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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
COMMISSION FILE NO. 1-13782
WESTINGHOUSE AIR BRAKE COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 25-1615902
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1001 Air Brake Avenue
Wilmerding, Pennsylvania 15148
(Address of principal executive offices)
(412) 825-1000
Registrant's telephone number, including area code
Indicate by checkmark 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
--- ---
Number of shares of common stock outstanding, excluding unearned ESOP shares,
as of August 1, 1997:
24,718,271
Number of shares of common stock outstanding, including unearned ESOP shares,
as of August 1, 1997:
33,503,858
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WESTINGHOUSE AIR BRAKE COMPANY
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
INDEX
Page
----
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements
Condensed Consolidated Statement of Operations 3
Condensed Consolidated Balance Sheet 4
Condensed Consolidated Statement of Cash Flows 5
Condensed Consolidated Statement of
Shareholders' Equity 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II OTHER INFORMATION
ITEM 4 Submission of Matters to a Vote of Security Holders 14
SIGNATURES 15
3
WESTINGHOUSE AIR BRAKE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 1997 AND 1996
(Dollars in thousands except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1997 1996 1997 1996
---- ---- ---- ----
NET SALES $ 138,066 $ 109,135 $ 274,574 $ 214,866
COST OF SALES 91,163 72,066 182,111 142,700
--------- --------- --------- ---------
Gross Profit 46,903 37,069 92,463 72,166
SELLING AND MARKETING EXPENSES 6,108 3,816 11,734 7,372
GENERAL AND ADMINISTRATIVE EXPENSES 9,719 7,418 18,979 13,692
ENGINEERING EXPENSES 6,318 3,923 12,315 8,177
AMORTIZATION EXPENSE 1,974 1,925 4,109 3,717
--------- --------- --------- ---------
Income from operations 22,784 19,987 45,326 39,208
OTHER INCOME AND EXPENSES:
Interest expense 7,613 6,262 14,484 12,694
Other (income) expense, net (108) (36) (156) (73)
--------- --------- --------- ---------
Income before income taxes 15,279 13,761 30,998 26,587
INCOME TAXES 5,959 5,505 12,089 10,635
--------- --------- --------- ---------
NET INCOME $ 9,320 $ 8,256 $ 18,909 $ 15,952
========= ========= ========= =========
EARNINGS PER COMMON SHARE $ 0.37 $ 0.29 $ 0.71 $ 0.56
========= ========= ========= =========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 24,924 28,410 26,719 28,446
========= ========= ========= =========
The accompanying notes are an integral part of this statement.
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WESTINGHOUSE AIR BRAKE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1997 AND DECEMBER 31, 1996
(Dollars in thousands)
June 30, December 31,
1997 1996
---- ----
(Unaudited)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 2,969 $ 618
Accounts receivable 79,040 73,507
Inventories 65,284 62,355
Other current assets 16,551 13,689
--------- ---------
Total current assets 163,844 150,169
PROPERTY, PLANT AND EQUIPMENT 172,030 162,324
Less: Accumulated depreciation (71,379) (66,480)
--------- ---------
Property, plant and equipment, net 100,651 95,844
OTHER ASSETS:
Prepaid pension costs 4,653 4,608
Goodwill 60,714 60,490
Intangibles 44,804 44,241
Debt issuance costs and Other 8,527 7,884
--------- ---------
Total other assets 118,698 117,223
TOTAL ASSETS $ 383,193 $ 363,236
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt $ 22,124 $ 29,700
Accounts payable 29,758 23,789
Accrued income taxes 974 2,634
Other current liabilities 49,031 45,870
--------- ---------
Total current liabilities 101,887 101,993
Long-term debt 354,890 311,990
Reserve for Post Retirement Benefits 13,855 13,309
Accrued Pension Costs 5,242 4,724
Deferred Income Taxes 7,066 7,415
Minority Interest 255 -
--------- ---------
Total liabilities 483,195 439,431
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 100,000,000 shares authorized and
47,426,600 shares issued 474 474
Additional paid-in capital 104,413 104,321
Less: Treasury stock, at cost, 13,922,742 and 9,937,867 shares (193,123) (149,331)
Less: Unearned ESOP shares, 8,785,587 and 8,927,565 shares (131,944) (133,914)
Retained earnings 123,749 105,363
Cumulative translation adjustment (3,571) (3,108)
--------- ---------
Total shareholders' equity (100,002) (76,195)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 383,193 $ 363,236
========= =========
The accompanying notes are an integral part of this statement.
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WESTINGHOUSE AIR BRAKE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Dollars in thousands)
(Unaudited)
Six months ended
June 30,
----------------------
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 18,909 $ 15,952
Adjustments to reconcile net income to cash
provided by operations:
Depreciation and amortization 12,148 10,602
Provision for contribution to ESOP 1,866 1,113
Deferred income taxes (337) 213
Changes in certain assets and liabilities:
Accounts receivable 800 (9,981)
Inventories 4,360 4,506
Other assets and liabilities (616) 3,328
Accounts payable 2,382 (1,700)
Accrued income taxes (1,606) (212)
Accrued liabilities and advanced deposits (4,551) 3,316
--------- --------
Net cash provided by operating activities 33,355 27,137
INVESTING ACTIVITIES:
Purchase of property, plant and equipment, net (11,698) (5,716)
Cost of business acquisitions (7,730) (15,040)
--------- --------
Net cash used for investing activities (19,428) (20,756)
FINANCING ACTIVITIES:
Net bank debt borrowings 44,470 18,055
Payments of term debt (9,100) (19,400)
Purchase of treasury stock, including fees (46,068) (1,629)
Issuance of treasury stock 404 -
Cash dividends (523) (564)
--------- --------
Net cash used for financing activities (10,817) (3,538)
FOREIGN CURRENCY TRANSLATION ADJUSTMENT (759) 143
Increase in cash and cash equivalents 2,351 2,986
CASH AND CASH EQUIVALENTS, beginning of period 618 210
--------- --------
CASH AND CASH EQUIVALENTS, end of period $ 2,969 $ 3,196
========= ========
The accompanying notes are an integral part of this statement.
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WESTINGHOUSE AIR BRAKE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(Dollars in thousands)
(Unaudited)
Additional Unallocated Cumulative Total
Common Paid-In Treasury ESOP Retained Translation Shareholders'
Stock Capital Stock Shares Earnings Adjustment Equity
----- ------- ----- ------ -------- ---------- ------
BALANCE, December 31, 1996 $ 474 $104,321 $(149,331) $(133,914) $105,363 $ (3,108) $ (76,195)
Net income - - - - 18,909 - 18,909
Purchase of treasury stock - - (44,000) - - - (44,000)
Exercise of stock options - 196 208 - - - 404
Allocation of ESOP shares - (104) - 1,970 - - 1,866
Dividends paid - - - - (523) - (523)
Cumulative translation adjustment - - - - - (463) (463)
----- -------- --------- --------- -------- -------- ---------
BALANCE, June 30, 1997 $ 474 $104,413 $(193,123) $(131,944) $123,749 $ (3,571) $(100,002)
===== ======== ========= ========= ======== ======== =========
The accompanying notes are an integral part of this statement.
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WESTINGHOUSE AIR BRAKE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
(Unaudited)
1. BASIS OF PRESENTATION:
The information contained in these financial statements and notes for the three
and six months ended June 30, 1997, should be read in conjunction with the
financial statements and notes for the year ended December 31, 1996, contained
in the Company's Annual Report, as filed with the Securities and Exchange
Commission on Form 10-K. The accompanying unaudited Condensed Consolidated
Financial Statements have been prepared in accordance with generally accepted
accounting principles and the rules and regulations of the Securities and
Exchange Commission. These condensed interim statements do not include all of
the information and footnotes required for complete financial statements. It is
management's opinion that all adjustments (including all normal recurring
accruals) considered necessary for a fair presentation have been made; however,
results for these interim periods are not necessarily indicative of results to
be expected for the full year.
Earnings Per Share
- ------------------
Earnings per common and common equivalent share is based upon the weighted
average common and common equivalent shares outstanding during the period.
Primary and fully diluted earnings per share are the same.
Employee stock options, when dilutive, are considered common stock equivalents
using the treasury stock method. Also included in the weighted average shares
is the pro-rata amount of the annual allocation of approximately 284,000 shares
to the ESOP participants.
In February 1997, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS
No. 128 differs from current accounting guidance in that earnings per share is
classified as basic earnings per share and diluted earnings per share, compared
to primary earnings per share and fully diluted earnings per share under
current standards. Basic earnings per share differs from primary earnings per
share in that it includes only the weighted average common shares outstanding
and does not include any dilutive securities in the calculation. Diluted
earnings per share under the new standard differs in certain calculations
compared to fully diluted earnings per share under the existing standards.
Adoption of SFAS No. 128 is required for interim and annual periods ending
after December 15, 1997. The Company currently believes that the effect of
adopting SFAS No. 128 will not have a material impact on its earnings per
share.
2. STOCK REDEMPTION
On March 31, 1997, the Company repurchased from Scandinavian Incentive
Holdings, B.V., ("SIH"), 4,000,000 shares of the Company's Common Stock for a
purchase price of $11 per share in cash and an aggregate purchase price of $44
million plus fees and expenses of approximately $2 million (such transaction
being hereinafter referred to as the "Redemption"). The Redemption was effected
pursuant to a Redemption Agreement (the "Redemption Agreement") dated as of
March 5, 1997 among the Company, SIH and Incentive AB, the sole shareholder of
SIH ("Incentive"). Concurrently therewith, SIH sold its remaining 6,000,000
shares of Common Stock to a group of investors consisting of Vestar Equity
Partners, L.P. ("Vestar"), Harvard Private Capital Holdings, Inc. ("Harvard"),
American Industrial Partners Capital Fund II, L.P. ("AIP") and certain members
of management of the Company (the "Management Purchasers") for a purchase price
of $11 per share in cash, pursuant to a Stock Purchase Agreement dated as of
March 5, 1997, which sale was effective as of March 31, 1997 (such transaction
being hereinafter referred to as the "SIH Purchase").
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In addition, the Company entered into a Common Stock Registration Rights
Agreement (the "Registration Rights Agreement") dated as of March 5, 1997 among
the Company, Harvard, AIP, the RAC Voting Trust (the "Voting Trust"), Vestar,
Vestar Capital Partners, Inc. ("Vestar Capital") and the former Pulse
Shareholders, which Registration Rights Agreement provides for, among other
things, the registration of sales of shares of Common Stock under the
Securities Act of 1933, as amended, by Holders (as defined in the Registration
Rights Agreement) at the expense, subject to certain specified exceptions, of
the Company.
To finance the Redemption, the Company amended its credit agreement with The
Chase Manhattan Bank, The Bank of New York and the other financial institutions
named therein, to increase the revolving credit availability by $15 million
(from $125 million to $140 million) and to obtain a waiver of the requirement
to make a prepayment in an aggregate principal amount equal to 50% of excess
cash flow for 1996, or approximately $11.5 million. The Company obtained
consents from record owners as of March 3, 1997 of its 9-3/8% Senior Notes Due
2005 (the "Notes") to certain amendments to a covenant contained in the
Indenture dated as of June 20, 1995 among the Company, as issuer, and The Bank
of New York, as trustee, pursuant to which the Notes were issued (the
"Indenture"). The Company borrowed $46 million to fund the Redemption and
related expenses.
Upon the Company's receipt of the requisite consents, the Indenture was amended
(i) to permit additional Restricted Payments in an amount of approximately $22
million in order to complete the Redemption, and (ii) to permit up to $2
million of additional Restricted Payments to be made in advance of when they
would otherwise have been permitted.
In addition, an Amended and Restated Stockholders Agreement dated as of March
5, 1997 by and among the Voting Trust, Vestar, Harvard, AIP and the Company,
and joined for certain purposes by Vestar Capital, William E. Kassling, Emilio
A. Fernandez, Ofelia B. Fernandez, Robert J. Brooks, John M. Meister,
Davideco, Inc. and Suebro, Inc., as amended by Amendment No. 1 thereto dated as
of March 28, 1997 (the "Stockholders Agreement"), was executed in connection
with the SIH Purchase. The Stockholders Agreement contains provisions
regarding, among other things, the disposition and voting of shares of Common
Stock by the parties to such agreement, as well as certain provisions regarding
the composition of the Board of Directors of the Company.
The following presents the Company's results for the six months ended June 30,
1997 on a pro forma basis as if this transaction had occurred on January 1,
1997:
In thousands,
except per share data
---------------------
Net Income $18,420
Earnings per Share $ .74
Weighted Average Shares 24,752
3. INVENTORIES:
Inventories are stated at the lower of cost or market. Cost is determined under
the first-in, first-out (FIFO) method. Inventory costs include material, labor
and overhead. The components of inventory at June 30, 1997, and December 31,
1996 are:
(Dollars in Thousands)
----------------------
June 30, December 31,
1997 1996
---- ----
Raw materials $25,487 $20,140
Work-in-process 27,364 31,294
Finished goods 12,433 10,921
------- -------
$65,284 $62,355
======= =======
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4. ACQUISITIONS:
Effective January 31, 1996, the Company acquired 100% of the stock of Futuris
Industrial Products Pty. Ltd. (Futuris), an Australian company, for a cash
purchase price of approximately $15 million. Futuris is a leading manufacturer
of brake shoes and disc brake pads for railroads in Australia and the Pacific
Rim.
On September 19, 1996, the Company acquired from Mark IV Industries Inc. the
Vapor Group (Vapor) for a cash purchase price of approximately $63.9 million.
The transaction, which has been accounted for as a purchase, was effective
September 1, 1996. Pursuant to an earn out provision, the purchase price may be
increased by up to $2 million based on a sales formula. Vapor is the leading
manufacturer of door controls for transit rail cars and metropolitan buses in
the United States, with annual revenues for its most recent fiscal year (prior
to the acquisition) of approximately $65 million. The net tangible assets of
Vapor were approximately $36 million at the date of purchase. The fair market
valuations and allocation of the purchase price to the acquired tangible and
intangible assets have been based upon an independent appraisal. The purchase
price paid in excess of the fair value of the acquired net tangible assets was
approximately $28.2 million and has been allocated to goodwill and other
intangibles.
Effective May 1, 1997 the Company purchased Stone Safety Service Corporation
and Stone U.K. Limited (Stone) from Enprotech Corporation, a subsidiary of
Itochu International. Stone is located in New Jersey and England, and is one of
the world's leading manufacturers of air conditioning equipment with an
established product base in North America, Europe and the Far East. On June 27,
1997 the Company acquired the heavy rail air conditioning business of Thermo
King Corporation (Thermo King) from Westinghouse Electric. The Thermo King
purchase included certain inventory, equipment and drawings. The aggregate
purchase price for the Stone and Thermo King acquisitions was approximately
$7.5 million and was financed by utilizing the Company's revolving line of
credit. Annual revenues of the Stone and Thermo King acquisitions aggregate
approximately $20 million. The acquisitions have been accounted for under the
purchase method and the excess of the purchase price over the fair value of net
assets acquired was approximately $1 million which has been allocated primarily
to goodwill.
5. SUBSEQUENT EVENT:
Effective July 31, 1997 the Company acquired 100% of the stock of H.P. S.r.l.
(HP), an Italian company. HP is a leading supplier of door controls for transit
rail cars and buses in the Italian market, with revenues of approximately $9
million for its most recent fiscal year.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis by management of financial condition
provides information with respect to the results of operations of the Company
for the three month and six month periods ended June 30, 1997 and 1996,
respectively. This discussion should be read in connection with the information
in the condensed consolidated financial statements and the notes pertaining
thereto.
Certain statements in this quarterly report on Form 10-Q are forward-looking
statements concerning the future operations of the Company. Such statements are
made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, and there are many important factors that could
cause actual results to differ materially from those in the forward-looking
statements.
Results of Operations
- ---------------------
The following table summarizes sales by market:
For the three months ended For the six months ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
Electronics $ 22,206 $ 18,676 $ 45,299 $ 31,825
Freight Car 43,117 48,987 88,027 102,222
Transit 42,659 15,523 79,994 31,295
Locomotive 12,233 11,252 23,831 22,090
Friction & Other 17,851 14,697 37,423 27,434
--------- --------- --------- ---------
$ 138,066 $ 109,135 $ 274,574 $ 214,866
========= ========= ========= =========
SECOND QUARTER 1997 COMPARED TO SECOND QUARTER 1996
Net Sales
- ---------
Net sales increased 27% to $138.1 million in the second quarter of 1997
compared to $109.1 million in the same period of 1996, due primarily to the
acquisitions of Vapor Corporation on September 1, 1996 and Stone Safety Service
Corporation on May 1, 1997 ($26.5 million of combined sales reflected in
transit sales), as well as continued strong performances from the Company's
electronics, transit and friction product segments.
Freight car sales decreased $5.9 million to $43.1 million in the second quarter
of 1997 from $49.0 million in 1996 due to the reduction in the number of new
freight car deliveries from 14,129 to 11,414.
Gross Profit
- ------------
Gross profit increased $9.8 million or 27%, to $46.9 million in 1997 versus
$37.1 million in 1996; gross profit margins remained constant at 34%. The
overall increase in sales resulted in the higher gross profit for the quarter
ended June 30, 1997.
Selling and Marketing Expenses
- ------------------------------
Selling and marketing expenses increased $2.3 million in 1997 compared to 1996;
increased expenses related to the acquisitions of Vapor and Stone accounted for
$1.4 million and the balance was attributable to international marketing
expansion and higher sales levels.
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General and Administrative Expenses
- -----------------------------------
General and administrative expenses increased $2.3 million to $9.7 million in
1997 from $7.4 million in 1996. The increase was primarily due to the addition
of Vapor and Stone which accounted for $1.7 million.
Engineering Expenses
- --------------------
Engineering expenses, which do not include that portion of engineering which
supports manufacturing, increased $2.4 million to $6.3 million in 1997 from
$3.9 million in 1996, due primarily to the acquisitions of Vapor and Stone
($1.8 million). The remainder of the increase in engineering expenses was due
to new product development in the Company's Integrated Railway Systems group.
Income from Operations
- ----------------------
Operating income increased 14% to $22.8 million in 1997 over the prior year due
primarily to the higher sales volume while the Company was able to maintain
gross profit margins at 34%.
Interest Expense
- ----------------
Second quarter 1997 interest expense was $7.6 million, a 22% increase over the
$6.3 million incurred in the second quarter of 1996. The increase is attributed
to additional debt levels in 1997, primarily associated with the Share
Redemption on March 31, 1997 and the incremental borrowing costs to finance
acquisitions less paydowns.
Income Taxes
- ------------
The effective tax rate was 39% for the second quarter of 1997 compared with 40%
for the comparable quarter of 1997. This decline was due to the establishment
of a Foreign Sales Corporation in October 1996 and lower overall state tax
rates. The provision for income taxes was $6.0 million in 1997 compared to
$5.5 million in 1996.
Net Income
- ----------
Higher sales volume coupled with increased gross profits and a lower overall
effective tax rate were principal reasons for the increase in profitability.
Net income increased 13% to $9.3 million in 1997 from $8.3 million in 1996, and
earnings per share increased 28% to $.37 from $.29 despite the 21% decline in
the freight Original Equipment Manufacturing ("OEM") market. The Company's
strategy to become less dependent on the cyclical freight market continued to
contribute to the favorable results of the Company as is evidenced in the
second quarter results.
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SIX MONTH PERIOD ENDED JUNE 30, 1997 COMPARED TO SIX MONTH PERIOD ENDED
JUNE 30, 1996
Net Sales
- ---------
Net sales increased 28% or $59.7 million to $274.6 million in 1997 compared to
$214.9 million in 1996. The 1997 increase in net sales over those generated in
1996 was due primarily to the acquisitions of Vapor and Stone ($48.4 million
shown in transit sales) as well as increased volume in the electronics, transit
and friction businesses. The federal mandate that most trains be equipped with
the two-way end-of-train monitoring device coupled with new products was the
reason for the electronics sales increase.
Net sales in the Locomotive business increased $1.7 million, or 8%, from $22.1
million in 1996 to $23.8 million in 1997. The Freight Car division sales
declined from $102.2 million in 1996 to $88.0 million in 1997, as the result of
the slowdown in the freight car OEM market by 21%.
Gross Profit
- ------------
Gross profit increased $20.3 million or 28%, to $92.5 million in 1997 compared
to $72.2 million in 1996. The gross profit increase was due to the overall 28%
increase in net sales. Gross margin, as a percentage of sales, remained level.
Selling and Marketing Expenses
- ------------------------------
Selling and marketing expenses increased $4.4 million in 1997 of which the
acquisitions accounted for $2.8 million; increased marketing expenses in
conjunction with new products and the Company's expanded international
marketing activities accounted for the remainder of the increase.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses increased $5.3 million to $19.0 million in
1997 from $13.7 million in 1996. Approximately $3.1 million of the increase was
due to the effects of the Vapor and Stone acquisitions; the remainder was due
to increased corporate expenses.
Engineering Expenses
- --------------------
Engineering expenses, which do not include that portion of engineering which
supports manufacturing, increased $4.1 million to $12.3 million in 1997 from
$8.2 million in 1996, due primarily to the acquisitions which accounted for
$3.3 million of the increase. Engineering expenses were also up in conjunction
with new product development.
Amortization Expense
- --------------------
Amortization expense increased $.4 million in 1997 due primarily to the
amortization of intangibles, including goodwill, associated with the
acquisition of Vapor in September 1996.
Income from Operations
- ----------------------
Operating income increased $6.1 million to $45.3 million in 1997 from $39.2
million in 1996. Operating income for the six months ended June 30, 1997 was
favorably impacted by the aforementioned increased sales volumes and increased
gross profit.
Interest Expense
- ----------------
Interest expense increased $1.8 million to $14.5 million in 1997 from $12.7
million in 1996, due to higher debt levels in 1997 primarily as the result of
financing the Share Redemption.
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Income Taxes
- ------------
The provision for income taxes was $12.1 million in 1997 compared to $10.6
million in 1996. The effective tax rate declined from 40% in 1996 to 39% in
1997, due to the establishment of a Foreign Sales Corporation and lower overall
state tax rates.
Net Income
- ----------
Net income increased by $2.9 million from $16.0 million in 1996 to $18.9
million in 1997 as the result of the increased sales volume and associated
increased gross profits.
Liquidity and Capital Resources
- -------------------------------
The Company has generated cash from operating activities of $33.4 million and
$27.1 million in the first six months of 1997 and 1996, respectively. During
the six months ended June 30, 1997, the Company increased its bank debt
obligations by a net $35 million as a result of funding the $46 million payment
for the stock repurchase, as is described below, and financing related to the
Stone and Thermo King acquisitions . Excluding the borrowings for the share
buyback and acquisitions, the Company would have decreased debt by
approximately $18.4 million. Also, cash and cash equivalents increased by $2.4
million during the six months ended June 30, 1997. Cash generated from
operating activities has remained strong due to continued profitability and
improved asset management, which has enabled the Company to fund both its
anticipated capital expenditures and the related working capital requirements.
On March 4, 1997, one of the Company's major shareholders, Scandinavian
Incentive Holding B.V. ("SIH"), agreed to sell the 10 million shares of WABCO
Common Stock that it holds. Under the terms of the March 5, 1997 agreement, the
Company bought 4 million shares at $11 per share, upon obtaining approval of
the Company's senior note holders, and an investment group consisting of Vestar
Equity Partners, L.P., Harvard Private Capital Group, American Industrial
Partners Capital Fund II, L.P. and certain members of Company management
acquired the remaining 6 million shares at the same price. This transaction was
completed on March 31, 1997 and increased total bank debt obligations by $46
million.
The Company's primary source of liquidity, other than operations, is the $140
million revolving credit facility (the Revolving Credit Facility) pursuant to
the Amended Credit Agreement, of which approximately $104 million had been
utilized for borrowings at June 30, 1997. The financing for the stock
repurchase was made under the Company's Revolving Credit Facility.
At June 30, 1997, the total indebtedness of the Company is approximately $377.0
million, of which approximately $260 million is outstanding under the Amended
Credit Agreement, $100.0 million is outstanding under the Company's Senior
Notes and $17.0 million is due to the former owners of Pulse. The Company's
total annual interest obligation on such indebtedness would be approximately
$30.5 million based on the interest rates in effect as of June 30, 1997 (using
a weighted average interest rate of approximately 8.1%). The interest rate for
the Notes is fixed at 9.375%, which will result in an annual interest
obligation of $9.4 million (based on a total outstanding amount of $100
million). Most of the remaining indebtedness bears interest at variable
interest rates and, therefore, the Company's total annual interest obligation
will change based on the applicable interest rates in effect from time to time.
However, the Company has entered into interest rate swap agreements that fix
the interest cost on $75 million at a weighted average interest rate of
approximately 7.95%.
Management believes, based upon current levels of operations and forecasted
earnings, that cash flows from operations, together with borrowings under the
Amended Credit Agreement, will be adequate to make required payments of
principal and interest on debt, including the Notes, to permit anticipated
capital expenditures, and to fund working capital requirements and other cash
needs. Nevertheless, the Company will remain leveraged to a significant extent
with corresponding requirements for debt service obligations. Moreover, the
ability of the Company to comply with the covenants and other restrictions
contained in the Notes and the Amended Credit Agreement may be affected by
events beyond its control. If the Company's sources of funds were to be
inadequate to satisfy the Company's cash requirements, the Company may need to
refinance its existing debt or obtain additional financing. There is no
assurance that any such new financing alternatives would be available and, in
any case, such new financing, if available, could be expected to be more costly
and burdensome than the debt agreements currently in place.
13
14
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on April 22, 1997.
Two matters were considered and voted upon at the Annual Meeting: the election
of two persons to serve as directors and the ratification of the appointment of
Arthur Andersen LLP as independent public accountants to audit the financial
statements of the Company and its subsidiaries for the 1997 fiscal year.
Nominations of Robert J. Brooks and Mikael Lilius to serve as directors for a
term expiring in 2000 were considered.
Votes Votes Votes Broker
Nominee For Against Withheld Non-Votes
------- --- ------- -------- ---------
Robert J. Brooks 29,566,259 - 89,606 -
Mikael Lilius 29,585,366 - 70,499 -
The holders of 29,647,768 shares of the Common Stock voted to ratify the
appointment of Arthur Andersen LLP. The holders of 5,487 shares voted against
such appointment. There were 0 abstentions and 2,610 broker non-votes as to
such matter. Accordingly such appointment was ratified.
14
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WESTINGHOUSE AIR BRAKE COMPANY
(Registrant)
August 14, 1997 By /s/ ROBERT J. BROOKS
------------------------------
Robert J. Brooks, Vice President and
Chief Financial Officer
15
5
1,000
6-MOS
DEC-31-1997
JAN-01-1997
JUN-30-1997
2,969
0
79,040
0
65,284
163,844
172,030
71,379
383,193
101,887
354,890
0
0
474
(100,476)
383,193
274,574
274,574
182,111
182,111
(156)
0
14,484
30,998
12,089
18,909
0
0
0
18,909
.71
.71
