Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 1-13782

 

 

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   25-1615902

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1001 Air Brake Avenue

Wilmerding, PA

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

 

 

412-825-1000

(Registrant’s telephone number, including area code)

N/A

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

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

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

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

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

 

Class

  

Outstanding at August 3, 2010

Common Stock, $.01 par value per share    47,923,796 shares

 

 

 


Table of Contents

WESTINGHOUSE AIR BRAKE

TECHNOLOGIES CORPORATION

June 30, 2010

FORM 10-Q

TABLE OF CONTENTS

 

         Page
  PART I—FINANCIAL INFORMATION   

Item 1.

  Financial Statements   
 

Condensed Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009

   3
 

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2010 and 2009

   4
 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009

   5
 

Notes to Condensed Consolidated Financial Statements

   6

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations    26

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk    35

Item 4.

  Controls and Procedures    36
  PART II—OTHER INFORMATION   

Item 1.

  Legal Proceedings    37

Item 1A.

  Risk Factors    37

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds    37

Item 6.

  Exhibits    38
  Signatures    39

 

2


Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

In thousands, except shares and par value

   Unaudited
June 30,
2010
    December 31,
2009
 
Assets     

Current Assets

    

Cash and cash equivalents

   $ 166,509      $ 188,659   

Accounts receivable

     275,201        208,260   

Inventories

     239,439        239,333   

Deferred income taxes

     36,964        40,533   

Other current assets

     13,527        12,724   
                

Total current assets

     731,640        689,509   

Property, plant and equipment

     447,609        451,996   

Accumulated depreciation

     (255,132     (250,289
                

Property, plant and equipment, net

     192,477        201,707   

Other Assets

    

Goodwill

     497,902        482,978   

Other intangibles, net

     184,366        187,630   

Deferred income taxes

     8,140        4,964   

Other noncurrent assets

     17,659        19,047   
                

Total other assets

     708,067        694,619   
                

Total Assets

   $ 1,632,184      $ 1,585,835   
                
Liabilities and Shareholders’ Equity     

Current Liabilities

    

Accounts payable

   $ 123,764      $ 119,895   

Customer deposits

     35,894        44,251   

Accrued compensation

     33,190        30,423   

Accrued warranty

     20,214        20,025   

Current portion of long-term debt

     38,201        32,741   

Other accrued liabilities

     59,190        58,013   
                

Total current liabilities

     310,453        305,348   

Long-term debt

     369,743        359,039   

Reserve for postretirement and pension benefits

     60,842        64,078   

Deferred income taxes

     53,930        52,156   

Accrued warranty

     12,320        9,182   

Other long term liabilities

     17,956        17,119   
                

Total liabilities

     825,244        806,922   

Shareholders’ Equity

    

Preferred stock, 1,000,000 shares authorized, no shares issued

     —          —     

Common stock, $.01 par value; 100,000,000 shares authorized: 66,174,767 shares issued and 47,964,756 and 47,688,695 outstanding at June 30, 2010 and December 31, 2009, respectively

     662        662   

Additional paid-in capital

     333,280        329,707   

Treasury stock, at cost, 18,210,011 and 18,486,072 shares, at June 30, 2010 and December 31, 2009, respectively

     (288,668     (289,137

Retained earnings

     826,847        766,221   

Accumulated other comprehensive loss

     (67,985     (30,546
                

Total Westinghouse Air Brake Technologies Corporation shareholders’ equity

     804,136        776,907   

Non-controlling interest

     2,804        2,006   
                

Total shareholders’ equity

     806,940        778,913   
                

Total Liabilities and Shareholders’ Equity

   $ 1,632,184      $ 1,585,835   
                

The accompanying notes are an integral part of these statements.

 

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Table of Contents

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Unaudited
Three Months Ended
June 30
    Unaudited
Six Months Ended
June 30
 

In thousands, except per share data

   2010     2009     2010     2009  

Net sales

   $ 374,137      $ 334,013      $ 738,064      $ 711,973   

Cost of sales

     (260,673     (242,350     (516,211     (513,135
                                

Gross profit

     113,464        91,663        221,853        198,838   

Selling, general and administrative expense

     (51,243     (42,112     (95,874     (80,665

Engineering expense

     (10,425     (10,765     (21,120     (21,324

Amortization expense

     (2,144     (2,059     (4,031     (4,374
                                

Total operating expenses

     (63,812     (54,936     (121,025     (106,363

Income from operations

     49,652        36,727        100,828        92,475   

Other income and expenses

        

Interest expense, net

     (4,092     (3,525     (8,004     (8,461

Other income (expense), net

     1,086        (134     365        255   
                                

Income from operations before income taxes

     46,646        33,068        93,189        84,269   

Income tax expense

     (15,435     (2,232     (31,614     (20,767
                                

Net income attributable to Wabtec shareholders

   $ 31,211      $ 30,836      $ 61,575      $ 63,502   
                                

Earnings Per Common Share

        

Basic

        

Net income attributable to Wabtec shareholders

   $ 0.65      $ 0.65      $ 1.29      $ 1.33   
                                

Diluted

        

Net income attributable to Wabtec shareholders

   $ 0.65      $ 0.64      $ 1.28      $ 1.32   
                                

Weighted average shares outstanding

        

Basic

     47,725        47,487        47,539        47,594   

Diluted

     48,089        48,013        47,911        48,088   
                                

The accompanying notes are an integral part of these statements.

 

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Table of Contents

WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Unaudited
Six Months Ended
June 30,
 

In thousands

   2010     2009  

Operating Activities

    

Net income attributable to Wabtec shareholders

   $ 61,575      $ 63,502   

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

    

Depreciation and amortization

     17,176        18,225   

Stock-based compensation expense

     5,640        1,414   

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

     207        (2,690

Excess income tax benefits from exercise of stock options

     (2,066     (161

Changes in operating assets and liabilities

    

Accounts receivable

     (66,263     27,680   

Inventories

     (5,496     18,445   

Accounts payable

     5,024        (48,694

Accrued income taxes

     6,633        (11,452

Accrued liabilities and customer deposits

     (2,845     (27,703

Other assets and liabilities

     9,877        (550
                

Net cash provided by operating activities

     29,462        38,016   

Investing Activities

    

Purchase of property, plant and equipment and other

     (7,007     (8,711

Proceeds from disposal of property, plant and equipment

     55        3,651   

Acquisitions of business, net of cash acquired

     (39,943     —     

Acquisition purchase price adjustment

     2,368        (4,743
                

Net cash used for investing activities

     (44,527     (9,803

Financing Activities

    

Proceeds from debt

     166,400        72,000   

Payments of debt

     (150,230     (107,693

Proceeds from exercise of stock options and other benefit plans

     2,647        123   

Stock repurchase

     (6,311     (19,654

Excess income tax benefits from exercise of stock options

     2,066        161   

Cash dividends ($0.02 per share for the six months ended June 30, 2010 and 2009)

     (949     (962
                

Net cash provided by (used for) financing activities

     13,623        (56,025

Effect of changes in currency exchange rates

     (20,708     7,340   
                

Decrease in cash

     (22,150     (20,472

Cash, beginning of year

     188,659        141,805   
                

Cash, end of period

   $ 166,509      $ 121,333   
                

The accompanying notes are an integral part of these statements.

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010 (UNAUDITED)

1. BUSINESS

Wabtec is one of the world’s largest providers of value-added, technology-based products and services for the global rail industry. Our products are found on virtually all U.S. locomotives, freight cars and passenger transit vehicles, as well as in approximately 100 countries throughout the world. Our products enhance safety, improve productivity and reduce maintenance costs for customers, and many of our core products and services are essential in the safe and efficient operation of freight rail and passenger transit vehicles. Wabtec is a global company with operations in 17 countries. In the first six months of 2010, about 48% of the Company’s revenues came from customers outside the U.S.

2. ACCOUNTING POLICIES

Basis of Presentation The unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles and the rules and regulations of the Securities and Exchange Commission and include the accounts of Wabtec and its majority owned subsidiaries. These condensed interim financial statements do not include all of the information and footnotes required for complete financial statements. In Management’s opinion, these financial statements reflect all adjustments of a normal, recurring nature necessary for a fair presentation of the results for the interim periods presented. Results for these interim periods are not necessarily indicative of results to be expected for the full year.

The Company operates on a four-four-five week accounting quarter, and accordingly, the quarters end on or about March 31, June 30, September 30 and December 31.

The notes included herein should be read in conjunction with the audited consolidated financial statements included in Wabtec’s Annual Report on Form 10-K for the year ended December 31, 2009. The December 31, 2009 information has been derived from the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

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

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

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

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

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010 (UNAUDITED)

 

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

Certain pre-production costs relating to long-term production and supply contracts have been deferred and will be recognized over the life of the contracts. Deferred pre-production costs were $11.1 million and $12.1 million at June 30, 2010 and December 31, 2009, respectively.

Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from the estimates. On an ongoing basis, management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.

Stock-Based Compensation The Company recognizes compensation expense for stock-based compensation based on the grant date fair value ratably over the requisite service period following the date of grant.

Financial Derivatives and Hedging Activities The Company has entered into foreign currency forward contracts to reduce the impact of changes in currency exchange rates. Forward contracts are agreements with a counterparty to exchange two distinct currencies at a set exchange rate for delivery on a set date at some point in the future. There is no exchange of funds until the delivery date. At the delivery date the Company can either take delivery of the currency or settle on a net basis.

At June 30, 2010, the Company had forward contracts for the sale of South African Rand (ZAR) and the purchase of U.S. Dollars (USD). The Company concluded that these foreign currency forward contracts qualify for cash flow hedge accounting which permits the recording of the fair value of the forward contract and corresponding adjustment to other comprehensive income (loss), net of tax, on the balance sheet. As of June 30, 2010, the Company had forward contracts with a notional value of 8.9 million ZAR (or $1.2 million USD), with an average exchange rate of 7.72 ZAR per $1 USD, resulting in the recording of a current asset and a corresponding offset in accumulated other comprehensive loss, net of tax, which was not material.

To reduce the impact of interest rate changes on a portion of its variable-rate debt, the Company entered into interest rate swaps which effectively convert a portion of the debt from variable to fixed-rate borrowings during the term of the swap contracts. The Company is exposed to credit risk in the event of nonperformance by the counterparties. However, since only the cash interest payments are exchanged, exposure is significantly less than the notional amount. The counterparties are large financial institutions and the Company does not anticipate nonperformance. The Company concluded that these interest rate swap agreements qualify for cash flow hedge accounting which permits the recording of the fair value of the interest rate swap agreements and corresponding adjustment to other comprehensive income (loss), net of tax, on the balance sheet. As of June 30, 2010, the Company had interest rate swap agreements with a notional value of $137.0 million and which effectively changed the Company’s interest rate on bank debt at June 30, 2010 from a variable rate to a fixed rate of 2.28%. The interest rate swap agreements mature at various times through December 2012. As of June 30, 2010, the Company recorded a current liability of $2.0 million and a corresponding offset in accumulated other comprehensive loss of $1.2 million, net of tax.

Foreign Currency Translation Assets and liabilities of foreign subsidiaries, except for the Company’s Mexican operations whose functional currency is the U.S. Dollar, are translated at the rate of exchange in effect on the balance sheet date while income and expenses are translated at the weighted average rates of exchange

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010 (UNAUDITED)

 

prevailing during the year. Foreign currency gains and losses resulting from transactions, and the translation of financial statements are recorded in the Company’s consolidated financial statements based upon the provisions of ASC 830 “Foreign Currency Matters.” The effects of currency exchange rate changes on intercompany transactions and balances of a long-term investment nature are accumulated and carried as a component of shareholders’ equity. The effects of currency exchange rate changes on transactions that are denominated in a currency other than an entity’s functional currency are charged or credited to earnings. Foreign exchange transaction gains recognized in other income (expense), net were $893,000 for the three months ended June 30, 2010 and foreign exchange transaction losses recognized in other income (expense), net were $427,000 for the three months ended June 30, 2009. Foreign exchange transaction gains recognized in other income (expense), net were $296,000 and $223,000 for the six months ended June 30, 2010 and 2009, respectively.

Noncontrolling Interests On January 1, 2009, the Company adopted the amendment under ASC 810 “Consolidation” related to noncontrolling interests in consolidated financial statements. This amendment establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The amendment clarifies that a noncontrolling interest should be reported as equity in the consolidated financial statements and requires net income attributable to both the parent and the noncontrolling interest to be disclosed separately on the face of the consolidated statement of income. The presentation and disclosure requirements of the amendment require retrospective application to all prior periods presented. In accordance with ASC 810, the Company classified noncontrolling interests as equity on our condensed consolidated balance sheets as of June 30, 2010 and December 31, 2009. Net income attributable to noncontrolling interests for the three and six months ended June 30, 2010 and 2009 was not material.

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

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

In thousands

   2010     2009     2010     2009  

Net income attributable to Wabtec shareholders

   $ 31,211      $ 30,836      $ 61,575      $ 63,502   

Foreign currency translation (loss) gain

     (27,787     23,157        (37,715     11,592   

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

     37        (33     71        (114

Unrealized loss on interest rate swap contracts, net of tax

     (722     (31     (1,173     (225

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

     1,083        379        1,378        740   
                                

Total comprehensive income

   $ 3,822      $ 54,308      $ 24,136      $ 75,495   
                                

The components of accumulated other comprehensive loss were:

 

In thousands

   June 30,
2010
    December 31,
2009
 

Foreign currency translation (loss) gain

   $ (24,815   $ 12,900   

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

     1        (70

Unrealized loss on interest rate swap contracts, net of tax

     (1,211     (38

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

     (41,960     (43,338
                

Total accumulated comprehensive loss

   $ (67,985   $ (30,546
                

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010 (UNAUDITED)

 

3. ACQUISITIONS AND DISCONTINUED OPERATIONS

On July 28, 2010, subsequent to the close of our accounting quarter, the Company acquired G&B Specialties (“G&B”), a manufacturer of railroad track and signaling products, for a net purchase price of approximately $35.0 million. G&B will operate as a business of Wabtec’s Freight Group.

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

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

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

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

 

     Xorail     Unifin  

In thousands

   March 12,
2010
    October 1,
2009
 

Current assets

   $ 11,358      $ 8,769   

Property, plant & equipment

     2,905        5,552   

Goodwill and other intangible assets

     34,803        88,308   

Other assets

     226        4,027   
                

Total assets acquired

     49,292        106,656   

Total liabilities assumed

     (9,349     (13,731
                

Net assets acquired

   $ 39,943      $ 92,925   
                

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

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010 (UNAUDITED)

 

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

 

In thousands

   Three Months Ended
June 30, 2009
   Six Months Ended
June 30, 2010
   Six Months Ended
June 30, 2009

Net sales

   $ 353,670    $ 746,096    $ 751,352

Gross profit

     101,011      225,774      217,314

Net income attributable to Wabtec shareholders

     36,784      61,877      72,808

Diluted earnings per share

        

As Reported

   $ 0.64    $ 1.28    $ 1.32

Pro forma

   $ 0.76    $ 1.29    $ 1.51

4. INVENTORIES

The components of inventory, net of reserves, were:

 

In thousands

   June 30,
2010
   December 31,
2009

Raw materials

   $ 98,484    $ 98,196

Work-in-process

     84,614      87,155

Finished goods

     56,341      53,982
             

Total inventories

   $ 239,439    $ 239,333
             

5. INTANGIBLES

Goodwill was $497.9 million and $483.0 million at June 30, 2010 and December 31, 2009, respectively. The adjustment of $2.4 million to Goodwill for preliminary purchase allocation is due to Unifin and Ricon. The change in the carrying amount of goodwill by segment for the six months ended June 30, 2010 is as follows:

 

In thousands

   Freight
Group
   Transit
Group
    Total  

Balance at December 31, 2009

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

Adjustment to preliminary purchase allocation

     —        (2,368     (2,368

Acquisition

     28,906      —        $ 28,906   

Foreign currency impact

     1,061      (12,675     (11,614
                       

Balance at June 30, 2010

   $ 341,197    $ 156,705      $ 497,902   
                       

As of June 30, 2010 and December 31, 2009, the Company’s trademarks had a net carrying amount of $93.1 million and $96.0 million, respectively, and the Company believes these intangibles have an indefinite life. Intangible assets of the Company, other than goodwill and trademarks, consist of the following:

 

In thousands

   June 30,
2010
   December 31,
2009

Patents and other, net of accumulated amortization of $26,845 and $26,135

   $ 12,058    $ 10,832

Customer relationships, net of accumulated amortization of $9,899 and $7,122

     79,182      80,806
             

Total

   $ 91,240    $ 91,638
             

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010 (UNAUDITED)

 

The weighted average remaining useful life of patents, customer relationships and intellectual property were eight years, 17 years and 17 years, respectively. Amortization expense for intangible assets was $2.1 million and $4.0 million for the three and six months ended June 30, 2010, respectively and $2.1 million and $4.4 million for the three and six months ended June 30, 2009, respectively.

6. LONG-TERM DEBT

Long-term debt consisted of the following:

 

In thousands

   June 30,
2010
   December 31,
2009

6.875% Senior Notes, due 2013

   $ 150,000    $ 150,000

Term Loan Facility

     145,625      170,000

Revolving Credit Facility

     112,000      71,000

Capital Leases

     319      780
             

Total

     407,944      391,780

Less—current portion

     38,201      32,741
             

Long-term portion

   $ 369,743    $ 359,039
             

2008 Refinancing Credit Agreement

On November 4, 2008, the Company refinanced its existing unsecured revolving credit agreement with a consortium of commercial banks. This “2008 Refinancing Credit Agreement” provides the company with a $300 million five-year revolving credit facility and a $200 million five-year term loan facility. The Company incurred $2.9 million of deferred financing cost related to the 2008 Refinancing Credit Agreement. Both facilities expire in January 2013. The 2008 Refinancing Credit Agreement borrowings bear variable interest rates indexed to the indices described below. At June 30, 2010, the Company had available bank borrowing capacity, net of $27.1 million of letters of credit, of approximately $160.9 million, subject to certain financial covenant restrictions.

Under the 2008 Refinancing Credit Agreement, the Company may elect a Base Rate of interest or an interest rate based on the London Interbank Offered Rate (“LIBOR”) of interest (“the Alternate Rate”). The Base Rate adjusts on a daily basis and is the greater of the PNC, N.A. prime rate, 30-day LIBOR plus 150 basis points or the Federal Funds Effective Rate plus 0.5% per annum, plus a margin that ranges from 25 to 50 basis points. The Alternate rate is based on quoted LIBOR rates plus a margin that ranges from 125 to 200 basis points. Both the Base Rate and Alternate Rate margins are dependent on the Company’s consolidated total indebtedness to cash flow ratios. The initial Base Rate margin is 25 basis points and the Alternate Rate margin is 125 basis points. At June 30, 2010 the weighted average interest rate on the Company’s variable rate debt was 1.60%. 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 June 30, 2010, the notional value of interest rate swaps outstanding totaled $137.0 million and effectively changed the Company’s interest rate on bank debt at June 30, 2010 from a variable rate to a fixed rate of 2.28%. The interest rate swap agreements mature at various times through December 2012. The Company is exposed to credit risk in the event of nonperformance by the counterparties. However, since only the cash interest payments are exchanged, exposure is significantly less than the notional amount. The counterparties are large financial institutions and the Company does not anticipate nonperformance.

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010 (UNAUDITED)

 

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

6.875% Senior Notes Due August 2013

In August 2003, the Company issued $150 million of Senior Notes due in 2013 (“the Notes”). The Notes were issued at par. Interest on the Notes accrues at a rate of 6.875% per annum and is payable semi-annually on January 31 and July 31 of each year. The proceeds were used to repay debt outstanding under the Company’s existing credit agreement, and for general corporate purposes. The principal balance is due in full at maturity.

The Notes are senior unsecured obligations of the Company and rank pari passu with all existing and future senior debt and senior to all existing and future subordinated indebtedness of the Company. The indenture under which the Notes were issued contains covenants and restrictions which limit among other things, the following: the incurrence of indebtedness, payment of dividends and certain distributions, sale of assets, change in control, mergers and consolidations and the incurrence of liens.

7. EMPLOYEE BENEFIT PLANS

Defined Benefit Pension Plans

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

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

 

     U.S.     International  
     Three months ended
June 30,
    Three months ended
June 30,
 

In thousands, except percentages

       2010             2009             2010             2009      

Net periodic benefit cost

        

Service cost

   $ 80      $ 76      $ 734      $ 673   

Interest cost

     648        694        1,862        1,684   

Expected return on plan assets

     (775     (808     (1,936     (1,540

Net amortization/deferrals

     479        391        457        519   

Curtailment loss recognized

     —          —          845        414   

Settlement loss recognized

     —          —          108        1,098   
                                

Net periodic benefit cost

   $ 432      $ 353      $ 2,070      $ 2,848   
                                

Assumptions

        

Discount rate

     5.75     6.25     6.11     6.69

Expected long-term rate of return

     8.00     8.00     6.94     7.34

Rate of compensation increase

     3.00     3.00     3.28     3.47

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010 (UNAUDITED)

 

     U.S.     International  
     Six months ended
June 30,
    Six months ended
June 30,
 

In thousands, except percentages

       2010             2009             2010             2009      

Net periodic benefit cost

        

Service cost

   $ 160      $ 151      $ 1,472      $ 1,304   

Interest cost

     1,296        1,387        3,744        3,262   

Expected return on plan assets

     (1,551     (1,616     (3,877     (2,979

Net amortization/deferrals

     958        782        910        1,004   

Curtailment loss recognized

     —          —          933        414   

Settlement loss recognized

     —          —          349        1,535   
                                

Net periodic benefit cost

   $ 863      $ 704      $ 3,531      $ 4,540   
                                

Assumptions

        

Discount rate

     5.75     6.25     6.11     6.69

Expected long-term rate of return

     8.00     8.00     6.94     7.34

Rate of compensation increase

     3.00     3.00     3.28     3.47

Post Retirement Benefit Plans

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

 

     U.S.     International  
     Three months ended
June 30,
    Three months ended
June 30,
 

In thousands, except percentages

       2010             2009             2010             2009      

Net periodic benefit cost

        

Service cost

   $ 13      $ 62      $ 17      $ 9   

Interest cost

     404        470        76        54   

Net amortization/deferrals

     (263     (222     (62     (61
                                

Net periodic benefit cost

   $ 154      $ 310      $ 31      $ 2   
                                

Assumptions

        

Discount rate

     5.75     6.25     6.40     7.50
     U.S.     International  
     Six months ended
June 30,
    Six months ended
June 30,
 

In thousands, except percentages

       2010             2009             2010             2009      

Net periodic benefit cost

        

Service cost

   $ 25      $ 124      $ 34      $ 18   

Interest cost

     808        940        151        104   

Net amortization/deferrals

     (526     (443     (123     (118
                                

Net periodic benefit cost

   $ 307      $ 621      $ 62      $ 4   
                                

Assumptions

        

Discount rate

     5.75     6.25     6.40     7.50

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010 (UNAUDITED)

 

8. STOCK-BASED COMPENSATION

As of June 30, 2010, the Company maintains employee stock-based compensation plans for stock options, restricted stock, and incentive stock awards as governed by the 2000 Stock Incentive Plan, as amended (the 2000 Plan). The Company also maintains a Non-Employee Directors’ Fee and Stock Option Plan (Directors Plan).

Stock-based compensation expense was $5.6 million and $1.4 million for the six months ended June 30, 2010 and 2009, respectively. Included in the stock-based compensation expense for 2010 above is $1.1 million of expense related to stock options, $1.7 million related to restricted stock, $2.4 million related to incentive stock awards and $450,000 as compensation for Directors’ fees. At June 30, 2010, unamortized compensation expense related to those stock options, restricted shares and incentive stock awards expected to vest totaled $16.8 million and will be recognized over a weighted average period of 1.7 years.

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

The following table summarizes the Company’s stock option activity and related information for both the 2000 Plan and Directors Plan for the six months ended June 30, 2010:

 

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

Outstanding at December 31, 2009

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

Granted

   120,125        38.21         170   

Exercised

   (191,000     13.86         (4,920

Canceled

   (1,500     34.85         (7
                          

Outstanding at June 30, 2010

   1,046,878      $ 27.35    6.6    $ 12,845   
                          

Exercisable at June 30, 2010

   580,827      $ 22.10    5.2    $ 10,175   

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:

 

     Six months ended
June 30,
 
     2010     2009  

Dividend yield

   .10   .13

Risk-free interest rate

   3.16   2.05

Stock price volatility

   46.1   43.1

Expected life (years)

   5.0      5.0   

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

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010 (UNAUDITED)

 

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

In addition, the Company has issued incentive stock awards to eligible employees that vest upon attainment of certain cumulative three year performance goals. The incentive stock awards included in the table below represent the number of shares that may ultimately vest. As of June 30, 2010, based on the Company’s performance, we estimate that these stock awards will vest and have recorded compensation expense accordingly. If our estimate of the number of these stock awards expected to vest changes in a future accounting period, compensation expense could be reduced or increased and will be recognized over the remaining vesting period.

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

The following table summarizes the restricted stock and incentive stock awards activity and related information for the six months ended June 30, 2010:

 

     Restricted
Stock
    Incentive
Stock
Awards
    Weighted
Average Grant
Date Fair
Value

Outstanding at December 31, 2009

   241,284      267,792      $ 31.65

Granted

   137,125      158,492        38.49

Vested

   (111,509   (99,318     33.20

Canceled

   —        (24,259     12.38
                  

Outstanding at June 30, 2010

   266,900      302,707      $ 35.44
                  

9. INCOME TAXES

The overall effective income tax rate was 33.1% and 33.9% for the three and six months ended June 30, 2010, respectively and 6.7% and 24.6% for the three and six months ended June 30, 2009, respectively. The increase in the 2010 effective rate is primarily due to a $9.7 million tax benefit recorded in the second quarter of 2009 for the settlement of examinations in various taxing jurisdictions.

As of June 30, 2010 the liability for income taxes associated with uncertain tax positions is $9.3 million. As of December 31, 2009, the liability for income taxes associated with uncertain tax positions was $10.0 million. If the benefits of the uncertain tax positions are realized, $2.7 million would favorably affect the Company’s effective tax rate. The remaining $6.6 million is recorded as a deferred tax asset and would not impact the Company’s effective rate. The Company includes interest and penalties related to uncertain tax positions in income tax expense.

As of June 30, 2010 the Company has accrued interest and penalties of approximately $3.0 million and $1.6 million, respectively. As of December 31, 2009, the Company had accrued interest and penalties related to uncertain tax positions of approximately $3.1 million and $1.7 million, respectively.

With limited exception, the Company is no longer subject to examination by various U.S. and foreign taxing authorities for years before 2007. At this time, the Company believes that it is reasonably possible that unrecognized tax benefits of approximately $2.5 million may change within the next twelve months due to the expiration of statutory review periods and current examinations.

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010 (UNAUDITED)

 

10. EARNINGS PER SHARE

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

 

     Three Months Ended
June 30,
 

In thousands, except per share

   2010     2009  

Numerator

    

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

   $ 31,211      $ 30,836   

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

     (481     (482
                

Undistributed earnings

     30,730        30,354   

Percentage allocated to common shareholders(1)

     99.5     99.5
                
     30,576        30,202   

Add: dividends declared—common shares

     479        480   
                

Numerator for basic and diluted earnings per common share

   $ 31,055      $ 30,682   
                

Denominator

    

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

     47,725        47,487   

Effect of dilutive securities:

    

Assumed conversion of dilutive stock-based compensation plans

     364        526   
                

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

     48,089        48,013   
                

Per common share net income attributable to Wabtec shareholders

    

Basic

   $ 0.65      $ 0.65   

Diluted

   $ 0.65      $ 0.64   

(1) Basic weighted-average common shares outstanding

     47,725        47,487   

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

     47,956        47,710   

Percentage allocated to common shareholders

     99.5     99.5

 

     Six Months Ended
June 30,
 

In thousands, except per share

   2010     2009  

Numerator

    

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

   $ 61,575      $ 63,502   

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

     (949     (962
                

Undistributed earnings

     60,626        62,540   

Percentage allocated to common shareholders(1)

     99.5     99.5
                
     60,323        62,227   

Add: dividends declared—common shares

     944        957   
                

Numerator for basic and diluted earnings per common share

   $ 61,267      $ 63,184   
                

Denominator

    

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

     47,539        47,594   

Effect of dilutive securities:

    

Assumed conversion of dilutive stock-based compensation plans

     372        494   
                

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

     47,911        48,088   
                

Per common share net income attributable to Wabtec shareholders

    

Basic

   $ 1.29      $ 1.33   

Diluted

   $ 1.28      $ 1.32   

(1) Basic weighted-average common shares outstanding

     47,539        47,594   

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

     47,761        47,830   

Percentage allocated to common shareholders

     99.5     99.5

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010 (UNAUDITED)

 

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

11. WARRANTIES

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

 

     Six Months Ended
June 30,
 

In thousands

   2010     2009  

Balance at December 31, 2009 and 2008, respectively

   $ 29,207      $ 30,676   

Warranty provision

     10,787        9,449   

Warranty claim payments

     (7,460     (8,748
                

Balance at June 30, 2010 and 2009, respectively

   $ 32,534      $ 31,377   
                

12. FAIR VALUE MEASUREMENT

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

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

The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of June 30, 2010, which are included in other current liabilities on the Condensed Consolidated Balance sheet:

 

     Total Carrying
Value at
June 30,
2010
    Fair Value Measurements at June 30, 2010 Using

In thousands

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

Foreign currency forward contracts

   $ 1      $ —      $ 1      $ —  

Interest rate swap agreements

     (2,004     —        (2,004     —  
                             

Total

   $ (2,003   $ —      $ (2,003   $ —  

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010 (UNAUDITED)

 

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

 

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

In thousands

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

Foreign currency forward contracts

   $ (110   $ —      $ (110   $ —  

Interest rate swap agreements

     (63     —        (63     —  
                             

Total

   $ (173   $ —      $ (173   $ —  

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

13. COMMITMENTS AND CONTINGENCIES

Claims have been filed against the Company and certain of its affiliates in various jurisdictions across the United States by persons alleging bodily injury as a result of exposure to asbestos-containing products. Most of these claims have been made against our wholly owned subsidiary, Railroad Friction Products Corporation (RFPC), and are based on a product sold by RFPC prior to the time that the Company acquired any interest in RFPC.

Most of these claims, including all of the RFPC claims, are submitted to insurance carriers for defense and indemnity or to non-affiliated companies that retain the liabilities for the asbestos-containing products at issue. We cannot, however, assure that all these claims will be fully covered by insurance or that the indemnitors or insurers will remain financially viable. Our ultimate legal and financial liability with respect to these claims, as is the case with other pending litigation, cannot be estimated.

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

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

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010 (UNAUDITED)

 

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

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

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

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

On May 14, 2010, Faiveley Transport USA, Inc., Faiveley Transport Nordic AB, Faiveley Transport Amiens S.A.S, and Ellcon National, Inc. filed a complaint against Wabtec Corporation in the U.S. District Court for the Southern District of New York. That complaint was amended on June 8, 2010. The claims in the amended complaint include misappropriation of trade secrets, unfair competition, tortious interference with prospective business relations, tortious interference with prospective economic advantage, and unjust enrichment. The Company is vigorously contesting all claims and does not believe that they would result in any material legal liability. On June 25, 2010, the Company filed a motion to dismiss the Faiveley entities’ amended complaint in its entirety. That motion to dismiss is now being briefed by all parties.

The Company is subject to a number of other commitments and contingencies as described in its Annual Report on Form 10-K for the year ended December 31, 2009, filed on February 24, 2010. During the first three months of 2010, there were no material changes to the information described in Note 19 therein.

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010 (UNAUDITED)

 

14. SEGMENT INFORMATION

Wabtec has two reportable segments—the Freight Group and the Transit Group. The key factors used to identify these reportable segments are the organization and alignment of the Company’s internal operations, the nature of the products and services, and customer type. The business segments are:

Freight Group manufactures products and provides services geared primarily to the production and operation of freight cars and locomotives, including braking control equipment, on-board electronic components and train coupler equipment.

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

The Company evaluates its business segments’ operating results based on income from operations. Corporate activities include general corporate expenses, elimination of intersegment transactions, interest income and expense and other unallocated charges. Since certain administrative and other operating expenses and other items have not been allocated to business segments, the results in the following tables are not necessarily a measure computed in accordance with generally accepted accounting principles and may not be comparable to other companies.

Segment financial information for the three months ended June 30, 2010 is as follows:

 

In thousands

   Freight
Group
   Transit
Group
   Corporate
Activities and
Elimination
    Total  

Sales to external customers

   $ 189,974    $ 184,163    $ —        $ 374,137   

Intersegment sales/(elimination)

     4,637      1,476      (6,113     —     
                              

Total sales

   $ 194,611    $ 185,639    $ (6,113   $ 374,137   
                              

Income (loss) from operations

   $ 29,574    $ 24,774    $ (4,696   $ 49,652   

Interest expense and other, net

     —        —        (3,006     (3,006
                              

Income (loss) from operations before income taxes

   $ 29,574    $ 24,774    $ (7,702   $ 46,646   
                              

Segment financial information for the three months ended June 30, 2009 is as follows:

 

In thousands

   Freight
Group
   Transit
Group
   Corporate
Activities and
Elimination
    Total  

Sales to external customers

   $ 136,079    $ 197,934    $ —        $ 334,013   

Intersegment sales/(elimination)

     7,410      710      (8,120     —     
                              

Total sales

   $ 143,489    $ 198,644    $ (8,120   $ 334,013   
                              

Income (loss) from operations

   $ 15,243    $ 26,364    $ (4,880   $ 36,727   

Interest expense and other, net

     —        —        (3,659     (3,659
                              

Income (loss) from operations before income taxes

   $ 15,243    $ 26,364    $ (8,539   $ 33,068   
                              

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010 (UNAUDITED)

 

Segment financial information for the six months ended June 30, 2010 is as follows:

 

In thousands

   Freight
Group
   Transit
Group
   Corporate
Activities and
Elimination
    Total  

Sales to external customers

   $ 355,118    $ 382,946    $ —        $ 738,064   

Intersegment sales/(elimination)

     11,537      2,016      (13,553     —     
                              

Total sales

   $ 366,655    $ 384,962    $ (13,553   $ 738,064   
                              

Income (loss) from operations

   $ 50,948    $ 58,005    $ (8,125   $ 100,828   

Interest expense and other, net

     —        —        (7,639     (7,639
                              

Income (loss) from operations before income taxes

   $ 50,948    $ 58,005    $ (15,764   $ 93,189   
                              

Segment financial information for the six months ended June 30, 2009 is as follows:

 

In thousands

   Freight
Group
   Transit
Group
   Corporate
Activities and
Elimination
    Total  

Sales to external customers

   $ 316,026    $ 395,947    $ —        $ 711,973   

Intersegment sales/(elimination)

     14,022      1,754      (15,776     —     
                              

Total sales

   $ 330,048    $ 397,701    $ (15,776   $ 711,973   
                              

Income (loss) from operations

   $ 40,789    $ 60,467    $ (8,781   $ 92,475   

Interest expense and other, net

     —        —        (8,206     (8,206
                              

Income (loss) from operations before income taxes

   $ 40,789    $ 60,467    $ (16,987   $ 84,269   
                              

Sales by product are as follows:

 

     Three Months Ended
June 30,

In thousands

   2010    2009

Brake products

   $ 106,435    $ 114,059

Freight electronics & specialty products

     114,229      78,207

Remanufacturing, overhaul & build

     73,973      64,694

Transit products

     55,523      62,303

Other

     23,977      14,750
             

Total sales

   $ 374,137    $ 334,013
             

 

     Six Months Ended
June 30,

In thousands

   2010    2009

Brake products

   $ 228,433    $ 240,807

Freight electronics & specialty products

     203,989      180,285

Remanufacturing, overhaul & build

     146,334      133,845

Transit products

     114,999      122,170

Other

     44,309      34,866
             

Total sales

   $ 738,064    $ 711,973
             

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010 (UNAUDITED)

 

15. GUARANTOR SUBSIDIARIES FINANCIAL INFORMATION

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

Balance Sheet as of June 30, 2010:

 

In thousands

   Parent     Guarantors     Non-Guarantors     Elimination     Consolidated

Cash and cash equivalents

   $ 15,296      $ 1,832      $ 149,381      $ —        $ 166,509

Accounts receivable

     246        170,614        104,341        —          275,201

Inventories

     —          167,139        72,300        —          239,439

Other current assets

     39,276        3,809        7,406        —          50,491
                                      

Total current assets

     54,818        343,394        333,428        —          731,640

Property, plant and equipment

     1,964        117,909        72,604        —          192,477

Goodwill

     7,980        364,150        125,772        —          497,902

Investment in subsidiaries

     2,217,932        452,654        375,132        (3,045,718     —  

Other intangibles

     —          130,476        53,890        —          184,366

Other long term assets

     (2,148     (5,785     33,732        —          25,799
                                      

Total Assets

   $ 2,280,546      $ 1,402,798      $ 994,558      $ (3,045,718   $ 1,632,184
                                      

Current liabilities

   $ 64,612      $ 157,809      $ 88,032      $ —        $ 310,453

Intercompany

     979,266        (1,056,110     76,844        —          —  

Long-term debt

     369,500        288        (45     —          369,743

Other long term liabilities

     60,228        25,154        59,666        —          145,048
                                      

Total liabilities

     1,473,606        (872,859     224,497        —          825,244

Stockholders’ equity

     806,940        2,275,657        770,061        (3,045,718     806,940
                                      

Total Liabilities and Stockholders’ Equity

   $ 2,280,546      $ 1,402,798      $ 994,558      $ (3,045,718   $ 1,632,184
                                      

Balance Sheet as of December 31, 2009:

 

In thousands

   Parent     Guarantors     Non-Guarantors    Elimination     Consolidated

Cash and cash equivalents

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

Accounts receivable

     522        121,203        86,535      —          208,260

Inventories

     —          166,638        72,695      —          239,333

Other current assets

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

Total current assets

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

Property, plant and equipment, net

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

Goodwill

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

Investment in subsidiaries

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

Other intangibles, net

     —          127,705        59,925      —          187,630

Other long term assets

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

Total Assets

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

Current liabilities

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

Intercompany

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

Long-term debt

     358,500        316        223      —          359,039

Other long term liabilities

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

Total liabilities

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

Stockholders’ equity

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

Total Liabilities and Stockholders’ Equity

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

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010 (UNAUDITED)

 

Income Statement for the Three Months Ended June 30, 2010:

 

In thousands

   Parent     Guarantors     Non-Guarantors     Elimination(1)     Consolidated  

Net sales

   $ —        $ 279,053      $ 116,154      $ (21,070   $ 374,137   

Cost of sales

     878        (184,642     (88,554     11,645        (260,673
                                        

Gross profit (loss)

     878        94,411        27,600        (9,425     113,464   

Operating expenses

     (12,993     (35,206     (15,613     —          (63,812
                                        

Operating (loss) profit

     (12,115     59,205        11,987        (9,425     49,652   

Interest (expense) income, net

     (5,733     1,594        47        —          (4,092

Other income (expense), net

     225        517        344        —          1,086   

Equity earnings

     54,407        9,819        —          (64,226     —     
                                        

Income (loss) from operations before income tax

     36,784        71,135        12,378        (73,651     46,646   

Income tax expense

     (5,573     (3,552     (6,310     —          (15,435
                                        

Net income (loss) attributable to Wabtec shareholders

   $ 31,211      $ 67,583      $ 6,068      $ (73,651   $ 31,211   
                                        

 

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

Income Statement for the Three Months Ended June 30, 2009:

 

In thousands

   Parent     Guarantors     Non-Guarantors     Elimination(1)     Consolidated  

Net sales

   $ —        $ 245,907      $ 104,888      $ (16,782   $ 334,013   

Cost of sales

     656        (166,827     (85,761     9,582        (242,350
                                        

Gross profit (loss)

     656        79,080        19,127        (7,200     91,663   

Operating expenses

     (10,161     (29,854     (14,921     —          (54,936
                                        

Operating (loss) profit

     (9,505     49,226        4,206        (7,200     36,727   

Interest (expense) income, net

     (5,423     1,761        137        —          (3,525

Other income (expense), net

     123        (5,081     4,824        —          (134

Equity earnings

     40,843        12,733        —          (53,576     —     
                                        

Income (loss) from operations before income tax

     26,038        58,639        9,167        (60,776     33,068   

Income tax expense

     4,798        (3,090     (3,940     —          (2,232
                                        

Net income (loss) attributable to Wabtec shareholders

   $ 30,836      $ 55,549      $ 5,227      $ (60,776   $ 30,836   
                                        

 

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

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010 (UNAUDITED)

 

Income Statement for the Six Months Ended June 30, 2010:

 

In thousands

   Parent     Guarantors     Non-Guarantors     Elimination(1)     Consolidated  

Net sales

   $ —        $ 541,731      $ 235,662      $ (39,329   $ 738,064   

Cost of sales

     1,058        (361,774     (180,775     25,280        (516,211
                                        

Gross profit (loss)

     1,058        179,957        54,887        (14,049     221,853   

Operating expenses

     (21,684     (68,576     (30,765     —          (121,025
                                        

Operating (loss) profit

     (20,626     111,381        24,122        (14,049     100,828   

Interest (expense) income, net

     (11,378     3,199        175        —          (8,004

Other income (expense), net

     1,314        1,496        (2,445     —          365   

Equity earnings

     108,448        14,645        —          (123,093     —     
                                        

Income (loss) from operations before income tax

     77,758        130,721        21,852        (137,142     93,189   

Income tax expense

     (16,183     (7,142     (8,289     —          (31,614
                                        

Net income (loss) attributable to Wabtec shareholders

   $ 61,575      $ 123,579      $ 13,563      $ (137,142   $ 61,575   
                                        

 

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

Income Statement for the Six Months Ended June 30, 2009:

 

In thousands

   Parent     Guarantors     Non-Guarantors     Elimination(1)     Consolidated  

Net sales

   $ —        $ 539,436      $ 214,587      $ (42,050   $ 711,973   

Cost of sales

     1,489        (361,497     (174,732     21,605        (513,135
                                        

Gross profit (loss)

     1,489        177,939        39,855        (20,445     198,838   

Operating expenses

     (18,343     (60,029     (27,991     —          (106,363
                                        

Operating (loss) profit

     (16,854     117,910        11,864        (20,445     92,475   

Interest (expense) income, net

     (11,592     2,861        270        —          (8,461

Other (expense) income, net

     (45     (5,726     6,026        —          255   

Equity earnings

     97,038        11,925        —          (108,963     —     
                                        

Income (loss) from operations before income tax

     68,547        126,970        18,160        (129,408     84,269   

Income tax expense

     (5,045     (6,036     (9,686     —          (20,767
                                        

Net income (loss) attributable to Wabtec shareholders

   $ 63,502      $ 120,934      $ 8,474      $ (129,408   $ 63,502   
                                        

 

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

 

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WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010 (UNAUDITED)

 

Condensed Statement of Cash Flows for the Six Months Ended June 30, 2010:

 

In thousands

   Parent     Guarantors     Non-Guarantors     Elimination     Consolidated  

Net cash (used for) provided by operating activities

   $ (10,719   $ 155,418      $ 21,905      $ (137,142   $ 29,462   

Net cash used for investing activities

     (89     (42,092     (2,346     —          (44,527

Net cash provided by (used for) financing activities

     14,078        (123,618     (13,979     137,142        13,623   

Effect of changes in currency exchange rates

     —          —          (20,708     —          (20,708
                                        

Increase (decrease) in cash

     3,270        (10,292     (15,128     —          (22,150

Cash, beginning of year

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

Cash, end of period

   $ 15,296      $ 1,832      $ 149,381      $ —        $ 166,509   
                                        

Condensed Statement of Cash Flows for the Six Months Ended June 30, 2009:

 

In thousands

   Parent     Guarantors     Non-Guarantors     Elimination     Consolidated  

Net cash provided by (used for) operating activities

   $ 22,648      $ 119,408      $ 25,368      $ (129,408   $ 38,016   

Net cash used for investing activities

     (1,234     (4,413     (4,156     —          (9,803

Net cash (used for) provided by financing activities

     (55,332     (120,949     (9,152     129,408        (56,025

Effect of changes in currency exchange rates

     —          —          7,340        —          7,340   
                                        

(Decrease) increase in cash

     (33,918     (5,954     19,400        —          (20,472

Cash, beginning of year

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

Cash, end of period

   $ 4,023      $ (1,682   $ 118,992      $ —        $ 121,333   
                                        

16. OTHER EXPENSE, NET

The components of other expense are as follows:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,

In thousands

       2010            2009             2010            2009    

Foreign currency gain (loss)

   $ 893    $ (427   $ 296    $ 223

Other miscellaneous income

     193      293        69      32
                            

Total other income (expense), net

   $ 1,086    $ (134   $ 365    $ 255
                            

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the information in the unaudited condensed consolidated financial statements and notes thereto included herein and Westinghouse Air Brake Technologies Corporation’s Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in its Annual Report on Form 10-K for the year ended December 31, 2009, filed with the Securities and Exchange Commission on February 24, 2010.

OVERVIEW

Wabtec is one of the world’s largest providers of value-added, technology-based products and services for the global rail industry. Our products are found on virtually all U.S. locomotives, freight cars and passenger transit vehicles, as well as in approximately 100 countries throughout the world. Our products enhance safety, improve productivity and reduce maintenance costs for customers, and many of our core products and services are essential in the safe and efficient operation of freight rail and passenger transit vehicles. Wabtec is a global company with operations in 17 countries. In the first six months of 2010, about 48% of the Company’s revenues came from customers outside the U.S.

Management Review and Future Outlook

Wabtec’s long-term financial goals are to generate cash flow in excess of net income, maintain a strong credit profile while minimizing our overall cost of capital, increase margins through strict attention to cost controls, and increase revenues through a focused growth strategy, including global and market expansion, new products and technologies, aftermarket products and services, and acquisitions. In addition, Management evaluates the Company’s short-term operational performance through measures such as quality and on-time delivery.

The Company monitors a variety of factors and statistics to gauge market activity. The freight rail industry is largely driven by general economic conditions, which can cause fluctuations in rail traffic. Based on those fluctuations, railroads can increase or decrease purchases of new locomotives and freight cars. In 2010, U.S. freight rail traffic has increased due to the improving overall economy. Through mid-July, revenue ton-miles were 9% higher than the year-ago period, and railroads have started to pull freight cars and locomotives out of storage and return them to the active fleet. This activity has led to an increase in sales of aftermarket components and services. Deliveries of new locomotives and freight cars, however, are expected to be lower than 2009 levels, due to the large number of these vehicles that are in storage. During the second quarter of 2010, the industry’s backlog of new freight cars ordered increased to about 15,000 cars, which indicates that short-term demand in this market segment is starting to improve. Although less than 15% of the Company’s revenues are directly related to deliveries of new freight locomotives and freight cars, the decline in those markets has had a negative impact on the Company’s financial results. To mitigate this impact, Wabtec initiated a series of cost savings initiatives in recent quarters. Whether demand continues to improve will depend largely on continued strength in the overall economy and in rail traffic volumes.

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

The North American transit industry is driven by government spending and ridership. Spending under SAFETEA-LU, the federal government’s transportation funding bill, increased about 6% in 2009, while ridership decreased about 4% due to the recession and its impact on employment levels. Although SAFETEA-LU expired

 

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in September 2009, the bill has been extended through December 2010, with funding at about 2009 levels. Spending in 2011 is expected to increase by about 5%, although a new bill has not yet been passed. In early 2009, the U.S. federal government passed new spending legislation designed to stimulate the U.S. economy, with up to $20 billion to be spent on freight and passenger transportation, as follows: $8.4 billion for public transportation, $8 billion for high-speed rail, $1.5 billion for discretionary intermodal projects, and $1.3 billion for AMTRAK. Most of this funding has already been allocated to specific projects, and Wabtec expects to benefit slightly from this additional spending, as transit authorities invest in new locomotives and buses.

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

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

In 2010 and beyond, general economic and market conditions in the United States and internationally will have an impact on our sales and operations. If the world economy does not continue to improve, this could result in renewed instability of capital markets, longer sales cycles, deferral or delay of customer orders or an inability to market our products effectively. Any of these factors could materially adversely affect our business and results of operations. In addition, we face risks associated with our growth strategies including the level of investment that customers are willing to make in new technologies developed by the industry and the Company, and risks inherent in global expansion. When necessary, we will modify our financial and operating strategies to reflect changes in market conditions and risks.

RESULTS OF OPERATIONS

The following table shows our Consolidated Statements of Operations for the periods indicated.

 

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

In millions

   2010     2009     2010     2009  

Net sales

   $ 374.1      $ 334.0      $ 738.0      $ 712.0   

Cost of sales

     (260.7     (242.4     (516.2     (513.2
                                

Gross profit

     113.4        91.6        221.8        198.8   

Selling, general and administrative expenses

     (51.3     (42.1     (95.9     (80.6

Engineering expenses

     (10.4     (10.8     (21.1     (21.3

Amortization expense

     (2.1     (2.0     (4.0     (4.4
                                

Total operating expenses

     (63.8     (54.9     (121.0     (106.3

Income from operations

     49.6        36.7        100.8        92.5   

Interest expense, net

     (4.1     (3.5     (8.0     (8.5

Other income (expense), net

     1.1        (0.1     0.4        0.3   
                                

Income from operations before income taxes

     46.6        33.1        93.2        84.3   

Income tax expense

     (15.4     (2.3     (31.6     (20.8
                                

Net income attributable to Wabtec shareholders

   $ 31.2      $ 30.8      $ 61.6      $ 63.5   
                                

 

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SECOND QUARTER 2010 COMPARED TO SECOND QUARTER 2009

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

 

     Three months ended June 30,  

In thousands

   2010    2009    Percent
Change
 

Freight Group

   $ 189,974    $ 136,079    39.6

Transit Group

     184,163      197,934    (7.0 )% 
                    

Net sales

     374,137      334,013    12.0

Income from operations

     49,652      36,727    35.2

Net income attributable to Wabtec shareholders

   $ 31,211    $ 30,836    1.2

Net sales increased by $40.1 million to $374.1 million from $334.0 million for the three months ended June 30, 2010 and 2009, respectively. The increase is primarily due to higher Freight Group original equipment and aftermarket sales and sales related to acquisitions of $20.5 million. Partially offsetting this increase was lower Transit Group sales. The Company realized a net sales increase of $0.6 million due to favorable effects of foreign exchange, but net earnings were generally not impacted by foreign exchange. Net income for the three months ended June 30, 2010 was $31.2 million or $0.65 per diluted share. Net income for the three months ended June 30, 2009 was $30.8 million or $0.64 per diluted share. The increase in net income is primarily due to higher sales volume and operating margins, partially offset by higher selling, general and administrative expenses and income tax expense.

Freight Group sales increased by $53.9 million, or 39.6%, due to higher sales of $14.3 million for electronics and specialty products, $4.3 million for remanufacturing, overhaul and build, $3.3 million for brake products and $20.5 million from acquisitions. For the Freight Group, net sales were increased by $3.9 million due to favorable effects of foreign exchange on sales mentioned above.

Transit Group sales decreased by $13.8 million, or 7.0%, due to lower sales of $9.4 million for brake products and $6.5 million for transit products, partially offset by increased sales for remanufacturing, overhaul and build. For the Transit Group, net sales were decreased by $3.3 million due to unfavorable effects of foreign exchange on sales mentioned above.

Gross profit Gross profit, which is dependent on a number of factors including pricing, sales volume and product mix, increased to $113.4 million in the second quarter of 2010 compared to $91.6 million in the same period of 2009. Gross profit, as a percentage of sales, was 30.3% for the second quarter of 2010 compared to 27.4%, for the second quarter of 2009. The gross profit percentage increased due to higher sales and realized cost savings from downsizing and consolidation actions initiated in 2009. The provision for warranty expense is generally established for specific losses, along with historical estimates of customer claims as a percentage of sales. The provision for warranty expense was $2.2 million higher in 2010 compared to the same period of 2009 due primarily to specific reserves on certain transit products. The warranty reserve increased at June 30, 2010 compared to June 30, 2009 by $1.1 million primarily due to reserves for certain transit products.

Operating expenses The following table shows our operating expenses:

 

     Three months ended June 30,  

In thousands

   2010    2009    Percent
Change
 

Selling, general and administrative expenses

   $ 51,243    $ 42,112    21.7

Engineering expenses

     10,425      10,765    (3.2 )% 

Amortization expense

     2,144      2,059    4.1
                    

Total operating expenses

   $ 63,812    $ 54,936    16.2
                    

 

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Selling, general, and administrative expenses increased $9.1 million in the second quarter of 2010 compared to the same period of 2009 primarily due to acquisitions, non-cash compensation and certain legal costs. Amortization expense increased in the second quarter of 2010 compared to the same period in 2009 due to acquisition. Total operating expenses were 17.1% and 16.4% of sales for the second quarter of 2010 and 2009, respectively.

Income from operations Income from operations totaled $49.6 million (or 13.3% of sales) in the second quarter of 2010 compared with $36.7 million (or 11.0% of sales) in the same period of 2009. The increase in income from operations is primarily due to higher sales volume and operating margins, partially offset by higher selling, general and administrative expenses.

Interest expense, net Interest expense, net increased $0.6 million in the second quarter of 2010 compared to the same period of 2009 due to increased long-term debt.

Other expense, net The Company recorded foreign exchange gains of $0.9 million in the second quarter of 2010 and foreign exchange losses of $0.4 million in the second quarter of 2009, due to the effect of currency exchange rate changes on intercompany transactions that are non U.S. dollar denominated and charged or credited to earnings.

Income taxes The effective income tax rate was 33.1% and 6.7% for the second quarter of 2010 and 2009, respectively. The increase in the 2010 effective rate is primarily due to a $9.7 million tax benefit recorded in the second quarter of 2009 for the settlement of examinations in various taxing jurisdictions.

Net income Net income for the second quarter of 2010 increased $0.4 million, compared with the same period of 2009. The increase in net income is primarily due to higher sales volume and operating margins, partially offset by higher selling, general and administrative expenses and income tax expense.

FIRST SIX MONTHS OF 2010 COMPARED TO FIRST SIX MONTHS OF 2009

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

 

     Six months ended June 30,  

In thousands

   2010    2009    Percent
Change
 

Freight Group

   $ 355,118    $ 316,026    12.4

Transit Group

     382,946      395,947    (3.3 )% 
                    

Net sales

     738,064      711,973    3.7

Income from operations

     100,828      92,475    9.0

Net income attributable to Wabtec shareholders

   $ 61,575    $ 63,502    (3.0 )% 

Net sales increased by $26.0 million to $738.0 million from $712.0 million for the six months ended June 30, 2010 and 2009, respectively. The increase is primarily due to higher Freight Group sales and sales related to acquisitions of $33.3 million. Partially offsetting this increase was lower Transit Group sales. The Company realized a net sales increase of $12.5 million due to favorable effects of foreign exchange, but net earnings were generally not impacted by foreign exchange. Net income for the six months ended June 30, 2010 was $61.6 million or $1.28 per diluted share. Net income for the six months ended June 30, 2009 was $63.5 million or $1.32 per diluted share. The decrease in net income is primarily due to higher selling, general and administrative expenses and income tax expense, partially offset by higher sales volume and operating margins.

Freight Group sales increased by $39.0 million or 12.4% primarily due to higher sales of $4.6 million for remanufacturing, overhaul and manufacturing of locomotives and $33.3 million from acquisitions. For the Freight Group, net sales were increased by $10.5 million due to favorable effects of foreign exchange on sales mentioned above.

 

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Transit Group sales decreased by $13.0 million or 3.3% primarily due to decreased sales of $13.8 million for brake products and $7.2 million for other transit-related products. Offsetting those decreases was an increase in sales of $6.4 million for remanufacturing, overhaul and build of locomotives. For the Transit Group, net sales were increased by $2.0 million due to favorable effects of foreign exchange on sales mentioned above.

Gross profit Gross profit increased to $221.8 million for the first six months of 2010 compared to $198.8 million in the same period of 2009. Gross profit is dependent on a number of factors including pricing, sales volume and product mix. Gross profit, as a percentage of sales, was 30.1% compared to 27.9%, for the first six months of 2010 and 2009, respectively. The provision for warranty expense is generally established for specific losses, along with historical estimates of customer claims as a percentage of sales. The provision for warranty expense was $1.4 million higher for the first six months of 2010 compared to the same period of 2009 due primarily to specific reserves on certain transit products.

Operating expenses The following table shows our operating expenses:

 

     Six months ended June 30,  

In thousands

   2010    2009    Percent
Change
 

Selling, general and administrative expenses

   $ 95,874    $ 80,665    18.9

Engineering expenses

     21,120      21,324    (1.0 )% 

Amortization expense

     4,031      4,374    (7.8 )% 
                    

Total operating expenses

   $ 121,025    $ 106,363    13.8
                    

Selling, general, and administrative expenses increased $15.2 million in the first six months of 2010 compared to the same period of 2009 primarily due to expenses from acquisitions, non-cash compensation and certain legal costs. Amortization expense increased in the first six months of 2010 compared to the same period in 2009 due primarily to the acquisitions. Total operating expenses were 16.4% and 14.9% of sales for the first six months of 2010 and 2009, respectively.

Income from operations Income from operations totaled $100.8 million (or 13.7% of sales) in the first six months of 2010 compared with $92.5 million (or 13.0% of sales) in the same period of 2009. Income from operations increased primarily due to higher sales volume and operating margins, partially offset by higher selling, general and administrative expenses.

Interest expense, net Interest expense, net decreased $0.5 million in the first six months of 2010 compared to the same period of 2009 primarily due to lower interest rates.

Other expense, net The Company recorded foreign exchange gains of $0.3 million in the first six months of 2010 and foreign exchange gains of $0.2 million in the first six months of 2009, due to the effect of currency exchange rate changes on intercompany transactions that are non U.S. dollar denominated and charged or credited to earnings.

Income taxes The effective income tax rate was 33.9% and 24.6% for the first six months of 2010 and 2009, respectively. The increase in the 2010 effective rate is primarily due to a $9.7 million tax benefit recorded in the second quarter of 2009 for the settlement of examinations in various taxing jurisdictions.

Net income Net income for the first six months of 2010 decreased $1.9 million, compared with the same period of 2009. The decrease in net income is primarily due to higher selling, general and administrative expenses and income tax expense, partially offset by higher sales volume and operating margins.

 

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Liquidity and Capital Resources

Liquidity is provided primarily by operating cash flow and borrowings under the Company’s unsecured credit facility with a consortium of commercial banks. The following is a summary of selected cash flow information and other relevant data:

 

     Six months ended
June 30,
 

In thousands

   2010     2009  

Cash provided by (used for):

    

Operating activities

   $ 29,462      $ 38,016   

Investing activities

     (44,527     (9,803

Financing activities

     13,623        (56,025

Decrease in cash

   $ (22,150   $ (20,472

Operating activities Cash provided by operations in the first six months of 2010 was $29.5 million as compared to cash provided by operations of $38.0 million for the same period of 2009. This $8.5 million decrease in cash provided by operations resulted from a net increase in working capital. Accounts payable increased from higher purchasing needs resulting in a $53.7 million improvement. Other assets and liabilities, including accrued income taxes, provided cash of $28.5 million. Accrued liabilities and customer deposits favorably impacted working capital by $24.9 due to the payment timing of certain accrued liabilities. Accounts receivables increased from higher sales volume resulting in a $93.9 million unfavorable impact on working capital. Inventory increased to meet higher sales demand resulting in a $23.9 million unfavorable impact on working capital.

Investing activities Cash used for investing activities in the first six months of 2010 was $44.5 million as compared to cash used for investing activities of $9.8 million for the same period of 2009. Capital expenditures were $7.0 million and $8.7 million in the first six months of 2010 and 2009, respectively. During the first six months of 2010 the Company received $2.4 million as part of the working capital settlement for the Ricon acquisition. During the first six months of 2010, Wabtec acquired Xorail, a provider of signal engineering and design services for $39.9 million, net of cash received. During the first six months of 2009 the Company sold a facility for net cash proceeds of $3.6 million to an unrelated third party. While certain portions of the building are being leased back, this transaction resulted in a gain of $2.1 million and deferred gain of $0.6 million. The deferred gain will be recognized over five years.

Financing activities In the first six months of 2010, cash provided by financing activities was $13.6 million, which included $166.4 million in proceeds from debt and $125.4 million of repayments of debt on the revolving credit facility, $24.8 million of debt repayments on the term loan and other debt, $1.0 million of dividend payments and $6.3 million for the repurchase of 154,600 shares of stock. In the first six months of 2009, cash used for financing activities was $56.0 million, which included $92.0 million of debt repayments and $72.0 million in proceeds from debt on the revolving credit facility, $15.7 million of debt repayments on the term loan and other debt, $1.0 million of dividend payments and $19.7 million for the repurchase of 669,700 shares of stock.

The following table shows outstanding indebtedness at June 30, 2010 and December 31, 2009.

 

In thousands

   June 30,
2010
   December 31,
2009

6.875% Senior Notes, due 2013

   $ 150,000    $ 150,000

Term Loan Facility

     145,625      170,000

Revolving Credit Facility

     112,000      71,000

Capital Leases

     319      780
             

Total

     407,944      391,780

Less—current portion

     38,201      32,741
             

Long-term portion

   $ 369,743    $ 359,039
             

Cash balance at June 30, 2010 and December 31, 2009 was $166.5 million and $188.7 million, respectively.

 

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2008 Refinancing Credit Agreement

On November 4, 2008, the Company refinanced its existing unsecured revolving credit agreement with a consortium of commercial banks. This “2008 Refinancing Credit Agreement” provides the company with a $300 million five-year revolving credit facility and a $200 million five-year term loan facility. The Company incurred $2.9 million of deferred financing cost related to the 2008 Refinancing Credit Agreement. Both facilities expire in January 2013. The 2008 Refinancing Credit Agreement borrowings bear variable interest rates indexed to the indices described below. At June 30, 2010, the Company had available bank borrowing capacity, net of $27.1 million of letters of credit, of approximately $160.9 million, subject to certain financial covenant restrictions.

Under the 2008 Refinancing Credit Agreement, the Company may elect a Base Rate of interest or an interest rate based on the London Interbank Offered Rate (“LIBOR”) of interest (“the Alternate Rate”). The Base Rate adjusts on a daily basis and is the greater of the PNC, N.A. prime rate, 30-day LIBOR plus 150 basis points or the Federal Funds Effective Rate plus 0.5% per annum, plus a margin that ranges from 25 to 50 basis points. The Alternate rate is based on quoted LIBOR rates plus a margin that ranges from 125 to 200 basis points. Both the Base Rate and Alternate Rate margins are dependent on the Company’s consolidated total indebtedness to cash flow ratios. The initial Base Rate margin is 25 basis points and the Alternate Rate margin is 125 basis points. At June 30, 2010 the weighted average interest rate on the Company’s variable rate debt was 1.60%. 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 June 30, 2010, the notional value of interest rate swaps outstanding totaled $137.0 million and effectively changed the Company’s interest rate on bank debt at June 30, 2010 from a variable rate to a fixed rate of 2.28%. The interest rate swap agreements mature at various times through December 2012. The Company is exposed to credit risk in the event of nonperformance by the counterparties. However, since only the cash interest payments are exchanged, exposure is significantly less than the notional amount. The counterparties are large financial institutions and the Company does not anticipate nonperformance.

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

6.875% Senior Notes Due August 2013

In August 2003, the Company issued $150 million of Senior Notes due in 2013 (“the Notes”). The Notes were issued at par. Interest on the Notes accrues at a rate of 6.875% per annum and is payable semi-annually on January 31 and July 31 of each year. The proceeds were used to repay debt outstanding under the Company’s existing credit agreement, and for general corporate purposes. The principal balance is due in full at maturity.

The Notes are senior unsecured obligations of the Company and rank pari passu with all existing and future senior debt and senior to all our existing and future subordinated indebtedness of the Company. The indenture under which the Notes were issued contains covenants and restrictions which limit among other things, the following: the incurrence of indebtedness, payment of dividends and certain distributions, sale of assets, change in control, mergers and consolidations and the incurrence of liens. The Company is in compliance with these measurements and covenants and expects that these measurements will not be any type of limiting factor in executing our operating activities.

 

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Management believes that based on current levels of operations and forecasted earnings, cash flow and liquidity will be sufficient to fund working capital and capital equipment needs as well as meeting debt service requirements. If sources of funds were to fail to satisfy the Company’s cash requirements, the Company may need to refinance our existing debt or obtain additional financing. There is no assurance that such new financing alternatives would be available, and, in any case, such new financing, if available, would be expected to be more costly and burdensome than the debt agreements currently in place.

Company Stock Repurchase Plan

On July 31, 2006, the Board of Directors authorized the repurchase of up to $50 million of the Company’s outstanding shares. On February 20, 2008, the Board of Directors authorized the repurchase of up to an additional $100 million of the Company’s outstanding shares. During the first quarter of 2008, the Company completed the $50 million authorization made in 2006. Cumulative purchases under both plans have totaled $108.5 million, leaving $41.5 million under the authorization.

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

During the first six months of 2010, the Company repurchased 154,600 shares at an average price of $40.82 per share. During 2009, the Company repurchased 669,700 shares of its stock at an average price of $29.35 per share. All purchases were on the open market.

Contractual Obligations and Off-Balance Sheet Arrangements

As of June 30, 2010, the Company has recognized a total liability of $9.3 million for unrecognized tax benefits related to uncertain tax positions. At this time, the Company is unable to make a reasonably reliable estimate of the timing of cash settlement for any of the unrecognized tax benefits due to the uncertainty of the timing and outcome of its audits and other factors.

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

Forward Looking Statements

We believe that all statements other than statements of historical facts included in this report, including certain statements under “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may constitute forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. Although we believe that our assumptions made in connection with the forward-looking statements are reasonable, we cannot assure that our assumptions and expectations are correct.

These forward-looking statements are subject to various risks, uncertainties and assumptions about us, including, among other things:

Economic and industry conditions

 

   

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

 

   

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

 

   

reliance on major original equipment manufacturer customers;

 

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original equipment manufacturers’ program delays;

 

   

demand for services in the freight and passenger rail industry;

 

   

demand for our products and services;

 

   

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

 

   

consolidations in the rail industry;

 

   

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

 

   

fluctuations in interest rates and foreign currency exchange rates; or

 

   

availability of credit;

Operating factors

 

   

supply disruptions;

 

   

technical difficulties;

 

   

changes in operating conditions and costs;

 

   

increases in raw material costs;

 

   

successful introduction of new products;

 

   

performance under material long-term contracts;

 

   

labor relations;

 

   

completion and integration of acquisitions; or

 

   

the development and use of new technology;

Competitive factors

 

   

the actions of competitors;

Political/governmental factors

 

   

political stability in relevant areas of the world;

 

   

future regulation/deregulation of our customers and/or the rail industry;

 

   

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

 

   

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

 

   

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

Transaction or commercial factors

 

   

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

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

 

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Critical Accounting Policies

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

 

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

In the ordinary course of business, Wabtec is exposed to risks that increases in interest rates may adversely affect funding costs associated with its variable-rate debt. The Company’s variable rate debt represents 30% and 38% of total long-term debt at June 30, 2010 and December 31, 2009, respectively. On an annual basis a 1% change in the interest rate for variable rate debt at June 30, 2010 would increase or decrease interest expense by $1.2 million.

To reduce the impact of interest rate changes on a portion of this variable-rate debt, the Company entered into interest rate swaps which effectively convert a portion of the debt from variable to fixed-rate borrowings during the term of the swap contracts. The Company is exposed to credit risk in the event of nonperformance by the counterparties. However, since only the cash interest payments are exchanged, exposure is significantly less than the notional amount. The counterparties are large financial institutions and the Company does not anticipate nonperformance. The Company concluded that these interest rate swap agreements qualify for cash flow hedge accounting which permits the recording of the fair value of the interest rate swap agreements and corresponding adjustment to other comprehensive income (loss), net of tax, on the balance sheet. As of June 30, 2010, the Company had interest rate swap agreements with a notional value of $137.0 million and which effectively changed the Company’s interest rate on bank debt at June 30, 2010 from a variable rate to a fixed rate of 2.28%. The interest rate swap agreements mature at various times through December 2012. As of June 30, 2010, the Company recorded a current liability of $2.0 million and a corresponding offset in accumulated other comprehensive loss of $1.2 million, net of tax.

Foreign Currency Exchange Risk

The Company has entered into foreign currency forward contracts to reduce the impact of changes in currency exchange rates. Forward contracts are agreements with a counterparty to exchange two distinct currencies at a set exchange rate for delivery on a set date at some point in the future. There is no exchange of funds until the delivery date. At the delivery date the Company can either take delivery of the currency or settle on a net basis.

At June 30, 2010, the Company had forward contracts for the sale of South African Rand (ZAR) and the purchase of U.S. Dollars (USD). The Company concluded that these foreign currency forward contracts qualify for cash flow hedge accounting which permits the recording of the fair value of the forward contract and corresponding adjustment to other comprehensive income (loss), net of tax, on the balance sheet. As of June 30, 2010, the Company had forward contracts with a notional value of 8.9 million ZAR (or $1.2 million USD), with an average exchange rate of 7.72 ZAR per $1 USD, resulting in the recording of a current asset and a corresponding offset in accumulated other comprehensive loss, net of tax, which was not material.

We are also subject to certain risks associated with changes in foreign currency exchange rates to the extent our operations are conducted in currencies other than the U.S. dollar. For the first six months of 2010, approximately 52% of Wabtec’s net sales were to customers in the United States, 15% in Canada, 8% in the United Kingdom, 5% in Australia, 2% in Germany, 2% in Mexico and 16% in other international locations.

 

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Item 4. CONTROLS AND PROCEDURES

Wabtec’s principal executive officer and its principal financial officer have evaluated the effectiveness of Wabtec’s “disclosure controls and procedures,” (as defined in Exchange Act Rule 13a-15(e)) as of June 30, 2010. Based upon their evaluation, the principal executive officer and principal financial officer concluded that Wabtec’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by Wabtec in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide reasonable assurance that information required to be disclosed by Wabtec in such reports is accumulated and communicated to Wabtec’s Management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

There was no change in Wabtec’s “internal control over financial reporting” (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2010, that has materially affected, or is reasonably likely to materially affect, Wabtec’s internal control over financial reporting.

 

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PART II—OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

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

 

Item 1A. RISK FACTORS

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

 

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

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

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

During the first six months of 2010, the Company repurchased 154,600 shares at an average price of $40.82 per share. During 2009, the Company repurchased 669,700 shares at an average price of $29.35 per share. All purchases were on the open market.

 

Period

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

April 4, 2010 to May 1, 2010

   —        —      —      $ 44,691,651

May 2, 2010 to May 29, 2010

   —        —      —      $ 44,691,651

May 30, 2010 to July 3, 2010

   79,600      40.40    79,600    $ 41,476,065
                       

Total

   79,600    $ 40.40    79,600    $ 41,476,065
                       

 

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Item 6. EXHIBITS

The following exhibits are being filed with this report:

 

    3.1    Restated Certificate of Incorporation of the Company dated January 30, 1995, as amended March 30, 1995.
    3.2    Amended and Restated By-Laws of the Company, effective December 13, 2007.
  31.1    Rule 13a-14(a) Certification of Chief Executive Officer.
  31.2    Rule 13a-14(a) Certification of Chief Financial Officer.
  32.1    Section 1350 Certification of Chief Executive Officer and Chief Financial Officer.
101.INS*    XBRL Instance Document.
101.SCH*    XBRL Taxonomy Extension Schema Document.
101.CAL*    XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*    XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*    XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*    XBRL Taxonomy Extension Presentation Linkbase Document.

 

* Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to liability under these sections.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

WESTINGHOUSE AIR BRAKE

TECHNOLOGIES CORPORATION

By:   /s/    ALVARO GARCIA-TUNON        
  Alvaro Garcia-Tunon,
  Senior Vice President,
  Chief Financial Officer and Secretary
(Duly Authorized Officer and Principal Financial Officer)

DATE: August 5, 2010

 

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EXHIBIT INDEX

 

    3.1    Restated Certificate of Incorporation of the Company dated January 30, 1995, as amended March 30, 1995, filed as an exhibit to the Company’s Registration Statement on Form S-1 (No. 33-90866), and incorporated herein by reference.
    3.2    Amended and Restated By-Laws of the Company, effective December 13, 2007, filed as Exhibit 3.1 to Form 8-K filed on December 14, 2007, and incorporated herein by reference.
  31.1    Rule 13a-14(a) Certification of Chief Executive Officer.
  31.2    Rule 13a-14(a) Certification of Chief Financial Officer.
  32.1    Section 1350 Certification of Chief Executive Officer and Chief Financial Officer.
101.INS*    XBRL Instance Document.
101.SCH*    XBRL Taxonomy Extension Schema Document.
101.CAL*    XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*    XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*    XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*    XBRL Taxonomy Extension Presentation Linkbase Document.

 

* Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to liability under these sections.

 

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