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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, 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 October 19, 1998, 33,875,883 shares of Common Stock of the
registrant were issued and outstanding, of which 8,595,931 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 September 30,
1998 and December 31, 1997 3
Condensed Consolidated Statement of Operations for the three
and nine months ended September 30, 1998 and 1997 4
Condensed Consolidated Statement of Cash Flows for the
nine months ended September 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
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WESTINGHOUSE AIR BRAKE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30 DECEMBER 31
Dollars in thousands, except share data 1998 1997
- --------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 9,833 $ 836
Accounts receivable 110,880 91,438
Inventories 88,371 69,297
Other 18,750 18,928
--------- ---------
Total current assets 227,834 180,499
Property, plant and equipment 209,625 186,534
Accumulated depreciation (90,175) (78,167)
--------- ---------
Property, plant and equipment, net 119,450 108,367
OTHER ASSETS
Prepaid pension costs 5,405 5,061
Goodwill 79,090 66,599
Other intangibles 39,389 42,466
Other noncurrent assets 5,374 7,887
--------- ---------
Total other assets 129,258 122,013
--------- ---------
Total Assets $ 476,542 $ 410,879
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 15,000 $ 32,600
Accounts payable 48,745 37,582
Accrued income taxes 6,439 488
Accrued interest 3,382 3,038
Customer deposits 20,275 21,210
Other 36,555 36,862
--------- ---------
Total current liabilities 130,396 131,780
Long-term debt 364,758 332,334
Reserve for postretirement benefits 15,659 14,860
Accrued pension costs 4,187 4,700
Other long-term liabilities 6,536 6,468
--------- ---------
Total liabilities 521,536 490,142
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 107,343 105,522
Less-Treasury stock, at cost, 13,566,378 and 13,743,924 shares (188,134) (190,657)
Less-Unearned ESOP shares, at cost, 8,611,491 and 8,751,531 shares (129,172) (131,273)
Retained earnings 171,557 141,617
Unamortized restricted stock award (228) --
Cumulative translation adjustment (6,834) (4,946)
--------- ---------
Total shareholders' equity (44,994) (79,263)
========= =========
Liabilities and Shareholders' Equity $ 476,542 $ 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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
Dollars in thousands, except share data 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------
Net sales $ 160,476 $ 142,761 $ 490,664 $ 417,335
Cost of sales 109,142 97,202 332,487 279,313
--------- --------- --------- ---------
Gross profit 51,334 45,559 158,177 138,022
Selling and marketing expenses 7,747 6,594 21,815 18,328
General and administrative expenses 9,713 8,906 34,016 27,885
Engineering expenses 6,999 6,019 20,453 18,334
Amortization expense 1,694 2,004 5,873 6,113
--------- --------- --------- ---------
Total operating expenses 26,153 23,523 82,157 70,660
--------- --------- --------- ---------
Income from operations 25,181 22,036 76,020 67,362
Other income and expenses
Interest expense 7,386 7,700 22,284 22,184
Other (income) expense, net 302 (150) (141) (306)
--------- --------- --------- ---------
Income before income taxes 17,493 14,486 53,877 45,484
Income taxes 6,647 5,650 20,473 17,739
--------- --------- --------- ---------
Income before extraordinary item 10,846 8,836 33,404 27,745
Loss on extinguishment of debt, net of tax (2,730)
--------- --------- --------- ---------
Net income $ 10,846 $ 8,836 $ 30,674 $ 27,745
========= ========= ========= =========
Basic Earnings Per Common Share
Income before extraordinary item $ .43 $ .36 $ 1.33 $ 1.07
Extraordinary item, net (.11)
--------- --------- --------- ---------
Net Income $ .43 $ .36 $ 1.22 $ 1.07
========= ========= ========= =========
Diluted Earnings Per Common Share
Income before extraordinary item $ .42 $ .35 $ 1.30 $ 1.06
Extraordinary item, net (.11)
--------- --------- --------- ---------
Net Income $ .42 $ .35 $ 1.19 $ 1.06
========= ========= ========= =========
Weighted Average Shares Outstanding (in thousands)
Basic 25,197 24,808 25,046 25,997
Diluted 25,696 25,282 25,696 26,235
--------- --------- --------- ---------
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)
NINE MONTHS
ENDED SEPTEMBER 30
Dollars in thousands 1998 1997
- ---------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 30,674 $ 27,745
Adjustments to reconcile net income to cash provided by operations
Depreciation and amortization 19,294 18,181
Provision for ESOP contribution 3,462 3,278
Extraordinary item 2,730
Other 661 (1,337)
Changes in operating assets and liabilities
Accounts receivable (10,979) (6,730)
Inventories (12,981) 5,550
Accounts payable 6,781 (1,181)
Accrued income taxes 7,400 (2,162)
Accrued liabilities (8,146) 3,542
Other assets and liabilities (3,647) 2,392
-------- --------
Net cash provided by operating activities 35,249 49,278
INVESTING ACTIVITIES
Purchase of property, plant and equipment, net (22,333) (16,694)
Acquisitions of businesses (19,314) (13,492)
-------- --------
Net cash used for investing activities (41,647) (30,186)
FINANCING ACTIVITIES
Net proceeds from term and revolving credit arrangements 14,895 23,987
Net proceeds from (payments of) other borrowings (71) 2,100
Debt issuance fees (1,037)
Purchase of treasury stock, including fees (46,068)
Cash dividends (734) (765)
Proceeds from exercise of stock options 2,094 2,460
-------- --------
Net cash provided by (used for) financing activities 15,147 (18,286)
Effect of changes in currency exchange rates 248 (1,168)
-------- --------
Increase (decrease) in cash 8,997 (362)
Cash, beginning of period 836 618
-------- --------
Cash, end of period $ 9,833 $ 256
======== ========
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 SEPTEMBER 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 third quarter ending September 30, 1998 and 1997
was $10.1 million and $8.7 million respectively, and for the nine months ending
September 30, 1998 and 1997 was $28.8 million and $27.1 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 approximately $10.0 million
including the
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assumption of certain debt. RFS is a leading provider of vehicle overhaul,
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.
On July 30, 1998, the Company purchased assets of Lokring Corporation of
California for $5.1 million in cash and in addition, the assumption of certain
liabilities. Lokring develops, manufactures and markets patented connectors and
sealing products for railroad and other industries, and had approximately $10
million in revenue for the fiscal year 1997. The acquisition was accounted for
under the purchase method and the excess of the purchase price over the fair
value of the net assets acquired of approximately $5.3 million was allocated to
goodwill.
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:
SEPTEMBER 30 DECEMBER 31
Dollars in thousands 1998 1997
- --------------------------------------------------------------
Raw materials $39,306 $27,395
Work-in-process 30,972 26,640
Finished goods 18,093 15,262
------- -------
Total inventory $88,371 $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 29
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 ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
In thousands, except per share 1998 1997 1998 1997
- --------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Income, before
extraordinary
item, applicable to
common
shareholders $10,846 $8,836 $33,404 $27,745
Divided by
Weighted average shares
outstanding 25,197 24,808 25,046 25,997
Basic earnings per
share, before
extraordinary item $.43 $.36 $1.33 $1.07
- --------------------------------------------------------------------
DILUTED EARNINGS PER SHARE
Income, before
extraordinary
item, applicable to
common
shareholders $10,846 $8,836 $33,404 $27,745
Divided by sum of
Weighted average shares
outstanding 25,197 24,808 25,046 25,997
Conversion of dilutive
stock options 499 474 650 238
------- ------- ------- -------
Diluted shares outstanding 25,696 25,282 25,696 26,235
Diluted earnings per
share, before
extraordinary item $.42 $.35 $1.30 $1.06
- --------------------------------------------------------------------
7. NEW CREDIT FACILITY
In June 1998, the Company refinanced its credit agreement with a consortium of
commercial banks. On October 2, 1998, the Company obtained an amendment for an
additional $40 million term loan. In the aggregate, the refinanced credit
facility, as amended, is $350 million which consists of $210 million of term
loans and up to $140 million of revolving loans, and also includes interest
rates that are based on several options, including LIBOR and prime and provides
for letters of credit and swingline loans that reduce the amount of credit
available. The new agreement also extends 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 September 30, 1998, the Company had available borrowing
capacity of approximately $24 million.
In connection with the June 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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8. SUBSEQUENT EVENT
On October 5, 1998, the Company purchased the railway electronics business
(Rockwell Railroad Electronics) of Rockwell Collins, Inc., a wholly owned
subsidiary of Rockwell International Corporation for approximately $80 million
in cash. The purchase was financed by obtaining; additional term debt of $40
million through an amendment to the Company's existing credit facility, an
unsecured bank loan of $30 million and through available borrowing capacity.
Rockwell Railroad Electronics (RRE) is a leading manufacturer and supplier of
mobile electronics (display and positioning systems), data communications, and
electronic braking systems for the railroad industry and its operations are in
the United States. Revenues of the acquired business for its September 1998 year
end is expected to approximate $45 million. The acquisition will be accounted
for under the purchase accounting method.
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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.
THIRD QUARTER 1998 COMPARED TO THIRD QUARTER 1997
SUMMARY RESULTS OF OPERATIONS
THREE MONTHS ENDED
SEPTEMBER 30
------------------- PERCENT
Dollars in thousands except per share 1998 1997 CHANGE
- --------------------------------------------------------------------------------
Net income $10,846 $8,836 22.7
Diluted earnings per share .42 .35 20.0
Net sales 160,476 142,761 12.4
Income from operations 25,181 22,036 14.3
Earnings before interest,
taxes, depreciation
and amortization 31,174 28,219 10.5
- --------------------------------------------------------------------------------
Net income increased 2.0 million or 22.7% 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 $160.5 million for the third quarter of
1998, reflecting a $17.7 million, or 12.4%, 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.
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 Lokring Corporation, RFS(E),Ltd., the transit coupler
product line of Hadady Corporation, the rail products division of Sloan
Valve, the Italian transit company H. P. s.r.l., and the heavy rail air
conditioning business of Thermo King Corporation. Incremental revenues from
these operations totaled $12.3 million and accounted for 69% of the overall
sales increase in the period-to-period comparison.
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NET SALES
The following table sets forth, for the period indicated, the Company's net
sales by market:
THREE MONTHS ENDED
SEPTEMBER 30
------------------
Dollars in thousands 1998 1997
- -------------------------------------------------------------
Electronics $11,660 $16,629
Freight Car 67,857 53,502
Transit 48,937 43,172
Locomotive 14,020 11,441
Friction & Other 18,002 18,017
------- --------
Net sales $160,476 $142,761
Net sales for the third quarter of 1998 increased $17.7 million, or 12.4%, to
$160.5 million. Increased volumes in the Freight Car business reflect a strong
original equipment manufacturer market that benefited from 18,000 freight car
deliveries compared with 12,000 a year ago, the acquisition of RFS(E), Ltd., and
a strong aftermarket. The Locomotive business also benefited from the recent
acquisition of RFS.
GROSS PROFIT
Gross profit increased 12.7% to $51.3 million in the third quarter of 1998
compared to $45.6 million in the year-earlier period. Gross margin, as a
percentage of sales, was 32%, similar to that of the same quarter last year.
Gross margin is dependent on a number of factors including sales volume and
product mix. Higher sales volumes, as a percentage of total sales in the Freight
Car business offset by incremental revenue from recent acquisitions at lower
margins contributed to stable overall margins in the comparison.
OPERATING EXPENSES
THREE MONTHS ENDED
SEPTEMBER 30
------------------ PERCENT
Dollars in thousands 1998 1997 CHANGE
- ----------------------------------------------------------------
Selling and marketing $7,747 $6,594 17.5
General and administrative 9,713 8,906 9.1
Engineering 6,999 6,019 16.3
Amortization 1,694 2,004 (15.5)
------- -------
Total operating expenses $26,153 $23,523 11.2
- ------------------------------- ---------- ---------- ----------
Total operating expenses as a percentage of net sales was 16.3% in the third
quarter of 1998 compared with 16.5% a year ago. Total operating expenses
increased $2.6 million in the period-to-period comparison, reflecting the effect
of acquisitions completed in 1997 and 1998. Incremental expenses from acquired
businesses totaled $1.6 million. In addition, higher operating expenses reflect
costs associated with computer system upgrades which includes Year 2000
compliant computer software and certain strategic initiatives including expanded
international marketing activities and additional engineering efforts associated
with new product development. Amortization expense was lower in the third
quarter 1998 due to the write off of previously capitalized bank financing fees
in June 1998, however, amortization will increase in the future due to goodwill
associated with the recent acquisition of the railway electronics business of
Rockwell Collins, Inc.
INCOME FROM OPERATIONS
Operating income totaled $25.2 million in third quarter of 1998 compared with
$22.0 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 $1.0 million to $6.6 million in the
third quarter of 1998 compared with the same period of 1997. The effective tax
rate dropped to 38% in the third quarter of 1998 from 39% a year ago, resulting
from additional benefits through our foreign sales corporation and lower overall
effective state tax rates.
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NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 COMPARED TO THE NINE MONTH PERIOD
ENDED SEPTEMBER 30, 1997
SUMMARY RESULTS OF OPERATIONS
NINE MONTHS ENDED
SEPTEMBER 30
------------------- PERCENT
Dollars in thousands except per share 1998 1997 CHANGE
- ----------------------------------------------------------------------
Income before extraordinary item $33,404 $27,745 20.4
Diluted earnings per share,
before extraordinary item 1.30 1.06 22.6
Extraordinary item, net of tax (2,730) nm
Net income 30,674 27,745 10.6
Diluted earnings per share 1.19 1.06 12.3
Net sales 490,664 417,335 17.6
Income from operations 76,020 67,362 12.9
Earnings before interest,
taxes, depreciation
and amortization 95,455 85,849 11.2
- ----------------------------------------------------------------------
nm - not meaningful
Income before extraordinary item for the nine month period ending September 30,
1998 increased $5.7 million, or 20.4%, compared with the same period a year ago.
Net sales were $490.7 million for the nine month period ending September 30,
1998, reflecting a $73.3 million, or 17.6%, increase compared to the
year-earlier period. The higher revenue base reflects the benefits associated
with acquisitions and a strong Freight OE and aftermarket. 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 related to the
refinanced credit facility, net income increased only $2.9 million, compared
with the same period a year ago.
A number of events have occurred over 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 this
timeframe were Lokring Corporation, RFS(E),Ltd., the transit coupler
product line of Hadady Corporation, Stone Safety Service Corporation, Stone
U.K. Limited, the Italian transit company H.P. s.r.l., the rail products
division of Sloan Valve and the heavy rail air conditioning business of
Thermo King Corporation. Incremental revenues from these operations in the
nine months ended September 30, 1998, totaled $38.7 million and accounted
for 53% 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, which has been reported as an extraordinary
item.
o In March 1997, the Company repurchased 4 million shares of its common stock
held by a major shareholder for $44 million plus $2 million in related
fees.
NET SALES
The following table sets forth, for the period indicated, the Company's net
sales by market:
NINE MONTHS ENDED
SEPTEMBER 30
------------------
Dollars in thousands 1998 1997
- ----------------------------------------------------------------
Electronics $35,691 $61,928
Freight Car 204,294 141,529
Transit 145,781 123,166
Locomotive 46,817 35,272
Friction & Other 58,081 55,440
-------- -------
Net sales $490,664 $417,335
- ----------------------------------------------------------------
Net sales for the nine month period ending September 30, 1998 increased $73.3
million, or 17.6%, to $490.7 million. Increased volumes in the Freight Car
business reflect a strong original equipment manufacturer market, with
approximately 55,000 freight cars delivered year to date compared to 37,000 in
the same period last year. Increases in the Transit market 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 14.6% to $158.2 million in the nine month period ending
September 30, 1998 compared to $138.0 million in the year-earlier period. Gross
margin, as a percentage of sales, was 32.2% as compared to 33.1%. Gross margin
is dependent on a number of factors including sales volume and product mix.
Incremental revenue from recent acquisitions at lower margins as compared to the
Company's historical results, was the primary reason for the lower margins in
the period-to-period comparison.
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OPERATING EXPENSES
NINE MONTHS ENDED
SEPTEMBER 30
------------------ PERCENT
Dollars in thousands 1998 1997 CHANGE
- --------------------------------------------------------------
Selling and marketing $21,815 $18,328 19.0
General and administrative 34,016 27,885 22.0
Engineering 20,453 18,334 11.6
Amortization 5,873 6,113 (3.9)
------- -------
Total operating expenses $82,157 $70,660 16.3
- --------------------------------------------------------------
Total operating expenses as percentage of net sales were 16.7% in the nine month
period ending September 30, 1998 compared with 16.9% a year ago. Total operating
expenses increased $11.5 million in the period-to-period comparison. Incremental
expenses from acquired businesses totaled $4.5 million or 39% of the increase.
In addition, higher operating expenses reflect costs associated with computer
system upgrades which includes Year 2000 compliant computer software and for
certain strategic initiatives including expanded international marketing
activities and additional engineering efforts associated with new product
development.
INCOME FROM OPERATIONS
Operating income totaled $76.0 million in the nine month period ending September
30, 1998 compared with $67.4 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 $2.7 million to $20.5 million for the
nine month period ending September 30, 1998 compared with the same period of
1997. The effective tax rate declined to 38% in the nine month period ending
September 30, 1998 from 39% a year ago, resulting from additional benefits
through our foreign sales corporation and lower overall effective state tax
rates.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is provided primarily by operating cash flow and long-term borrowings.
WABCO's operations generated cash flow totaling $35.2 million in the nine month
period ending September 30, 1998 compared to $49.3 million from the prior
period. Working capital has increased due to higher accounts receivable and
increased inventory levels which are associated with increased sales growth.
Gross capital expenditures were $22.3 million and $16.7 million in the first
nine 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 $30 million.
The following table sets forth outstanding indebtedness and average interest
rates at September 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 can vary with changes to prime.
SEPTEMBER 30,
Dollars in thousands 1998
- ----------------------------------------------------------------
Revolving credit notes 7.16%,
due December 2003 $91,275
Term loan, 7.25% 170,000
Senior notes, 9.375%, due June 2005 100,000
Note payable-Pulse acquisition, 9.5%, due
January 2004 16,990
Other 1,493
-------
Total 379,758
Current portion 15,000
-------
Long-term portion $364,758
- ----------------------------------------------------------------
In June 1998, the Company refinanced its credit agreement with a consortium of
commercial banks. On October 2, 1998, the Company obtained an amendment for an
additional $40 million term loan. In the aggregate, the refinanced credit
facility, as amended, is $350 million which consists of $210 million of term
loans and up to $140 million of revolving loans, and also includes interest
rates that are based on several options, including LIBOR and prime and provides
for letters of credit and swingline loans which reduce the amount of credit
available. The new agreement also extends 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 September 30, 1998, the Company had available borrowing
capacity of approximately $24 million. After the October 1998 acquisition of the
railway electronics business of Rockwell Collins, Inc., available borrowing
capacity was reduced by approximately $10 million.
12
13
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 in process that
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
estimated cost of the project is expected to be in the $7 to $10 million range
with the majority of costs previously expended.
As with any operation that relies heavily on computer technology, the risk that
the Company, its major customers and or its major vendors do not correct year
2000 computer issues, could have an adverse effect on the Company's future
results of operations, financial condition and liquidity.
Since the Company's computer systems will be year 2000 compliant in the near
term, and management believes its major vendors and customers systems will be
year 2000 compliant, it currently has no contingency plans. Should the Company's
future evaluation of its systems and the systems of its major vendors and
customers prove otherwise, the Company will establish contingency plans as
necessary.
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 condition.
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 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit No. 27 "Financial Data Schedule" as of and for the nine months ended
September 30, 1998 is filed herewith.
There was a Current Report filed on Form 8-K on October 20, 1998 for the purpose
of reporting the October 5, 1998 acquisition (Item 2) of the railway electronics
business of Rockwell Collins, Inc.
13
14
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: November 6, 1998
14
5
1,000
9-MOS
DEC-31-1997
JAN-01-1998
SEP-30-1998
9,833
0
110,880
0
88,371
227,834
209,625
90,175
476,542
130,396
0
0
0
474
(45,468)
476,542
490,664
490,664
332,487
332,487
82,157
0
22,284
53,877
20,473
0
0
(2,730)
0
30,674
1.22
1.19
