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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, 1998
Commission file number 1-13782
WESTINGHOUSE AIR BRAKE COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 25-1615902
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1001 AIR BRAKE AVENUE
WILMERDING, PENNSYLVANIA 15148 (412) 825-1000
(Address of principal executive offices) (Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for at least the past 90 days. Yes X No .
----- -----
As of August 1, 1998, 33,842,938 shares of Common Stock of the
registrant were issued and outstanding, of which 8,642,611 shares were
unallocated ESOP shares.
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TABLE OF CONTENTS
Page
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of June 30, 1998 and
December 31, 1997 3
Condensed Consolidated Statement of Operations for the three
and six months ended June 30, 1998 and 1997 4
Condensed Consolidated Statement of Cash Flows for the
six months ended June 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Position and
Results of Operations 8
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
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WESTINGHOUSE AIR BRAKE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
JUNE 30 DECEMBER 31
Dollars in thousands, except share data 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 5,095 $ 836
Accounts receivable 107,444 91,438
Inventories 84,872 69,297
Other 17,848 18,928
---------------------------
Total current assets 215,259 180,499
Property, plant and equipment 202,822 186,534
Accumulated depreciation (86,681) (78,167)
---------------------------
Property, plant and equipment, net 116,141 108,367
OTHER ASSETS
Prepaid pension costs 5,334 5,061
Goodwill 74,919 66,599
Other intangibles 40,333 42,466
Other noncurrent assets 5,453 7,887
---------------------------
Total other assets 126,039 122,013
---------------------------
Total Assets $457,439 $410,879
===========================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $15,000 $32,600
Accounts payable 44,372 37,582
Accrued income taxes 3,983 488
Accrued interest 1,233 3,038
Advance deposits 18,946 21,210
Other 41,899 36,862
---------------------------
Total current liabilities 125,433 131,780
Long-term debt 361,239 332,334
Reserve for postretirement benefits 15,420 14,860
Accrued pension costs 5,337 4,700
Other long-term liabilities 6,601 6,468
---------------------------
Total liabilities 514,030 490,142
SHAREHOLDERS' EQUITY
Preferred stock, 1,000,000 shares authorized, no shares issued - -
Common stock, $.01 par value; 100,000,000 shares
authorized and 47,426,600 shares issued 474 474
Additional paid-in capital 106,831 105,522
Less-Treasury stock, at cost, 13,602,709 and 13,743,924 shares (188,648) (190,657)
Less-Unearned ESOP shares, at cost, 8,658,171 and 8,751,531 shares (129,872) (131,273)
Retained earnings 160,956 141,617
Unamortized restricted stock award (294) -
Cumulative translation adjustment (6,038) (4,946)
---------------------------
Total shareholders' equity (56,591) (79,263)
===========================
Liabilities and Shareholders' Equity $457,439 $410,879
===========================
The accompanying notes are an integral part of this statement.
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WESTINGHOUSE AIR BRAKE COMPANY
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
Dollars in thousands, except share data 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $172,052 $138,066 $330,188 $274,574
Cost of sales 117,005 91,163 223,345 182,111
--------------------------- ----------------------------
Gross profit 55,047 46,903 106,843 92,463
Selling and marketing expenses 7,154 6,108 14,068 11,734
General and administrative expenses 12,719 9,719 24,303 18,979
Engineering expenses 7,016 6,318 13,454 12,315
Amortization expense 2,074 1,974 4,179 4,109
--------------------------- ----------------------------
Total operating expenses 28,963 24,119 56,004 47,137
--------------------------- ----------------------------
Income from operations 26,084 22,784 50,839 45,326
Other income and expenses
Interest expense 7,525 7,613 14,898 14,484
Other (income) expense, net (312) (108) (443) (156)
--------------------------- ----------------------------
Income before income taxes 18,871 15,279 36,384 30,998
Income taxes 7,171 5,959 13,826 12,089
--------------------------- ----------------------------
Income before extraordinary item 11,700 9,320 22,558 18,909
Loss on extinguishment of debt, net of tax (2,730) (2,730)
--------------------------- ----------------------------
Net income $8,970 $9,320 $19,828 $18,909
=========================== ============================
Basic Earnings Per Common Share
Income before extraordinary item $.47 $.38 $.90 $.71
Extraordinary item, net (.11) (.11)
--------------------------- ----------------------------
Net Income $.36 $.38 $.79 $.71
=========================== ============================
Diluted Earnings Per Common Share
Income before extraordinary item $.45 $.37 $.88 $.71
Extraordinary item, net (.11) (.11)
--------------------------- ----------------------------
Net Income $.34 $.37 $.77 $.71
=========================== ============================
Weighted Average Shares Outstanding (in thousands)
Basic 25,096 24,670 25,007 26,602
Diluted 25,837 24,911 25,733 26,681
--------------------------- ----------------------------
The accompanying notes are an integral part of this statement.
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WESTINGHOUSE AIR BRAKE COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30
Dollars in thousands 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $19,828 $18,909
Adjustments to reconcile net income to cash provided by operations
Depreciation and amortization 12,999 12,148
Provision for ESOP contribution 2,455 1,866
Extraordinary item 2,730
Other 323 (337)
Changes in operating assets and liabilities
Accounts receivable (8,228) 800
Inventories (10,270) 4,360
Accounts payable 2,853 2,382
Accrued income taxes 4,787 (1,606)
Accrued liabilities (6,312) (4,551)
Other assets and liabilities (539) (616)
----------------------------
Net cash provided by operating activities 20,626 33,355
INVESTING ACTIVITIES
Purchase of property, plant and equipment, net (14,405) (11,698)
Acquisitions of businesses (14,114) (7,730)
----------------------------
Net cash used for investing activities (28,519) (19,428)
FINANCING ACTIVITIES
Net proceeds from term and revolving credit arrangements 12,598 44,470
Net repayments of other borrowings (315) (9,100)
Debt issuance fees (978) 404
Purchase of treasury stock (46,068)
Cash dividends (489) (523)
Proceeds from exercise of stock options 1,647
----------------------------
Net cash provided by (used for) financing activities 12,463 (10,817)
Effect of changes in currency exchange rates (311) (759)
----------------------------
Increase in cash 4,259 2,351
Cash, beginning of period 836 618
----------------------------
Cash, end of period $5,095 $2,969
============================
The accompanying notes are an integral part of this statement.
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WESTINGHOUSE AIR BRAKE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
(UNAUDITED)
1. BUSINESS
Westinghouse Air Brake Company (the "Company") is North America's largest
manufacturer of value-added equipment for locomotives, railway freight cars and
passenger transit vehicles. The Company's products, which are sold to both the
original equipment manufacturer market and the aftermarket, are intended to
enhance safety, improve productivity and reduce maintenance costs for its
customers. The Company's products include electronic controls and monitors, air
brakes, couplers, door controls, draft gears and brake shoes. The Company's
primary manufacturing operations are in the United States and Canada, and the
Company's revenues have been primarily from North America. The Company's
customer base consists of freight transportation (railroad) companies,
locomotive and freight car original equipment manufacturers (OE), transit car
builders and public transit systems.
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 Westinghouse Air Brake Company and its majority owned subsidiaries
("WABCO"). 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, which
are 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. Certain
prior period amounts have been reclassified, where necessary, to conform to the
current period presentation.
The notes included herein should be read in conjunction with the audited
consolidated financial statements included in WABCO's Annual Report on Form 10-K
for the year ended December 31, 1997.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires the Company to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during the
reporting period. Actual amounts could differ from the estimates.
EARNINGS PER SHARE
Basic earnings per common share are computed by dividing net income applicable
to common shareholders by the weighted-average number of shares of common stock
outstanding during the year. Diluted earnings per common share are computed by
dividing net income applicable to common shareholders by the weighted average
number of shares of common stock outstanding adjusted for the assumed conversion
of all dilutive securities (such as employee stock options).
OTHER COMPREHENSIVE INCOME
In 1998, the Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," which established standards for reporting
and displaying comprehensive income and its components in financial statements.
Comprehensive income is defined as net income and all nonowner changes in
shareholders' equity. The Company's accumulated other comprehensive income
(loss) consists entirely of foreign currency translation adjustments. Total
comprehensive income for the second quarter ending June 30, 1998 and 1997 was
$7.8 million and $9.3 million respectively, and for the six months ending June
30, 1998 and 1997 was $18.7 million and $18.4 million respectively.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The Statement establishes accounting and reporting standards
requiring that every derivative instrument be measured at its fair value and the
changes in fair value be recorded currently in earnings unless specific hedge
accounting criteria are met. Statement No. 133 is effective for fiscal years
beginning after June 15, 1999, and accordingly, the Company anticipates adopting
this standard January 1, 2000.
Historically, the Company has had a relatively low amount of transactions that
are hedging transactions. Had the Company adopted this standard currently, the
effect on the results of operations, financial condition and liquidity would not
be significant.
3. ACQUISITIONS
In April 1998, the Company acquired 100% of the stock of RFS (E) Limited ("RFS")
of Doncaster, South Yorkshire, England, for $10.0 million including the
assumption of certain debt. RFS is a leading provider of vehicle overhaul,
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conversion and maintenance services to Britain's railway industry and had
revenue of approximately $27.5 million for its most recent fiscal year. The
acquisition was accounted for under the purchase method. The excess of the
purchase price over the fair value of the net assets acquired of approximately
$4.0 million was allocated to goodwill.
In April 1998, the Company completed the acquisition of the transit coupler
product line of Hadady Corporation. The total investment was for approximately
$4.6 million and was accounted for under the purchase method. The excess of the
purchase price over the fair value of the net assets acquired was allocated to
goodwill.
In July 1997, the Company acquired 100% of the stock of H.P. s.r.l. ("HP"), an
Italian company, for a total purchase price of $5.8 million, including the
assumption of certain debt. HP is a leading supplier of door controls for
transit rail cars and buses in the Italian market.
The results of operations for these acquisitions are included in the Company's
financial statements since the date of the applicable transaction. The effect of
the acquisitions is not material to the consolidated financial position or
results of operations of the Company.
4. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined under
the first-in, first-out (FIFO) method. Inventory costs include material, labor
and overhead. The components of inventory, net of reserves, were:
JUNE 30 DECEMBER 31
Dollars in thousands 1998 1997
- ---------------------------------------------------------------
Raw materials $39,371 $27,395
Work-in-process 29,242 26,640
Finished goods 16,259 15,262
-------------------------
Total inventory $84,872 $69,297
- ---------------------------------------------------------------
5. RESTRICTED STOCK AWARD
In February 1998, the Company granted 15,000 shares of restricted common stock
to an officer. The shares vest according to a vesting schedule over the next 32
months. The grant date market value totaled $372 thousand and is being amortized
to expense over the vesting period. Unamortized compensation is recorded as a
separate component of shareholders' equity.
6. EARNINGS PER SHARE
The computation of earnings per share is as follows:
THREE MONTHS SIX MONTHS ENDED
ENDED JUNE 30 JUNE 30
In thousands, except per share 1998 1997 1998 1997
- ----------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Income, before
extraordinary item,
applicable to common
shareholders $11,700 $9,320 $22,558 $18,909
Divided by
Weighted average shares
outstanding 25,096 24,670 25,007 26,602
Basic earnings per share,
before extraordinary item $.47 $.38 $.90 $.71
- ----------------------------------------------------------------------
DILUTED EARNINGS PER SHARE
Income, before
extraordinary
item, applicable to
common
shareholders $11,700 $9,320 $22,558 $18,909
Divided by sum of
Weighted average shares
outstanding 25,096 24,670 25,007 26,602
Conversion of dilutive
stock options 741 241 726 79
------------------------------------
Diluted shares outstanding 25,837 24,911 25,733 26,681
Diluted earnings per
share, before
extraordinary item $.45 $.37 $.88 $.71
- ----------------------------------------------------------------------
7. NEW CREDIT FACILITY
On June 30, 1998, the Company refinanced its credit agreement with a consortium
of commercial banks. The new agreement provides for an aggregate facility of
$310 million, consisting of $170 million of term loans and up to $140 million of
revolving loans, with interest rates based on several options, including LIBOR
and prime. The new agreement extended the final maturity dates until December
2003 for both the term and revolving loans, provides for a more level principal
payment schedule and more flexibility for business acquisitions and capital
expenditures. At June 30, 1998, the Company had available borrowing capacity of
approximately $26 million.
In connection with the new 1998 Refinanced Credit Agreement, the Company wrote
off approximately $4.4 million of previously capitalized costs relating to the
previous credit agreement. This resulted in a net of tax charge of $2.7 million
or $.11 per share in the period ended June 30, 1998, which has been reflected as
an extraordinary item.
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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 Company's Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in its 1997 Annual Report on Form 10-K.
OVERVIEW
Westinghouse Air Brake Company ("WABCO") is North America's largest manufacturer
of value-added equipment for locomotives, railway freight cars and passenger
transit vehicles. The Company's primary manufacturing operations are in the
United States and Canada and revenues have historically been predominantly from
North America. In recent years, the proportion of international sales has
increased significantly, in line with the company's strategy to expand its
business outside North America.
The Company's customer base consists of freight transportation companies,
locomotive and freight car original equipment manufacturers, transit car
builders and public transit systems.
WABCO's strategy for growth is focused on using technological advancements to
develop new products, expanding the range of after-market products and services,
and penetrating international markets. In addition, management continually
evaluates acquisition opportunities that meet the Company's criteria and
complement WABCO's operating strategies and product offerings.
SECOND QUARTER 1998 COMPARED TO SECOND QUARTER 1997
SUMMARY RESULTS OF OPERATIONS
THREE MONTHS
Dollars in thousands ENDED JUNE 30
--------------------- PERCENT
except per share 1998 1997 CHANGE
- ----------------------------------------------------------------
Income before extraordinary item $11,700 $9,320 25.5
Diluted earnings per share,
before extraordinary item $.45 $.37 21.6
Extraordinary item, net of tax (2,730) nm
Net income 8,970 $9,320 (3.8)
Diluted earnings per share $.34 $.37 (8.1)
Net sales 172,052 138,066 24.6
Income from operations 26,084 22,784 14.5
Earnings before interest,
taxes, depreciation
and amortization 33,011 28,839 14.5
- ----------------------------------------------------------------
nm - not meaningful
Income before extraordinary item increased $2.4 million or 25.5% due to the
effect of increased sales, particularly in the Freight Car market and the effect
of sales from operations acquired since last year. Net sales were $172.1 million
for the second quarter of 1998, reflecting a $34.0 million, or 24.6%, increase
compared to the year-earlier period. The higher revenue base reflects the
benefits associated with acquisitions and a strong Freight OE and aftermarket.
Both Operating income and Earnings before interest, taxes, depreciation and
amortization increased primarily due to revenue growth and related gross
margins. Because of the $2.7 million extraordinary charge to write-off certain
previously capitalized debt issuance costs in the second quarter of 1998,
relative to the refinanced credit facility, Net income decreased $.4 million,
compared with the same period a year ago.
Several events occurred in the comparative period that impacted the Company's
results of operations and financial condition including:
o The Company completed several acquisitions that complement and enhance the
mix of existing products and markets. Acquisitions completed during the
past year were RFS(E), Ltd. , H.P. s.r.l., the transit coupler product line
of Hadady Corporation and the rail products division of Sloan Valve.
Incremental revenues in the second quarter of 1998 from these operations
acquired totaled $16.3 million and accounted for 48% of the overall sales
increase in the period-to-period comparison.
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o In June 1998, the Company refinanced its credit agreement and wrote-off
previously deferred financing costs of approximately $2.7 million ($.11 per
share) , net of income tax, reported as a non-cash, non-recurring,
extraordinary item.
NET SALES
The following table sets forth, for the period indicated, the Company's net
sales by market:
THREE MONTHS ENDED
JUNE 30
-----------------------
Dollars in thousands 1998 1997
- ---------------------------------------------------------------
Electronics $13,447 $22,206
Freight Car 71,770 43,117
Transit 46,861 42,659
Locomotive 20,662 12,233
Friction & Other 19,312 17,851
-----------------------
Net sales $172,052 $138,066
- ---------------------------------------------------------------
Net sales for the second quarter of 1998 increased $34.0 million, or 24.6%, to
$172.1 million. Increased volumes in the Freight Car business reflect a strong
original equipment manufacturer market that benefited from 19,000 new freight
car deliveries compared with 11,000 a year ago, the acquisition of RFS(E), Ltd.,
and a strong aftermarket. The Locomotive business, also benefited from the
recent acquisition of RFS. These increases were partially offset by lower sales
in the Electronics business, where in the prior year period, product sales
benefited from a federal mandate that certain monitoring equipment be installed
in trains by July 1997.
GROSS PROFIT
Gross profit increased 17.4% to $55.0 million in the second quarter of 1998
compared to $46.9 million in the year-earlier period. Gross margin, as a
percentage of sales, was 32.0% as compared to 34.0%. Gross margin is dependent
on a number of factors including sales volume and product mix. Incremental
revenue from recent acquisitions at lower margins increased gross profit, was
the primary reason for the lower margins in the quarter-to-quarter comparison.
OPERATING EXPENSES
THREE MONTHS
ENDED JUNE 30
--------------------- PERCENT
Dollars in thousands 1998 1997 CHANGE
- --------------------------------------------------------------
Selling and marketing $7,154 $6,108 17.1
General and administrative 12,719 9,719 30.9
Engineering 7,016 6,318 11.0
Amortization 2,074 1,974 5.1
---------------------
Total operating expenses $28,963 $24,119 20.1
- --------------------------------------------------------------
Total operating expenses as a percentage of net sales were 16.8% in the second
quarter of 1998 compared with 17.5% a year ago. Total operating expenses
increased $4.8 million in the period-to-period comparison, in part, reflecting
the effect of acquisitions completed in 1997 and 1998. Incremental expenses from
acquired businesses totaled $1.4 million. In addition, higher operating expenses
reflect costs associated with computer system upgrades which includes Year 2000
compliant computer software totaled $1.2 million and the remainder was for
certain strategic initiatives including expanded international marketing
activities and additional engineering efforts associated with new product
development.
INCOME FROM OPERATIONS
Operating income totaled $26.1 million in second quarter of 1998 compared with
$22.8 million a year ago. Higher operating income results from higher sales
volume and related higher gross profit.
INCOME TAXES
The provision for income taxes increased $1.2 million to $7.2 million in the
second quarter of 1998 compared with the same period of 1997. The effective tax
rate declined to 38% in the second quarter of 1998 from 39% a year ago,
resulting from additional benefits through our foreign sales corporation and
lower overall state taxes.
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SIX MONTH PERIOD ENDED JUNE 30, 1998 COMPARED TO SIX MONTH PERIOD ENDED JUNE 30,
1997
SUMMARY RESULTS OF OPERATIONS
SIX MONTHS ENDED
Dollars in thousands JUNE 30
-------------------- PERCENT
except per share 1998 1997 CHANGE
- ----------------------------------------------------------------
Income before extraordinary $22,558 $18,909
item 19.3
Diluted earnings per share,
before extraordinary item $.88 $.71 23.9
Extraordinary item, net of tax (2,730) nm
Net income 19,828 18,909 4.9
Diluted earnings per share $.77 $.71 8.5
Net sales 330,188 274,574 20.3
Income from operations 50,839 45,326 12.2
Earnings before interest,
taxes, depreciation
and amortization 64,281 57,630 11.5
- -------------------------------- ---------- ---------- ---------
nm - not meaningful
Income before extraordinary item for the six month period ending June 30, 1998
increased $3.6 million, or 19.3%, compared with the same period a year ago. Net
sales were $330.2 million for the six month period ending June 30, 1998,
reflecting a $55.6 million, or 20.3%, increase compared to the year-earlier
period. The higher revenue base reflects the benefits associated with
acquisitions and a strong Freight OE and aftermarket. Operating income and
earnings before interest, taxes, depreciation and amortization increased in the
comparison primarily due to revenue growth and related gross margins. Because of
the $2.7 million extraordinary charge to write-off certain previously
capitalized debt issuance costs in the second quarter of 1998, relative to the
refinanced credit facility, Net income increased $.9 million, compared with the
same period a year ago.
A number of events have occurred in the past eighteen months that impacted the
Company's results of operations and financial condition including:
o The Company completed several acquisitions that complement and enhance the
mix of existing products and markets. Acquisitions completed during this
timeframe were RFS(E), Ltd., Stone Safety Service Corporation, Stone U.K.
Limited, Thermo King Corporation's heavy rail business, H.P. s.r.l., the
transit coupler product line of Hadady Corporation and the rail products
division of Sloan Valve. Incremental revenues from these acquired
businesses in the six months ended June 30, 1998, totaled $28.1 million and
accounted for 51% of the overall sales increase in the period-to-period
comparison.
o In June 1998, the Company refinanced its credit agreement and wrote-off
previously deferred financing costs of approximately $2.7 million ($.11 per
share) , net of income tax, reported as a non-cash, non-recurring,
extraordinary item.
o In March 1997, the Company repurchased 4 million shares of its common stock
held by a major shareholder for $44 million, or $11 per share.
NET SALES
The following table sets forth, for the period indicated, the Company's net
sales by market:
SIX MONTHS ENDED
JUNE 30
-----------------------
Dollars in thousands 1998 1997
- ---------------------------------------------------------------
Electronics $24,031 $45,299
Freight Car 136,437 88,027
Transit 96,844 79,994
Locomotive 32,797 23,831
Friction & Other 40,079 37,423
-----------------------
Net sales $330,188 $274,574
- ---------------------------------------------------------------
Net sales for the six month period ending June 30, 1998 increased $55.6 million,
or 20.3%, to $330.2 million. Increased volumes in the Freight Car business
reflect a strong original equipment manufacturer market and aftermarket.
Increases in the Transit and Locomotive markets primarily represent results of
acquired operations. These increases were partially offset by lower sales in the
Electronics business, where in the prior year period, product sales benefited
from a federal mandate that certain monitoring equipment be installed in trains
by July 1997.
GROSS PROFIT
Gross profit increased 15.6% to $106.8 million in the six month period ending
June 30, 1998 compared to $92.5 million in the year-earlier period. Gross
margin, as a percentage of sales, was 32.4% as compared to 33.7%. Gross margin
is dependent on a number of factors including sales volume and product mix.
Incremental revenue from recent acquisitions at lower margins increased gross
profit, was the primary reason for the lower margins in the period to period
comparison.
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OPERATING EXPENSES
SIX MONTHS ENDED
JUNE 30
--------------------- PERCENT
Dollars in thousands 1998 1997 CHANGE
- ---------------------------------------------------------------
Selling and marketing $14,068 $11,734 19.9
General and administrative 24,303 18,979 28.1
Engineering 13,454 12,315 9.2
Amortization 4,179 4,109 1.7
---------------------
Total operating expenses $56,004 $47,137 18.8
- ---------------------------------------------------------------
Total operating expenses as percentage of net sales were 17.0% in the six month
period ending June 30, 1998 compared with 17.2% a year ago. Total operating
expenses increased $8.9 million in the period-to-period comparison. Incremental
expenses from acquired businesses totaled $2.9 million or 32.6% of the increase.
In addition, higher operating expenses reflect $1.7 million in third party costs
associated with computer system upgrades which includes Year 2000 compliant
computer software and the remainder was for certain strategic initiatives
including expanded international marketing activities and additional engineering
efforts associated with new product development.
INCOME FROM OPERATIONS
Operating income totaled $50.8 million in the six month period ending June 30,
1998 compared with $45.3 million a year ago. Higher operating income results
from higher sales volume and related higher gross profit.
INTEREST EXPENSE
Interest expense increased $.4 million to $14.9 million for the six month period
ending June 30, 1998, primarily from funding costs associated with repurchases
of common stock and acquisitions, partially offset by debt repayments.
INCOME TAXES
The provision for income taxes increased $1.7 million to $13.8 million for the
six month period ending June 30, 1998 compared with the same period of 1997. The
effective tax rate declined to 38% in the six month period ending June 30, 1998
from 39% a year ago, resulting from additional benefits through our foreign
sales corporation and lower overall state taxes.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is provided primarily by operating cash flow and long-term borrowings.
WABCO's operations generated cash flow totaling $20.6 million in the six month
period ending June 30, 1998 and $33.4 million a year ago. Working capital
increased due to higher accounts receivable associated with increased sales
growth and increased inventory levels to support sales growth. Gross capital
expenditures were $14.4 million and $11.7 million in the first six months of
1998 and 1997, respectively. The majority of capital expenditures reflect
spending for replacement equipment and facilities for increased capacity and
efficiency. The Company expects capital expenditures in 1998, exclusive of
acquisitions, to approximate $28 million.
The following table sets forth outstanding indebtedness and average interest
rates at June 30, 1998. The revolving credit note and term loan interest rates
are variable and dependent on market conditions. Interest on the note payable
related to the Pulse acquisition has clauses which can vary the interest rate
paid.
JUNE 30
Dollars in thousands 1998
- ----------------------------------------------------------------
Revolving credit notes, 7.53%, due
December 2003 $88,000
Term loan, 7.65% 170,000
Senior notes, 9.375%, due June 2005 100,000
Note payable-Pulse acquisition, 9.5%, due January
2004 16,990
Other 1,249
-----------
Total 376,239
Current portion 15,000
-----------
Long-term portion $361,239
- ----------------------------------------------------------------
On June 30, 1998, the Company refinanced its credit agreement with a consortium
of commercial banks. The new agreement provides for an aggregate facility of
$310 million, consisting of $170 million of term loans and up to $140 million of
revolving loans, as well as interest rates that are based on several options,
including LIBOR and prime and includes letters of credit and swingline loans
which reduce the amount of credit available. The new agreement extended the
final maturity dates until December 2003 for both the term and revolving loans,
provides for a more level principal payment schedule and more flexibility for
business acquisitions and capital expenditures. At June 30, 1998, the Company
had available borrowing capacity of approximately $26 million.
11
12
Management believes, based upon current levels of operations and forecasted
earnings, that cash flow from operations, together with borrowings under the
Credit Agreement, will be adequate to make payments of principal and interest on
debt, including the Notes, to make required contributions to the ESOP, to permit
anticipated capital expenditures, and to fund working capital requirements and
other cash needs. Nevertheless, the Company will remain leveraged to a
significant extent and its debt service obligations will continue to be
substantial. If the Company's sources of funds were insufficient to satisfy the
Company's cash requirements, the Company may need to refinance its existing debt
or obtain additional financing under terms that may be less favorable than the
current bank credit agreement.
EFFECT OF YEAR 2000
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 2000 compliant. The
majority of the expenditures incurred for hardware and purchased software
related to this project are capitalized and amortized over their estimated
useful lives. Other costs, such as training and advisory consulting, are
expensed as incurred. These expenditures are not expected to have a significant
impact on the Company's future results of operations or financial position.
FORWARD-LOOKING STATEMENTS
From time to time, in this report and in other written reports and oral
statements, references are made to expectations regarding future performance of
the Company. Examples include, but are not limited to, statements as to
expectations, beliefs and strategies, future earnings, revenue growth, and sales
expansion opportunities. These "forward-looking statements" are based on
currently available competitive, financial and economic data and the Company's
operating plans, but they are inherently uncertain. Investors must recognize
that events could turn out to be significantly different from what is expected.
Differences from expectations in the factors listed below, among others, could
affect the Company's financial performance in the future and could cause actual
results to differ materially from those expressed or implied in such
forward-looking statements. These factors, which include changes in both
domestic and global assumptions and expectations are, among others: overall
economic conditions; interest rates; demand for services in the freight and
passenger rail industry; consolidations in the rail industry; demand for the
Company's products and services; product mix; gains and losses in market share;
demand for freight cars, locomotives, passenger transit cars and buses; industry
demand for faster and more efficient braking equipment; continued outsourcing by
the Company's customers; governmental funding for some of the Company's
customers; future regulation/deregulation of the Company's customers and/or the
rail industry; successful research and development; success in developing,
marketing and delivering new products; the Company's ability to complete
expected sales; cancellation of orders; labor stability; integration of recent
acquisitions; completion of additional acquisitions; changes in expected level
of capital expenditures; continued bank financing; warranty claims;
environmental laws; lawsuits; and other factors identified within this Form 10-Q
and other filings with the Securities and Exchange Commission. Such statements
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995.
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 May 26, 1998. Four
matters were considered and voted upon at the Annual Meeting: the election of
two persons to serve as directors, the adoption of the 1998 Employee Stock
Purchase Plan, an amendment to the 1995 Stock Incentive Plan and 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 1998
fiscal year.
Nominations of James P. Kelley and James C. Huntington, Jr. to serve as
directors for a term expiring 2001 were considered and ultimately approved.
Broker
Votes Votes Votes Non-
Nominee For Against Withheld Votes
- ----------------------------------------------------------------
James P. Kelly 28,027,066 - 208,394 -
James C. Huntington, Jr. 28,022,365 - 213,095 -
Other matters were considered and ultimately approved.
Broker
Votes Votes Votes Non-
For Against Abstained Votes
- ------------------------------------------------------------------
1998 Employee Stock
Purchase Plan adoption 24,171,702 106,098 8,385 -
1995 Stock Incentive Plan
amendment 23,521,916 744,969 19,299 -
Arthur Andersen LLP
as auditors 28,144,622 83,393 7,445 -
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit No. 27 "Financial Data Schedule" as of and for the six months ended June
30, 1998 is filed herewith.
There were no Current Reports on Form 8-K filed during the quarter ended June
30, 1998.
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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 COMPANY
By: /s/ ROBERT J. BROOKS
-------------------------------
Robert J. Brooks
Chief Financial Officer
Date: August 7, 1998
13
5
1,000
6-MOS
DEC-31-1998
JAN-01-1998
JUN-30-1998
5,095
0
107,444
0
84,872
215,259
202,822
86,681
457,439
125,433
0
0
0
474
(57,065)
457,439
330,188
330,188
223,345
223,345
56,004
0
14,898
36,384
13,826
22,558
0
(2,730)
0
19,828
.79
.77
