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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 SEPTEMBER 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 November 3, 1997:
24,915,467
----------
Number of shares of common stock outstanding, including unearned ESOP shares,
as of November 3, 1997:
33,630,065
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WESTINGHOUSE AIR BRAKE COMPANY
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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
None 14
SIGNATURES 15
3
WESTINGHOUSE AIR BRAKE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Dollars in thousands except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1997 1996 1997 1996
---- ---- ---- ----
NET SALES $ 142,761 $ 109,801 $ 417,335 $ 324,667
COST OF SALES 97,202 72,213 279,313 214,913
--------- --------- --------- ---------
Gross Profit 45,559 37,588 138,022 109,754
SELLING AND MARKETING EXPENSES 6,594 4,668 18,328 12,040
GENERAL AND ADMINISTRATIVE EXPENSES 8,906 6,581 27,885 20,273
ENGINEERING EXPENSES 6,019 4,674 18,334 12,851
AMORTIZATION EXPENSE 2,004 1,983 6,113 5,700
--------- --------- --------- ---------
Income from operations 22,036 19,682 67,362 58,890
OTHER INCOME AND EXPENSES:
Interest expense 7,700 6,346 22,184 19,040
Other (income) expense, net (150) (12) (306) (85)
--------- --------- --------- ---------
Income before income taxes 14,486 13,348 45,484 39,935
INCOME TAXES 5,650 5,339 17,739 15,974
--------- --------- --------- ---------
NET INCOME $ 8,836 $ 8,009 $ 27,745 $ 23,961
========= ========= ========= =========
PER SHARE DATA:
Primary Earnings Per Share $ 0.35 $ 0.28 $ 1.05 $ 0.84
Average Shares used in Primary 25,565 28,456 26,388 28,449
Fully-Diluted Earnings Per Share $ 0.34 $ 0.28 $ 1.03 $ 0.84
Average Shares used in Fully-Diluted 26,019 28,456 27,062 28,449
The accompanying notes are an integral part of this statement.
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4
WESTINGHOUSE AIR BRAKE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
(Dollars in thousands)
September 30, December 31,
1997 1996
---- ----
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 256 $ 618
Accounts receivable 92,207 73,507
Inventories 66,178 62,355
Other current assets 17,163 13,689
---------- ---------
Total current assets 175,804 150,169
PROPERTY, PLANT AND EQUIPMENT 178,043 162,324
Less: Accumulated depreciation (75,566) (66,480)
---------- ---------
Property, plant and equipment, net 102,477 95,844
OTHER ASSETS:
Prepaid pension costs 4,607 4,608
Goodwill 63,819 60,490
Intangibles 43,774 44,241
Debt issuance costs and other 8,567 7,884
---------- ---------
Total other assets 120,767 117,223
TOTAL ASSETS $ 399,048 $ 363,236
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 22,944 $ 29,700
Accounts payable 31,085 23,789
Accrued income taxes 389 2,634
Other current liabilities 58,967 45,870
---------- ---------
Total current liabilities 113,385 101,993
Long-term debt 347,073 311,990
Reserve for post-retirement benefits 14,130 13,309
Accrued pension costs 5,596 4,724
Deferred income taxes 6,061 7,415
Other long-term liabilities 955 -
---------- ---------
Total liabilities 487,200 439,431
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 100,000,000 shares authorized and
47,426,600 issued 474 474
Additional paid-in capital 105,077 104,321
Less: Treasury stock, at cost, 13,796,535 and 9,937,867 shares (191,384) (149,331)
Less: Unearned ESOP shares, 8,714,598 and 8,927,565 shares (130,879) (133,914)
Retained earnings 132,343 105,363
Cumulative translation adjustment (3,783) (3,108)
--------- ---------
Total shareholders' equity (88,152) (76,195)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 399,048 $ 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 NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Dollars in thousands)
(Unaudited)
Nine months ended
September 30,
------------------------------
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 27,745 $ 23,961
Adjustments to reconcile net income to cash provided by operations:
Depreciation and amortization 18,181 16,486
Provision for contribution to ESOP 3,278 1,638
Deferred income taxes (1,337) (253)
Changes in certain assets and liabilities:
Accounts receivable (6,730) (5,977)
Inventories 5,550 6,712
Other assets and liabilities 2,392 3,357
Accounts payable (1,181) (3,022)
Accrued income taxes (2,162) 953
Accrued liabilities and advanced deposits 3,542 2,941
-------- --------
Net cash provided by operating activities 49,278 46,796
INVESTING ACTIVITIES:
Purchase of property, plant and equipment, net (16,694) (9,101)
Cost of business acquisitions (13,492) (78,890)
-------- --------
Net cash used for investing activities (30,186) (87,991)
FINANCING ACTIVITIES:
Net bank debt borrowings 35,187 69,895
Payments of term debt (9,100) (19,400)
Purchase of treasury stock, including fees (46,068) (2,022)
Proceeds from exercise of stock options 2,460 -
Cash dividends (765) (846)
-------- --------
Net cash provided (used) by financing activities (18,286) 47,627
FOREIGN CURRENCY TRANSLATION ADJUSTMENT (1,168) 24
Increase (Decrease) in cash and cash equivalents (362) 6,456
CASH AND CASH EQUIVALENTS, beginning of period 618 210
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 256 $ 6,666
======== ========
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 NINE MONTHS ENDED SEPTEMBER 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 - - - - 27,745 - 27,745
Purchase of treasury stock - - (44,000) - - - (44,000)
Exercise of stock options - 513 1,947 - - - 2,460
Allocation of ESOP shares - 243 - 3,035 - - 3,278
Dividends paid - - - - (765) - (765)
Cumulative translation adjustment - - - - - (675) (675)
----- --------- ---------- ---------- --------- --------- ---------
BALANCE, September 30, 1997 $ 474 $ 105,077 $ (191,384) $ (130,879) $ 132,343 $ (3,783) $ (88,152)
===== ========= ========== ========== ========= ======== =========
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 SEPTEMBER 30, 1997
(Unaudited)
1. BASIS OF PRESENTATION:
The information contained in these financial statements and notes for the three
and nine months ended September 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.
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 with a restatement of all prior periods being required.
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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8
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 nine months ended
September 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 $27,256
=======
Primary Earnings Per Share $ 1.09
Average Shares used for Primary 25,084
Fully-Diluted Earnings Per Share $ 1.06
Average Shares used for Fully-Diluted 25,758
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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 September 30, 1997, and December
31, 1996 are:
(Dollars in Thousands)
----------------------
September 30, December 31,
1997 1996
---- ----
Raw materials $23,689 $20,140
Work-in-process 27,328 31,294
Finished goods 15,161 10,921
------- -------
$66,178 $62,355
======= =======
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 suppliers of air conditioning equipment for the transit
industry 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.
Effective July 31, 1997 the Company acquired 100% of the stock of H.P. S.r.l.
(HP), an Italian company for a total purchase price of $5.6 million, which
included the assumption of $2.4 million in debt. HP is located in Sassuolo,
Italy and is a leading supplier of door controls for transit rail cars and
buses in the Italian market, with revenues of approximately $9 million for its
most recent fiscal year. The acquisition has been accounted for under the
purchase method and the excess of the purchase price over the fair value of the
net assets acquired of approximately $3.5 million has been allocated primarily
to goodwill.
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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 nine month periods ended September 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 nine months ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
Electronics $ 16,629 $ 17,637 $ 61,928 $ 49,462
Freight Car 53,502 41,793 141,529 144,015
Transit 43,172 24,764 123,166 56,059
Locomotive 11,441 10,088 35,272 32,178
Friction & Other 18,017 15,519 55,440 42,953
--------- --------- --------- ---------
$ 142,761 $ 109,801 $ 417,335 $ 324,667
========= ========= ========= =========
THIRD QUARTER 1997 COMPARED TO THIRD QUARTER 1996
Net Sales
Net sales were $142.8 million in the third quarter of 1997, an increase of 30%
over the comparable quarter of 1996. The recent acquisitions of Stone, a
transit air conditioning manufacturer with locations in the U.S. and the U.K.,
the heavy rail air conditioning division of Thermo King, and HP, an Italian
transit door manufacturer, contributed $8.9 million during the quarter. Also,
the inclusion of Vapor Corporation for a full three months in the current
quarter, which was acquired as of September 1, 1996, accounted for $13.5
million of the increased sales.
Sales in the Company's Freight Car operations increased 28% or $11.7 million,
to $53.5 million in 1997 from $41.8 million in 1996. This increase was due
primarily to higher deliveries associated with freight car OEM for the quarter
ended September 30, 1997. Sales in the Company's Electronics segment decreased
$1.0 million due primarily to the completion of deliveries pursuant to the
federal mandate that most trains be equipped with the two-way end-of-train
monitoring equipment by July 1997.
Gross Profit
Gross profit increased $8.0 million or 21%, to $45.6 million in 1997 versus
$37.6 million in 1996 while gross profit margins decreased to 32% of sales in
1997 from 34% in 1996. The reduced margins were due principally to the lower
margins in the beginning backlog of the recently acquired businesses of both
Stone and HP.
Selling and Marketing Expenses
Selling and marketing expenses increased $1.9 million in 1997 compared to 1996;
selling expenses of the acquired businesses of Vapor and Stone accounted for a
majority of the increase; the balance of the increase was attributable to
international marketing expansion and new product introductions.
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General and Administrative Expenses
General and administrative expenses increased $2.3 million to $8.9 million in
1997 from $6.6 million in 1996. The increase was primarily attributable to
expenses of the acquired businesses of Vapor and Stone.
Engineering Expenses
Engineering expenses, which do not include that portion of engineering which
supports manufacturing, increased $1.3 million to $6.0 million in 1997 from
$4.7 million in 1996. Excluding the effects of the increase relating to the
acquisitions of Vapor, Stone and HP, engineering expenses remained relatively
constant between periods.
Income from Operations
Operating income increased 12% over the prior year to $22.0 million in 1997
from $19.7 million in 1996, due primarily to the higher sales volume and
related gross profit.
Interest Expense
Interest expense increased $1.4 million in the third quarter of 1997 in
comparison to the same period in 1996. This increase was attributable to higher
average debt levels in 1997 as the result of borrowings to finance the Share
Redemption on March 31, 1997, and the recent acquisitions of Stone, Thermo King
and HP.
Income Taxes
The effective tax rate was 39% for the third quarter of 1997 as compared to 40%
for the same period of 1996. The reduced tax rate was due to the establishment
of a Foreign Sales Corporation in October 1996 and lower overall state tax
rates.
Net Income
Net income for the third quarter of 1997 was $8.8 million, representing a 10%
increase over the prior year. Earnings per share for the third quarter of 1997
increased to $.35 ($.34 on a fully-diluted basis) as compared to $.28 for the
corresponding period in the prior year (fully-diluted EPS was also $.28 in the
third quarter of 1996).
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NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTH PERIOD ENDED
SEPTEMBER 30, 1996
Net Sales
Net sales for the nine months ended September 30, 1997 increased 29% to $417.3
million in 1997 compared to $324.7 million in 1996. The increase in net sales
was due principally to the acquisitions of Vapor, Stone and HP ($70.8 million)
as well as increased volume in the Electronics, Transit and Friction
businesses. The sales increase in the Electronics product segment was
primarily due to new products and the federal mandate for most trains to be
equipped with the two-way end-of-train monitoring device.
Net sales in the Locomotive business increased $3.1 million, or 10%, from $32.2
million in 1996 to $35.3 million in 1997. The Freight Car division sales
declined from $144.0 million in 1996 to $141.5 million in 1997, as the result
of the year-on-year decline in OEM freight car production.
Gross Profit
Gross profit increased 26%, to $138.0 million in 1997 compared to $109.8
million in 1996. Gross margin, as a percentage of sales, was 33% in 1997 as
compared to 34% in 1996. The overall product mix of sales and the lower margins
at the recently acquired businesses of both Stone and HP were the primary
factors for the change.
Selling and Marketing Expenses
Selling and marketing expenses increased $6.3 million in 1997 of which the
acquisitions accounted for $4.1 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 to $27.9 million in 1997 from
$20.3 million in 1996. The increase in general and administrative expenses was
due primarily to the effects of the Vapor, Stone and HP acquisitions.
Engineering Expenses
Engineering expenses, which do not include that portion of engineering which
supports manufacturing, increased $5.4 million to $18.3 million in 1997 from
$12.9 million in 1996, due primarily to the acquisitions which accounted for
$4.9 million of the increase. Additional engineering expenses were also
incurred in conjunction with new product development.
Amortization Expense
Amortization expense increased $.4 million in 1997 due to the amortization of
intangibles, including goodwill, associated with the acquisition of Vapor in
September 1996.
Income from Operations
Operating income increased to $67.4 million in 1997 from $58.9 million in 1996,
up $8.5 million. Operating income for 1997 was favorably impacted by the
aforementioned increased sales volume and related gross profit.
Interest Expense
Interest expense increased $3.1 million to $22.1 million in 1997 from $19.0
million in 1996, due to higher debt levels in 1997 as the result of incremental
borrowings for the Share Redemption and acquisitions less repayments made to
date during 1997.
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13
Income Taxes
The provision for income taxes increased $1.8 million to $17.7 million in 1997
compared to $15.9 million in 1996. The effective tax rate declined to 39% in
1997 from 40% in 1996, due to the establishment of a Foreign Sales Corporation
and lower overall state tax rates.
Net Income
Net income increased $3.8 million to $27.7 million in 1997 from $23.9 million
in 1996 as the result of the increased sales volume and associated increased
gross profits. Primary earnings per share increased to $1.05 in 1997 compared
to $.84 in 1996; while fully-diluted earnings per share increased to $1.03 in
1997 from $.84 in 1996.
Liquidity and Capital Resources
The Company has generated cash from operating activities of $49.3 million and
$46.8 million in the first nine months of 1997 and 1996, respectively. During
the nine months ended September 30, 1997, the Company increased its bank debt
obligations by a net $28 million as a result of funding the $46 million payment
for the stock repurchase, as is described below, and financing related to the
Stone, Thermo King and HP acquisitions . Excluding the borrowings for the share
buyback and acquisitions, the Company would have decreased debt by
approximately $31.0 million through September 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.
Accounts receivable have increased approximately $19 million or 25% from
December 31, 1996 due to receivables of acquired businesses and increased
receivables from the increased sales volume in the freight car market. Other
current liabilities increased $13 million or 28% from December 31, 1996
primarily for those new acquisitions mentioned above.
Pursuant to an agreement dated 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 for the Company's portion of the buyback.
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 $94 million had been
utilized for borrowings at September 30, 1997 and an additional $20 million had
been utilized for letters of credit under customer contract requirements.
At September 30, 1997, the total indebtedness of the Company is approximately
$370.0 million, of which approximately $249.0 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. In
addition, the Company has approximately $4.0 million of debt in acquired
businesses. 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%. The Company's total annual interest
obligation on all indebtedness would be approximately $30.0 million based on
the interest rates in effect as of September 30, 1997 (using a weighted average
interest rate of approximately 8.1%).
The Company has information system improvement initiatives under way which
include both new computer hardware and software applications. The new system is
expected to be operational by late 1998 and will be year
13
14
2000 compliant. The majority of the expenditures incurred for this project will
be capitalized and amortized over their estimated useful lives, and
accordingly, are not expected to have a significant impact on the Company's
future results of operations.
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.
PART II. OTHER INFORMATION
None
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)
November 12, 1997 By /s/ ROBERT J. BROOKS
-------------------------------------
Robert J. Brooks, Vice President and
Chief Financial Officer
15
5
1,000
9-MOS
DEC-31-1997
JAN-01-1997
SEP-30-1997
256
0
92,207
0
66,178
175,804
178,043
75,566
399,048
113,385
347,073
0
0
474
(88,626)
399,048
417,335
417,335
279,313
279,313
(306)
0
22,184
45,484
17,739
27,745
0
0
0
27,745
1.05
1.03
