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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, 1999
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 July 19, 1999, 34,092,335 shares of Common Stock of the
registrant were issued and outstanding, of which 8,443,876 shares were
unallocated ESOP shares.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of June 30, 1999 and
December 31, 1998 3
Condensed Consolidated Statement of Operations for the three
and six months ended June 30, 1999 and 1998 4
Condensed Consolidated Statement of Cash Flows for the six
months ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial Position and
Results of Operations 10-15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15-16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
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WESTINGHOUSE AIR BRAKE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
UNAUDITED
JUNE 30 DECEMBER 31
Dollars in thousands, except par value 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 6,487 $ 3,323
Accounts receivable 127,964 132,901
Inventories 111,444 103,560
Other 22,610 23,177
-----------------------
Total current assets 268,505 262,961
Property, plant and equipment 229,987 214,461
Accumulated depreciation (99,502) (89,480)
-----------------------
Property, plant and equipment, net 130,485 124,981
OTHER ASSETS
Prepaid pension costs 6,699 5,724
Goodwill 151,113 151,658
Other intangibles 43,434 46,021
Other noncurrent assets 6,206 4,839
-----------------------
Total other assets 207,452 208,242
-----------------------
Total Assets $606,442 $596,184
=======================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $27,659 $30,579
Accounts payable 53,259 62,974
Accrued income taxes 9,377 8,352
Accrued interest 2,181 1,616
Customer deposits 18,402 20,426
Other accrued liabilities 47,234 43,603
-----------------------
Total current liabilities 158,112 167,550
Long-term debt 422,560 437,238
Reserve for postretirement benefits 16,848 16,238
Accrued pension costs 3,996 3,631
Other long-term liabilities 7,420 5,380
-----------------------
Total liabilities 608,936 630,037
SHAREHOLDERS' EQUITY
Preferred stock, 1,000,000 shares authorized, no shares issued -- --
Common stock, $.01 par value; 100,000,000 shares authorized:
47,426,600 shares issued 474 474
Additional paid-in capital 108,709 107,720
Treasury stock, at cost, 13,401,822 and 13,532,092 shares (186,028) (187,654)
Unearned ESOP shares, at cost, 8,459,436 and 8,564,811 shares (126,892) (128,472)
Retained earnings 206,928 182,291
Unamortized restricted stock award (85) (162)
Accumulated other comprehensive income (loss) (5,600) (8,050)
-----------------------
Total shareholders' equity (2,494) (33,853)
=======================
Liabilities and Shareholders' Equity $606,442 $596,184
=======================
</TABLE>
The accompanying notes are an integral part of this statement.
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WESTINGHOUSE AIR BRAKE COMPANY
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
In thousands, except per share data 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $193,981 $172,052 $385,185 $330,188
Cost of sales 130,649 117,005 260,308 223,345
---------------------- ----------------------
Gross profit 63,332 55,047 124,877 106,843
Selling and marketing expenses 7,607 7,154 16,110 14,068
General and administrative expenses 13,422 12,719 26,250 24,303
Engineering expenses 9,629 7,016 18,536 13,454
Amortization expense 2,427 2,074 4,837 4,179
---------------------- ----------------------
Total operating expenses 33,085 28,963 65,733 56,004
---------------------- ----------------------
Income from operations 30,247 26,084 59,144 50,839
Other income and expense
Interest expense 8,768 7,525 17,864 14,898
Other (income) expense, net 414 (312) 480 (443)
---------------------- ----------------------
Income before income taxes and extraordinary item 21,065 18,871 40,800 36,384
Income taxes 7,852 7,171 15,198 13,826
---------------------- ----------------------
Income before extraordinary item 13,213 11,700 25,602 22,558
Loss on extinguishment of debt, net of tax -- (2,730) (469) (2,730)
---------------------- ----------------------
Net income $ 13,213 $ 8,970 $ 25,133 $ 19,828
====================== ======================
EARNINGS PER COMMON SHARE
Basic
Income before extraordinary item $0.52 $ 0.47 $ 1.01 $ 0.90
Extraordinary item, net -- (0.11) (0.02) (0.11)
====================== ======================
Net Income $0.52 $0.36 $ 0.99 $ 0.79
====================== ======================
Diluted
Income before extraordinary item $0.51 $ 0.45 $ 0.99 $ 0.88
Extraordinary item, net -- (0.11) (0.02) (0.11)
====================== ======================
Net Income $0.51 $ 0.34 $ 0.97 $ 0.77
====================== ======================
Weighted Average Shares Outstanding
Basic 25,484 25,096 25,409 25,007
Diluted 26,079 25,837 25,916 25,733
---------------------- ----------------------
</TABLE>
The accompanying notes are an integral part of this statement.
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WESTINGHOUSE AIR BRAKE COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
UNAUDITED
SIX MONTHS ENDED
JUNE 30
In thousands 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 25,133 $ 19,828
Adjustments to reconcile net income to cash provided by operations
Extraordinary loss on extinguishment of debt 469 2,730
Depreciation and amortization 12,658 12,999
Provision for ESOP contribution 2,262 2,455
Changes in operating assets and liabilities,
net of acquisitions
Accounts receivable 4,580 (8,228)
Inventories (7,413) (10,270)
Accounts payable (9,792) 2,853
Accrued income taxes 1,015 4,787
Accrued liabilities and customer deposits 2,056 (6,312)
Other assets and liabilities 604 (216)
------------------------
Net cash provided by operating activities 31,572 20,626
INVESTING ACTIVITIES
Purchase of property, plant and equipment, net (11,671) (14,405)
Acquisitions of businesses, net of cash acquired (960) (14,114)
------------------------
Net cash used for investing activities (12,631) (28,519)
FINANCING ACTIVITIES
Proceeds from Senior Note offering 76,875 --
Debt issuance costs (1,926) (978)
Net (repayments of) proceeds from the credit agreement (52,055) 12,598
Repayments of other borrowings (40,492) (315)
Cash dividends (493) (489)
Proceeds from exercise of stock options and employee stock purchases 1,536 1,647
------------------------
Net cash (used for) provided by financing activities (16,555) 12,463
Effect of changes in currency exchange rates 778 (311)
------------------------
Increase in cash 3,164 4,259
Cash, beginning of year 3,323 836
========================
Cash, end of year $ 6,487 $ 5,095
========================
</TABLE>
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, 1999
(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 ("OEM") 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, 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, 1998.
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.
OTHER COMPREHENSIVE INCOME 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,
1999 and 1998 was $15.0 million and $7.8 million respectively, and for the six
months ending June 30, 1999 and 1998 was $27.6 million and $18.7 million
respectively.
3. ACQUISITIONS
On October 5, 1998, the Company purchased the railway electronics business of
Rockwell Collins, Inc. ("RRE"), a wholly owned subsidiary of Rockwell
International Corporation, for approximately $80 million in cash. The purchase
was initially 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 additional borrowings under the Company's revolving credit
agreement. 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 fiscal year ended September 30, 1998
were approximately $46 million.
During the past eighteen months, the Company also completed the following
acquisitions:
i) The October 1998 acquisition of the United States railway service center
business of Comet Industries, Inc. ("Comet"), for $13.2 million, financed
through the issuance of $12.2 million of promissory notes. Annual revenue
for its most recent fiscal year was approximately $20 million.
ii) In July 1998, the purchase of assets and assumption of certain liabilities
of U.S.-based Lokring Corporation ("Lokring"), for $5.1 million in cash.
Lokring develops, manufactures and markets patented non-welded connectors
and sealing products for railroad and other industries. Annual sales in
1997 were approximately $10 million.
iii) The acquisition in April 1998, of 100% of the stock of RFS (E) Limited
("RFS") of England, for approximately $10.0 million including the
assumption of certain debt. RFS is a leading provider of vehicle overhaul,
conversion and maintenance services to Britain's railway industry. Annual
revenue for its most recent fiscal year was approximately $27.5 million.
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iv) The acquisition in April 1998, of the transit coupler product line of
Hadady Corporation ("Hadady") located in the United States for $4.6 million
in cash.
v) In February 1999, the acquisition of the mass transit electrical inverter
and converter product line of AGC System & Technologies, Inc. of Canada for
approximately $960 thousand.
All of the above acquisitions were accounted for under the purchase method.
Accordingly, the results of operations of the applicable acquisition are
included in the Company's financial statements prospectively from the
acquisition date.
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 1999 1998
- ---------------------------------------------------------------
Raw materials $ 49,961 $ 47,853
Work-in-process 42,107 29,965
Finished goods 19,376 25,742
-----------------------
Total inventory $111,444 $103,560
- ---------------------------------------------------------------
5. DEBT OFFERING AND EXTRAORDINARY ITEM
In 1999, WABCO issued $75 million of 9 3/8% Senior Notes which mature in June
2005. The Senior Notes were issued at a premium resulting in an effective rate
of 8.5%. The premium is being amortized over the life of the instruments.
The issuance improved WABCO's financial liquidity by i) using a portion of the
proceeds to repay $30 million of debt associated with the RRE acquisition that
bore interest at 9.56%, and; ii) using a portion of the proceeds to repay
variable-rate revolving credit borrowings thereby increasing amounts available
under the revolving credit facility. As a result of the issuance and retirement
of certain term debt, the Company wrote-off previously capitalized debt issuance
costs of approximately $469 thousand, ($.02 per diluted share), net of tax, in
the first quarter of 1999.
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 1999 1998 1999 1998
- ----------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Income, before extraordinary
item, applicable to
common shareholders $13,213 $11,700 $25,602 $22,558
Divided by
Weighted average shares
outstanding 25,484 25,096 25,409 25,007
Basic earnings per share
before extraordinary item $0.52 $0.47 $1.01 $0.90
- ----------------------------------------------------------------------
DILUTED EARNINGS PER SHARE
Income, before extraordinary
item, applicable to
common shareholders $13,213 $11,700 $25,602 $22,558
Divided by sum of
Weighted average shares
outstanding 25,484 25,096 25,409 25,007
Conversion of dilutive
stock options 595 741 507 726
--------------------------------------
Diluted shares outstanding 26,079 25,837 25,916 25,733
Diluted earnings per share,
before extraordinary item $0.51 $0.45 $0.99 $0.88
- ----------------------------------------------------------------------
7. LEGAL PROCEEDINGS
On February 12, 1999, GE Harris Railway Electronics, LLC and GE Harris Railway
Electronic Services, LLC (collectively, "GE Harris") brought suit against the
Company for alleged patent infringement and unfair competition related to a
communications system installed in one of the Company's products. GE Harris is
seeking to prohibit the Company from future infringement and is seeking an
unspecified amount of money damages to recover, in part, royalties. While this
lawsuit is in the earliest stages, the Company believes the technology developed
by the Company does not infringe on the GE Harris patents. The Company plans to
contest the infringement claims vigorously, in order to present alternative
product lines to customers in the rail industry.
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8. SEGMENT INFORMATION
The Company evaluates its business segments' operating results based on income
from operations. Corporate activities include general corporate expenses,
elimination of intersegment transactions, interest income and expense and other
unallocated charges. Since certain administrative and other operating expenses
and other items have not been allocated to business segments, the results in the
below tables are not necessarily a measure computed in accordance with generally
accepted accounting principles and may not be comparable to other companies.
WABCO has three reportable segments - Railroad Group, Transit Group and Molded
Products Group. The key factors used to identify these reportable segments are
the organization and alignment of the Company's internal operations, the nature
of the products and services and customer type. The business segments are:
RAILROAD GROUP consists of products geared to the production of freight cars and
locomotives, including braking control equipment and train couplers, and in
addition, to freight railroad companies. Revenues are derived from OEM and
aftermarket sales and from repairs and services.
TRANSIT GROUP consists of products for passenger transit vehicles (typically
subways, rail and buses) that include braking, coupling, electrification and
monitoring equipment, climate control and door equipment that are engineered to
meet individual customer specifications. Revenues are derived from OEM and
aftermarket sales as well as from repairs and services.
MOLDED PRODUCTS GROUP include manufacturing and distribution of brake shoes and
discs and other rubberized products. Revenues are generally derived from the
aftermarket.
Segment financial information for the three months ended June 30, 1999 is as
follows:
<TABLE>
<CAPTION>
MOLDED
RAILROAD TRANSIT PRODUCTS CORPORATE
In thousands GROUP GROUP GROUP ACTIVITIES TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales to external customers $112,886 $61,485 $19,610 $193,981
Intersegment sales 6,242 491 3,110 (9,843) --
---------------------------------------------------------------------
Total sales $119,128 $61,976 $22,720 $ (9,843) $193,981
=====================================================================
Income from operations 21,043 4,889 7,261 (2,946) 30,247
Interest expense and other 9,182 9,182
---------------------------------------------------------------------
Income before income taxes and extraordinary item $ 21,043 $ 4,889 $ 7,261 $(12,128) $ 21,065
=====================================================================
</TABLE>
Segment financial information for the three months ended June 30, 1998 is as
follows:
<TABLE>
<CAPTION>
MOLDED
RAILROAD TRANSIT PRODUCTS CORPORATE
In thousands GROUP GROUP GROUP ACTIVITIES TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales to external customers $102,521 $51,104 $18,427 $172,052
Intersegment sales 6,136 217 2,357 (8,710) --
---------------------------------------------------------------------
Total sales $108,657 $51,321 $20,784 $ (8,710) $172,052
=====================================================================
Income from operations 20,637 3,025 5,591 (3,169) 26,084
Interest expense and other 7,213 7,213
---------------------------------------------------------------------
Income before income taxes and extraordinary item $ 20,637 $ 3,025 $ 5,591 $(10,382) $ 18,871
=====================================================================
</TABLE>
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Segment financial information for the six months ended June 30, 1999 is as
follows:
<TABLE>
<CAPTION>
MOLDED
RAILROAD TRANSIT PRODUCTS CORPORATE
In thousands GROUP GROUP GROUP ACTIVITIES TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales to external customers $231,202 $116,347 $37,636 $385,185
Intersegment sales 8,497 532 5,701 $(14,730) --
---------------------------------------------------------------------
Total sales $239,699 $116,879 $43,337 $(14,730) $385,185
=====================================================================
Income from operations 43,466 9,259 12,707 (6,288) 59,144
Interest expense and other 18,344 18,344
---------------------------------------------------------------------
Income before income taxes and extraordinary item $ 43,466 $ 9,259 $12,707 $(24,632) $ 40,800
=====================================================================
</TABLE>
Segment financial information for the six months ended June 30, 1998 is as
follows:
<TABLE>
<CAPTION>
MOLDED
RAILROAD TRANSIT PRODUCTS CORPORATE
In thousands GROUP GROUP GROUP ACTIVITIES TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales to external customers $190,207 $102,635 $37,346 $330,188
Intersegment sales 8,197 336 4,861 (13,394) --
---------------------------------------------------------------------
Total sales $198,404 $102,971 $42,207 $(13,394) $330,188
=====================================================================
Income from operations 38,131 7,407 11,091 (5,790) 50,839
Interest expense and other 14,455 14,455
---------------------------------------------------------------------
Income before income taxes and extraordinary item $ 38,131 $ 7,407 $11,091 $(20,245) $ 36,384
=====================================================================
</TABLE>
9. PENDING MERGER
On June 2, 1999, the Company agreed to merge with and into MotivePower
Industries, Inc., pursuant to an Agreement and Plan of Merger. In the merger,
each share of our Common Stock will be exchanged with 1.3 shares of MotivePower
Common Stock. For accounting purposes, the transaction will be accounted for as
a pooling of interests. The merger is intended to be a tax-free reorganization
for federal income tax purposes and is subject to a variety of conditions,
including approval by the shareholders of both companies at special meetings of
shareholders scheduled for August 23, 1999. The Company has filed a Form S-4
that became effective on July 22, 1999, which contains specific details on the
proposed merger.
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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 1998 Annual Report on Form 10-K.
OVERVIEW
Westinghouse Air Brake Company was formed in 1990 through the acquisition of the
Railway Products Group of American Standard Inc. The Company is North America's
largest manufacturer of value-added equipment for locomotives, railway freight
cars and passenger transit vehicles.
The Company's business is comprised of three principal business segments:
Railroad, Transit and Molded Products.
On June 2, 1999, the Company agreed to merge with and into MotivePower
Industries, Inc., pursuant to an Agreement and Plan of Merger. In the merger,
each share of our Common Stock will be exchanged with 1.3 shares of MotivePower
Common Stock. The merger is intended to be a tax-free reorganization for federal
income tax purposes and is subject to a variety of conditions, including
approval by the shareholders of both companies. For accounting purposes, the
transaction will be accounted for as a pooling of interests, and is expected to
be completed in the third quarter of 1999.
SECOND QUARTER 1999 COMPARED TO
SECOND QUARTER 1998
Summary Results of Operations
THREE MONTHS
ENDED JUNE 30
Dollars in millions, ------------------- PERCENT
except per share 1999 1998 CHANGE
- --------------------------------------------------------------
Net sales $194.0 $172.1 12.7%
Gross profit margin 32.6% 32.0% nm
Income from operations $ 30.3 $ 26.1 16.1
Income before extraordinary
item 13.2 11.7 12.8
Extraordinary item, net -- (2.7) nm
of tax
Net income 13.2 9.0 46.7
Diluted earnings per share,
before extraordinary item 0.51 0.45 13.3
Diluted earnings per share 0.51 0.34 50.0
- --------------------------------------------------------------
nm-not meaningful
Excluding the $2.7 million, net of tax, extraordinary charge to write-off
certain previously capitalized debt issuance costs in the second quarter of
1998, net income would have increased $1.5 million, or 12.8%. Diluted earnings
per share before extraordinary item increased 13.3% to $0.51. Income from
operations increased in the comparison primarily due to revenue growth and
related gross profit.
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 RRE, Comet, Lokring and Hadady. Aggregate incremental
revenues from all of the above acquisitions were $17.6 million in the second
quarter of 1999.
o Continued strength in the OEM market for freight cars.
o In the second quarter of 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 the Company's net sales by business segment:
THREE MONTHS ENDED
JUNE 30
-----------------------
Dollars in thousands 1999 1998
- ---------------------------------------------------------------
Railroad Group $112,886 $102,521
Transit Group 61,485 51,104
Molded Products Group 19,610 18,427
-----------------------
Net sales $193,981 $172,052
- ---------------------------------------------------------------
Net sales for the second quarter of 1999 increased $21.9 million, or 12.7%, to
$194.0 million. This increase was primarily attributable to incremental revenue
from the acquisitions referred to above within the Railroad Group, partially
offset by decreased sales in the Company's British railroad vehicle overhaul
business RFS(E) and increased sales within the Transit Group. Sales volumes
within the Railroad Group also reflect a strong OEM market for freight cars,
with approximately 19,000 freight cars delivered in the second quarter of 1999
compared to a similar amount in the same period of 1998.
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Gross Profit
Gross profit increased 14.9% to $63.3 million in the second quarter of 1999
compared to $55.0 million in the same period of 1998. Gross margin, as a
percentage of sales, was 32.6% compared to 32.0%. Gross margin is dependent on a
number of factors including sales volume and product mix. Favorable margins on
increased sales in the Molded Products and core Railroad Group operations more
than offset incremental revenue from recent acquisitions at lower margins as
compared to the Company's historical results.
Operating Expenses
THREE MONTHS
ENDED JUNE 30
------------------ PERCENT
Dollars in thousands 1999 1998 CHANGE
- --------------------------------------------------------------
Selling and marketing $ 7,607 $ 7,154 6.3
General and administrative 13,422 12,719 5.5
Engineering 9,629 7,016 37.2
Amortization 2,427 2,074 17.0
------------------
Total $33,085 $28,963
- --------------------------------------------------------------
Total operating expenses as a percentage of net sales were 17.1% in the second
quarter of 1999 as compared to 16.8% in the same period a year ago. Total
operating expenses increased $4.1 million in the quarter-to-quarter comparison
all of which related to operating expenses of the acquired businesses listed
above.
Income from Operations
Operating income totaled $30.2 million in the second quarter of 1999 compared
with $26.1 million. Higher operating income resulted from higher sales volume
and related higher gross profit. As a percentage of sales, operating income was
15.6% and is substantially consistent with that of the prior year. Favorable
volume changes at relatively strong operating margins in the Transit and Molded
Products Groups was the primary reason for the increase in operating income.
Interest and Other Expense
Interest expense totaled $8.8 million, an increase of $1.3 million in the
quarter-to-quarter comparison. The increase was primarily due to financing costs
of recent acquisitions, partially offset by debt repayments.
Income Taxes
The provision for income taxes on income before extraordinary items increased to
$7.9 million for the second quarter of 1999. The effective tax rate declined to
37.25% in the current quarter from 38.0% a year ago, resulting from additional
benefits through our Foreign Sales Corporation and lower overall effective state
tax rates.
SIX MONTH PERIOD ENDED JUNE 30, 1999
COMPARED TO SIX MONTH PERIOD ENDED JUNE 30, 1998
Summary Results of Operations
SIX MONTHS
ENDED JUNE 30
Dollars in millions, ------------------- PERCENT
except per share 1999 1998 CHANGE
- --------------------------------------------------------------
Net sales $385.2 $330.2 16.7%
Gross profit margin 32.4% 32.4% nm
Income from operations $ 59.1 $50.8 16.3
Income before extraordinary
item 25.6 22.6 13.3
Extraordinary item, net of tax (0.5) (2.7) nm
Net income 25.1 19.8 26.8
Diluted earnings per share,
before extraordinary item 0.99 0.88 12.5
Diluted earnings per share 0.97 0.77 26.0
- --------------------------------------------------------------
nm-not meaningful
Excluding the $2.7 million and $0.5 million, net of tax, extraordinary charges
to write-off certain previously capitalized debt issuance costs in the second
quarter of 1998, and the first quarter of 1999, respectively, net income would
have increased $3.0 million, or 13.3%. Diluted earnings per share before
extraordinary item increased 12.5% to $0.99 per share. Income from operations
increased in the comparison primarily due to revenue growth and related gross
profit.
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 RRE, Comet, Lokring, Hadady, and RFS(E). Aggregate
incremental revenues from all of the above acquisitions were $38.5 million,
or 70% of the increase, in the six months ending June 30, 1999.
o In January 1999, the Company issued $75 million of Senior Notes at a premium
resulting in an effective interest rate of 8.5% (See Note 5 - "Notes to
Condensed Consolidated Financial Statements" included elsewhere in this
report). As a result of the issuance and payoff of the unsecured credit
facility, the Company wrote off previously capitalized debt issuance costs
of approximately $469 thousand, net of tax ($.02 per diluted share) in the
first quarter of 1999, which was reported as an extraordinary item.
11
<PAGE> 12
o In the second quarter of 1998, the Company refinanced its credit agreement
and wrote-off previously deferred financing costs of approximately $2.7
million ($0.11 per share) , net of income tax, reported as a non-cash,
non-recurring, extraordinary item.
Net Sales
The following table sets forth the Company's net sales by business segment:
SIX MONTHS ENDED
JUNE 30
---------------------
Dollars in thousands 1999 1998
- --------------------------------------------------------------
Railroad Group $231,202 $190,207
Transit Group 116,347 102,635
Molded Products Group 37,636 37,346
---------------------
Net sales $385,185 $330,188
- --------------------------------------------------------------
Net sales for the six month period ending June 30, 1999 increased $55.0 million,
or 16.7%, to $385.2 million. This increase was primarily attributable to
incremental revenue from the acquisitions referred to above within the Railroad
Group, and increases in Transit sales are a result of continuing improvements to
mass transit authority infrastructure pursuant to recent governmental funding
legislation. Sales volumes within the Railroad Group also reflect a continuing
strong OEM market for freight cars. In spite of this increase, the Company
anticipates new freight car deliveries in 1999 and the immediate future to be
lower than that of 1998; however, railroad OEM and aftermarket sales are
expected to be reasonably strong for the foreseeable future.
Gross Profit
Gross profit increased to $124.9 million in the six month period ending June 30,
1999 compared to $106.8 million in the same period of 1998. Gross margin, as a
percentage of sales, was 32.4%, the same as the prior period. Gross margin is
dependent on a number of factors including sales volume and product mix.
Favorable margins on increased sales in the Molded Product and core Railroad
Group operations offset incremental revenue from recent acquisitions at lower
margins as compared to the Company's historical results.
Operating Expenses
SIX MONTHS ENDED
JUNE 30
-------------------- PERCENT
Dollars in thousands 1999 1998 CHANGE
- ----------------------------------------------------------------------
Selling and marketing $16,110 $14,068 14.5
General and administrative 26,250 24,303 8.0
Engineering 18,536 13,454 37.8
Amortization 4,837 4,179 15.7
------------------
Total $65,733 $56,004
- ----------------------------------------------------------------------
Total operating expenses as a percentage of net sales were 17.1% in the six
month period ending June 30, 1999 as compared to 17.0% in the same period a year
ago. Total operating expenses increased $9.7 million in the period to period
comparison, all of which related to operating expenses of the acquired
businesses listed above. Excluding incremental revenues and operating expenses
from businesses acquired in the comparative period, operating expenses as a
percentage of sales would have decreased to 16.2% due to costs incurred in 1998
to install computer system upgrades that included Year 2000 compliant software.
In addition, during the fourth quarter 1998 and first quarter of 1999, the
Company completed the consolidation of several facilities as it integrated
recently acquired businesses into its core operations.
Income from Operations
Operating income totaled $59.1 million in the six month period ending June 30,
1999 compared with $50.8 million in the same period of 1998. Higher operating
income resulted from higher sales volume and related higher gross profit. As a
percentage of sales, operating income was 15.4% and is substantially consistent
with that of the prior year. Favorable volume changes at relatively stable
operating margins in all of the business segments was the primary reason for the
increase in operating income (See Note 8 - "Notes to Condensed Consolidated
Financial Statements" included elsewhere in this report).
Interest and Other Expense
Interest expense totaled $17.9 million, an increase of $3.0 million in the
comparison. The increase was primarily due to financing costs of recent
acquisitions, partially offset by debt repayments.
Income Taxes
The provision for income taxes on income before extraordinary items increased to
$15.2 million. The effective tax rate declined to 37.25% in the current year
from 38.0% a year ago, resulting from additional benefits through our Foreign
Sales Corporation and lower overall effective state tax rates.
12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is provided primarily by operating cash flow and borrowings under the
Company's credit facilities with a consortium of commercial banks ("Credit
Agreement"). The following is a summary of selected cash flow information and
other relevant data.
SIX MONTHS ENDED
JUNE 30
-----------------------
Dollars in millions 1999 1998
- ---------------------------------------------------------------
Cash provided (used) by:
Operating activities $ 31.6 $ 20.6
Investing activities (12.6) (28.5)
Financing activities (16.6) 12.5
Earnings before interest,
taxes, depreciation and
amortization 71.8 63.8
- ---------------------------------------------------------------
Operating cash flow in the six month period ending June 30, 1999 increased to
$31.6 million from $20.6 million in the same period a year ago, primarily as a
result of higher earnings and a significant decrease in the rate of growth in
working capital. In addition, inventory levels are increasing within the Transit
Group as production continues for future product deliveries related to the
Metropolitan Transit Authority/New York City Transit project. Deliveries are
expected to commence in the latter part of 1999.
Cash used for investing activities declined to $12.6 million from $28.5 million
a year ago. In the six month period ending June 30, 1999 and 1998, the Company
used $1.0 million and $14.1 million, respectively for certain business
acquisitions. Gross capital expenditures were $11.6 million and $14.4 million in
the six months ending June 30, 1999 and 1998, respectively. The majority of
capital expenditures for these periods relates to incurring costs for upgrades
to existing equipment, replacement of antiquated equipment and purchases of new
equipment due to expansion of WABCO's operations, where the Company believes
overall cost savings can be achieved through increasing efficiencies. The
Company expects 1999 capital expenditures for equipment purchased for similar
purposes to approximate $25 to $30 million.
In 1999, the Company issued $75 million of additional Senior Notes and used the
proceeds to repay amounts outstanding on certain term debt and the balance to
repay a portion of the Company's revolving credit facility, thereby increasing
amounts available under the Credit Agreement (see below for additional
information). Additionally, a significant amount of cash generated from
operations in the six month period ended June 30, 1999 was used to repay a
portion of the outstanding balance on the revolving credit facility.
Historically, the Company has financed the purchase of significant businesses
through utilizing the amounts available under the credit facility and/or
obtaining amendments to or refinancings of the Credit Agreement. Future business
acquisitions, if any, will likely require similar debt structurings.
Based on anticipated cash flow provided by operations, forecasted results and
credit available under the credit agreement, the Company believes it will be
able to make planned capital expenditures and required debt payments over the
next twelve months.
The following table sets forth the Company's outstanding indebtedness and
average interest rates at June 30, 1999. The revolving credit note and term loan
interest rates are variable and dependent on market conditions.
Interest on the Pulse note can vary with changes to prime.
JUNE 30 DECEMBER 31
Dollars in thousands 1999 1998
- ---------------------------------------------------------------
Credit Agreement, matures 12/2003
Revolving credit, 6.5% $ 61,000 $105,555
Term loan, 6.5% 195,000 202,500
9 3/8% Senior notes due 6/2005 175,000 100,000
Unsecured credit facility -- 30,000
Pulse note, 9.5%, due 1/2004 16,990 16,990
Comet notes -- 10,200
Other 2,229 2,572
----------------------
Total 450,219 467,817
Less-current portion 27,659 30,579
----------------------
Long-term portion $422,560 $437,238
- ---------------------------------------------------------------
The Credit Agreement provides for an aggregate credit facility of $350 million,
consisting of up to $170 million of June 1998 term loans, up to $40 million of
September 1998 term loans, and up to $140 million of revolving loans. At June
30, 1999, amounts available under the revolving credit facility increased to $57
million.
In 1999, WABCO issued $75 million of 9 3/8% Senior Notes (with an effective rate
of 8.5%) which mature in June 2005. The January issuance improved WABCO's
financial liquidity by i) using a portion of the proceeds to repay $30 million
of debt associated with the RRE acquisition that bore interest at 9.56%, and;
ii) using a portion of the proceeds to repay variable-rate revolving credit
borrowings thereby increasing amounts available under the revolving credit
facility.
Management believes, based upon current levels of operations and forecasted
earnings, that cash flow from operations, together with available 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 for the foreseeable future, including 1999.
13
<PAGE> 14
Nevertheless, the Company will remain leveraged to a significant extent and its
debt service obligations will continue to be substantial. The debt of the
Company requires the dedication of a substantial portion of future cash flows to
the payment of principal and interest on indebtedness, thereby reducing funds
available for capital expenditures and future business opportunities that the
Company believes are available. The Company believes that cash flow and
liquidity will be sufficient to meet its debt service requirements. If the
Company's sources of funds were to fail 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 such new financing alternatives
would be available, and, in any case, such new financing, if available, would be
expected to be more costly and burdensome than the debt agreements currently in
place. The Company intends to reduce its indebtedness in 1999 through generating
operating income and by reducing working capital requirements and other
measures.
EFFECTS 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
substantially operational and is year 2000 compliant. The estimated cost of the
project is expected to be in the $8 to $10 million range with the majority of
the costs, approximately $8 million, previously incurred. The majority of the
expenditures incurred for hardware and purchased software related to this
project have been capitalized and is 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
our future results of operations or financial condition.
The Company has identified other equipment that is used in operations that has
non-information system characteristics and embedded technology components, such
as those items with internal clocks. The Company will need to replace this type
of equipment but does not believe a possible Year 2000 failure will have a
significant impact on our operations. The estimated cost of replacement
equipment is not considered significant.
The Company has received written assurances from some of our suppliers and
customers and other providers acknowledging Year 2000 issues and stating their
present intention to be compliant; however, not all customers, vendors and
providers have provided such assurances.
The Company will continue to evaluate information technology applications, as
well as those of the suppliers regularly, and based on such evaluation, will
revise our Year 2000 readiness planning accordingly. The Company is evaluating
its preparedness in a number of areas, including our information technology
infrastructure, external resources, physical plant and production facilities,
equipment and machinery, products and inventory.
In the evaluation and prioritization of Year 2000 concerns, the Company seeks to
develop potential solutions to the Year 2000 issues identified in planning,
consider these solutions in light of other information technology and business
priorities, prioritize the various remediation tasks and develop an
implementation schedule.
Identified problems are corrected as soon as practicable after identification.
The Company is in the process of developing contingency plans and actions for
Year 2000 issues related to both internal and external systems. As part of this
planning, the Company is evaluating the incremental cost of the contingency
alternatives as compared to the perceived level of risk for Year 2000 problems.
In some cases, we have determined that the perceived level of risk does not
justify the cost of the contingency alternative. Contingency plans involve
consideration of a number of possible actions, including, to the extent
necessary or justified, the selection of alternative service providers and
adjustments to staffing strategies, as ordering and billing procedures could be
done manually. The Company plans to continue developing and modifying
contingency plans throughout 1999 as the Company monitors and evaluates the
progress of our internal and external Year 2000 compliance program.
With regard to contingency planning, as previously noted, the Company is
assessing the Year 2000 readiness of key suppliers, distributors, customers and
service providers. Toward that objective, since the Company has not received
assurances from all of its suppliers and other service providers that they will
be compliant, we are evaluating the risks to us that the failure of others to be
Year 2000 ready would cause a material disruption to, or have a material effect
on, our financial condition, business or operations. Although the Company has
not determined the costs to handle Year 2000 failures by our third party
suppliers or customers, we presently believe such costs will not be material.
Due to the nature of our business, we do not anticipate that Year 2000 problems
at our suppliers or customers will generate many problems with the process such
suppliers or customers must undertake in order to provide products to us or
purchase products from us, as the case may be. For example, our critical
supplies include bar stock and scrap metal and are commodity materials that can
be obtained from different sources. Further, these types of industries are not
expected to be severely hampered by the Year 2000 issues. Rather, if anything,
we expect that Year 2000 problems will affect the ability of suppliers or
customers
14
<PAGE> 15
to communicate with us in a manner in which we can efficiently obtain the
necessary supplies or take customer orders. The Company has attempted to address
these Year 2000 concerns by preparing to accept paper copy orders from customers
and enter those orders into our own computer system, if our customers' computers
are unable to communicate with our computers. The Company's ordering on the
supply end is typically done by paper copy rather than computer, so it should
not be negatively impacted by Year 2000 issues. The Company is also considering
the advisability of augmenting our inventories of certain raw materials and
finished products, securing additional sources for certain supplies and services
and exploring the use of manual paper flow to handle both the distribution and
sales channels, among other things.
The Company's products are generally sold with a limited warranty for defects.
The Company has reviewed its products currently in use by our customers or being
sold and does not believe that there will be material increases in warranty or
liability claims arising out of year 2000 non-compliance. However, a material
increase in such claims could have a material adverse effect on our financial
condition, future results of operations and liquidity. If large scale systems
failures occur, it could have a significant adverse effect on our financial
condition, future results of operations and liquidity.
FORWARD LOOKING STATEMENTS
The Company believes that all statements other than statements of historical
facts included in this report, including certain statements under "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," may constitute forward-looking statements. The Company has based
these forward-looking statements on current expectations and projections about
future events and believes assumptions made in connection with these statements
are reasonable, however, there is no assurance these assumptions and
expectations will prove to have been correct.
These forward-looking statements are subject to various risks, uncertainties and
assumptions about us, including, among other things:
- - Interest rates;
- - Demand for services in the freight and passenger rail industry;
- - Consolidations in the rail industry;
- - Demand for our products and services;
- - 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 our customers;
- - Governmental funding for some of our customers;
- - Future regulation/deregulation of our customers and/or the rail
industry;
- - General economic conditions in the markets which we compete, including
North America, South America, Europe and Australia;
- - Successful introduction of new products;
- - Successful integration of newly acquired companies;
- - Year 2000 concerns;
- - Labor relations;
- - Completion of additional acquisitions; and
- - Other factors.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK In the ordinary course of business, WABCO is exposed to risks
that increases in interest rates may adversely affect funding costs associated
with $225 million of variable-rate debt (considering the effects of existing
interest rate swaps), which represents 50% of total long-term debt at June 30,
1999. At June 30, 1999, an instantaneous 100 basis point increase in interest
rates would reduce the Company's earnings annually by approximately $1.4
million, net of tax, assuming no additional intervention strategies by
management.
FOREIGN CURRENCY EXCHANGE RISK The Company routinely enters into several types
of financial instruments for the purpose of managing its exposure to foreign
currency exchange rate fluctuations in countries in which the Company has
significant operations. As of June 30, 1999, the Company had no instruments
outstanding.
WABCO is also subject to certain risks associated with changes in foreign
currency exchange rates to the extent its operations are conducted in currencies
other than the U.S. dollar. For the six months ending June 30, 1999,
approximately 75% of WABCO's net sales are in the United States, 12% in Canada
and 13% in other international locations, primarily Europe. At June 30, 1999,
the Company does not believe changes in foreign currency exchanges rates
represent a material risk to results of operations or financial position.
LEGAL PROCEEDINGS
On February 12, 1999, GE Harris Railway Electronics, LLC and GE Harris Railway
Electronic Services, LLC (collectively, "GE Harris") brought suit against the
Company for alleged patent infringement and unfair competition related to a
communications system installed in one of the Company's products. GE Harris is
seeking to prohibit the Company from future infringement and is seeking an
unspecified amount of money damages to recover, in part, royalties. While this
lawsuit is in the earliest stages, the Company believes the technology developed
by the Company does not infringe on the GE Harris patents. The Company plans to
contest the infringement claims vigorously, in order to present alternative
product lines to customers in the rail industry.
15
<PAGE> 16
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held May 19, 1999. Two
matters were considered and voted upon at the Annual Meeting: the election of
three persons to serve as directors, 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 1999 fiscal year.
Nominations of Emilio A. Fernandez, William E. Kassling and James V. Napier to
serve as directors for a term expiring in 2002 and the appointment of Arthur
Andersen were considered and ultimately approved.
Votes Votes Votes Broker
Nominee For Against Withheld Non-Votes
- -------------------------------------------------------------------
Emilio A. Fernandez 31,040,589 -- 137,010 --
William E. Kassling 31,041,581 -- 136,018 --
James V. Napier 30,879,972 -- 297,627 --
Votes Votes Votes Broker
For Against Withheld Non-Votes
- -------------------------------------------------------------------
Arthur Andersen LLP
as auditors for 1999 31,161,542 6,781 9,276 --
On July 26, 1999, the Company first mailed a Joint Proxy Statement/Prospectus to
the shareholders for the consideration of and voting upon the proposed merger
between the Company and MotivePower Industries, Inc. A special meeting to
further consider the proposal will be held on August 23, 1999.
EXHIBITS AND REPORTS ON FORM 8-K
Exhibit No. 27 "Financial Data Schedule" as of and for the Six Months ended June
30, 1999 is filed herewith.
There was a Current Report filed on Form 8-K on June 3, 1999 for the purpose of
reporting the June 2, 1999 execution of the merger agreement (Item 5) between
the Company and MotivePower Industries, Inc.
16
<PAGE> 17
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 11, 1999
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM WESTINGHOUSE
AIR BRAKE COMPANY'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
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<SECURITIES> 0
<RECEIVABLES> 127,964
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<INVENTORY> 111,444
<CURRENT-ASSETS> 268,505
<PP&E> 229,987
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<COMMON> 474
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<TOTAL-LIABILITY-AND-EQUITY> 606,442
<SALES> 385,185
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<OTHER-EXPENSES> 65,733
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