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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 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 October 31, 1999, 33,801,363 shares of Common Stock of the
registrant were issued and outstanding, of which 8,397,196 shares were
unallocated ESOP shares.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
---------
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of September 30,
1999 and December 31, 1998 3
Condensed Consolidated Statement of Operations for the three
and nine months ended September 30, 1999 and 1998 4
Condensed Consolidated Statement of Cash Flows for the nine
months ended September 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
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15-16
Signatures 17
</TABLE>
2
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WESTINGHOUSE AIR BRAKE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
UNAUDITED
SEPTEMBER 30 DECEMBER 31
Dollars in thousands, except par value 1999 1998
- --------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 7,487 $ 3,323
Accounts receivable 123,100 132,901
Inventories 110,966 103,560
Other 25,476 23,177
-----------------------------
Total current assets 267,029 262,961
Property, plant and equipment 236,361 214,461
Accumulated depreciation (103,413) (89,480)
-----------------------------
Property, plant and equipment, net 132,948 124,981
OTHER ASSETS
Prepaid pension costs 6,875 5,724
Goodwill 150,204 151,658
Other intangibles 42,237 46,021
Other noncurrent assets 6,319 4,839
-----------------------------
Total other assets 205,635 208,242
-----------------------------
Total Assets $ 605,612 $ 596,184
=============================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 27,666 $ 30,579
Accounts payable 45,260 62,974
Accrued income taxes 8,228 8,352
Accrued interest 5,217 1,616
Customer deposits 23,070 20,426
Other accrued liabilities 40,716 43,603
-----------------------------
Total current liabilities 150,157 167,550
Long-term debt 413,728 437,238
Reserve for postretirement benefits 17,103 16,238
Accrued pension costs 3,944 3,631
Other long-term liabilities 7,804 5,380
-----------------------------
Total liabilities 592,736 630,037
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 109,186 107,720
Treasury stock, at cost, 13,315,050 and 13,532,092 shares (184,716) (187,654)
Unearned ESOP shares, at cost, 8,412,756 and 8,564,811 shares (126,191) (128,472)
Retained earnings 219,198 182,291
Unamortized restricted stock award (59) (162)
Accumulated other comprehensive income (loss) (5,016) (8,050)
-----------------------------
Total shareholders' equity 12,876 (33,853)
-----------------------------
Liabilities and Shareholders' Equity $ 605,612 $ 596,184
=============================
</TABLE>
The accompanying notes are an integral part of this statement.
3
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WESTINGHOUSE AIR BRAKE COMPANY
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
In thousands, except per share data 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $172,471 $160,476 $557,656 $490,664
Cost of sales 114,297 109,142 374,605 332,487
------------------------ -----------------------
Gross profit 58,174 51,334 183,051 158,177
Selling and marketing expenses 7,325 7,747 23,435 21,815
General and administrative expenses 10,188 9,713 36,438 34,016
Engineering expenses 8,796 6,999 27,332 20,453
Amortization expense 2,887 1,694 7,724 5,873
------------------------ -----------------------
Total operating expenses 29,196 26,153 94,929 82,157
------------------------ -----------------------
Income from operations 28,978 25,181 88,122 76,020
Other income and expense
Interest expense 8,748 7,386 26,612 22,284
Other (income) expense, net 520 302 1,000 (141)
------------------------ -----------------------
Income before income taxes and extraordinary item 19,710 17,493 60,510 53,877
Income taxes 7,191 6,647 22,389 20,473
------------------------ -----------------------
Income before extraordinary item 12,519 10,846 38,121 33,404
Loss on extinguishment of debt, net of tax (469) (2,730)
------------------------ -----------------------
Net income $ 12,519 $ 10,846 $ 37,652 $ 30,674
======================== =======================
EARNINGS PER COMMON SHARE
Basic
Income before extraordinary item $ 0.49 $ 0.43 $ 1.50 $ 1.33
Extraordinary item, net (0.02) (0.11)
------------------------ -----------------------
Net Income $ 0.49 $ 0.43 $ 1.48 $ 1.22
======================== =======================
Diluted
Income before extraordinary item $ 0.48 $ 0.42 $ 1.47 $ 1.30
Extraordinary item, net (0.02) (0.11)
------------------------ -----------------------
Net Income $ 0.48 $ 0.42 $ 1.45 $ 1.19
======================== =======================
Weighted Average Shares Outstanding
Basic 25,619 25,197 25,449 25,046
Diluted 26,129 25,696 25,960 25,696
------------------------ -----------------------
</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
NINE MONTHS ENDED
SEPTEMBER 30
In thousands 1999 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 37,652 $ 30,674
Adjustments to reconcile net income to cash provided by operations
Extraordinary loss on extinguishment of debt 469 2,730
Depreciation and amortization 19,622 19,294
Provision for ESOP contribution 3,273 3,462
Changes in operating assets and liabilities,
net of acquisitions
Accounts receivable 10,180 (10,979)
Inventories (6,426) (12,981)
Accounts payable (18,136) 6,781
Accrued income taxes (168) 7,400
Accrued liabilities and customer deposits 1,318 (8,146)
Other assets and liabilities (1,537) (2,986)
------------------------
Net cash provided by operating activities 46,247 35,249
INVESTING ACTIVITIES
Purchase of property, plant and equipment, net (17,694) (22,333)
Acquisitions of businesses, net of cash acquired (960) (19,314)
------------------------
Net cash used for investing activities (18,654) (41,647)
FINANCING ACTIVITIES
Proceeds from Senior Note offering 76,875 --
Debt issuance costs (1,926) (1,037)
Net (repayments of) proceeds from the credit agreement (60,655) 14,895
Repayments of other borrowings (40,717) (71)
Cash dividends (741) (734)
Proceeds from exercise of stock options and employee stock purchases 2,939 2,094
------------------------
Net cash (used for) provided by financing activities (24,225) 15,147
Effect of changes in currency exchange rates 796 248
------------------------
Increase in cash 4,164 8,997
Cash, beginning of year 3,323 836
------------------------
Cash, end of period $ 7,487 $ 9,833
========================
</TABLE>
The accompanying notes are an integral part of this statement.
5
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WESTINGHOUSE AIR BRAKE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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 third quarter ending September
30, 1999 and 1998 was $13.1 million and $10.1 million, respectively, and for the
nine months ending September 30, 1999 and 1998 was $40.7 million and $28.8
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.
Since the beginning of 1998, the Company also completed the following
acquisitions:
i) 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.
ii) 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.
iii) 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.
6
<PAGE> 7
iv) 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.
v) 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.
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:
SEPTEMBER 30 DECEMBER 31
Dollars in thousands 1999 1998
- --------------------------------------------------------------
Raw materials $ 51,988 $ 47,853
Work-in-process 40,559 29,965
Finished goods 18,419 25,742
----------------------
Total inventory $110,966 $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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
In thousands, except per share 1999 1998 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Income, before extraordinary
item, applicable to common
shareholders $12,519 $10,846 $38,121 $33,404
Divided by
Weighted average shares
outstanding 25,619 25,197 25,449 25,046
Basic earnings per share,
before extraordinary item $ 0.49 $ 0.43 $ 1.50 $ 1.33
- --------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE
Income, before extraordinary
item, applicable to common
shareholders $12,519 $10,846 $38,121 $33,404
Divided by sum of
Weighted average shares
outstanding 25,619 25,197 25,449 25,046
Conversion of dilutive
stock options 510 499 511 650
-------------------------------------------
Diluted shares outstanding 26,129 25,696 25,960 25,696
Diluted earnings per share,
before extraordinary item $ 0.48 $ 0.42 $ 1.47 $ 1.30
- --------------------------------------------------------------------------------
</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. As this
lawsuit is in the earliest stages, the Company is unable to estimate the cost,
if any, of resolving litigation and thus, no costs have been provided for this
matter.
7
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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
tables below 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. Customers
include freight car and locomotive manufacturers as well as 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 includes manufacturing and distribution of composition
brake shoes and discs and other rubberized products. Revenues are generally
derived from the aftermarket.
Segment financial information for the three months ended September 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 $ 95,866 $57,711 $18,894 $172,471
Intersegment sales 5,730 2,209 (7,939) --
-----------------------------------------------------------------
Total sales $101,596 $57,711 $21,103 $ (7,939) $172,471
=================================================================
Income from operations 19,118 5,477 6,776 (2,393) 28,978
Interest expense and other 9,268 9,268
-----------------------------------------------------------------
Income before income taxes and extraordinary item $ 19,118 $ 5,477 $ 6,776 $(11,661) $ 19,710
=================================================================
</TABLE>
Segment financial information for the three months ended September 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 $92,294 51,679 16,503 $160,476
Intersegment sales 3,482 598 1,992 (6,072) --
---------------------------------------------------------------
Total sales $95,776 $52,277 $18,495 $ (6,072) $160,476
===============================================================
Income from operations 19,072 3,044 5,023 (1,958) 25,181
Interest expense and other 7,688 7,688
---------------------------------------------------------------
Income before income taxes and extraordinary item $19,072 $ 3,044 $ 5,023 $ (9,646) $ 17,493
===============================================================
</TABLE>
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Segment financial information for the nine months ended September 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 $327,068 $174,058 $56,530 $557,656
Intersegment sales 14,227 532 7,910 (22,669) --
--------------------------------------------------------------------
Total sales $341,295 $174,590 $64,440 $(22,669) $557,656
====================================================================
Income from operations 62,584 14,736 19,483 (8,681) 88,122
Interest expense and other 27,612 27,612
--------------------------------------------------------------------
Income before income taxes and extraordinary item $ 62,584 $ 14,736 $19,483 $(36,293) $ 60,510
====================================================================
</TABLE>
Segment financial information for the nine months ended September 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 $282,501 $154,314 $53,849 $490,664
Intersegment sales 11,679 934 6,853 (19,466) --
--------------------------------------------------------------------
Total sales $294,180 $155,248 $60,702 $(19,466) $490,664
====================================================================
Income from operations 57,203 10,451 16,114 (7,748) 76,020
Interest expense and other 22,143 22,143
--------------------------------------------------------------------
Income before income taxes and extraordinary item $ 57,203 $ 10,451 $16,114 $(29,891) $ 53,877
====================================================================
</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. Prior to the
August 23, 1999 special meeting to vote upon the proposed merger, WABCO
postponed it's meeting in order to provide shareholders more time to evaluate
recent financial disclosures regarding MotivePower. On September 26, 1999, the
companies agreed to an amended and restated merger agreement. In the revised
merger agreement, each share of MotivePower Common Stock and Right will be
exchanged with 0.66 shares of WABCO Common Stock. For accounting purposes, the
transaction will be accounted for as a pooling of interests and is expected to
be completed in the fourth quarter. 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 November 19, 1999.
The Company has filed a Form S-4 that became effective on October 20, 1999,
which contains specific details on the proposed merger.
The Company has deferred costs of approximately $2 million related to the
proposed merger and will take this as a charge against earnings in the fourth
quarter of 1999 in conjunction with other merger related restructuring and
integration costs.
9
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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 September 26, 1999, WABCO and MotivePower Industries, Inc. agreed to an
amended and restated merger agreement. In connection with the merger, each share
of MotivePower Common Stock and Right will be exchanged with 0.66 shares of
WABCO Common Stock. For accounting purposes, the transaction will be accounted
for as a pooling of interests and is expected to be completed in the fourth
quarter. 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 November 19, 1999.
THIRD QUARTER 1999 COMPARED TO
THIRD QUARTER 1998
Summary Results of Operations
THREE MONTHS
ENDED
SEPTEMBER 30
Dollars in millions, -------------------- PERCENT
except per share 1999 1998 CHANGE
- ---------------------------------------------------------------
Net sales $172.5 $160.5 7.5%
Gross profit margin 33.7% 32.0% nm
Income from operations $29.0 $25.2 15.1
Net income 12.5 10.8 15.7
Diluted earnings per share 0.48 0.42 14.3
- ---------------------------------------------------------------
nm-not meaningful
Net income increased $1.7 million, or 15.7% in the quarter ending September 30,
1999 as compared to the third quarter of 1998. Diluted earnings per share
increased 14.3% to $0.48 in the same comparison. 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 and Comet. Aggregate incremental revenues from all of the
above acquisitions were approximately $10 million in the third quarter of
1999.
o Increased aftermarket sales in all product lines.
o Improved sales and backlog in the transit business due to increased
governmental spending for transit equipment.
Net Sales
The following table sets forth the Company's net sales by business segment:
THREE MONTHS ENDED
SEPTEMBER 30
----------------------------
Dollars in thousands 1999 1998
- -----------------------------------------------------------------
Railroad Group $ 95,866 $ 92,294
Transit Group 57,711 51,679
Molded Products Group 18,894 16,503
----------------------------
Net sales $172,471 $160,476
- -----------------------------------------------------------------
Net sales for the third quarter of 1999 increased $12.0 million, or 7.5%, to
$172.5 million. This increase was attributable to incremental revenue from the
events referred to above, partially offset by decreased OEM freight car volumes
within the Railroad Group. Sales volumes within the Railroad Group reflect a
strong, but softening OEM market for freight cars, with approximately 16,400
freight cars delivered in the third quarter of 1999 compared to 18,400 in the
same period of 1998.
Gross Profit
Gross profit increased 13.3% to $58.2 million in the third quarter of 1999
compared to $51.3 million in the same period of 1998. Gross margin, as a
percentage of sales, was 33.7% compared to 32.0%. Gross margin is dependent on a
number of factors including sales volume and product mix. Favorable margins on
increased aftermarket sales in all major product lines more than offset the
reduction of freight OEM sales and incremental revenue from recent acquisitions
at lower margins as compared to the Company's historical results.
10
<PAGE> 11
Operating Expenses
THREE MONTHS ENDED
SEPTEMBER 30
---------------------- PERCENT
Dollars in thousands 1999 1998 CHANGE
- -----------------------------------------------------------------
Selling and marketing $ 7,325 $ 7,747 (5.4%)
General and administrative 10,188 9,713 4.9
Engineering 8,796 6,999 25.7
Amortization 2,887 1,694 70.4
---------- -----------
Total $29,196 $26,153
- -----------------------------------------------------------------
Total operating expenses as a percentage of net sales were 16.9% in the third
quarter of 1999 as compared to 16.3% in the same period a year ago. Total
operating expenses increased $3.0 million in the quarter-to-quarter comparison
almost all of which related to operating expenses of the acquired businesses
listed above. Amortization expense increased in the comparison due to
amortization of goodwill and intangibles on recent acquisitions and amortization
of debt fees on the January Senior Notes offering.
Income from Operations
Operating income totaled $29.0 million in the third quarter of 1999 compared
with $25.2 million. Higher operating income resulted from higher sales volume
and related higher gross profit. As a percentage of sales, operating income was
16.8% and is slightly higher than the prior year. Favorable aftermarket sales
volume at relatively strong operating margins in the Transit and Molded Products
Groups was the primary reason for the increase in operating income (See Note 8 -
"Notes to Condensed Consolidated Financial Statements" regarding
segment-specific information, included elsewhere in this report).
Interest and Other Expense
Interest expense totaled $8.7 million, an increase of $1.3 million in the
quarter-to-quarter comparison. The increase was primarily due to financing costs
of recent acquisitions.
Income Taxes
The provision for income taxes on income increased to $7.2 million for the third
quarter of 1999. In the third quarter of 1999, the effective tax rate improved
to an annual rate of 37% quarter from 38.0% a year ago, resulting from
additional benefits through our Foreign Sales Corporation.
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999 COMPARED TO
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998
Summary Results of Operations
NINE MONTHS
ENDED
SEPTEMBER 30
Dollars in millions, ------------------- PERCENT
except per share 1999 1998 CHANGE
- ---------------------------------------------------------------
Net sales $557.7 $490.7 13.6%
Gross profit margin 32.8% 32.2% nm
Income from operations $ 88.1 $ 76.0 15.9%
Income before extraordinary
item 38.1 33.4 14.1
Extraordinary item, net
of tax (.5) (2.7) nm
Net income 37.6 30.7 22.5
Diluted earnings per share,
before extraordinary item 1.47 1.30 13.1
Diluted earnings per share 1.45 1.19 21.8
- ---------------------------------------------------------------
nm-not meaningful
Income before extraordinary item, increased $4.7 million, or 14.1%. Diluted
earnings per share before extraordinary item increased 13.1% to $1.47 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, Hadady, Lokring and RFS(E). Aggregate incremental
revenues from all of the above acquisitions were $48.5 million, or 72% of
the increase, in the nine months ending September 30, 1999.
o In January 1999, the Company issued $75 million of Senior Notes at 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 repayment of an 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.
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.
11
<PAGE> 12
Net Sales
The following table sets forth the Company's net sales by business segment:
NINE MONTHS ENDED
SEPTEMBER 30
----------------------------
Dollars in thousands 1999 1998
- -----------------------------------------------------------------
Railroad Group $327,068 $282,501
Transit Group 174,058 154,314
Molded Products Group 56,530 53,849
----------------------------
Net sales $557,656 $490,664
- -----------------------------------------------------------------
Net sales for the nine month period ending September 30, 1999 increased $67
million, or 13.6%, to $557.7 million. This increase was primarily attributable
to incremental revenue from the acquisitions referred to above and increases in
Transit sales as a result of continuing improvements to mass transit authority
infrastructure, in both OE and aftermarket, pursuant to recent governmental
funding legislation. All business segments experienced significant growth in
aftermarket sales volumes in the nine month period ending September 30, 1999 as
compared to the prior year period. OEM freight car volumes year to year were
lower due to a return to more normal replacement levels of production. The
Company anticipates new freight car deliveries to level out in 2000 at a lower
level than that of 1999; however, railroad OEM and aftermarket sales are
expected to remain strong.
Gross Profit
Gross profit increased to $183.1 million in the nine month period ending
September 30, 1999 compared to $158.2 million in the same period of 1998. Gross
margin, as a percentage of sales, was 32.8%, compared to 32.2% for the prior
period. Gross margin is dependent on a number of factors including sales volume
and product mix. Favorable margins on increased volumes, particularly
aftermarket sales in all major product lines more than offset the effect of
reduced freight OEM sales and incremental revenue from recent acquisitions at
lower margins as compared to the Company's historical results.
Operating Expenses
NINE MONTHS ENDED
SEPTEMBER 30
---------------------- PERCENT
Dollars in thousands 1999 1998 CHANGE
- -----------------------------------------------------------------
Selling and marketing $23,435 $21,815 7.4%
General and administrative 36,438 34,016 7.1
Engineering 27,332 20,453 33.6
Amortization 7,724 5,873 31.5
---------- ----------
Total $94,929 $82,157
- -----------------------------------------------------------------
Total operating expenses as a percentage of net sales were 17.0% in the nine
month period ending September 30, 1999 as compared to 16.7% in the same period a
year ago. Total operating expenses increased $12.8 million in the period to
period comparison, substantially all of which related to operating expenses of
the businesses acquired during this period. Excluding incremental revenues and
operating expenses from businesses acquired in the comparative period, 1999
operating expenses as a percentage of sales would have decreased to 16.2%, as
compared to the prior year period, due to costs incurred in 1998 to install
computer system upgrades that included Year 2000 compliant software. During
1999, the Company completed cost savings programs from the consolidation of
several facilities as it integrated recently acquired businesses into its core
operations. Amortization expense increased in the comparison due to amortization
of goodwill and intangibles on recent acquisitions and amortization of debt fees
on the January Senior Notes offering.
Income from Operations
Operating income totaled $88.1 million in the nine month period ending September
30, 1999 compared with $76.0 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 15.8% and is
substantially consistent with that of the prior year. Favorable volume changes
at relatively consistent operating margins, was the primary reason for the
increase in operating income (See Note 8 - "Notes to Condensed Consolidated
Financial Statements" regarding segment-specific information, included elsewhere
in this report).
Interest and Other Expense
Interest expense totaled $26.6 million, compared with $22.3 million in 1998. The
increase was primarily due to the effect of financing recent acquisitions.
Income Taxes
The provision for income taxes on income before extraordinary items increased to
$22.4 million. The effective tax rate improved to 37% 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.
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
12
<PAGE> 13
following is a summary of selected cash flow information and other relevant
data.
NINE MONTHS
ENDED SEPTEMBER 30
------------------------------
Dollars in millions 1999 1998
- -------------------------------------------------------------
Cash provided (used) by:
Operating activities $ 46.2 $ 35.2
Investing activities (18.7) (41.6)
Financing activities (24.2) 15.1
Earnings before interest,
taxes, depreciation and
amortization 107.7 95.3
- -------------------------------------------------------------
Operating cash flow in the nine month period ending September 30, 1999 increased
to $46.2 million from $35.2 million in the same period a year ago, primarily as
a result of higher earnings and improved working capital management. However,
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 first
quarter of 2000.
Cash used for investing activities declined to $18.7 million from $41.6 million
a year ago. In the nine month period ending September 30, 1999 and 1998, the
Company used $1.0 million and $19.3 million, respectively, for certain business
acquisitions. Gross capital expenditures were $17.7 million and $22.3 million in
the nine months ending September 30, 1999 and 1998, respectively. The majority
of capital expenditures for these periods relates to upgrades to existing
equipment, replacement of existing 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 unsecured bank term debt. The
balance repaid a portion of the Company's revolving credit facility, thereby
increasing amounts available under the Credit Agreement (see below for
additional information). Additionally, $26 million of cash generated from
operations in the nine month period ended September 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.
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 September 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 prime.
SEPTEMBER 30 DECEMBER 31
Dollars in thousands 1999 1998
- ------------------------------------------------------------------
Credit Agreement, matures 12/2003
Revolving credit, 6.74% $ 52,400 $105,555
Term loan, 6.54% 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 2,004 2,572
--------------------------
Total 441,394 467,817
Less-current portion 27,666 30,579
--------------------------
Long-term portion $413,728 $437,238
- ------------------------------------------------------------------
The Credit Agreement provides for an aggregate credit facility of $350 million,
consisting of $210 million of term loans and up to $140 million of revolving
loans. At September 30, 1999, amounts available under the revolving credit
facility were $65.7 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.
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
13
<PAGE> 14
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
maintaining working capital at current 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 cost of the project
will be approximately $10 million, with the majority of the costs incurred. 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,
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 regularly evaluate information technology
applications, as well as those of the suppliers, and based on such evaluation,
will revise Year 2000 readiness plans accordingly. The Company is evaluating its
preparedness in a number of areas, including information technology
infrastructure, external resources, physical plant and production facilities,
equipment and machinery, products and inventory.
The Company has developed 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, the Company is 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, financial condition, business or operations. Although the
Company has not determined the costs to handle Year 2000 failures by third party
suppliers or customers, the Company presently believes 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 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
14
<PAGE> 15
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 "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 $216 million
of variable-rate debt (considering the effects of existing interest rate swaps),
which represents 49% of total long-term debt at September 30, 1999. At September
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 periodically 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 September 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 nine months ending September 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 September 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. As this
lawsuit is in the earliest stages, the Company is unable to estimate the cost,
if any, of resolving litigation and thus, no costs have been provided for this
matter.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 26, 1999, the Company and MotivePower Industries, Inc. agreed to an
amended and restated merger agreement whereby each share of MotivePower Common
Stock and Right will be exchanged with 0.66 shares of WABCO Common Stock (See
Note 9 - "Notes to Condensed Consolidated Financial Statements" included
elsewhere in this report). On October 26, 1999, the Company mailed a Joint Proxy
Statement/Prospectus to the shareholders for the consideration of and voting
upon the proposed revised merger, at a special meeting of shareholders scheduled
for November 19, 1999.
EXHIBITS AND REPORTS ON FORM 8-K
The Company filed the Current Report on Form 8-K on the dates below pertaining
to the following items:
On August 18, 1999, text of joint press release on the MotivePower
Industries, Inc. and the Company's possible synergies, benefits of the merger,
and 1999 EPS expectations (Item 7).
15
<PAGE> 16
On August 23, 1999, text of press release of the August 20, 1999
announcement of the postponement of the Shareholders meeting to vote upon the
merger with MotivePower Industries, Inc. (Item 7).
On October 13, 1999, reported the September 26, 1999 Amended and
Restated Merger Agreement between MotivePower Industries, Inc. and the Company
(Item 5).
On October 15, 1999, text of press release of the Company's Third
Quarter 1999 and September 30, 1999 Year to Date financial results and share
repurchase program (Items 5 and 7).
Exhibit No. 27 "Financial Data Schedule" as of and for the Nine Months ended
September 30, 1999 is filed herewith.
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: November 5, 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>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,487
<SECURITIES> 0
<RECEIVABLES> 123,100
<ALLOWANCES> 0
<INVENTORY> 110,966
<CURRENT-ASSETS> 267,029
<PP&E> 236,361
<DEPRECIATION> 103,413
<TOTAL-ASSETS> 605,612
<CURRENT-LIABILITIES> 150,157
<BONDS> 0
0
0
<COMMON> 474
<OTHER-SE> 12,402
<TOTAL-LIABILITY-AND-EQUITY> 605,612
<SALES> 557,656
<TOTAL-REVENUES> 557,656
<CGS> 374,605
<TOTAL-COSTS> 374,605
<OTHER-EXPENSES> 94,929
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,612
<INCOME-PRETAX> 60,510
<INCOME-TAX> 22,389
<INCOME-CONTINUING> 38,121
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<EXTRAORDINARY> (469)
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<NET-INCOME> 37,652
<EPS-BASIC> 1.48
<EPS-DILUTED> 1.45
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