EXHIBIT 99.3
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Westinghouse Air Brake Technologies Corporation:
We have audited the accompanying consolidated balance sheet of Westinghouse Air
Brake Technologies Corporation and subsidiaries as of December 31, 2002, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the year then ended. 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 audit. The financial statements of
Westinghouse Air Brake Technologies Corporation and subsidiaries as of December
31, 2001, and for the two fiscal years then ended were audited by other auditors
who have ceased operations. Those auditors expressed an unqualified opinion on
those financial statements in their report dated February 18, 2002.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 audit provides 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
Technologies Corporation and subsidiaries as of December 31, 2002, and the
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States.
As more fully discussed in Note 8 to the consolidated financial statements,
effective January 1, 2002, Westinghouse Air Brake Technologies Corporation
adopted the provisions of Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets (SFAS No. 142).
As discussed above, the consolidated financial statements of Westinghouse Air
Brake Technologies Corporation as of December 31, 2001, and for the two fiscal
years then ended were audited by other auditors who have ceased operations. As
described in Note 8, these financial statements have been revised to include the
transitional disclosures required by SFAS No. 142, which was adopted by the
Company as of January 1, 2002. Our audit procedures with respect to the
disclosures in Note 8 with respect to 2001 and 2000 included (a) agreeing the
previously reported net income to the previously issued financial statements and
the adjustments to reported net income representing amortization expense
(including any related tax effects) recognized in those periods related to
goodwill as a result of initially applying Statement No. 142 to the Company's
underlying records obtained from management, and (b) testing the mathematical
accuracy of the reconciliation of adjusted net income to reported net income,
and the related earnings per share amounts. In our opinion, the disclosures for
2001 and 2000 in Note 8 are appropriate. However, we were not engaged to audit,
review, or apply any procedures to the 2001 and 2000 financial statements of the
Company other than with respect to such disclosures and, accordingly, we do not
express an opinion or any other form of assurance on the 2001 and 2000 financial
statements taken as a whole.
/s/ ERNST & YOUNG LLP
February 14, 2003
except for Note 25,
as to which the date
is July 9, 2003
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Westinghouse Air Brake Technologies Corporation:
We have audited the accompanying consolidated balance sheets of Westinghouse Air
Brake Technologies Corporation (a Delaware corporation) and subsidiaries as of
December 31, 2001 and 2000, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 2001. 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 auditing standards generally accepted
in the United States. 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
Technologies Corporation and subsidiaries as of December 31, 2001 and 2000, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States.
/s/ Arthur Andersen LLP
Pittsburgh, Pennsylvania
February 18, 2002
This is a copy of the audit report previously issued by Arthur Andersen LLP in
connection with the Company's Annual Report on Form 10-K for the year ended
December 31, 2001. This audit report has not been reissued by Arthur Andersen
LLP in connection with the Annual Report on Form 10-K for the year ended
December 31, 2002. See Exhibit 23.2 to our Annual Report on Form 10-K for the
year ended December 31, 2002 for further discussion.
F-2
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31,
-----------------------
(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE) 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash........................................................................................ $ 19,210 $ 53,949
Accounts receivable......................................................................... 108,019 106,527
Inventories................................................................................. 88,470 104,930
Deferred income taxes....................................................................... 23,613 22,960
Other....................................................................................... 5,911 7,328
-----------------------
Total current assets........................................................................... 245,223 295,694
Property, plant and equipment.................................................................. 308,495 318,188
Accumulated depreciation....................................................................... (159,903) (150,493)
-----------------------
Property, plant and equipment, net............................................................. 148,592 167,695
Other Assets...................................................................................
Assets held for sale........................................................................ 10,105 7,180
Prepaid pension costs....................................................................... 110 1,449
Goodwill, net............................................................................... 109,450 198,788
Other intangibles, net...................................................................... 41,524 44,348
Deferred income taxes....................................................................... 26,112 3,860
Other noncurrent assets..................................................................... 7,749 10,938
-----------------------
Total other assets............................................................................. 195,050 266,563
-----------------------
Total assets................................................................................... $ 588,865 $ 729,952
-----------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt........................................................... $ 833 $ 782
Accounts payable............................................................................ 62,104 75,150
Accrued income taxes........................................................................ 3,928 43,741
Customer deposits........................................................................... 10,827 10,314
Accrued compensation........................................................................ 19,814 17,465
Accrued warranty............................................................................ 17,407 15,373
Other accrued liabilities................................................................... 20,350 23,396
-----------------------
Total current liabilities...................................................................... 135,263 186,221
Long-term debt................................................................................. 194,318 241,088
Reserve for postretirement and pension benefits................................................ 38,266 27,544
Deferred income taxes.......................................................................... 8,771 9,065
Commitments and contingencies.................................................................. 7,568 10,601
Other long-term liabilities.................................................................... 5,417 10,162
-----------------------
Total liabilities.............................................................................. 389,603 484,681
Shareholders' equity
Preferred stock, 1,000,000 shares authorized, no shares issued.............................. -- --
Common stock, $.01 par value; 100,000,000 shares authorized:
65,447,867 shares issued and 43,440,840 outstanding at December 31, 2002 and 43,152,545
outstanding at December 31, 2001........................................................ 654 654
Additional paid-in capital.................................................................. 272,782 272,674
Treasury stock, at cost, 22,007,027 and 22,295,322 shares,
respectively............................................................................ (273,634) (277,489)
Retained earnings........................................................................... 231,282 278,569
Deferred compensation....................................................................... 270 538
Accumulated other comprehensive loss........................................................ (32,092) (29,675)
-----------------------
Total shareholders' equity..................................................................... 199,262 245,271
-----------------------
Total liabilities and shareholders' equity..................................................... $ 588,865 $ 729,952
- -------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
F-3
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENTS OF
OPERATIONS
- ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Net sales.............................................................................. $ 696,195 $ 783,698 $ 811,178
Cost of sales.......................................................................... (516,724) (573,772) (575,516)
---------------------------------------
Gross profit........................................................................... 179,471 209,926 235,662
Selling, general and administrative expenses........................................... (93,023) (96,723) (94,757)
Merger and restructuring charges....................................................... -- (3,723) (18,202)
Engineering expenses................................................................... (33,592) (33,156) (32,297)
Asset writedowns....................................................................... -- (9,253) --
Amortization expense................................................................... (5,322) (13,013) (12,615)
---------------------------------------
Total operating expenses............................................................... (131,937) (155,868) (157,871)
Income from operations................................................................. 47,534 54,058 77,791
Other income and expenses..............................................................
Interest expense.................................................................... (18,072) (33,501) (43,649)
Other income (expense), net......................................................... (5,558) (2,130) 3,776
---------------------------------------
Income from continuing operations before income taxes and cumulative effect
of accounting change................................................................ 23,904 18,427 37,918
Income tax expense..................................................................... (7,594) (4,465) (18,718)
---------------------------------------
Income from continuing operations before cumulative effect of accounting change........ 16,310 13,962 19,200
Discontinued operations................................................................
Income from discontinued operations (net of tax).................................... 403 6,360 6,193
Gain (loss) on sale of discontinued operations (net of tax)......................... (529) 41,458 --
---------------------------------------
Total discontinued operations.......................................................... (126) 47,818 6,193
---------------------------------------
Income before cumulative effect of accounting change................................... 16,184 61,780 25,393
Cumulative effect of accounting change for goodwill, net of tax........................ (61,663) -- --
---------------------------------------
Net income (loss)...................................................................... $ (45,479) $ 61,780 $ 25,393
---------------------------------------
Earnings per common share
Basic
Income from continuing operations before cumulative effect of accounting change.. $ 0.37 $ 0.33 $ 0.45
Income from discontinued operations.............................................. -- 1.11 0.14
Cumulative effect of accounting change........................................... (1.42) -- --
---------------------------------------
Net income (loss)...................................................................... $ (1.05) $ 1.44 $ 0.59
---------------------------------------
Diluted.............................................................................
Income from continuing operations before cumulative effect of accounting change.. $ 0.37 $ 0.32 $ 0.45
Income from discontinued operations.............................................. -- 1.11 0.14
Cumulative effect of accounting change........................................... (1.41) -- --
---------------------------------------
Net income (loss)...................................................................... $ (1.04) $ 1.43 $ 0.59
---------------------------------------
Weighted average shares outstanding
Basic............................................................................... 43,291 42,949 43,318
Diluted............................................................................. 43,617 43,198 43,382
- ---------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
F-4
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENTS OF CASH
FLOWS
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------
(IN THOUSANDS) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income (loss)......................................................................... $ (45,479) $ 61,780 $ 25,393
Adjustments to reconcile net income to cash provided by operations:
Cumulative effect of accounting change for goodwill, net of tax........................ 61,663 -- --
Depreciation and amortization.......................................................... 25,513 33,061 32,416
Provision for ESOP contribution........................................................ -- -- 1,315
Results of discontinued operations, net of tax......................................... 126 (47,818) (6,193)
Loss/(gain) on sale of product line.................................................... -- 521 (4,375)
Writedown of assets.................................................................... -- 9,253 --
Deferred income taxes.................................................................. 702 (6,278) 7,955
Other, primarily non-cash portion of merger and restructuring charges.................. -- 160 3,106
Discontinued operations................................................................ 58 (1,213) (5,136)
Changes in operating assets and liabilities, net of acquisitions ......................
Accounts receivable................................................................. (548) 49,772 (15,201)
Inventories......................................................................... 17,812 12,670 4,049
Accounts payable.................................................................... (12,814) (4,330) 603
Accrued income taxes................................................................ (29,615) 5,021 (5,081)
Accrued liabilities and customer deposits........................................... 1,964 (20,856) 4,365
Commitments and contingencies....................................................... (3,033) (2,251) (5,753)
Other assets and liabilities........................................................ (691) 29,605 22,751
--------------------------------------
Net cash provided by operating activities................................................. 15,658 119,097 60,214
Investing Activities
Purchase of property, plant and equipment, net......................................... (10,464) (14,801) (30,831)
Acquisitions of businesses, net of cash acquired....................................... (1,654) (3,730) (650)
Cash received from disposition of discontinued operations.............................. 1,400 240,900 --
Cash received from disposition of product line......................................... -- 4,120 5,500
Discontinued operations................................................................ (99) 924 4,496
--------------------------------------
Net cash provided by (used for) investing activities...................................... (10,817) 227,413 (21,485)
Financing Activities
Borrowings (repayments) of credit agreements........................................... 129,700 (298,000) (10,000)
Repayments of senior notes............................................................. (175,000) -- --
Repayments of other borrowings......................................................... (641) (280) (18,390)
Purchase of treasury stock............................................................. -- (585) (12,215)
Proceeds from treasury stock from stock based benefit plans............................ 3,695 3,359 4,291
Cash dividends......................................................................... (1,808) (1,681) (1,695)
--------------------------------------
Net cash used for financing activities.................................................... (44,054) (297,187) (38,009)
Effect of changes in currency exchange rates.............................................. 4,474 (1,445) (1,705)
--------------------------------------
Increase (decrease) in cash............................................................... (34,739) 47,878 (985)
Cash, beginning of year................................................................ 53,949 6,071 7,056
--------------------------------------
Cash, end of year...................................................................... $ 19,210 $ 53,949 $ 6,071
- ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
F-5
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY
ADDITIONAL
COMPREHENSIVE COMMON PAID-IN TREASURY
(IN THOUSANDS) INCOME STOCK CAPITAL STOCK
- --------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $ 654 $ 318,357 $ (201,711)
Cash dividends.....................
Purchase of treasury stock......... (12,215)
Proceeds from treasury stock
issued from the exercise of
stock options and other
benefit plans, net of
tax............................. (3,697) 9,545
Allocation of ESOP shares, net of
tax effect...................... (434)
Compensatory stock options
granted through a Rabbi Trust... 5,726
ESOP termination................... (40,732) (83,010)
Net income......................... $ 25,393
Translation adjustment............. (4,184)
-----------------------------------------------------------
$ 21,209
---------
BALANCE, DECEMBER 31, 2000......... $ 654 $ 273,494 $ (281,665)
Cash dividends.....................
Purchase of treasury stock......... (585)
Proceeds from treasury stock
issued from the exercise of
stock options and other
benefit plans, net of tax....... (820) 4,398
Compensatory stock options granted
through a Rabbi Trust........... 363
Net income......................... $ 61,780
Translation adjustment............. (5,170)
Cumulative effect of change in
accounting for derivative
financial instruments, net of
$665 tax........................ (1,234)
Unrealized losses on derivatives
designated and qualified as
cash flow hedges, net of $705
tax............................. (1,310)
Additional minimum pension
liability, net of $4,144 tax.... (6,479)
-----------------------------------------------------------
$ 47,587
---------
BALANCE, DECEMBER 31, 2001......... $ 654 $ 272,674 $ (277,489)
Cash dividends.....................
Proceeds from treasury stock
issued from the exercise of
stock options and other
benefit plans, net of
tax............................ 108 3,587
Compensatory stock options granted
through a Rabbi Trust........... 268
Net loss........................... $ (45,479)
Translation adjustment............. 3,165
Unrealized gains on derivatives
designated and qualified as
cash flow hedges, net of $755
tax............................. 1,538
Additional minimum pension
liability, net of $4,551 tax.... (7,120)
---------
$ (47,896)
-----------------------------------------------------------
BALANCE, DECEMBER 31, 2002 ........ $ 654 $ 272,782 $ (273,634)
- -------------------------------------------------------------------------------------------------------------
ACCUMULATED
UNEARNED OTHER
ESOP RETAINED DEFERRED COMPREHENSIVE
(IN THOUSANDS) SHARES EARNINGS COMPENSATION INCOME (LOSS)
- -----------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999......... $ (125,491) $ 194,772 $ 6,595 $ (11,298)
Cash dividends..................... (1,695)
Purchase of treasury stock.........
Proceeds from treasury stock
issued from the exercise of
stock options and other
benefit plans, net of
tax............................. 31
Allocation of ESOP shares, net
of tax effect................... 1,749
Compensatory stock options granted
through a Rabbi Trust........... (5,726)
ESOP termination................... 123,742
Net income......................... 25,393
Translation adjustment............. (4,184)
------------------------------------------------------------
BALANCE, DECEMBER 31, 2000......... -- $ 218,470 $ 900 $ (15,482)
Cash dividends..................... (1,681)
Purchase of treasury stock.........
Proceeds from treasury stock
issued from the exercise of
stock options and other
benefit plans, net of tax....... 1
Compensatory stock options granted
through a Rabbi Trust........... (363)
Net income......................... 61,780
Translation adjustment............. (5,170)
Cumulative effect of change in
accounting for derivative
financial instruments, net of
$665 tax........................ (1,234)
Unrealized losses on derivatives
designated and qualified as
cash flow hedges, net of $705
tax............................. (1,310)
Additional minimum pension
liability, net of $4,144 tax.... (6,479)
------------------------------------------------------------
BALANCE, DECEMBER 31, 2001......... -- $ 278,569 $ 538 $ (29,675)
Cash dividends..................... (1,808)
Proceeds from treasury stock
issued from the exercise of
stock options and other
benefit plans, net of
tax............................
Compensatory stock options granted
through a Rabbi Trust........... (268)
Net loss........................... (45,479)
Translation adjustment............. 3,165
Unrealized gains on derivatives
designated and qualified as
cash flow hedges, net of $755
tax............................. 1,538
Additional minimum pension
liability, net of $4,551 tax (7,120)
------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 ........ -- $ 231,282 $ 270 $ (32,092)
- --------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
F-6
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Westinghouse Air Brake Technologies Corporation (the "Company") is one of North
America's largest manufacturers of value-added equipment for locomotives,
railway freight cars and passenger transit vehicles. The Company was formed in
November 1999 from the merger of Westinghouse Air Brake Company and MotivePower
Industries, Inc. Our products are intended to enhance safety, improve
productivity and reduce maintenance costs for our customers. Product offerings
include brakes for locomotives, freight cars and passenger transit vehicles,
electronic controls and monitors, heat exchangers and cooling systems, switcher
and commuter locomotives, couplers, door systems and draft gears. The Company
aggressively pursues technological advances with respect to both new product
development and product enhancements. The Company has its headquarters in
Wilmerding, Pennsylvania and has 4,409 full time employees at facilities
throughout the world.
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.
Sales between subsidiaries are billed at prices consistent with sales to third
parties and are eliminated in consolidation.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles in the United States requires the
Company to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting period. Actual amounts
could differ from the estimates. On an ongoing basis, management reviews its
estimates based on currently available information. Changes in facts and
circumstances may result in revised estimates.
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 (see Note 6).
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment additions are
stated at cost. Expenditures for renewals and improvements are capitalized.
Expenditures for ordinary maintenance and repairs are expensed as incurred. The
Company provides for book depreciation principally on the straight-line method.
Accelerated depreciation methods are utilized for income tax purposes (see Note
7).
INTANGIBLE ASSETS. The Company adopted SFAS No. 142 effective January 1, 2002,
and, as a result, goodwill and other intangible assets with indefinite lives are
no longer amortized. Other intangibles (with definite lives) are amortized on a
straight-line basis over their estimated economic lives. Goodwill effective
January 1, 2002 is reviewed annually for impairment while amortizable
intangibles are reviewed for impairment when indicators of impairment are
present (see Note 8).
REVENUE RECOGNITION. Revenue is recognized in accordance with Staff Accounting
Bulletin (SAB) 101, "Revenue Recognition in Financial Statements." Wabtec
recognizes revenue upon the passage of title, ownership and risk of loss to the
customer.
The Company recognizes revenues on long-term contracts based on the percentage
of completion method of accounting. Contract revenues and cost estimates are
reviewed and revised quarterly, at a minimum, and adjustments are reflected in
the accounting period as known. Provisions are made for estimated losses on
uncompleted contracts as known, if necessary.
SHIPPING AND HANDLING FEES AND COSTS. All fees billed to the customer for
shipping and handling are classified as a component of net sales. All costs
associated with shipping and handling are classified as a component of cost of
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 Employees" (see Note 14 for related pro forma
disclosures).
RESEARCH AND DEVELOPMENT. Research and development costs are charged to expense
as incurred. For the years ended December 31, 2002, 2001 and 2000, the Company
incurred costs of approximately $33.6 million, $33.2 million and $32.3 million,
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 a number of 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 $17.6 million, $14.1 million
and $11.2 million for 2002, 2001 and 2000, respectively. Warranty reserves were
$17.4 and $15.4 million at December 31, 2002 and 2001, respectively (see Note
17).
F-7
FINANCIAL DERIVATIVES AND HEDGING ACTIVITIES. The Company periodically enters
into interest rate swap agreements to reduce the impact of interest rate changes
on its variable rate borrowings. Interest rate swaps are agreements with a
counterparty to exchange periodic interest payments (such as pay fixed, receive
variable) calculated on a notional principal amount. The interest rate
differential to be paid or received is recognized as interest expense (see Note
9).
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
133, and as amended by SFAS 138, "Accounting for Derivative Instruments and
Hedging Activities" effective January 1, 2001, resulting in the recording of
current assets of $266,000, long term assets of $399,000, current liabilities of
$760,000, long term liabilities of $1.1 million, and a decrease in other
comprehensive loss of $1.2 million. In the application, the Company has
concluded its interest rate swap contracts qualify for "special cash flow hedge
accounting" which permit recording the fair value of the swap and corresponding
adjustment to other comprehensive income (loss) on the balance sheet.
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 12).
FOREIGN CURRENCY TRANSLATION. Assets and liabilities of foreign subsidiaries,
except for the Company's Mexican operations whose functional currency is the
U.S. Dollar, are translated at the rate of exchange in effect on the balance
sheet date while income and expenses are translated at the average rates of
exchange prevailing during the year. Foreign currency gains and losses resulting
from transactions, and the translation of financial statements are recorded in
the Company's consolidated financial statements based upon the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency
Translation." The effects of currency exchange rate changes on intercompany
transactions and balances of a long-term investment nature are accumulated and
carried as a component of shareholders' equity. The effects of currency exchange
rate changes on intercompany transactions that are non U.S. dollar denominated
amounts are charged or credited to earnings. Foreign exchange loss was $1.2
million, $1.7 million and $1 million for 2002, 2001 and 2000, respectively.
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 13).
OTHER COMPREHENSIVE INCOME (LOSS). Comprehensive income (loss) is defined as net
income and all other nonowner changes in shareholders' equity. The Company's
accumulated other comprehensive income (loss) consists of foreign currency
translation adjustments, unrealized gains and losses on derivatives designated
and qualified as cash flow hedges and pension related adjustments (see Note 15).
SIGNIFICANT CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK. The Company's trade
receivables are primarily from rail and transit industry original equipment
manufacturers, Class I railroads, railroad carriers and commercial companies
that utilize rail cars in their operations, such as utility and chemical
companies. One customer, in the transit group, accounted for 11% of the
Company's consolidated net sales in 2002 and 2001. No one customer accounted for
more than 10% of the Company's consolidated net sales in 2000. The allowance for
doubtful accounts was $4.6 million and $2.3 million as of December 31, 2002 and
2001, respectively.
EMPLOYEES. As of December 31, 2002, approximately 36% of the Company's workforce
was covered by collective bargaining agreements. These agreements are generally
effective through 2003, 2004 and 2005.
DEFERRED COMPENSATION AGREEMENTS. In May 1998, a consensus on Emerging Issues
Task Force Issue No. 97-14, "Accounting for Deferred Compensation Arrangements
Where Amounts Earned Are Held in a Rabbi Trust and Invested" ("EITF 97-14"), was
issued. The adoption of EITF 97-14 required the Company to record as treasury
stock the historical value of the Company's stock maintained in its deferred
compensation plans.
RECENT ACCOUNTING PRONOUNCEMENTS. In August 2001, the Financial Accounting
Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets." Under its provisions, all tangible long-lived assets,
whether to be held and used or to be disposed of by sale or other means, will be
tested for recoverability whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001. The Company adopted SFAS 144 in
the third quarter of 2001, prior to the time it was required.
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity,"
under which a liability for an exit cost was recognized at the date of an
entity's commitment to an exit plan. SFAS No. 146 requires that a liability for
a cost associated with an exit or disposal activity be recognized at fair value
when the liability is incurred. The provisions of this statement are effective
for exit or disposal
F-8
activities that are initiated after December 31, 2002. The Company has not
completed the process of evaluating the impact that will result from adopting
it.
In December 2002, the Financial Accounting Standards Board issued SFAS No. 148,
"Accounting for Stock-Based Compensation--Transition and Disclosure." SFAS No.
148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternate methods of transition to SFAS No. 123's fair value method of
accounting for stock-based compensation. While the Statement does not amend SFAS
No. 123 to require companies to account for employee stock options using the
fair value method, the disclosure provisions of the Statement are applicable to
all companies with stock-based compensation. The provisions of this standard are
effective for fiscal years ending after December 15, 2002. The adoption of this
pronouncement did not have a material impact on the Company as no change was
made to the method of accounting for stock based compensation.
3. DISCONTINUED OPERATIONS
On November 1, 2001, the Company completed the sale of certain assets to GE
Transportation Systems (GETS) for $238 million in cash. The assets sold
primarily included locomotive aftermarket products and services for which Wabtec
was not the original equipment manufacturer. Under the terms of the sales
agreement, the Company has agreed to indemnify GETS for, among other things,
certain potential third party, off site environmental cleanup or remediation
costs. The Company has purchased an insurance policy to mitigate its exposure
for the environmental indemnities. The Company reported a $48.7 million after
tax gain on the sale in 2001.
In the fourth quarter of 2001, the Company decided to exit other businesses and
has put these businesses up for sale. The net amount of these businesses has
been written down to their estimated realizable value based on a multiple of
earnings and has been classified as Assets Held for Sale on the balance sheet.
The Company reported a $7.2 million after tax loss on the writedown of these
entities. As of December 31, 2002, one of the businesses continues to be
classified as held for sale. Market conditions have deteriorated in the past
year, and, as a result, the asset has not sold. The Company actively solicited
but did not receive any reasonable offers to purchase the asset and, in
response, has reduced the price. The asset continues to be actively marketed at
a price that is reasonable given the change in market conditions. The asset is
recorded as held for sale for $2.4 million.
In accordance with SFAS 144, the operating results of these businesses have been
classified as discontinued operations for all years presented and are summarized
as of December 31, as follows:
- ---------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------
(IN THOUSANDS) 2002 2001 2000
- ---------------------------------------------------------------------------------
Net sales..................................... $ 11,158 $ 156,803 $ 216,798
Income before income taxes.................... 593 9,785 9,677
Income tax expense............................ 190 3,425 3,484
Income from discontinued operations........... $ 403 $ 6,360 $ 6,193
- ---------------------------------------------------------------------------------
F-9
4. SUPPLEMENTAL CASH FLOW DISCLOSURES
- -------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
---------------------------------
(IN THOUSANDS) 2002 2001 2000
---------------------------------
Interest paid during the year............................. $ 18,111 $ 37,181 $ 45,871
Income taxes paid during the year......................... 34,452 8,318 14,935
Business acquisitions:
Fair value of assets acquired....................... $ 1,654 $ 5,275 $ 897
Liabilities assumed................................. -- (842) (247)
--------------------------------
Cash paid..................................... 1,654 4,433 650
Less cash acquired.................................. -- 703 --
--------------------------------
Net cash paid........................... $ 1,654 $ 3,730 $ 650
================================
Noncash investing and financing activities:
Deferred compensation............................... $ 268 $ 363 $ 5,726
Treasury stock...................................... (268) (363) (5,726)
- ------------------------------------------------------------------------------------------------
5. MERGERS AND ACQUISITIONS
During 2002, 2001 and 2000, the Company completed the following acquisitions:
i) In February 2002, the Company purchased the minority interest of a
business in India that the Company did not already own for $1.7 million.
ii) In October 2001, the Company purchased certain assets of Milufab, a
supplier of door panels for subway trains for $3.7 million.
iii) In June 2001, the Company purchased certain assets of Core Systems, a
company that provides repair billings in the rail industry for $743,000.
iv) In July 2000, the Company purchased certain assets of Iron Fireman, a
manufacturer of transportation boiler equipment for $650,000.
These 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 identifiable net assets was
approximately $2.9 million and was allocated to goodwill. Effective January 1,
2002, goodwill was no longer amortized upon adoption of SFAS No. 142 (see Note
2).
6. INVENTORY
The components of inventory, net of reserves, were:
- ----------------------------------------------------------------------
AS OF DECEMBER 31,
---------------------
(IN THOUSANDS) 2002 2001
- ----------------------------------------------------------------------
Raw materials............................... $ 56,016 $ 60,013
Work-in-process............................. 27,856 34,265
Finished goods.............................. 4,598 10,652
Total inventory....................... $ 88,470 $104,930
- ----------------------------------------------------------------------
7. PROPERTY, PLANT & EQUIPMENT
The major classes of depreciable assets are as follows:
- --------------------------------------------------------------------------------
AS OF DECEMBER 31,
--------------------------
(IN THOUSANDS) 2002 2001
- --------------------------------------------------------------------------------
Machinery and equipment........................ $ 229,813 $ 229,297
Buildings and improvements..................... 72,848 78,550
Land and improvements.......................... 5,572 10,105
Locomotive leased fleet........................ 262 236
-----------------------
PP&E..................................... 308,495 318,188
Less accumulated depreciation.................. (159,903) (150,493)
-----------------------
Total.................................... $ 148,592 $ 167,695
- -----------------------------------------------------------------------------
The estimated useful lives of property, plant and equipment are as follows.
F-10
- ----------------------------------------------------
YEARS
- ----------------------------------------------------
Land improvements...................... 10 to 20
Buildings and improvements............. 20 to 40
Machinery and equipment................ 3 to 15
Locomotive leased fleet................ 4 to 15
- ----------------------------------------------------
8. INTANGIBLES
The Company has adopted SFAS No. 142, "Goodwill and Other Intangible Assets"
effective January 1, 2002. Under its provisions, all goodwill and other
intangible assets with indefinite lives are no longer amortized under a
straight-line basis over the assets estimated useful life. Instead, they will be
subject to periodic assessments for impairment by applying a fair-value-based
test. The Company completed the Phase I and Phase II assessments and wrote down
the carrying value of goodwill by $90 million ($83.2 million for the freight
group and $6.8 million for the transit group), resulting in a non-cash after-tax
charge of $61.7 million. The fair value of these reporting units was determined
using a combination of discounted cash flow analysis and market multiples based
upon historical and projected financial information. Goodwill still remaining on
the balance sheet is $109.5 million at December 31, 2002.
As of December 31, 2002 and 2001, the Company's trademarks had a gross carrying
amount of $23,121 and accumulated amortization of $3,558 and the Company
believes this intangible has an indefinite life.
Intangible assets of the Company, other than goodwill and trademarks, consist of
the following:
- -------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31,
--------------------
(IN THOUSANDS) 2002 2001
- -------------------------------------------------------------------------------------------------------------
Patents and other, net of accumulated amortization of $39,136 and $36,859............. $ 16,124 $18,485
Covenants not to compete, net of accumulated amortization of $16,673 and $15,326...... 1,480 2,827
Intangible pension asset.............................................................. 4,357 3,473
--------------------
Total........................................................................... $ 21,961 $24,785
- -------------------------------------------------------------------------------------------------------------
In connection with the adoption of SFAS No. 142, the Company reassessed the
useful lives and the classification of its identifiable assets and determined
that they continue to be appropriate. The weighted average useful lives of
patents was 13 years and covenants not to compete was 5 years.
Amortization expense for intangible assets was $5.3 million for the year ended
December 31, 2002. Estimated amortization expense for the five succeeding years
is as follows:
- -----------------------------------------
(IN THOUSANDS)
- -----------------------------------------
2003......................... $ 4,019
2004......................... 3,903
2005......................... 2,962
2006......................... 2,297
2007......................... 2,084
- -----------------------------------------
The changes in the carrying amount of goodwill by segment for the year ended
December 31, 2002 are as follows:
- -------------------------------------------------------------------------------------------
FREIGHT TRANSIT
(IN THOUSANDS) GROUP GROUP TOTAL
- -------------------------------------------------------------------------------------------
Balance at December 31, 2001........................ $ 175,085 $ 23,703 $ 198,788
Goodwill acquired................................... 664 -- 664
Goodwill written off................................ (83,179) (6,823) (90,002)
-----------------------------------
Balance at December 31, 2002........................ $ 92,570 $ 16,880 $ 109,450
- -------------------------------------------------------------------------------------------
F-11
Actual results of continuing operations for the year ended December 31, 2002 and
pro forma results of continuing operations for 2001 and 2000 had we applied the
non-amortization provisions of SFAS No. 142 in these periods are as follows:
- -------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------------
Reported income before cumulative effect of accounting change...................... $ 16,184 $ 61,780 $ 25,393
Add: goodwill amortization, net of tax............................................. -- 4,147 4,063
Add: trademark amortization, net of tax............................................ -- 376 370
---------------------------------
Adjusted income before cumulative effect of accounting change...................... $ 16,184 $ 66,303 $ 29,826
Basic earnings per share
Reported income before cumulative effect of accounting change................ $ 0.37 $ 1.44 $ 0.59
Goodwill amortization........................................................ -- 0.09 0.09
Trademark amortization....................................................... -- 0.01 0.01
---------------------------------
Adjusted income before cumulative effect of accounting change................ $ 0.37 $ 1.54 $ 0.69
Diluted earnings per share
Reported income before cumulative effect of accounting change................ $ 0.37 $ 1.43 $ 0.59
Goodwill amortization........................................................ -- 0.09 0.09
Trademark amortization....................................................... -- 0.01 0.01
---------------------------------
Adjusted income before cumulative effect of accounting change per share...... $ 0.37 $ 1.53 $ 0.69
- -------------------------------------------------------------------------------------------------------------------------
9. LONG-TERM DEBT
Long-term debt consisted of the following:
- -----------------------------------------------------------------------------------
AS OF DECEMBER 31,
-----------------------
(IN THOUSANDS) 2002 2001
-----------------------
Revolving credit agreement due 2004..................... $ 189,700 $ 60,000
9.375% Senior notes..................................... -- 175,000
5.5% Industrial revenue bond due 2008................... 4,909 5,556
Other................................................... 542 1,314
----------------------
Total............................................. $ 195,151 $ 241,870
Less--current portion............................. 833 782
----------------------
Long-term portion....................................... $ 194,318 $ 241,088
- ----------------------------------------------------------------------------------
CREDIT AGREEMENT
In November 1999, Wabtec refinanced the then existing unsecured MotivePower
credit agreement with a consortium of commercial banks. This unsecured credit
agreement currently provides a $275 million five-year revolving credit facility
expiring in November 2004 and a 364-day $95 million convertible revolving credit
facility maturing in November 2004, with an annual renewal in November 2003. In
November 2001, the Company and the banks negotiated a reduction in the 364-day
facility from $213 million to $100 million, as a result of the $208 million, net
of tax, cash proceeds from the sale of locomotive businesses to GE. In November
2002, the Company negotiated a further reduction in the 364-day facility from
$100 million to $95 million. At December 31, 2002, the Company had available
bank borrowing capacity, net of letters of credit, of approximately $159
million.
Under the credit agreement, the Company may elect a base rate, an interest rate
based on the London Interbank Offered Rates of Interest ("LIBOR"), a cost of
funds rate and a bid rate. The base rate is the greater of LaSalle Bank National
Association's prime rate or the federal funds effective rate plus 0.5% per
annum. The LIBOR rate is based on LIBOR plus a margin that ranges from 87.5 to
200 basis points depending on the Company's consolidated total indebtedness to
cash flow ratios. The current margin is 150 basis points. The cost of funds rate
is a fluctuating interest rate based on LaSalle Bank National Association's then
cost of funds. Under the bid rate option, any participating bank may propose the
interest rate at which it will lend funds, which rate may either be a fixed rate
or a floating rate based on LIBOR.
The credit agreement limits the Company's ability to declare or pay cash
dividends and prohibits the Company from declaring or making other
distributions, subject to certain exceptions. The credit agreement contains
various other covenants and restrictions including the following limitations:
incurrence of additional indebtedness; mergers, consolidations and sales of
assets and acquisitions; additional liens; sale and leasebacks; permissible
investments, loans and advances; certain debt payments; capital expenditures;
and imposes a minimum interest expense coverage ratio and a maximum debt to cash
flow ratio.
F-12
The credit agreement contains customary events of default, including payment
defaults, failure of representations or warranties to be true in any material
respect, covenant defaults, defaults with respect to other indebtedness of the
Company, bankruptcy, certain judgments against the Company, ERISA defaults and
"change of control" of the Company.
Credit agreement borrowings bear variable interest rates indexed to the indexes
described above. The maximum credit agreement borrowings, average credit
agreement borrowings and weighted-average contractual interest rate on credit
agreement borrowings was $217.7 million, $133.7 million and 3.31%, respectively
for 2002. 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, 2002, the notional value
of interest rate swaps outstanding totaled $60 million and effectively changed
the Company's interest rate from a variable rate to a fixed rate of 8.7%. The
interest rate swap agreements mature in June 2003. 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.
9 3/8% SENIOR NOTES
In June 1995, the Company issued $100 million of 9.375% Senior Notes due in 2005
(the "1995 Notes"). In January 1999, the Company issued an additional $75
million of 9.375% Senior Notes due in 2005 (the "1999 Notes"; the 1995 Notes and
the 1999 Notes are collectively, the "Notes"). The 1999 Notes were issued at a
premium resulting in an effective rate of 8.5%. The terms of the 1995 Notes and
the 1999 Notes were substantially the same, and the 1995 Notes and the 1999
Notes were issued pursuant to indentures that were substantially the same. The
Notes were redeemed at par (face) on July 8, 2002 through the use of cash on
hand and additional borrowings under the credit agreement. This redemption
resulted in a non-cash loss of $1.9 million relating to a write-off of deferred
debt issuance costs which was recorded as interest expense (see Note 25).
INDUSTRIAL REVENUE BOND
In July 1998, a subsidiary of the Company entered into a 10 year $7.5 million
debt obligation that bears an interest rate of 5.5% and is payable in monthly
principal and interest installments. The proceeds of the bond provided financing
for the purchase of a building used in the Company's operations.
Scheduled principal repayments of outstanding loan balances required as of
December 31, 2002 are as follows:
- ---------------------------------------------------
(IN THOUSANDS)
- ---------------------------------------------------
2003................................ $ 833
2004................................ 190,723
2005................................ 590
2006................................ 309
2007................................ 277
Future years........................ 2,419
---------
Total......................... $ 195,151
- ---------------------------------------------------
F-13
10. EMPLOYEE BENEFIT PLANS
- ------------------------------------------------------------------------------------------------------------------------------------
PENSION PLANS POSTRETIREMENT PLANS
-------------------------------------------------------
AS OF OR FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES) 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
DEFINED BENEFIT PLANS
CHANGE IN BENEFIT OBLIGATION
Obligation at beginning of year...................................... $ (67,239) $ (58,409) $ (21,368) $ (20,434)
Service cost......................................................... (1,661) (1,447) (232) (240)
Interest cost........................................................ (4,638) (4,382) (1,447) (1,524)
Special termination benefits......................................... (1,241) (1,602) -- --
Actuarial loss....................................................... (965) (7,732) (2,581) (228)
Benefits paid........................................................ 5,257 4,389 1,928 1,058
Expenses paid........................................................ 326 292 -- --
Effect of currency rate changes...................................... 136 1,652 -- --
----------------------------------------------------
Obligation at end of year...................................... $ (70,025) $ (67,239) $ (23,700) $ (21,368)
----------------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year....................... $ 56,590 $ 65,710 -- --
Actual loss on plan assets........................................... (4,781) (4,186) -- --
Employer contribution................................................ 2,010 1,642 -- --
Participant contributions............................................ 50 41 -- --
Benefits paid........................................................ (5,257) (4,389) -- --
Administrative expenses.............................................. (620) (564) -- --
Liabilities assumed through an acquisition........................... -- (110) -- --
Effect of currency rate changes...................................... 121 (1,554) -- --
----------------------------------------------------
Fair value of plan assets at end of year....................... $ 48,113 $ 56,590 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
PENSION PLANS POSTRETIREMENT PLANS
------------------------------------------------------
AS OF OR FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES) 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
FUNDED STATUS
Funded status at year end............................................ $(21,854) $(10,649) (23,700) (21,368)
Unrecognized net actuarial (gain) loss............................... 25,628 14,687 3,922 1,342
Unrecognized prior service cost...................................... 4,249 3,720 34 31
Unrecognized transition obligation................................... -- -- 216 238
---------------------------------------------------
Prepaid (accrued) benefit cost................................. $ 8,023 $ 7,758 $(19,528) $(19,757)
---------------------------------------------------
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION INCLUDE:
Prepaid pension cost................................................. $ 110 $ 1,449 $ -- $ --
Reserve for postretirement and pension benefits...................... (18,738) (7,787) (19,528) (19,757)
Intangible asset..................................................... 4,357 3,473 -- --
Accumulated other comprehensive loss................................. 22,294 10,623 -- --
---------------------------------------------------
Prepaid (accrued) benefit cost................................. $ 8,023 $ 7,758 $(19,528) $(19,757)
- ---------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
PENSION PLANS POSTRETIREMENT PLANS
----------------------------------------------------------------------
2002 2001 2000 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
NET PERIODIC BENEFIT COST
Service cost.......................................... $ 1,661 $ 1,447 $ 1,492 $ 232 $ 240 $ 231
Interest cost......................................... 4,638 4,382 4,572 1,447 1,524 1,430
Expected return on plan assets........................ (5,270) (5,846) (6,708) -- -- --
Net amortization/deferrals............................ 762 680 219 19 (3) 69
------------------------------------------------------------------
Net periodic benefit (income) cost.............. $ 1,791 $ 663 $ (425) $1,698 $1,761 $1,730
------------------------------------------------------------------
ASSUMPTIONS
Discount rate......................................... 6.75% 7% 7.25% 6.75% 7.5% 7.5%
Expected long-term rate of return..................... 8.25% 9% 9% na na Na
Rate of compensation increase......................... 4% 5% 5% na na Na
- ---------------------------------------------------------------------------------------------------------------------------------
F-14
The assumed health care cost trend rate grades from an initial rate of 9% to an
ultimate rate of 4.75% in five years.
A 1% increase in the assumed health care cost trend rate will increase the
amount of expense recognized for the postretirement plans by approximately
$303,000 for 2003, and increase the accumulated postretirement benefit
obligation by approximately $3.5 million. A 1% decrease in the assumed health
care cost trend rate will decrease the amount of expense recognized for the
postretirement plans by approximately $239,000 for 2003, and decrease the
accumulated postretirement benefit obligation by approximately $2.8 million.
The composition of plan assets consists primarily of equities, corporate bonds,
governmental notes and temporary investments.
In 2002 and 2001, as a result of an early retirement package offered to certain
union employees, the Company incurred charges of approximately $1.2 million and
$1.6 million, respectively, reflected above as a special termination benefit.
Included in the above table, the aggregate benefit obligation and fair value of
plan assets for the pension plans with plan assets in excess of benefit
obligations were $2 million and $2.1 million, respectively, as of December 31,
2002 and $8.3 million and $9.7 million, respectively, as of December 31, 2001
(the total of which was pension plan benefit obligation in excess of plan
assets).
DEFINED CONTRIBUTION PLANS
Costs recognized under multi-employer and other defined contribution plans are
summarized as follows:
- ------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------
(IN THOUSANDS) 2002 2001 2000
--------------------------
Multi-employer pension and health & welfare plans................. $1,310 $ 994 $1,152
401(k) savings and other defined contribution plans............... 6,929 8,172 5,371
Employee stock ownership plan (ESOP).............................. -- -- 1,315
-------------------------
Total....................................................... $8,239 $9,166 $7,838
- -----------------------------------------------------------------------------------------------
The Company sponsors defined benefit pension plans that cover certain U.S. and
Canadian employees and provide benefits of stated amounts for each year of
service of the employee. In connection with the establishment of the Employee
Stock Ownership Plan and Trust (see Note 11) 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 funding methods, which are primarily based on the ERISA
requirements, differ from those used to recognize pension expense, which is
primarily based on the projected unit credit method applied in the accompanying
financial statements.
In addition to providing pension benefits, the Company has provided certain
unfunded postretirement health care and life insurance benefits for
substantially all U.S. employees. In conjunction with the establishment of the
ESOP in January 1995 (see Note 11), 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.
The Company also participates in a variety of defined contribution, 401(k) and
multiemployer pension, health and welfare plans. Additionally, the Company has
stock option-based benefit and other plans further described in Note 14.
11. EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST (ESOP)
Effective January 31, 1995, the Company established the Westinghouse Air Brake
Company Employee Stock Ownership Plan and Trust (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 10, the ESOP contributions were 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 were used to repay the ESOP loan's
annual debt service requirements of approximately $12 million. The Company was
obligated to contribute amounts sufficient to repay the ESOP loan. The ESOP used
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 occurred simultaneously and, for accounting purposes, offset each
other. Allocated ESOP shares through August 1, 2000 were approximately 1.1
million shares.
The Company terminated all contributions to the ESOP effective August 1, 2000
and, in 2002, allocated shares were distributed to the participants' 401(k)
accounts and the unallocated shares were returned to the Company in exchange for
forgiveness of the ESOP loan.
Also in 2000, the Company incurred a $5.1 million non-cash charge for the
write-off of the related deferred tax asset, due to its ESOP tax benefits. These
benefits, which would have been realized had the ESOP continued, will not be
utilized in future periods. This charge is reported within the caption "Income
tax expense" in the consolidated statement of operations.
F-15
12. INCOME TAXES
The components of the income from continuing operations before provision for
income taxes for the Company's domestic and foreign operations for the years
ended December 31 are provided below:
- ------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------
(IN THOUSANDS) 2002 2001 2000
- ------------------------------------------------------------------------------------------
Domestic............................................. $ 12,226 $ 10,287 $ 24,740
Foreign.............................................. 11,678 8,140 13,178
----------------------------------
Income from continuing operations.................... $ 23,904 $ 18,427 $ 37,918
- -------------------------------------------------------------------------------------------
The consolidated provision (credit) for income taxes included in the Statement
of Income for the years ended December 31 consisted of the following:
- ---------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------
(IN THOUSANDS) 2002 2001 2000
- ---------------------------------------------------------------------------------------
Current taxes
Federal.................................. $ 609 $ 28,703 $ --
State.................................... (2,421) 4,919 1,009
Foreign.................................. 2,876 3,345 8,999
------------------------------------
$ 1,064 $ 36,967 $ 10,008
Federal.................................. (14,788) 1,106 8,669
State.................................... (4,364) 287 749
Foreign.................................. (2,716) (325) 2,776
------------------------------------
(21,868) 1,068 12,194
Total provision (credit)........... $ (20,804) $ 38,035 $ 22,202
- ---------------------------------------------------------------------------------------
Consolidated income tax provision (credit) is included in the Statement of
Income as follows:
- -------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
(IN THOUSANDS) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------
Continuing operations........................................... $ 7,594 $ 4,465 $ 18,718
Income (loss) from discontinued operations...................... (59) 33,570 3,484
Cumulative effect of accounting change for goodwill............. (28,339) -- --
------------------------------------
Total provision (credit).................................. $ (20,804) $ 38,035 $ 22,202
- -------------------------------------------------------------------------------------------------------
A reconciliation of the United States federal statutory income tax rate to the
effective income tax rate on continuing operations for the years ended December
31 is provided below:
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
U. S. federal statutory rate....................................................................... 35.0% 35.0% 35.0%
State taxes........................................................................................ 3.6 3.6 3.2
Foreign............................................................................................ 0.3 0.4 2.2
Foreign tax credits................................................................................ (2.1) -- --
ESOP............................................................................................... -- -- 10.6
Research and development credit.................................................................... (3.3) (15.9) --
Other, net......................................................................................... (1.5) 1.1 (1.6)
--------------------------
Effective rate............................................................................... 32.0% 24.2% 49.4%
- ----------------------------------------------------------------------------------------------------------------------------------
F-16
Research and development credit for the year 2002 relates to current credits
claimed. Research and development credit for the year 2001 related to both
credits claimed in the current period and refund claims filed with amended
returns for the prior periods.
Components of deferred tax assets and (liabilities) were as follows:
- --------------------------------------------------------------------------
AS OF DECEMBER 31,
----------------------
(IN THOUSANDS) 2002 2001
- --------------------------------------------------------------------------
Accrued expenses and reserves................... $ 11,899 $ 13,696
Employee benefits/pension....................... 15,835 14,346
Inventory....................................... 3,878 5,911
Accrued warranty................................ 6,062 5,951
Restructuring reserve........................... 1,479 2,730
Deferred debt costs............................. -- 1,316
Net operating loss.............................. 303 3,304
Plant, equipment and intangibles................ 10,139 (21,728)
Other........................................... -- 870
---------------------
49,595 26,396
Valuation allowance............................. (8,641) (8,641)
---------------------
Net deferred tax assets................... $ 40,954 $ 17,755
- -------------------------------------------------------------------------
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The Company has
established a valuation allowance for certain net operating loss carryforwards
and for losses anticipated to produce no tax benefit. Although realization of
the net deferred tax asset is not assured, management believes that it is more
likely than not that the net deferred tax asset will be realized.
The Company's net operating loss carryforward for the year ended December 31,
2002 is $778,000, and will expire in 2010.
13. EARNINGS PER SHARE
The computation of earnings per share from continuing operations is as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
BASIC
Income from continuing operations before cumulative effect of accounting change applicable to
common shareholders.......................................................................... $ 16,310 $ 13,962 $ 19,200
Divided by:
Weighted average shares outstanding....................................................... 43,291 42,949 43,318
Basic earnings from continuing operations before cumulative effect of accounting change per
share......................................................................................... $ 0.37 $ 0.33 $ 0.45
--------------------------------
DILUTED
Income from continuing operations before cumulative effect of accounting change applicable to
common shareholders.......................................................................... $ 16,310 $ 13,962 $ 19,200
Divided by the sum of:
Weighted average shares outstanding....................................................... 43,291 42,949 43,318
Assumed conversion of dilutive stock options.............................................. 326 249 64
--------------------------------
Diluted shares outstanding.......................................................... 43,617 43,198 43,382
Diluted earnings from continuing operations before cumulative effect of accounting change per
share........................................................................................ $ 0.37 $ 0.32 $ 0.45
- -----------------------------------------------------------------------------------------------------------------------------------
Options to purchase approximately 2.1 million, 2.8 million and 4.2 million
shares of Common Stock were outstanding in 2002, 2001 and 2000, 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.
F-17
14. STOCK-BASED COMPENSATION PLANS
STOCK OPTIONS Under the 2000 Stock Incentive Plan (the 2000 Plan), the Company
may grant options to employees for an initial amount of 1.1 million shares of
Common Stock. This amount is subject to annual modification based on a formula.
Under the formula, 1.5% of total common shares outstanding at the end of the
preceding fiscal year are added to shares available for grant under the 2000
Plan. Based on the adjustment, the Company had approximately 1.5 million shares
available for 2002 grants and has available approximately 1.3 shares through the
end of fiscal 2003. The shares available for grants on any given date may not
exceed 15% of Wabtec's total common shares outstanding. Generally, the options
become exercisable over a three-year vesting period and expire ten years from
the date of grant.
As part of a long-term incentive program, in 1998, the Company granted options
to purchase up to 500,020, to certain executives under a plan that preceded the
2000 Plan. The option price is $20 per share. 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. No further grants may be made under this plan.
The Company also has a non-employee director's stock option plan under which
500,000 shares of Common Stock are reserved for issuance. Through year-end 2002,
the Company granted nonqualified stock options to non-employee directors to
purchase a total of 80,000 shares.
EMPLOYEE STOCK PURCHASE PLAN In 1998, the Company adopted an employee discounted
stock purchase plan (DSPP). The DSPP had 500,000 shares available for issuance.
Participants can purchase the Company's common stock at 85% of the lesser of
fair market value on the first or last day of each offering period. Stock
outstanding under this plan at December 31, 2002 was 172,646 shares.
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.
- -----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------
(IN THOUSANDS, EXCEPT PER SHARE) 2002 2001 2000
- -----------------------------------------------------------------------------------------------
Net income (loss)
As reported......................................... $ (45,479) $ 61,780 $ 25,393
Pro forma........................................... (47,114) 58,691 20,601
Diluted earnings (loss) per share
As reported......................................... $ (1.04) $ 1.43 $ 0.59
Pro forma........................................... (1.07) 1.36 0.47
- ----------------------------------------------------------------------------------------------
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,
-----------------------------
2002 2001 2000
- --------------------------------------------------------------------------
Dividend yield........................ .30% .30% .40%
Risk-free interest rate............... 5.6% 5.9% 5.09%
Stock price volatility................ 46.70 47.30 46.74
Expected life (years)................. 5.0 5.0 5.0
- ------------------------------------------------------------------------
The Black-Scholes option valuation model was developed for use in estimating
fair value of traded options, which are significantly different than employee
stock options. Although this valuation model is an acceptable method for use in
presenting pro forma information, because of the differences in traded options
and employee stock options, the Black-Scholes model does not necessarily provide
a single measure of the fair value of employee stock options.
F-18
A summary of the Company's stock option activity and related information for the
years indicated follows:
- -------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
---------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
- -------------------------------------------------------------------------------------------------------------------------------
Beginning of year.............................. 4,599,935 $ 13.76 5,389,397 $ 14.74 4,977,008 $ 15.14
Granted........................................ 835,500 12.15 512,212 13.22 1,310,000 10.81
Exercised...................................... (192,779) 11.60 (210,660) 10.40 (581,318) 6.20
Canceled....................................... (265,360) 15.41 (1,091,014) 19.00 (316,293) 20.82
----------------------------------------------------------------------------
End of year.................................... 4,977,296 $ 13.44 4,599,935 $ 13.76 5,389,397 $ 14.74
----------------------------------------------------------------------------
Exercisable at end of year..................... 3,771,366 3,738,562 3,621,317
Available for future grant..................... 1,343,893 1,432,980 1,150,078
Weighted average fair value of options granted
during the year............................. $ 5.20 $ 5.98 $ 5.97
- -------------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at
December 31, 2002:
- ---------------------------------------------------------------------------------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER
OUTSTANDING REMAINING AVERAGE EXERCISABLE
AS OF CONTRACTUAL EXERCISE AS OF
RANGE OF EXERCISE PRICES 12/31/02 LIFE PRICE 12/31/02
- ---------------------------------------------------------------------------------------------------------
$ 3.86-$ 8.63............................ 83,766 6.9 $ 5.16 82,100
$ 9.54-$ 9.54............................ 567,000 7.9 9.54 381,015
$ 9.88-$10.86............................ 436,550 7.0 10.63 406,969
$11.00-$12.75............................ 1,405,625 7.7 12.14 470,309
$13.18-$13.97............................ 427,189 8.5 13.25 373,807
$14.00-$14.00............................ 1,287,506 3.1 14.00 1,287,506
$14.63-$19.91............................ 159,400 6.2 17.23 159,400
$20.00-$20.00............................ 457,640 5.8 20.00 457,640
$22.38-$29.61............................ 152,620 5.7 24.78 152,620
--------------------------------------------------------
4,977,296 6.2 $ 13.44 3,771,366
- --------------------------------------------------------------------------------------------------------
RESTRICTED STOCK AWARD
In February of 2001, the Company awarded to two officers 4,920 shares of
restricted Common Stock in lieu of a cash bonus for 2000.
15. OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive loss were:
- ------------------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31,
-----------------------
(IN THOUSANDS) 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustment........................................................... $ (17,487) $ (20,652)
Unrealized losses on derivatives designated and qualified as cash flow hedges, net of tax of
$615 and $1,370................................................................................ (1,006) (2,544)
Additional minimum pension liability, net of tax of $8,695 and $4,144............................. (13,599) (6,479)
Total accumulated other comprehensive loss.................................................. $ (32,092) $ (29,675)
- -----------------------------------------------------------------------------------------------------------------------------
16. OPERATING LEASES
The Company leases office and manufacturing facilities under operating leases
with terms ranging from one to fifteen years, excluding renewal options.
The Company has sold remanufactured locomotives to various financial
institutions and leased them back under operating leases with terms from five to
20 years.
Total net rental expense charged to operations in 2002, 2001, and 2000 was $6.2
million, $5.7 million and $6.3 million, respectively. Certain of the Company's
equipment rental obligations under operating leases pertain to locomotives,
which are subleased to customers under both short-term and long-term agreements.
The amounts above are shown net of sublease rentals of $2.8 million, $2.8
million and $4 million for the years 2002, 2001 and 2000, respectively.
F-19
Future minimum rental payments under operating leases with remaining
noncancelable terms in excess of one year are as follows:
- ---------------------------------------------------------------------
REAL SUBLEASE
(IN THOUSANDS) ESTATE EQUIPMENT RENTALS TOTAL
- ---------------------------------------------------------------------
2003................. $ 4,374 $ 4,802 $ (2,833) $ 6,343
2004................. 3,312 4,542 (2,463) 5,391
2005................. 2,904 4,246 (2,431) 4,719
2006................. 2,843 3,913 (2,310) 4,446
2007................. 2,733 1,996 (1,535) 3,194
2008 and after....... 15,850 1,988 (1,535) 16,303
- --------------------------------------------------------------------
17. WARRANTIES
The following table reconciles the changes in the Company's product warranty
reserve as of and for the year ended December 31, 2002.
- ----------------------------------------------------------------------------------------
(IN THOUSANDS)
- ----------------------------------------------------------------------------------------
Balance at December 31, 2001............................................. $ 15,373
Accrual for warranty expensed during the year ended December 31, 2002.... 17,625
Warranty expenditures made during the year............................... (15,591)
---------
Balance at December 31, 2002............................................. $ 17,407
- ---------------------------------------------------------------------------------------
18. STOCKHOLDERS' AGREEMENTS
As of December 31, 2002, the approximate ownership interests in the Company's
Common Stock are: management (10%), the investors consisting of Vestar Equity
Partners, L.P., Charlesbank Equity Fund II, Limited Partnership, and American
Industrial Partners Capital Fund II, L.P. (13%), and all others including public
shareholders (77%).
A Stockholders Agreement exists between the Company and Vestar, Charlesbank, and
American Industrial Partners referred to above that provides for, among other
things, the composition of the Board of Directors as long as certain minimum
stock ownership percentages are maintained, and rights to request the
registration of the shares.
19. 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,
2002 and 2001 there was no preferred stock issued or outstanding.
20. COMMITMENTS AND CONTINGENCIES
The Company is 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, Inc. ("ASI"), has indemnified the Company for
certain items including, among others, environmental claims. The indemnification
provisions of the agreement expired at various dates through 2000, except for
those claims, which were timely asserted, which continue until resolved. If ASI
was unable to honor or meet these indemnifications, the Company would be
responsible for such items. In the opinion of management, ASI currently has the
ability to meet its indemnification obligations.
The Company 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
unreimbursed costs, if any, associated with the cleanup activities at this site
will not be material, and as a result of the indemnification provisions referred
to above and an insurance policy from Rocky Mountain International Insurance
Ltd., which has acknowledged coverage and is currently paying on the claim, the
Company has not established a reserve for such costs.
F-20
The Company's and its affiliates' operations do not use and their products do
not contain any asbestos. Asbestos actions have been filed against the Company
and certain of its affiliates. Consistent with the experience of others, the
number of claims have increased in recent years.
However, it is important to note that these asbestos claims involve products
sold prior to the 1990 formation of the Company. The Company and its affiliates
have not incurred any significant costs related to these asbestos claims. The
claims are covered by insurance or are subject to indemnity from the companies
who manufactured or sold the products in question. Management believes that
these claims will not be material; and accordingly, the financial statements do
not reflect any costs or reserves for such claims.
BOISE, IDAHO
The Company is subject to a RCRA Part B Closure Permit ("the Permit") issued by
the Environmental Protection Agency (EPA) and the Idaho Department of Health and
Welfare, Division of Environmental Quality relating to the monitoring and
treatment of groundwater contamination on, and adjacent to, the MotivePower
Industries (Boise, Idaho) facility. In compliance with the Permit, the Company
has completed the first phase of an accelerated plan for the treatment of
contaminated groundwater, and continues onsite and offsite monitoring for
hazardous constituents. The Company has accrued $793,000 at December 31, 2002,
the estimated remaining costs for remediation. The Company was in compliance
with the Permit at December 31, 2002.
MOUNTAINTOP, PENNSYLVANIA
Foster Wheeler Energy Corporation ("FWEC") the seller of the Mountaintop
property to the predecessor of one of the Company's subsidiaries in 1989, agreed
to indemnify the Company's predecessor and its successors and assigns against
certain identified environmental liabilities for which FWEC executed a Consent
Order Agreement with the Pennsylvania Department of Environmental Protection
(PADEP) and EPA. Management believes that this indemnification arrangement is
enforceable for the benefit of the Company and that FWEC has the financial
resources to honor its obligations under this indemnification arrangement.
MATTOON, ILLINOIS
Prior to the Company's acquisition of Young Radiator, Young agreed to clean up
alleged contamination on a prior production site in Mattoon, Ill. The Company is
in the process of remediating the site with the state of Illinois and now
estimates the costs to remediate the site to be approximately $543,000, which
has been accrued at December 31, 2002.
RACINE, WISCONSIN
Young ceased manufacturing operations at its Racine facility in the early
1990's. Investigations prior to the acquisition of Young revealed some levels of
contamination on the Racine property and the Company has begun remediation
efforts. The Company has initiated a comprehensive site evaluation with the
state of Wisconsin and believes this governing body is generally in agreement
with the findings. The Company has accrued approximately $476,000 at December
31, 2002 as its estimate of remaining restoration costs.
GETS-GS
On November 3, 2000, the Company settled a suit brought against it in 1999 by
GE-Harris Railway Electronics, L.L.C. and GE-Harris Railway Electronics
Services, L.L.C. (collectively "GE-Harris"). On September 20, 2002, a motion in
that lawsuit was filed by the successor to GE Harris, GE Transportation Services
Global Signaling, L.L.C. ("GETS-GS"). The motion by GETS-GS contends that the
Company is acting beyond authority granted in the parties' November 2000
settlement and license agreement and in contempt of the consent order that
concluded the suit at that time. In support of its motion, GETS-GS points
principally to sales and offers to sell certain railway brake equipment,
including distributed power equipment, to Australian customers. GETS-GS is
seeking substantial money damages and has claimed a significant business loss.
This matter is in discovery and a hearing on GETS-GS' motion is scheduled for
May 13, 2003. The Company has other contingent obligations relating to certain
sales leaseback transactions for which reserves have been established. 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.
F-21
21. SEGMENT INFORMATION
Wabtec has two reportable segments--the Freight Group and the Transit Group. The
key factors used to identify these reportable segments are the organization and
alignment of the Company's internal operations, the nature of the products and
services and customer type. The business segments are:
The Freight Group manufactures products and provides services geared to the
production and operation of freight cars and locomotives, including braking
control equipment, engines, on-board electronic components and train coupler
equipment. Revenues are derived from OEM sales and locomotive overhauls,
aftermarket sales and from freight car repairs and services. All of the assets
sold to GETS were part of the Freight Group.
The Transit Group consists of products for passenger transit vehicles (typically
subways, rail and buses) that include braking, coupling and monitoring systems,
climate control and door equipment that are engineered to meet individual
customer specifications. Revenues are derived from OEM and aftermarket sales as
well as from repairs and services.
The Company evaluates its business segments' operating results based on income
from operations before merger and restructuring charges. Corporate activities
include general corporate expenses, elimination of intersegment transactions,
interest income and expense and other unallocated charges. Since certain
administrative and other operating expenses and other items have not been
allocated to business segments, the results in the below tables are not
necessarily a measure computed in accordance with generally accepted accounting
principles and may not be comparable to other companies.
F-22
Segment financial information for 2002 is as follows:
- ---------------------------------------------------------------------------------------------------------------------------------
FREIGHT TRANSIT CORPORATE MERGER AND
(IN THOUSANDS) GROUP GROUP ACTIVITIES RESTRUCTURING TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
Sales to external customers................................. $ 443,443 $ 252,752 -- -- $ 696,195
Intersegment sales/(elimination)............................ 8,849 567 $ (9,416) --
-----------------------------------------------------------------
Total sales........................................... $ 452,292 $ 253,319 $ (9,416) -- $ 696,195
-----------------------------------------------------------------
Income from operations...................................... $ 48,186 $ 22,237 $(22,889) -- $ 47,534
Interest expense and other.................................. -- -- (23,630) -- (23,630)
-----------------------------------------------------------------
Income from continuing operations before income taxes
and cumulative effect of accounting change......... $ 48,186 $ 22,237 $(46,519) -- $ 23,904
-----------------------------------------------------------------
Depreciation and amortization............................... $ 17,166 $ 5,761 $ 2,586 -- $ 25,513
Capital expenditures........................................ 9,134 3,757 1,246 -- 14,137
Segment assets.............................................. 375,032 142,764 71,069 -- 588,865
- ---------------------------------------------------------------------------------------------------------------------------------
Segment financial information for 2001 is as follows:
- ----------------------------------------------------------------------------------------------------------------------------------
FREIGHT TRANSIT CORPORATE MERGER AND
(IN THOUSANDS) GROUP GROUP ACTIVITIES RESTRUCTURING TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
Sales to external customers................................. $ 490,261 $ 293,437 -- -- $ 783,698
Intersegment sales/(elimination)............................ 10,160 788 $ (10,948) -- --
------------------------------------------------------------------
Total sales........................................... $ 500,421 $ 294,225 $ (10,948) -- $ 783,698
------------------------------------------------------------------
Income from operations...................................... $ 58,989 $ 32,390 $ (33,598) $ (3,723) $ 54,058
Interest expense and other.................................. -- -- (35,631) -- (35,631)
------------------------------------------------------------------
Income from continuing operations before income taxes
and cumulative effect of accounting change......... $ 58,989 $ 32,390 $ (69,229) $ (3,723) $ 18,427
------------------------------------------------------------------
Depreciation and amortization............................... $ 23,234 $ 7,337 $ 2,490 -- $ 33,061
Capital expenditures........................................ 14,048 4,469 2,157 -- 20,674
Segment assets.............................................. 477,983 175,028 76,941 -- 729,952
- ----------------------------------------------------------------------------------------------------------------------------------
Segment financial information for 2000 is as follows:
- ----------------------------------------------------------------------------------------------------------------------------------
FREIGHT TRANSIT CORPORATE MERGER AND
(IN THOUSANDS) GROUP GROUP ACTIVITIES RESTRUCTURING TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
Sales to external customers................................ $ 532,889 $ 278,289 -- -- $ 811,178
Intersegment sales/(elimination)........................... 10,189 570 $ (10,759) -- --
------------------------------------------------------------------
Total sales.......................................... $ 543,078 $ 278,859 $ (10,759) -- $ 811,178
------------------------------------------------------------------
Income from operations..................................... $ 87,919 $ 27,440 $ (17,353) $ (20,215) $ 77,791
Interest expense and other................................. -- -- (39,873) -- (39,873)
------------------------------------------------------------------
Income from continuing operations before income taxes
and cumulative effect of accounting change........ $ 87,919 $ 27,440 $ (57,226) $ (20,215) $ 37,918
------------------------------------------------------------------
Depreciation and amortization.............................. $ 21,896 $ 7,971 $ 2,549 -- $ 32,416
Capital expenditures....................................... 13,679 6,742 2,752 -- 23,173
Segment assets............................................. 734,378 197,487 52,182 -- 984,047
- ----------------------------------------------------------------------------------------------------------------------------------
In 2001 and 2000, $530,000 and $15.2 million of the above merger and
restructuring costs related to the Freight Group. In 2001 and 2000, $2 million
and $235,000 of the above merger and restructuring costs related to the Transit
Group.
The following geographic area data include net sales based on product shipment
destination and long-lived assets, which consist of plant, property and
equipment, net of depreciation, resident in their respective countries.
- ----------------------------------------------------------------------------------------------------------------------------------
NET SALES LONG-LIVED ASSETS
---------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
(IN THOUSANDS) 2002 2001 2000 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
United States............................... $ 525,724 $ 582,655 $ 620,094 $ 99,292 $ 115,583 $ 146,576
Canada...................................... 50,035 73,177 92,001 27,889 32,963 40,136
Mexico...................................... 11,487 8,693 8,911 10,979 10,584 19,852
Other international......................... 108,949 119,173 90,172 10,432 8,565 8,081
---------------------------------------------------------------------------------
Total................................. $ 696,195 $ 783,698 $ 811,178 $148,592 $ 167,695 $ 214,645
- ----------------------------------------------------------------------------------------------------------------------------------
Export sales from the Company's United States operations were $61.9 million,
$90.3 million and $98.9 million for the years ending December 31, 2002, 2001 and
2000, respectively. The following data reflects income (loss) from operations,
including merger and
F-23
restructuring related charges by major geographic area, attributed to the
Company's operations within each of the following countries or regions.
- ------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS
------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------
(IN THOUSANDS) 2002 2001 2000
- ------------------------------------------------------------------------
United States.................. $ 34,554 $ 41,007 $ 54,331
Canada......................... 496 6,412 17,432
Mexico......................... (325) (2,467) 168
Other international............ 12,809 9,106 5,860
------------------------------------
Total.................... $ 47,534 $ 54,058 $ 77,791
- ------------------------------------------------------------------------
22. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments approximate
their related carrying values, except for the following:
- -------------------------------------------------------------------------------------
2002 2001
-------------------------------------------------
CARRY FAIR CARRY
(IN THOUSANDS) VALUE VALUE VALUE FAIR VALUE
- -------------------------------------------------------------------------------------
9.375% Senior Notes.............. -- -- $ (175,000) $ (173,250)
Interest rate swaps.............. $ (1,756) $ (1,756) (3,914) (3,914)
- ------------------------------------------------------------------------------------
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 9)
were based on dealer quotes and represent the estimated amount the Company would
pay to the counterparty to terminate the swap agreements.
23. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
(IN THOUSANDS, EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER
- ----------------------------------------------------------------------------------------------------------------------------------
2002
Net sales................................................................. $ 177,325 $ 179,808 $ 161,422 $ 177,640
Gross profit.............................................................. 44,780 45,356 43,284 46,051
Operating income.......................................................... 10,467 13,300 11,170 12,597
Income from continuing operations before taxes............................ 4,044 7,329 5,910 6,621
Income (loss) from discontinued operations (net of tax)................... (405) 57 48 174
Net income (loss)......................................................... (59,440) 4,821 3,890 5,250
Basic earnings from continuing operations per common share................ $ 0.06 $ 0.11 $ 0.09 $ 0.12
Diluted earnings from continuing operations per common share.............. $ 0.06 $ 0.11 $ 0.09 $ 0.12
2001
Net sales................................................................. $ 215,305 $ 194,117 $ 185,854 $ 188,422
Gross profit.............................................................. 61,413 53,577 47,782 47,154
Operating income.......................................................... 24,493 18,574 10,932 59
Income (loss) from continuing operations before taxes..................... 12,608 9,618 2,821 (6,620)
Income from discontinued operations (net of tax).......................... 2,292 1,583 2,576 41,367
Net income................................................................ 10,362 7,961 6,393 37,064
Basic earnings (loss) from continuing operations per common share......... $ 0.19 $ 0.15 $ 0.09 $ (0.10)
Diluted earnings (loss) from continuing operations per common share....... $ 0.19 $ 0.15 $ 0.09 $ (0.10)
- ----------------------------------------------------------------------------------------------------------------------------------
F-24
Earnings per share for the year are different than the sum of the quarterly
earnings per share due to rounding.
The Company recorded a cumulative effect of accounting change for goodwill, net
of tax, of $61.7 million, or $1.41 in the first quarter of 2002. In the fourth
quarter of 2002, the Company recorded a $772,000, or $0.02, per diluted share
tax benefit due to research and development credits and the utilization of
foreign tax credits. Also in the fourth quarter of 2002, the Company's vacation
policy was changed so that employees that leave the Company are entitled to a
pro rata portion of their vacation for that year instead of their entire
vacation for the year. This change resulted in income of $789,000, net of tax,
or $0.02 per diluted share.
The Company recorded restructuring-related costs of approximately $854,000 or
$0.01 in the first quarter of 2001, $1.1 million or $0.02, $1.6 million or
$0.02, and $192,000 or $0.00, net of tax, per diluted share, in the second,
third and fourth quarters of 2001, respectively. The Company also recorded a $2
million, or $0.05, per diluted share research and development tax credit in the
third quarter of 2001. In the fourth quarter of 2001, the Company recorded a
$9.3 million, or $0.14, net of tax, per diluted share charge for asset
writedowns, consisting primarily of an asset impairment related to the
locomotive lease fleet of $5.2 million, a writeoff of $1.8 million of an
investment in Argentina and a $1.5 million writedown of a facility to its
estimated realizable value, a $1.7 million, or $0.03, net of tax, per diluted
share charge for severance related to a ten percent salary headcount reduction,
and a $685,000, or $0.01, net of tax, per diluted share gain on the sale of
unused facilities.
24. MERGER AND RESTRUCTURING CHARGE
In 2001, the Company completed a merger and restructuring plan with charges
totaling $71 million pre-tax, with approximately $2 million of the charge
expensed in 2001, $20 million in 2000 and $49 million in 1999. The plan involved
the elimination of duplicate facilities and excess capacity, operational
realignment and related workforce reductions, and the evaluation of certain
assets as to their perceived ongoing benefit to the Company.
As of December 31, 2002, $647,000 of the merger and restructuring charge was
still remaining as accrued on the balance sheet as part of other accrued
liabilities. The table below identifies the significant components of the charge
and reflects the accrual balance at that date.
- -------------------------------------------------------------------------------------------------
LEASE
IMPAIRMENTS
AND ASSET
(IN THOUSANDS) WRITEDOWNS SEVERANCE OTHER TOTAL
- -------------------------------------------------------------------------------------------------
Beginning balance, January 1, 2002............. $ 2,458 $ 525 $ 169 $ 3,152
Amounts paid in 2002........................... (1,811) (525) (169) (2,505)
---------------------------------------------
Balance at December 31, 2002................... $ 647 $ -- $ -- $ 647
- -------------------------------------------------------------------------------------------------
The lease impairment charges and asset writedowns are associated with the
Company's closing of several plants, the consolidation of the corporate
headquarters, and the Company's evaluation of certain assets where projected
cash flows from such assets over their remaining lives are estimated to be less
than their carrying values.
The Company began and completed a new restructuring plan for the Transit rail
business in 2001. The restructuring plan involved operational realignment and
related workforce reductions. The charges in 2001 for the restructuring plan
move totaled $2 million pre-tax. 2002 operations still included much of the cost
of integration in normal operations.
The $2 million charge in 2001 included costs associated with relocating several
production operations from Chicago to Montreal, including severance costs for
approximately 103 employees.
25. EARLY EXTINGUISHMENT OF DEBT
In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13 and Technical Corrections," which, among other things,
eliminates the requirement to report certain extinguishments of debt as
extraordinary items. As a result, gains and losses from extinguishment of debt
should be classified as extraordinary items only if they meet the criteria of
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The
provisions of this Statement are required to be adopted by the Company on
January 1, 2003. In connection with the anticipated sale of $150 million of
senior notes in July 2003, the Company adopted SFAS No. 145 effective January 1,
2003. Accordingly, the loss on extinguishment of debt of approximately $1.2
million (net of tax provision of approximately $648,000) in 2002 and similar
transactions in prior years, all previously recorded as extraordinary items,
have been reclassified as interest expense in the accompanying consolidated
statements of operations.
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