are expensed as incurred. The Company
provides for book depreciation principally on the straight-line method over the
following estimated useful lives of plant and equipment.
YEARS
- --------------------------------------------
Land improvements 10 to 20
Buildings 20 to 40
Machinery and equipment 4 to 15
- --------------------------------------------
Accelerated depreciation methods are utilized for income tax purposes.
INTANGIBLE ASSETS Goodwill is amortized on a straight-line basis over 40 years.
Other intangibles are amortized on a straight-line basis over their estimated
economic lives. Goodwill and other intangible assets, including patents and
tradenames, are periodically reviewed for impairment based on an assessment of
future operations (see Note 4).
REVENUE RECOGNITION Revenue is recognized when products have been shipped to the
respective customers and the price for the product has been determined. The
percentage of completion method of accounting for revenues on long-term sales
contracts is applied on a relatively small amount of contracts when appropriate.
Sales returns are infrequent and not material in relation to the Company's net
sales.
STOCK-BASED COMPENSATION The Company accounts for stock-based compensation,
including stock options and employee stock purchases, under APB Opinion No. 25,
"Accounting for Stock Issued to
30
32
Employees." See Note 11 for related pro forma disclosures.
RESEARCH AND DEVELOPMENT Research and development costs are charged to expense
as incurred. Such costs totaled $30.4 million, $24.4 million and $18.2 million
in 1998, 1997 and 1996, respectively.
WARRANTY COSTS Warranty costs are accrued based on management's estimates of
repair or upgrade costs per unit and historical experience. In recent years, the
Company has introduced several new products. The Company does not have the same
level of historical warranty experience for these new products as it does for
its continuing products. Therefore, warranty reserves have been established for
these new products based upon management's estimates. Actual future results may
vary from such estimates. Warranty expense was $6.2 million, $9.9 million and
$5.5 million for 1998, 1997 and 1996, respectively. Warranty reserves were $12.7
million and $12.9 million at December 31, 1998 and 1997, respectively.
FINANCIAL DERIVATIVES The Company periodically enters into interest rate swap
agreements to reduce the impact of interest rate changes on its variable rate
borrowings. Interest rate swaps are agreements with a counterparty to exchange
periodic interest payments (such as pay fixed, receive variable) calculated on a
notional principal amount. The interest rate differential to be paid or received
is accrued to interest expense (see Note 5). In addition, the Company
periodically enters into foreign currency exchange forward and options contracts
to mitigate the effects of fluctuations in foreign exchange rates in countries
where it has significant operations.
INCOME TAXES Income taxes are accounted for under the liability method. Deferred
tax assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. The provision for income taxes includes federal, state and
foreign income taxes (see Note 8).
FOREIGN CURRENCY TRANSLATION The financial statements of the Company's foreign
subsidiaries are translated into U.S. currency under the guidelines set forth in
SFAS No. 52, "Foreign Currency Translation." The effects of currency exchange
rate changes on intercompany transactions of a long-term investment nature are
accumulated and carried as a component of shareholders' equity. The effects of
currency exchange rate changes on intercompany transactions that are non U.S.
dollar amounts are charged or credited to earnings.
EARNINGS PER SHARE Basic earnings per common share are computed by dividing net
income applicable to common shareholders by the weighted-average number of
shares of common stock outstanding during the year. Diluted earnings per common
share are computed by dividing net income applicable to common shareholders by
the weighted average number of shares of common stock outstanding adjusted for
the assumed conversion of all dilutive securities (such as employee stock
options). See Note 11.
OTHER COMPREHENSIVE INCOME In 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" which
established standards for reporting and displaying comprehensive income and its
components in financial statements. Comprehensive income is defined as net
income and all other nonowner changes in shareholders' equity. The Company's
accumulated other comprehensive income (loss) consists entirely of foreign
currency translation adjustments.
SIGNIFICANT CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK The Company's trade
receivables are primarily from rail and transit industry original equipment
manufacturers, railroad carriers and commercial companies that utilize rail cars
in their operations, such as utility and chemical companies. No one customer
accounted for more than 10% of the Company's sales in 1998, 1997 or 1996. The
allowance for doubtful accounts was $2.9 million and $2.0 million as of December
31, 1998 and 1997, respectively.
EMPLOYEES As of December 31, 1998, approximately 28% of the Company's workforce
is covered by collective bargaining agreements. These agreements are generally
effective through 2001 and 2002.
RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting
Standards Board issued Statement of Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities". The Statement establishes
accounting and reporting standards requiring that every derivative instrument be
measured at its fair value and the changes in fair value be recorded currently
in earnings unless specific hedge accounting criteria are met. Statement No. 133
is effective for fiscal years beginning after June 15, 1999, and accordingly,
the Company anticipates adopting this standard January 1,
31
33
2000. Management continues to evaluate the impact the standard will have on
results of operations and financial condition.
3. ACQUISITIONS
On October 5, 1998, the Company purchased the railway electronics business
(Rockwell Railroad Electronics) (RRE) of Rockwell Collins, Inc., a wholly owned
subsidiary of Rockwell International Corporation, for approximately $80 million
in cash. The purchase was initially financed by obtaining additional term debt
of $40 million through an amendment to the Company's existing credit facility,
an unsecured bank loan of $30 million and additional borrowings under the
Company's revolving credit agreement. RRE is a leading manufacturer and supplier
of mobile electronics (display and positioning systems), data communications,
and electronic braking systems for the railroad industry and its operations are
in the United States. Revenues of the acquired business for its fiscal year
ended September 30, 1998 were approximately $46 million. The acquisition was
accounted for under the purchase accounting method and, accordingly, its results
are included in WABCO's consolidated financial statements since the date of
acquisition.
The excess of the purchase price over the fair value of the net assets acquired
was approximately $63 million and was allocated to goodwill. This amount is
based upon an independent appraisal and may decrease as a result of adjustments
to purchase price.
The following unaudited pro forma results of operations, including the effects
of pro forma adjustments related to the acquisition of Rockwell Railroad
Electronics have been prepared as if this transaction had occurred at the
beginning of 1997:
(UNAUDITED)
DOLLARS IN THOUSANDS, YEAR ENDED DECEMBER 31
EXCEPT PER SHARE 1998 1997
- -------------------------------------------------
Net sales $707,840 $597,948
Income before
extraordinary income 41,414 32,575
Net income 38,099 32,575
Diluted earnings per
share
As reported 1.62 1.42
Pro forma 1.48 1.24
- -------------------------------------------------
The pro forma financial information above does not purport to present what the
Company's results of operations would have been if the acquisition of RRE had
actually occurred on January 1, 1997, or to project the Company's results of
operations for any future period, and does not reflect anticipated cost savings
through the combination of these operations.
In the past three years, the Company also completed the following acquisitions:
i) The October 1998 acquisition of the United States railway service center
business of Comet Industries, Inc., for $13.2 million, financed through
the issuance of $12.2 million of promissory notes. Annual revenue for its
most recent fiscal year was approximately $20 million.
ii) On July 30, 1998, purchased assets and assumed certain liabilities of
U.S.-based Lokring Corporation, for $5.1 million in cash. Lokring
develops, manufactures and markets patented non-welded connectors and
sealing products for railroad and other industries. Annual sales in 1997
were approximately $10 million.
iii) Acquired in April 1998, 100% of the stock of RFS (E) Limited ("RFS") of
England, for approximately $10.0 million including the assumption of
certain debt. RFS is a leading provider of vehicle overhaul, conversion
and maintenance services to Britain's railway industry. Annual revenue for
its most recent fiscal year was approximately $27.5 million.
iv) Acquired in April 1998, the transit coupler product line of Hadady
Corporation located in the United States for $4.6 million in cash.
v) In October 1997, the Company purchased the rail products business and
related assets of Sloan Valve Company for $2.5 million.
vi) Effective July 31, 1997 the Company acquired 100% of the stock of H.P.
s.r.l. ("HP"), an Italian transit company, for a total purchase price of
$5.8 million, which included the assumption of $2.3 million in debt. HP is
located in Sassuolo, Italy and is a leading supplier of door controls for
transit rail cars and buses in the Italian market. Annual revenues
approximated $9 million.
vii) Acquired in May 1997 Stone Safety Service Corporation, New Jersey, and
Stone U.K. Limited ("Stone"), a supplier of transit air conditioning
equipment and in June 1997, the Company acquired the heavy rail air
conditioning business of Thermo King Corporation ("Thermo King") from
Westinghouse Electric. The aggregate purchase price for the Stone and
Thermo King acquisitions was approximately
32
34
$7.7 million. Annual revenues of the these acquisitions prior to purchase
were approximately $30 million.
viii) On September 19, 1996, the Company purchased the Vapor Group ("Vapor") for
approximately $63.9 million in cash. Vapor is the leading manufacturer of
door controls for transit rail cars and metropolitan buses in the United
States. Annual revenues for its most recent fiscal year prior to the
acquisition totaled $65 million.
ix) In January 1996, the Company acquired Futuris Industrial Products Pty.
Ltd., an Australian molded products manufacturer, for approximately $15
million. Annual revenues prior to acquisition were approximately $10.5
million.
All of these other 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. The excess of the purchase price over the fair value of net
assets was allocated to goodwill. Such recorded amounts totaled approximately
$24 million, $7 million and $17 million, in 1998, 1997 and 1996, respectively.
4. INTANGIBLES
Intangible assets of the Company, other than goodwill, consist of the following:
DECEMBER 31
DOLLARS IN THOUSANDS 1998 1997
- ---------------------------------------------
Patents, tradenames and
trademarks, net of
accumulated amortization
of $22,874 and $19,768
(4-40 years) $35,251 $35,942
Covenants not to compete,
net of accumulated
amortization of $10,144
and $9,333 (5 years) 6,092 1,133
Other intangibles, net of
accumulated amortization
of $7,356 and $7,052
(3-7 years) 4,678 5,391
-----------------
$46,021 $42,466
- ---------------------------------------------
At December 31, 1998 and 1997, goodwill, net of accumulated amortization of $7.7
million and $5.4 million, respectively, totaled $151.7 million and $66.6
million, respectively. The Company evaluates the recoverability of intangible
assets, including goodwill, at each balance sheet date based on forecasted
future operations, undiscounted cash flows and other subjective criteria. Based
upon historical information, management believes that the carrying amount of
these intangible assets will be realizable over the respective amortization
periods.
5. LONG-TERM DEBT
Long-term debt consisted of the following:
YEAR ENDED
DECEMBER 31
-------------------
DOLLARS IN THOUSANDS 1998 1997
- ---------------------------------------------
Credit Agreement
Revolving credit $105,555 $100,880
Term loan 202,500 145,500
9 3/8% Senior notes due
June 5, 2005 100,000 100,000
Unsecured credit
facility 30,000
Pulse note 16,990 16,990
Comet notes 10,200
Other 2,572 1,564
-------------------
Total 467,817 364,934
Less-current
portion 30,579 32,600
-------------------
Long-term portion $437,238 $332,334
- ---------------------------------------------
Credit Agreement
In June 1998, the Company refinanced its credit facility with a consortium of
commercial banks and amended it in October 1998 in connection with the Rockwell
acquisition (as amended, the "Credit Agreement"). The Credit Agreement provides
for an aggregate credit facility of $350 million, consisting of up to $170
million of June 1998 term loans, up to $40 million of September 1998 term loans,
and up to $140 million of revolving loans. In addition, the Credit Agreement
provides for swingline loans of up to an aggregate amount of $5 million, and for
the issuance of letters of credit in an aggregate face amount of up to $50
million. Swingline loans and the issuance of letters of credit will reduce the
amount of revolving loans which may be incurred under the revolving credit
facility.
At December 31, 1998, the Company had available borrowing capacity, net of
letters of credit, of approximately $12 million. The Company repaid a portion of
its borrowings under the Credit Agreement in January 1999 with proceeds of the
offering of $75 million of 9 3/8 Senior Notes, as further described
33
35
below, resulting in increased borrowing capacity of $47 million. (See Note 19).
The Credit Agreement limits the Company with respect to declaring or making cash
dividend payments and prohibits the Company from declaring or making other
distributions whether in cash, property, securities or a combination thereof,
with respect to any shares of the Company's capital stock subject to certain
exceptions, including an exception pursuant to which the Company will be
permitted to pay cash dividends on its Common Stock in any fiscal year in an
aggregate amount up to $15 million minus the aggregate amount of prepayments of
the Pulse note during such fiscal year so long as no default in the payment of
interest or fees has occurred thereunder. The Credit Agreement contains various
other covenants and restrictions including, without limitation, the following: a
limitation on the incurrence of additional indebtedness; a limitation on
mergers, consolidations and sales of assets and acquisitions (other than mergers
and consolidations with certain subsidiaries, sales of assets in the ordinary
course of business, and acquisitions for which the consideration paid by the
Company does not exceed $50 million individually or $150 million in the
aggregate); a limitation on liens; a limitation on sale and leasebacks; a
limitation on investments, loans and advances; a limitation on certain debt
payments; a limitation on capital expenditures; a minimum interest expense
coverage ratio; and a maximum leverage ratio. All debt incurred under the Credit
Agreement is secured by substantially all of the assets of the Company and its
domestic subsidiaries and is guaranteed by the Company's domestic subsidiaries.
The Credit Agreement contains customary events of default, including payment
defaults, failure of representations to be true in any material respect,
covenant defaults, defaults with respect to other indebtedness of the Company,
bankruptcy, certain judgments against the Company, ERISA defaults and "change of
control" of the Company.
Credit Agreement borrowings bear variable interest rates indexed to common
indexes such as LIBOR. The weighted-average contractual interest rate on Credit
Agreement borrowings was 6.71% on December 31, 1998. To reduce the impact of
interest rate changes on a portion of this variable-rate debt, the Company
entered into interest rate swaps which effectively convert a portion of the debt
from variable to fixed-rate borrowings during the term of the swap contracts. On
December 31 1998, the notional value of interest rate swaps outstanding totaled
$50 million and effectively changed the Company's interest rate from a variable
rate to a fixed rate of 7.09%. The interest rate swap agreements mature in 2000
and 2001. The Company is exposed to credit risk in the event of nonperformance
by the counterparties. However, since only the cash interest payments are
exchanged, exposure is significantly less than the notional amount. The
counterparties are large financial institutions and the Company does not
anticipate nonperformance.
Scheduled term loan principal repayments required under the Credit Agreement as
of December 31, 1998 are as follows:
Dollars in millions
- --------------------------------------------
1999 $ 20.0
2000 32.5
2001 40.0
2002 50.0
2003 60.0
------
$202.5
- --------------------------------------------
9 3/8% Senior Notes Due June 2005
In June 1995 the Company issued $100 million of 9 3/8% Senior Notes due 2005
(the "Existing Notes"). In January 1999, the Company issued an additional $75
million of 9 3/8% Senior Notes due 2005 (the "Additional Notes"; the Existing
Notes and the Additional Notes are collectively, the "Notes"). See "Subsequent
Event" Note 19.
The terms of the Existing Notes and the Additional Notes are substantially the
same, and the Existing Notes and the Additional Notes were issued pursuant to
indentures that are substantially the same. The Notes bear interest at the rate
of 9 3/8% and mature in June 2005. The net proceeds of the Existing Notes were
used to prepay term loans outstanding under the then existing credit agreement.
The net proceeds of the Additional Notes were used to repay the unsecured credit
facility and to reduce revolving credit borrowings.
The Notes are senior unsecured obligations of the Company and rank pari passu in
right of payment with all existing and future indebtedness under (i) capitalized
lease obligations, (ii) the Credit Agreement, (iii) indebtedness of the Company
for money borrowed and (iv) indebtedness evidenced by notes, debentures, bonds
or other similar instruments for the payment of which the Company is responsible
or
34
36
liable unless, in the case of clause (iii) or (iv), in the instrument creating
or evidencing the same or pursuant to which the same is outstanding, it is
provided that such obligations are subordinate in right of payment to the Notes.
Unsecured Credit Facility
In October 1998, the Company obtained a $30 million unsecured credit facility
from a group of commercial banks for the purpose of financing the Rockwell
acquisition. At December 31, 1998, the interest rate on the note was 9.75% per
annum. In January 1999, this facility was repaid with proceeds of the Additional
Note offering. See "Subsequent Event" Note 19.
Pulse Note
As partial payment for the Pulse acquisition, the Company issued a $17.0 million
note due January 31, 2004. Interest is payable semiannually and accrues at 9.5%
until February 1, 2001; and from February 1, 2001 until January 31, 2004,
interest will accrue at the prime rate charged by Chase Manhattan Bank on
December 31, 2000 plus 1%.
Comet Notes
In connection with the Comet acquisition, the Company issued notes totaling
$12.2 million, of which unsecured notes totaling $6.2 million were delivered by
the Company and a note in the amount of $6 million was delivered by a subsidiary
of the Company and secured by the acquired assets. The notes bore interest at
the rate of 10% per annum and were scheduled to mature on October 8, 1999. These
notes were repaid in January 1999 (See Note 19).
Capitalized debt issuance costs of $4.8 million, net of accumulated
amortization, are being amortized over the terms of the borrowings.
35
37
6. EMPLOYEE BENEFIT PLANS
PENSION PLANS POSTRETIREMENT PLAN
Dollars in thousands ------------------- -------------------
AS OF OR FOR THE YEAR ENDED DECEMBER 31 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit (obligation) at beginning of year......... $(39,424) (34,126) $(17,750) $(14,980)
Service cost...................................... (1,363) (1,176) (300) (289)
Interest cost..................................... (2,904) (2,720) (1,273) (1,226)
Participant contribution.......................... (32) (35)
Actuarial gain (loss)............................. (4,796) (3,964) (1,348) (1,526)
Plan amendments................................... (1,480) (1,025)
Benefits paid..................................... 2,725 2,797 392 271
Effect of currency rate changes................... 1,748 825
------------------------------------------
Benefit (obligation) at end of year............ $(45,526) $(39,424) $(20,279) $(17,750)
------------------------------------------
------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.... $ 37,884 $ 33,702 -- --
Actual return on plan assets...................... 5,335 5,519
Employer contribution............................. 3,688 2,550
Participant contribution.......................... 32 35
Administrative expenses........................... (116) (213)
Benefits paid..................................... (2,725) (2,797)
Effect of currency rate changes................... (1,741) (912)
------------------------------------------
Fair value of plan assets at end of year....... $ 42,357 $ 39,884 -- --
------------------------------------------
------------------------------------------
FUNDED STATUS
Funded status at year end......................... $ (3,169) $ (1,540) $(20,279) $(17,750)
Unrecognized net actuarial (gain) loss............ 2,111 (261) 3,960 2,856
Unrecognized prior service cost................... 3,151 2,162 (221) (290)
Unrecognized transition obligation................ 302 324
------------------------------------------
Prepaid (accrued) benefit cost................. $ 2,093 $ 361 $(16,238) $(14,860)
------------------------------------------
------------------------------------------
PENSION PLANS POSTRETIREMENT PLAN
--------------------------- ------------------------
1998 1997 1996 1998 1997 1996
- --------------------------------------------------------------------------------------------------
NET PERIODIC BENEFIT COST
Service cost........................... $ 1,505 $ 1,305 $ 1,054 $ 340 $ 289 $ 267
Interest cost.......................... 2,904 2,675 2,394 1,351 1,226 935
Expected return on assets.............. (3,717) (4,463) (2,482)
Net amortization/deferrals............. 755 1,865 302 195 155 13
Special event.......................... 696
-------------------------------------------------------
Net periodic benefit cost........... $ 1,447 $ 1,382 $ 1,964 $1,886 $1,670 $1,215
-------------------------------------------------------
-------------------------------------------------------
ASSUMPTIONS
Discount rate.......................... 6.75% 7.25% 8.50% 6.75% 7.25% 7.50%
Expected rate of return................ 10.00 9.25 9.25 -- -- --
- --------------------------------------------------------------------------------------------------
36
38
The Company sponsors defined benefit pension plans which cover substantially all
union employees and certain non-union Canadian employees and provide pension
benefits of stated amounts for each year of service of the employee. In
connection with the establishment of the ESOP (see Note 7) in January 1995, the
pension plan for U.S. salaried employees was modified to eliminate any credit
(or accrual) for current service costs for any future periods, effective March
31, 1995. The Company's 401(k) savings plan was also amended to provide for the
Company's future matching contributions to be made to the ESOP in the form of
the Company's Common Stock. The Company's funding methods, which are primarily
based on the ERISA requirements, differ from those used to recognize pension
expense, which is primarily based on the projected unit credit method, in the
accompanying financial statements. Within the analysis above, the pension plan
for U.S. salaried employees has a benefit obligation of $22,338 and plan assets
of $20,708 as of December 31, 1998. In 1996, as the result of an early
retirement package offered to certain union employees, the Company incurred a
charge of $696,000 reflected as a special event.
In addition to providing pension benefits, the Company had provided certain
unfunded postretirement health care and life insurance benefits for
substantially all U.S. employees. In conjunction with the establishment of the
ESOP in January 1995 (see Note 7), the postretirement health care and life
insurance benefits for salaried employees were modified to discontinue benefits
for employees who had not attained the age of 50 by March 31, 1995. The Company
is not obligated to pay health care and life insurance benefits to individuals
who had retired prior to 1990.
A one percentage point increase in the assumed health care cost trend rates for
each future year increases annual postretirement benefit expense by $290,832 and
the accumulated postretirement benefit obligation by $3.3 million. A one
percentage point decrease in the assumed health care cost trend rates for each
future year decreases annual postretirement benefit expense by $230,163 and the
accumulated postretirement benefit obligation by $2.6 million.
7. EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST (ESOP)
Effective January 31, 1995, the Company established the ESOP to enable
participating employees to obtain ownership interests in the Company. Employees
eligible to participate in the ESOP primarily include the salaried U.S.
employees and, as described in Note 6, the ESOP contributions are intended to
supplement or replace other salaried employee benefit plans.
In connection with the establishment of the ESOP, the Company made a $140
million loan to the ESOP, which was used to purchase 9,336,000 shares of the
Company's outstanding common stock. The ESOP loan initially had a term of 50
years with interest at 8.5% and was collateralized by the shares purchased by
the ESOP. Company contributions to the ESOP will be used to repay the ESOP
loan's annual debt service requirements of approximately $12 million. The
Company is obligated to contribute amounts sufficient to repay the ESOP loan.
The ESOP uses such Company contributions to repay the ESOP loan. Approximately
187,000 shares were to be allocated annually to participants over a 50-year
period. These transactions occur simultaneously and, for accounting purposes,
offset each other. Unearned ESOP shares of $128.5 million at December 31, 1998,
is reflected as a reduction in shareholders' equity in the accompanying
financial statements and will be amortized to compensation expense coterminous
with the ESOP loan. Total compensation expense recognized for allocated ESOP
shares were $4.5 million, $3.2 million and $2.9 million in 1998, 1997 and 1996,
respectively.
8. INCOME TAXES
The provision for income taxes consisted of the following:
YEAR ENDED DECEMBER 31
DOLLARS IN THOUSANDS 1998 1997 1996
- --------------------------------------------------
Current taxes
Federal $19,629 $18,490 $17,498
State 1,330 1,849 2,138
Foreign 10,537 6,494 2,372
---------------------------
31,496 26,833 22,008
Deferred taxes
Federal (1,964) (1,375) (2,432)
State (282) (137) (278)
Foreign (1,689) (1,994) 1,625
---------------------------
(3,935) (3,506) (1,085)
---------------------------
Total provision $27,561 $23,327 $20,923
- --------------------------------------------------
The 1998 provision excludes a $2.0 million income tax effect on the
extraordinary loss (see Note 9)
37
39
related to the early extinguishment of certain debt obligations.
The components of income before taxes on income for U.S. and foreign operations,
primarily Canada, were $49.9 million and $22.6 million, respectively, for 1998,
$47.9 million and $12.7 million, respectively, for 1997, and $42.4 million and
$11.3 million, respectively, for 1996.
A reconciliation of the United States federal statutory income tax rate to the
effective income tax rate is provided below:
YEAR ENDED DECEMBER 31
1998 1997 1996
- ------------------------------------------------
U. S. federal statutory
rate 35.0% 35.0% 35.0%
State taxes 2.1 2.7 3.5
Foreign .9 .8 .5
-----------------------
Effective rate 38.0% 38.5% 39.0%
- ------------------------------------------------
The sources of deferred income taxes were as follows:
YEAR ENDED DECEMBER 31
DOLLARS IN THOUSANDS 1998 1997 1996
- --------------------------------------------------
Deferred debt costs $(1,673)
ESOP (1,513) $(1,150) $ (919)
Depreciation (964) 176 782
Postretirement
benefits (593) (851) (171)
Inventory (350) 451 (1,450)
Accrued warranty 1,157 (1,697) (497)
Pension 31 958 (319)
Other liabilities and
reserves (30) (1,393) 1,489
---------------------------
Deferred tax
benefits $(3,935) $(3,506) $(1,085)
- --------------------------------------------------
Components deferred tax assets and liabilities were as follows:
DECEMBER 31
DOLLARS IN THOUSANDS 1998 1997
- ---------------------------------------------
ESOP $ 4,539 $ 3,026
Postretirement benefits 3,508 2,915
Inventory 3,461 3,111
Accrued warranty 3,021 4,178
Deferred debt costs 1,673
Pension 749 780
Depreciation (7,458) (8,422)
Other 50 20
-----------------
Net deferred tax asset $ 9,543 $ 5,608
- ---------------------------------------------
9. EXTRAORDINARY ITEM
In June 1998, the Company refinanced its credit agreement and subsequently
amended the agreement in October 1998. This resulted in a write off of
previously deferred financing costs of approximately $3.3 million, net of tax,
($.13 per diluted share) which has been reported as an extraordinary item.
10. EARNINGS PER SHARE
The computation of earnings per share is as follows:
DOLLARS IN THOUSANDS, YEAR ENDED DECEMBER 31
EXCEPT PER SHARE 1998 1997 1996
- -------------------------------------------------------
BASIC
Income before
extraordinary item
applicable to common
shareholders $44,969 $37,263 $32,725
Divided by
Weighted average shares
outstanding 25,081 25,693 28,473
Basic earnings per share
before extraordinary
item $1.79 $1.45 $1.15
- -------------------------------------------------------
DILUTED
Income before
extraordinary item
applicable to common
shareholders $44,969 $37,263 $32,725
Divided by sum of
Weighted average shares
outstanding 25,081 25,693 28,473
Conversion of dilutive
stock options 627 480
-------------------------
Diluted shares
outstanding 25,708 26,173 28,473
Diluted earnings per
share before
extraordinary item $1.75 $1.42 $1.15
- -------------------------------------------------------
Options to purchase .2 million, .5 million and 2.2 million shares of common
stock were outstanding in 1998, 1997, and 1996, respectively, but were not
included in the computation of diluted earnings per share because the options'
exercise price exceeded the average market price of the common shares.
11. STOCK-BASED COMPENSATION PLANS
STOCK OPTIONS Under the 1995 Stock Incentive Plan, as amended in 1998, the
Company may grant options to employees of Westinghouse Air Brake Company and
Subsidiaries for up to 4.7 million shares of Westinghouse Air Brake Company
Common Stock. The 1998 amendment increased the number of stock options available
for grant, from 3.1 million to 4.7 million. Options to purchase approximately
3.8 million shares of Westinghouse Air Brake Company Common Stock under the plan
have been granted to employees of Westinghouse Air Brake Company at, or in
excess of, fair market value at the date of grant.
38
40
Generally, the options become exercisable over three and five-year vesting
periods and expire ten years from the date of grant.
As part of a long-term incentive program, in 1998 and 1996 the Company granted
options to purchase up to 500,020 and 684,206 shares, respectively, to certain
executives under the 1995 Stock Incentive Plan. The option price per share is
the greater of the market value of the stock on the date of grant or $20 and
$14, respectively. The options vest 100% after eight years and are subject to
accelerated vesting after three years if the Company achieves certain earnings
targets as established by the compensation committee of the board of directors.
The Company also has a nonemployee directors stock option plan under which
100,000 shares of common stock are reserved for issuance at a price not less
than $14. Through year-end 1998, the Company granted nonstatutory stock options
to nonemployee directors to purchase a total of 35,000 shares.
EMPLOYEE STOCK PURCHASE PLAN In 1998, the Company adopted an employee stock
purchase plan (ESPP). The ESPP has 500,000 shares available for issuance.
Participants purchase the Corporation's Common Stock at 85% of the lesser of
fair market value on the first or last day of each offering period. Shares
issued pursuant to the ESPP in 1998 were 6,998 shares and the average purchase
price per share was $16.575.
The Company applies APB 25 and related interpretations in accounting for its
stock-based compensation plans. Accordingly, no compensation expense has been
recognized under these plans. Had compensation expense for these plans been
determined based on the fair value at the grant dates for awards, the Company's
net income and earnings per share would be as set forth in the following table.
For purposes of pro forma disclosures, the estimated fair value is amortized to
expense over the options' vesting period.
DOLLARS IN THOUSANDS, YEAR ENDED DECEMBER 31
EXCEPT PER SHARE 1998 1997 1996
- --------------------------------------------------
Net income
As reported $41,654 $37,263 $32,725
Pro forma 38,324 34,007 31,117
Diluted earnings per
share
As reported $ 1.62 $ 1.42 $ 1.15
Pro forma 1.49 1.30 1.09
- --------------------------------------------------
Since compensation expense associated with option grants would be recognized
over the vesting period, the initial impact of applying SFAS No. 123 on pro
forma net income is not representative of the potential impact on pro forma net
income in future years. In each subsequent year, pro forma compensation expense
would include the effect of recognizing a portion of compensation expense from
multiple awards.
For purposes of presenting pro forma results, the fair value of each option
grant is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions:
YEAR ENDED DECEMBER 31
1998 1997 1996
- -------------------------------------------------
Dividend yield .20% .23% .32%
Risk-free interest rate 4.56 5.80 6.25
Stock price volatility 29.10 29.22 30.43
Expected life (years) 5.0 5.3 7.3
- -------------------------------------------------
The Black-Scholes option valuation model was developed for use in estimating
fair value of traded options, which are significantly different than employee
stock options. Although this valuation model is an acceptable method for use in
presenting pro forma information, because of the differences in traded options
and employee stock options, the Black-Scholes model does not necessarily provide
a single measure of the fair value of employee stock options.
39
41
A summary of the Company's stock option activity and related information for the
years ended December 31 follows:
1998 1997 1996
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
- ------------------------------------------------------------------------------------------------------------
Beginning of year.................... 2,778,443 $14.64 2,222,456 $13.63 1,279,500 $14.00
Granted.............................. 813,520 20.99 748,126 17.84 958,956 13.14
Exercised............................ (169,025) 14.39 (135,139) 13.75
Canceled............................. (134,951) 15.86 (57,000) 14.00 (16,000) 14.00
---------- ---------- ----------
End of year.......................... 3,287,987 16.29 2,778,443 14.64 2,222,456 13.63
========== ========== ==========
Exercisable at end of year........... 1,148,134 671,971 332,992
Available for future grant........... 1,107,849 186,418 877,544
Weighted average fair value of
options granted during the year.... $8.98 $8.07 $4.05
- ------------------------------------------------------------------------------------------------------------
Exercise prices for options outstanding as of December 31, 1998 ranged from
$11.00 to $27.66 The weighted-average remaining contractual life of those
options is 8 years.
RESTRICTED STOCK AWARD In 1998, the Company granted 15,000 shares of restricted
Common Stock to an officer. The shares vest according to a vesting schedule over
a three-year period. The grant date market value totaled $372 thousand and is
being amortized to expense over the vesting period. Unamortized compensation is
recorded as a component of shareholders' equity.
EXECUTIVE RETIREMENT PLAN Under the 1997 Executive Retirement Plan, the Company
may award its Common Stock to certain employees including certain executives who
do not participate in the ESOP. Through December 31, 1998, 19,555 shares have
been awarded with a fair market value of approximately $400 thousand.
With respect to the Restricted Stock Award and the Executive Retirement Plan,
compensation expense is recognized in the consolidated statement of operations.
12. OPERATING LEASES
Minimum annual rentals payable under noncancelable leases in each of the next
five years and beyond are as follows:
Dollars in millions
- --------------------------------------------
1999 $ 3.2
2000 2.6
2001 2.2
2002 1.2
2003 .7
Thereafter 2.1
-----
$12.0
- --------------------------------------------
Rental expense under all leases was approximately $3.8 million, $3.3 million and
$2.8 million for the years ended December 31, 1998, 1997 and 1996, respectively.
Operating leases relate principally to facilities, transportation equipment and
communication systems.
13. STOCK REPURCHASE
In March 1997, the Company repurchased from Scandinavian Incentive Holdings,
B.V., ("SIH"), 4 million shares of the Company's Common Stock for an aggregate
purchase price of $44 million plus fees and expenses of approximately $2 million
(the "Redemption"). The Redemption was effected pursuant to a Redemption
Agreement (the "Redemption Agreement") dated as of March 5, 1997 among the
Company, SIH and Incentive AB, the sole shareholder of SIH. Concurrently
therewith, SIH sold its remaining 6 million shares of WABCO Common Stock to
investors consisting of Vestar Equity Partners, L.P., Charlesbank Capital
Partners, LLC, f/k/a Harvard
40
42
Private Capital Holdings, Inc., American Industrial Partners Capital Fund II,
L.P. and certain members of management of the Company (the "Management
Purchasers") for a purchase price of $11 per share in cash, pursuant to a Stock
Purchase Agreement dated as of March 5, 1997, which sale was effective as of
March 31, 1997 (the "SIH Purchase").
To finance the Redemption, the Company amended its Credit Agreement to increase
the revolving credit availability by $15 million (from $125 million to $140
million) and to obtain a waiver of the requirement to make a prepayment in an
aggregate principal amount equal to 50% of excess cash flow for 1996, or
approximately $11.5 million. The Company obtained consents from record owners as
of March 3, 1997 of the Existing Notes to certain amendments to a covenant
contained in the Indenture dated as of June 20, 1995 among the Company, as
issuer, and The Bank of New York, as trustee, pursuant to which the Notes were
issued (the "Indenture"). The Company borrowed $46 million to fund the
Redemption and related expenses.
The following presents the Company's results for the year ended December 31,
1997 on a pro forma basis as if the stock repurchase had occurred on January 1,
1997:
IN THOUSANDS, EXCEPT PER SHARE REPORTED PRO FORMA
- ----------------------------------------------------
Net income $37,263 $36,774
Basic earnings per share 1.45 1.49
Diluted earnings per share 1.42 1.46
Average shares used for Basic 25,693 24,718
Diluted 26,173 25,198
- ----------------------------------------------------
14. STOCKHOLDERS' AND VOTING TRUST AGREEMENTS
As of December 31, 1998, the approximate ownership interests in the Company's
common stock are held by management and the ESOP (58%), the investors referred
to in Note 13 (17%), and all others including public shareholders (25%). The
investors referred to in Note 13 and certain members of senior management
purchased 6 million shares of WABCO common stock from SIH. The seller is a
successor in interest to Incentive AB (a Swedish corporation) which acquired
Investment AB Cardo, an original equity owner at the time of the 1990
acquisition of the Railway Products Group of American Standard, Inc. ("1990
Acquisition"). A Stockholders Agreement exists between management and the
investors referred to in Note 13 that provides for, among other things, the
composition of the Board of Directors as long as certain minimum stock ownership
percentages are maintained, restrictions on the disposition of shares and rights
to request the registration of the shares.
The active original management owners have entered into an Amended Voting
Trust/Disposition Agreement effective December 13, 1995, as amended. The
agreement provides for, among other matters, the stock to be voted as one block
and restrictions on the sale or transfer of such stock. The agreement expires on
January 1, 2000 and can be terminated by an affirmative vote of two-thirds of
the stock shares held by the trust. In connection with this Voting Trust, the
Company has entered into an Indemnification Agreement with the trustees, which
is covered by the Company's directors and officers liability insurance.
The shares held by the ESOP (established January 31, 1995) are subject to the
terms of the related ESOP Loan Agreement, Employee Stock Ownership Trust
Agreement, Employee Stock Ownership Plan and the Pledge Agreement. The ESOP is
further described in Note 7.
15. PREFERRED STOCK
The Company's authorized capital stock includes 1,000,000 shares of preferred
stock. The Board of Directors has the authority to issue the preferred stock and
to fix the designations, powers, preferences and rights of the shares of each
such class or series, including dividend rates, conversion rights, voting
rights, terms of redemption and liquidation preferences, without any further
vote or action by the Company's shareholders. The rights and preferences of the
preferred stock would be superior to those of the common stock. At December 31,
1998 and 1997 there was no preferred stock issued or outstanding.
16. 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 expire at various dates through 2000. 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
41
43
obligations. ASI has not disputed any coverage or reimbursement under these
provisions.
The Company, through one of its operating subsidiaries, has been named, along
with other parties, as a Potentially Responsible Party (PRP) under the North
Carolina Inactive Sites Response Act because of an alleged release or threat of
release of hazardous substances at the "Old James Landfill" site in North
Carolina. The Company believes that any costs associated with the cleanup
activities at this site which it may be held responsible for, if any, are
covered by (a) the ASI indemnification referred to above, as ASI previously
owned 50% of the subsidiary and (b) a related insurance policy which expires
January 2002 for environmental claims provided by the other former 50% owner of
the involved operating subsidiary. The Company has submitted a claim under the
policy for any costs of clean up imposed on or incurred by the Company in
connection with the "Old James Landfill" and Rocky Mountain International
Insurance, Ltd. has acknowledged coverage under the policy, subject to the
stated policy exclusions. In addition, management believes that such costs, if
any, attributable to the Company will not be material and, therefore, has not
established a reserve for such costs.
The Company's operations do not use and its products do not contain any
asbestos. The operations acquired by the Company from ASI discontinued the use
of asbestos in 1980. The Company is named as a codefendant in asbestos claims
filed by third parties against ASI relating to events occurring prior to 1981
(which is significantly prior to the 1990 acquisition). These claims are covered
by the indemnification agreement and the insurance policy referred to above. ASI
has taken complete responsibility in administering, defending and settling the
claims. The Company is not involved with, nor has it incurred any costs related
to, these claims. ASI has not claimed that the Company has any responsibility
for these cases. Management believes that these claims are not related to the
Company and that such costs, if any, attributable to the Company and will not be
material; therefore, the financial statements accordingly do not reflect any
costs or reserves for such claims.
In the opinion of management, based on available information, environmental
matters and asbestos claims do not presently represent any material
contingencies to the Company.
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. While this
lawsuit is in the earliest stages, the Company believes the technology developed
by the Company does not infringe on the GE Harris patents.
From time to time the Company is involved in litigation relating to claims
arising out of its operations in the ordinary course of business. As of the date
hereof, the Company is involved in no litigation that the Company believes will
have a material adverse effect on its financial condition, results of operations
or liquidity. The Company historically has not been required to pay any material
liability claims.
17. SEGMENT INFORMATION
WABCO has three reportable segments -- Railroad Group, Transit Group and Molded
Products 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:
RAILROAD GROUP consists of products geared to the production of freight cars and
locomotives, including braking control equipment and train coupler systems and
operating freight railroads. Revenues are derived from OEM and aftermarket sales
and from repairs and services.
TRANSIT GROUP consists of products for passenger transit vehicles (typically
subways, rail and busses) 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.
MOLDED PRODUCTS GROUP include manufacturing and distribution of brake shoes and
other rubberized products. Revenues are generally derived from the aftermarket.
The Company evaluates its business segments' operating results based on income
from operations. Corporate activities include general corporate expenses,
elimination of intersegment transactions, interest income and expense and other
unallocated charges. Since certain administrative and other operating expenses
and other items have not been allocated to
42
44
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 1998 is as follows:
MOLDED
RAILROAD TRANSIT PRODUCTS CORPORATE
IN THOUSANDS GROUP GROUP GROUP ACTIVITIES TOTAL
- ------------------------------------------------------------------------------------------------
Sales to external customers....... $388,797 $211,801 $ 70,311 $670,909
Intersegment sales................ 14,137 1,276 8,805 $(24,218)
----------------------------------------------------------
Total sales.................. $402,934 $213,077 $ 79,116 $(24,218) $670,909
==========================================================
Income from operations............ $ 78,987 $ 16,047 $ 20,713 $(11,081) $104,666
Interest expense and other........ 32,136 32,136
----------------------------------------------------------
Income before income taxes and
extraordinary item........... $ 78,987 $ 16,047 $ 20,713 $(43,217) $ 72,530
==========================================================
Depreciation and amortization..... $ 7,401 $ 4,742 $ 1,952 $ 11,113 $ 25,208
Capital expenditures.............. 12,111 8,470 5,393 2,983 28,957
Working capital................... 75,516 41,856 9,762 (31,723) 95,411
Segment assets.................... 325,585 182,398 48,550 39,651 596,184
- ------------------------------------------------------------------------------------------------
Segment financial information for 1997 is as follows:
MOLDED
RAILROAD TRANSIT PRODUCTS CORPORATE
IN THOUSANDS GROUP GROUP GROUP ACTIVITIES TOTAL
- ------------------------------------------------------------------------------------------------
Sales to external customers....... $310,295 $189,541 $ 64,605 $564,441
Intersegment sales................ 8,977 1,247 7,323 $(17,547)
----------------------------------------------------------
Total sales.................. $319,272 $190,788 $ 71,928 $(17,547) $564,441
==========================================================
Income from operations............ $ 63,840 $ 19,907 $ 18,364 $(12,136) $ 89,975
Interest expense and other........ 29,385 29,385
----------------------------------------------------------
Income before income taxes and
extraordinary item........... $ 63,840 $ 19,907 $ 18,364 $(41,521) $ 60,590
==========================================================
Depreciation and amortization..... $ 6,284 $ 4,168 $ 2,029 $ 12,143 $ 24,624
Capital expenditures.............. 19,236 5,341 3,254 1,365 29,196
Working capital................... 42,485 29,553 8,401 (31,720) 48,719
Segment assets.................... 175,586 149,669 42,865 42,759 410,879
- ------------------------------------------------------------------------------------------------
43
45
Segment financial information for 1996 is as follows:
MOLDED
RAILROAD TRANSIT PRODUCTS CORPORATE
IN THOUSANDS GROUP GROUP GROUP ACTIVITIES TOTAL
- ----------------------------------------------------------------------------------------------------
Sales to external customers................. $294,021 $100,902 $58,589 $453,512
Intersegment sales.......................... 12,707 863 6,089 $(19,659)
------------------------------------------------------
Total sales............................ $306,728 $101,765 $64,678 $(19,659) $453,512
======================================================
Income from operations...................... $ 62,839 $ 12,865 $15,057 $(11,043) $ 79,718
Interest expense and other.................. 26,070 26,070
------------------------------------------------------
Income before income taxes and
extraordinary item..................... $ 62,839 $ 12,865 $15,057 $(37,113) $ 53,648
======================================================
Depreciation and amortization............... $ 5,893 $ 2,785 $ 1,563 $ 12,008 $ 22,249
Capital expenditures........................ 8,759 2,306 1,663 127 12,855
Working capital............................. 46,705 21,862 7,922 (28,313) 48,176
Segment assets.............................. 157,768 117,274 40,890 47,304 363,236
- ----------------------------------------------------------------------------------------------------
The following geographic area data include trade revenues based on product
shipment destination and long-lived assets consists of plant, property and
equipment, net of depreciation, that are resident in their respective countries.
SALES LONG-LIVED ASSETS
In thousands ------------------------------ -----------------------------
YEAR ENDED DECEMBER 31 1998 1997 1996 1998 1997 1996
- -------------------------------------------------------------------------------------------------
United States................... $486,010 $421,057 $333,405 $ 78,720 $ 71,030 $63,348
Canada.......................... 74,066 72,618 76,301 38,775 34,529 30,178
Other international............. 110,833 70,766 43,806 7,486 2,808 2,318
---------------------------------------------------------------
Total...................... $670,909 $564,441 $453,512 $124,981 $108,367 $95,844
- -------------------------------------------------------------------------------------------------
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments approximate
their related carrying values, except for the following:
1998 1997
------------- -------------
CARRY FAIR CARRY FAIR
DOLLARS IN MILLIONS VALUE VALUE VALUE VALUE
- ----------------------------------------------------
9 3/8% Senior Notes $(100) $(106) $(100) $(106)
Unsecured credit
facility (30) (30) -- --
Note Payable-Pulse
9 1/2% (17) (18) (17) (18)
Comet Notes (10) (10) -- --
Interest rate swaps -- (1) -- (1)
- ----------------------------------------------------
Fair values of the fixed rate obligations were estimated using discounted cash
flow analyses. The fair value of the Company's interest rate swaps (see Note 5)
were based on dealer quotes and represent the estimated amount the Company would
pay to the counterparty to terminate the swap agreements.
19. SUBSEQUENT EVENT
In January 1999, WABCO completed the private placement of $75 million of 9 3/8%
Senior Notes which mature in 2005. The Senior Notes were issued at a premium
resulting in an effective rate of 8.5%. The issuance improved WABCO's financial
liquidity by i) using a portion of the proceeds to repay $30 million of debt
associated with the RRE 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) repay the remaining unpaid principal of $10.2 million from the Comet
acquisition. As result of the issuance, the Company will write-off previously
capitalized debt issuance costs of approximately $.02 per diluted share, in the
first quarter of 1999.
44
46
20. SELECTED QUARTERLY FINANCIAL DATA
(UNAUDITED)
-----------------------------------------
FIRST SECOND THIRD FOURTH
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA QUARTER QUARTER QUARTER QUARTER
- -----------------------------------------------------------------------------------------------
1998
Net sales........................................... $158,136 $172,052 $160,476 $180,245
Operating income.................................... 24,755 26,084 25,181 28,646
Income before taxes................................. 17,513 18,871 17,493 18,653
Income before extraordinary item.................... 10,858 11,700 10,846 11,565
Net income.......................................... 10,858 8,970 10,846 10,980
Diluted earnings per common share before
extraordinary item................................ 0.42 0.45 0.42 0.45
Diluted earnings per common share................... 0.42 0.34 0.42 0.43
1997
Net sales........................................... $136,508 $138,066 $142,761 $147,106
Operating income.................................... 22,542 22,784 22,036 22,613
Income before taxes................................. 15,719 15,279 14,486 15,106
Net income.......................................... 9,589 9,320 8,836 9,518
Diluted earnings per common share................... 0.34 0.37 0.35 0.37
- -----------------------------------------------------------------------------------------------
In the second quarter of 1998, the Company refinanced its credit agreement and
wrote-off deferred financing costs of approximately $2.7 million, net of tax, or
$.11 per diluted share. In the fourth quarter of 1998, the Company amended its
credit agreement and wrote-off deferred financing costs of approximately $.6
million, net of tax, or $.02 per diluted share. Such charges were recorded as
extraordinary items.
45
47
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 COMPANY
By /s/ WILLIAM E. KASSLING
------------------------------------
William E. Kassling, Chief
Executive Officer
Date: February 18, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company in the
capacities indicated and on the dates indicated.
SIGNATURE AND TITLE DATE
------------------- ----
/s/ WILLIAM E. KASSLING February 18, 1999
- --------------------------------------------
William E. Kassling, Chairman of the Board,
and Chief Executive Officer
/s/ ROBERT J. BROOKS February 18, 1999
- --------------------------------------------
Robert J. Brooks, Chief Financial Officer,
Chief Accounting Officer and Director
/s/ JAMES C. HUNTINGTON, JR. February 18, 1999
- --------------------------------------------
James C. Huntington, Director
/s/ KIM G. DAVIS February 18, 1999
- --------------------------------------------
Kim G. Davis, Director
/s/ EMILIO A. FERNANDEZ February 18, 1999
- --------------------------------------------
Emilio A. Fernandez, Director
/s/ JAMES V. NAPIER February 18, 1999
- --------------------------------------------
James V. Napier, Director
/s/ JAMES P. KELLEY February 18, 1999
- --------------------------------------------
James P. Kelley, Director
/s/ GREGORY T. H. DAVIES February 18, 1999
- --------------------------------------------
Gregory T. H. Davies, President,
Chief Operating Officer and Director
46
48
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS OF
WESTINGHOUSE AIR BRAKE COMPANY:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of Westinghouse Air Brake Company included in
this Form 10-K, and have issued our report thereon dated February 17, 1999. Our
audits were made for the purpose of forming an opinion on those statements taken
as a whole. The schedule listed in the index in Item 14(a)2 of this Form 10-K is
the responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial date required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania
February 17, 1999
47
49
SCHEDULE II
WESTINGHOUSE AIR BRAKE COMPANY
VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS ENDED DECEMBER 31
BALANCE AT CHARGED/ CHARGED TO DEDUCTIONS BALANCE
BEGINNING OF (CREDITED) TO OTHER FROM AT END OF
DOLLARS IN THOUSANDS PERIOD EXPENSE ACCOUNTS (1) RESERVES (2) PERIOD
- ---------------------------------------------------------------------------------------------------------------
1998
Accrued warranty...................... $12,851 $6,238 $4,936 $11,368 $12,657
Allowance for doubtful accounts....... 2,045 528 712 428 2,857
1997
Accrued warranty...................... $ 8,172 $9,893 $2,281 $ 7,495 $12,851
Allowance for doubtful accounts....... 1,347 812 36 150 2,045
1996
Accrued warranty...................... $ 3,655 $5,459 $3,802 $ 4,744 $ 8,172
Allowance for doubtful accounts....... 831 406 210 100 1,347
- ---------------------------------------------------------------------------------------------------------------
(1) Reserves of acquired companies
(2) Actual disbursements and/or charges
48
50
INDEX TO EXHIBITS
FILING METHOD
-------------
3.1 Restated Certificate of Incorporation of the Company dated
January 30, 1995, as amended March 30, 1995 2
3.2 Amended and Restated By-Laws of the Company, effective March
31, 1997 5
4.1 Form of Indenture between the Company and The Bank of New
York with respect to the public offering of $100,000,000 of
9 3/8% Senior Notes due 2005 2
4.2 Form of Note (included in Exhibit 4.1)
4.3 First Supplemental Indenture dated as of March 21, 1997
between the Company and The Bank of New York 6
4.4 Indenture dated as of January 12, 1999 by and between the
Company and The Bank of New York with respect to the private
offering of $75,000,000 of 9 3/8% Senior Notes due 2005,
Series B 1
4.5 Form of Note (included in Exhibit 4.4) 1
9 Second Amended WABCO Voting Trust/Disposition Agreement
dated as of December 13, 1995 among the Management Investors
(Schedules and Exhibits omitted) 3
10.1 Westinghouse Air Brake Company Employee Stock Ownership Plan
and Trust, effective January 31, 1995 2
10.2 ESOP Loan Agreement dated January 31, 1995 between
Westinghouse Air Brake Company Employee Stock Ownership
Trust ("ESOT") and the Company (Exhibits omitted) 2
10.3 Employee Stock Ownership Trust Agreement dated January 31,
1995 between the Company and U.S. Trust Company of
California, N.A. 2
10.4 Pledge Agreement dated January 31, 1995 between ESOT and the
Company 2
10.5 Credit Agreement dated as of June 30, 1998, and Amended and
Restated as of October 2, 1998 among the Company, various
financial institutions, The Chase Manhattan Bank, Chase
Manhattan Bank Delaware, and The Bank of New York (Schedules
and Exhibits omitted) 1
10.6 Amended and Restated Stockholders Agreement dated as of
March 5, 1997 among the RAC Voting Trust ("Voting Trust"),
Vestar Equity Partners, L.P., Charlesbank Capital Partners
f/k/a Harvard Private Capital Holdings, Inc. ("Charles"),
American Industrial Partners Capital Fund II, L.P. ("AIP")
and the Company 6
10.7 Common Stock Registration Rights Agreement dated as of
January 31, 1995 among the Company, Scandinavian Incentive
Holding B.V. ("SIH"), Voting Trust, Vestar Capital, Pulse
Electronics, Inc., Pulse Embedded Computer Systems, Inc.,
the Pulse Shareholders and ESOT (Schedules and Exhibits
omitted) 2
10.8 Indemnification Agreement dated January 31, 1995 between the
Company and the Voting Trust trustees 2
10.9 Agreement of Sale and Purchase of the North American
Operations of the Railway Products Group, an operating
division of American Standard Inc., dated as of 1990 between
Rail Acquisition Corp. and American Standard Inc. (only
provisions on indemnification are reproduced) 2
10.10 Letter Agreement (undated) between the Company and American
Standard Inc. on environmental costs and sharing 2
49
51
FILING METHOD
-------------
10.11 Purchase Agreement dated as of June 17, 1992 among the
Company, Schuller International, Inc., Manville Corporation
and European Overseas Corporation (only provisions on
indemnification are reproduced) 2
10.12 Asset Purchase Agreement dated as of January 23, 1995 among
the Company, Pulse Acquisition Corporation, Pulse
Electronics, Inc., Pulse Embedded Computer Systems, Inc. and
the Pulse Shareholders (Schedules and Exhibits omitted) 2
10.13 License Agreement dated as of December 31, 1993 between SAB
WABCO Holdings B.V. and the Company 2
10.14 Letter Agreement dated as of January 19, 1995 between the
Company and Vestar Capital Partners, Inc. 2
10.15 Westinghouse Air Brake Company 1995 Stock Incentive Plan, as
amended 1
10.16 Westinghouse Air Brake Company 1995 Non-Employee Directors'
Fee and Stock Option Plan 1
10.17 Form of Employment Agreement between William E. Kassling and
the Company 2
10.18 Letter Agreement dated as of January 1, 1995 between the
Company and Vestar Capital Partners, Inc. 2
10.19 Form of Indemnification Agreement between the Company and
Authorized Representatives 2
10.20 Share Purchase Agreement between Futuris Corporation Limited
and the Company (Exhibits omitted) 2
10.21 Purchase Agreement dated as of September 19, 1996 by and
among Mark IV Industries, Inc., Mark IV PLC, and W&P Holding
Corp. (Exhibits and Schedules omitted) (Originally filed as
Exhibit No. 2.01) 4
10.22 Purchase Agreement dated as of September 19,1996 by and
among Mark IV Industries Limited and Westinghouse Railway
Holdings (Canada) Inc. (Exhibits and Schedules omitted)
(Originally filed as Exhibit No. 2.02) 4
10.23 Amendment No. 1 to Amended and Restated Stockholders
Agreement dated as of March 5, 1997 among the Voting Trust,
Vestar, Charles, AIP and the Company 6
10.24 Common Stock Registration Rights Agreement dated as of March
5, 1997 among the Company, Charles, AIP and the Voting Trust 6
10.25 1998 Employee Stock Purchase Plan 1
10.26 Sale Agreement dated as of August 7, 1998 by and between
Rockwell Collins, Inc. and the Company (Schedules and
Exhibits omitted) (Originally filed as Exhibit No. 2.01) 7
10.27 Amendment No. 1 dated as of October 5, 1998 to Sale
Agreement dated as of August 7, 1998 by and between Rockwell
Collins, Inc. and the Company (Originally filed as Exhibit
No. 2.02) 7
21 List of subsidiaries of the Company 1
23 Consent of Arthur Andersen LLP 1
27 Financial Data Schedule 1
99 Annual Report on Form 11-K for the year ended December 31,
1998 of the Westinghouse Air Brake Company Employee Stock
Ownership Plan and Trust 1
50
52
FILING METHOD
- -------------
1 Filed herewith
2 Filed as an exhibit to the Company's Registration Statement
on Form S-1 (No. 33-90866)
3 Filed as an exhibit to the Company's Annual Report on Form
10-K for the period ended December 31, 1995
4 Filed as an exhibit to the Company's Current Report on Form
8-K, dated October 3, 1996
5 Filed as an exhibit to the Company's Registration Statement
on Form S-8 (No. 333-39159)
6 Filed as an exhibit to the Company's Annual Report on Form
10-K for the period ended December 31, 1997
7 Filed as an exhibit to the Company's Current Report on Form
8-K, dated October 5, 1998
51