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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 MARCH 31, 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 April 26, 1999, 33,944,452 shares of Common Stock of the
registrant were issued and outstanding, of which 8,477,571 shares were
unallocated ESOP shares.
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TABLE OF CONTENTS
<TABLE>
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Page
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of March 31, 1999
and December 31, 1998 3
Condensed Consolidated Statement of Operations for the three
months ended March 31, 1999 and 1998 4
Condensed Consolidated Statement of Cash Flows for the three
months ended March 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Position and
Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
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WESTINGHOUSE AIR BRAKE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
UNAUDITED
MARCH 31 DECEMBER 31
Dollars in thousands, except par value 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $4,627 $3,323
Accounts receivable 137,921 132,901
Inventories 107,703 103,560
Other 21,573 23,177
---------------------------
Total current assets 271,824 262,961
Property, plant and equipment 223,849 214,461
Accumulated depreciation (95,783) (89,480)
---------------------------
Property, plant and equipment, net 128,066 124,981
OTHER ASSETS
Prepaid pension costs 6,526 5,724
Goodwill 151,797 151,658
Other intangibles 44,738 46,021
Other noncurrent assets 6,509 4,839
---------------------------
Total other assets 209,570 208,242
---------------------------
Total Assets $609,460 $596,184
===========================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $20,264 $30,579
Accounts payable 51,347 62,974
Accrued income taxes 10,039 8,352
Accrued interest 5,240 1,616
Customer deposits 17,310 20,426
Other accrued liabilities 46,562 43,603
---------------------------
Total current liabilities 150,762 167,550
Long-term debt 450,226 437,238
Reserve for postretirement benefits 16,543 16,238
Accrued pension costs 3,911 3,631
Other long-term liabilities 7,380 5,380
---------------------------
Total liabilities 628,822 630,037
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 108,066 107,720
Treasury stock, at cost, 13,482,148 and 13,532,092 shares (187,014) (187,654)
Unearned ESOP shares, at cost, 8,493,131 and 8,564,811 shares (127,397) (128,472)
Retained earnings 193,965 182,291
Unamortized restricted stock award (103) (162)
Accumulated other comprehensive income (loss) (7,353) (8,050)
---------------------------
Total shareholders' equity (19,362) (33,853)
---------------------------
Liabilities and Shareholders' Equity $609,460 $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
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
In thousands, except per share data 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $191,204 $158,136
Cost of sales 129,659 106,340
----------------------------
Gross profit 61,545 51,796
Selling and marketing expenses 8,503 6,914
General and administrative expenses 12,828 11,584
Engineering expenses 8,907 6,438
Amortization expense 2,410 2,105
----------------------------
Total operating expenses 32,648 27,041
Income from operations 28,897 24,755
Other income and expenses
Interest expense 9,096 7,373
Other expense (income), net 66 (131)
----------------------------
Income before income taxes and extraordinary item 19,735 17,513
Income taxes 7,346 6,655
----------------------------
Income before extraordinary item 12,389 10,858
Loss on early extinguishment of debt, net of tax 469 -
----------------------------
Net income $11,920 $10,858
============================
EARNINGS PER COMMON SHARE
Basic
Income before extraordinary item $.49 $.43
Extraordinary item (.02) -
----------------------------
Net income $.47 $.43
============================
Diluted
Income before extraordinary item $.48 $.42
Extraordinary item (.02) -
----------------------------
Net income $.46 $.42
============================
Weighted Average Shares Outstanding
Basic 25,371 24,962
Diluted 25,776 25,669
============================
</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)
THREE MONTHS ENDED
MARCH 31
In thousands 1999 1998
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<S> <C> <C>
OPERATING ACTIVITIES
Net income $11,920 $10,858
Adjustments to reconcile net income to cash provided by operations
Extraordinary loss on extinguishment of debt 469
Depreciation and amortization 6,785 6,384
Provision for ESOP contribution 1,380 1,188
Changes in operating assets and liabilities,
net of acquisitions
Accounts receivable (5,427) (11,327)
Inventories (4,020) (3,941)
Accounts payable (11,542) 5,407
Accrued income taxes 1,882 5,038
Accrued liabilities and customer deposits 2,899 (443)
Other assets and liabilities 1,569 (697)
----------------------------
Net cash provided by operating activities 5,915 12,467
INVESTING ACTIVITIES
Purchase of property, plant and equipment, net (6,533) (5,329)
Acquisitions of businesses, net of cash acquired (960) (3,900)
----------------------------
Net cash used for investing activities (7,493) (9,229)
FINANCING ACTIVITIES
Proceeds from Senior Note offering 76,875
Debt issuance costs (1,926)
Net (repayments of) proceeds from revolving credit facility (31,955) 120
Repayments of other borrowings (40,372) (135)
Cash dividends (246) (244)
Proceeds from exercise of stock options and employee stock purchases 577 544
----------------------------
Net cash provided by financing activities 2,953 285
Effect of changes in currency exchange rates (71) 33
----------------------------
Increase in cash 1,304 3,556
Cash, beginning of year 3,323 836
----------------------------
Cash, end of year $4,627 $4,392
============================
</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 MARCH 31, 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 first quarter ending March 31,
1999 and 1998 was $12.6 million and $10.9 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.
The Company also completed the following:
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.
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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.
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:
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
Dollars in thousands 1999 1998
- ---------------------------------------------------------------
<S> <C> <C>
Raw materials $48,455 $47,853
Work-in-process 40,741 29,965
Finished goods 18,507 25,742
-------------------------
Total inventory $107,703 $103,560
- ---------------------------------------------------------------
</TABLE>
5. DEBT OFFERING AND EXTRAORDINARY ITEM
In January 1999, WABCO completed the private placement of $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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
In thousands, except per share 1999 1998
- ----------------------------------------------------------------
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BASIC EARNINGS PER SHARE
Income before extraordinary item
applicable to common
shareholders $12,389 $10,858
Divided by
Weighted average shares
outstanding 25,371 24,962
Basic earnings per share before
extraordinary item $.49 $.43
- ----------------------------------------------------------------
DILUTED EARNINGS PER SHARE
Income before extraordinary item
applicable to common
shareholders $12,389 $10,858
Divided by sum of
Weighted average shares
outstanding 25,371 24,962
Conversion of dilutive
stock options 405 707
--------------------
Diluted shares outstanding 25,776 25,669
Diluted earnings per share
before extraordinary item $.48 $.42
- ----------------------------------------------------------------
</TABLE>
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.
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 as well as
operating freight
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railroads. 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 March 31, 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 $118,316 $54,862 $18,026 $191,204
Intersegment sales 2,255 41 2,591 $ (4,887) ---
-----------------------------------------------------------------------
Total sales $120,571 $54,903 $20,617 $ (4,887) $191,204
=======================================================================
Income from operations $22,423 $4,370 $5,446 $ (3,342) $28,897
Interest expense and other 9,162 9,162
-----------------------------------------------------------------------
Income before income taxes and extraordinary item $22,423 $4,370 $5,446 $(12,504) $19,735
=======================================================================
</TABLE>
Segment financial information for the three months ended March 31, 1998 is as
follows:
<TABLE>
<CAPTION>
MOLDED
RAILROAD TRANSIT PRODUCTS CORPORATE
In thousands GROUP GROUP GROUP ACTIVITIES TOTAL
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<S> <C> <C> <C> <C> <C>
Sales to external customers $87,686 $51,531 $18,919 $158,136
Intersegment sales 2,061 119 2,504 $(4,684) ---
-----------------------------------------------------------------------
Total sales $89,747 $51,650 $21,423 $(4,684) $158,136
=======================================================================
Income from operations $17,494 $ 4,382 $ 5,500 $(2,621) $ 24,755
Interest expense and other 7,242 7,242
-----------------------------------------------------------------------
Income before income taxes and extraordinary item $17,494 $ 4,382 $ 5,500 $(9,863) $ 17,513
=======================================================================
</TABLE>
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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.
FIRST QUARTER 1999 COMPARED TO
FIRST QUARTER 1998
<TABLE>
<CAPTION>
Summary Results of Operations
THREE MONTHS
Dollars in millions, ENDED MARCH 31
except per share ----------------- PERCENT
1999 1998 CHANGE
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<S> <C> <C> <C>
Income before extraordinary item $12.4 $10.9 13.8
Extraordinary item, net of tax (.5) -- nm
Net income 11.9 10.9 9.2
Diluted earnings per share,
before extraordinary item .48 .42 14.3
Diluted earnings per share .46 .42 9.5
Net sales 191.2 158.1 20.9
Income from operations 28.9 24.8 16.5
Earnings before interest,
taxes, depreciation and
amortization 35.6 31.3 13.7
Gross profit margin 32.2% 32.8% nm
- ---------------------------------------------------------------
</TABLE>
nm-not meaningful
Income before extraordinary item for the first three months of 1999 increased
$1.5 million, or 13.8%, compared with the same period a year ago. Because of the
$469 thousand, net of tax, extraordinary charge to write-off certain previously
capitalized debt issuance costs, net income increased only $1.0 million,
compared to the first quarter of 1998. Diluted earnings per share before
extraordinary item increased 14.3% to $.48. Income from operations and earnings
before interest, taxes, depreciation and amortization 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. Aggregate incremental
revenues from all of the above acquisitions were $20.9 million in the first
quarter of 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.
Net Sales
The following table sets forth the Company's net sales by business segment:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
---------------------------
Dollars in thousands 1999 1998
- -----------------------------------------------------------------
<S> <C> <C>
Railroad Group $118,316 $87,686
Transit Group 54,862 51,531
Molded Products Group 18,026 18,919
---------------------------
Net sales $191,204 $158,136
- -----------------------------------------------------------------
</TABLE>
Net sales for the first quarter of 1999 increased $33.1 million, or 20.9%, to
$191.2 million. This increase was primarily attributable to incremental revenue
from the acquisitions referred to above within the Railroad Group. Increased
sales volumes in the Railroad Group also reflect a strong OEM market for freight
cars, with approximately 21,600 freight cars delivered in the first quarter of
1999 compared to 17,800 in the same period of 1998. In spite of this increase,
the Company anticipates new freight car deliveries in 1999 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 18.8% to $61.5 million in the first quarter of 1999
compared to $51.8 million in the same period
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of 1998. Gross margin, as a percentage of sales, was 32.2% compared to 32.8%.
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. These lower margins were
partially offset by favorable margins on increased sales in the core Railroad
Product Group operations.
Operating Expenses
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
------------------ PERCENT
Dollars in thousands 1999 1998 CHANGE
- ----------------------------------------------------------------
<S> <C> <C> <C>
Selling and marketing $8,503 $6,914 23.0
General and administrative 12,828 11,584 10.7
Engineering 8,907 6,438 38.4
Amortization 2,410 2,105 14.5
------------------
Total $32,648 $27,041 20.7
- ----------------------------------------------------------------
</TABLE>
Total operating expenses as a percentage of net sales were 17.1% in the
first quarter of 1999 and 1998. Total operating expenses increased $5.6
million in the quarter-to-quarter comparison of which $5.2 million, or 93%
of the increase, related to operating expenses of the acquired businesses.
Excluding incremental revenues and operating expenses from businesses
acquired in the comparative period, operating expenses as a percentage of
sales would have decreased 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 $19.7 million in the first quarter of 1999 compared
with $17.5 million in the first quarter of 1998. Higher operating income
resulted from higher sales volume and related higher gross profit. As a
percentage of revenue, operating income was 15.1% and is substantially
consistent with that of the prior year. Favorable volume changes at relatively
stable operating margins in the Railroad Group was the primary reason for the
increase in operating income.
Interest and Other Expense
Interest expense totaled $9.1 million, an increase of $1.7 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
$7.3 million for the first 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.
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"). Operating cash flow decreased $6.6 million in the
quarter-to-quarter comparison as a result of a 27% increase in working
capital since December 31, 1998. These changes are primarily due to higher
accounts receivables and inventory levels related to sales growth. In
addition, inventory levels have increased 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 second half of 1999.
Cash used for investing activities declined $1.7 million. In the first quarter
of 1998, the Company used $3.9 million for certain business acquisitions. Gross
capital expenditures were $6.5 million and $5.3 million in the first quarter of
1999 and 1998, respectively. The majority of capital expenditures reflect
spending for replacement and cost savings. The Company expects capital
expenditures in 1999 to approximate $25 to $30 million.
In the quarter ending March 31, 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). 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.
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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 March 31, 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.
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
Dollars in thousands 1999 1998
- ------------------------------------------------------------------
<S> <C> <C>
Credit Agreement, matures 12/2003
Revolving credit, 6.3%, $73,600 $105,555
Term loan, 6.3% 202,500 202,500
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 2,400 2,572
-----------------------
Total 470,490 467,817
Less-current portion 20,264 30,579
-----------------------
Long-term portion $450,226 $437,238
- ------------------------------------------------------------------
</TABLE>
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 March
31, 1999, amounts available under the revolving credit facility increased to
$44.3 million.
In January 1999, WABCO completed the private placement of $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.
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 was $8 million. The majority of the expenditures incurred for hardware
and purchased software related to this project have been capitalized and are
amortized over their estimated useful lives. Other costs, such as training and
advisory consulting, were expensed as incurred.
The Company has identified other equipment it uses in its operations that have
non-information system characteristics and have 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 the Company's operations. The estimated cost of
replacement equipment is not considered significant.
The Company has received written assurances from some of its 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 evaluate on an ongoing
basis whether it is necessary and practical to establish contingency plans with
respect to year 2000 issues. However, if large-scale systems failures occur, it
could have a significant adverse effect on the Company's financial condition,
future results of operations and liquidity.
The Company's products are generally sold with a limited warranty for defects.
The Company has reviewed its products currently in use by its 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 the Company's
financial condition, future results of operations and liquidity.
11
<PAGE> 12
FORWARD LOOKING STATEMENTS
We believe 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. We have based these
forward-looking statements on our current expectations and projections about
future events. Although we believe that our assumptions made in connection with
the forward-looking statements are reasonable, we cannot assure you that our
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.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
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 $246 million of variable-rate debt (considering the effects of existing
interest rate swaps), which represents 52% of total long-term debt at March 31,
1999. At March 31, 1999, an instantaneous 100 basis point increase in interest
rates would reduce the Company's earnings annually by approximately $1.6
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 March 31, 1999, the Company had no significant
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 quarter ending March 31, 1999, approximately
74% of WABCO's net sales are in the United States, 12% in Canada and 14% in
other international locations, primarily Europe. At March 31, 1999, the Company
does not believe changes in foreign currency exchange 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.
EXHIBITS AND REPORTS ON FORM 8-K
Exhibit No. 27 "Financial Data Schedule" as of and for the three months ended
March 31, 1999 is filed herewith.
There were no Current Reports on Form 8-K filed during the quarter ended March
31, 1999.
12
<PAGE> 13
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: May 7, 1999
13
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<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.
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