WAB

Business Context and Reporting Period

Company: Westinghouse Air Brake Technologies Corporation (Wabtec)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2002
Business Overview: Wabtec is a major North American manufacturer of equipment for locomotives, railway freight cars, and passenger transit vehicles. Operations are divided into two segments: the Freight Group and the Transit Group. The company operates on a four-four-five week accounting quarter.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales for the nine months ended September 30, 2002, decreased 12.9% to $518.6 million from $595.3 million in 2001. This was driven by lower industry deliveries of new freight cars (down 52%) and locomotives, as well as the completion of a major New York City subway contract in the Transit Group.
• Net Loss vs. Profit: The company reported a net loss of $50.7 million for the nine-month period, compared to net income of $24.7 million in the prior year. This reversal was primarily due to a non-cash goodwill impairment charge of $61.7 million (net of tax) required by the adoption of SFAS No. 142.
• Operating Margins: Operating margins for continuing operations decreased to 6.7% for the nine-month period from 9.1% in the prior year, attributed to volume declines and unfavorable product mix.
• Debt Reduction: Long-term debt was reduced by approximately $29.5 million in the first nine months of 2002, including the redemption of $175 million in Senior Notes in July 2002.

Guidance, Outlook, and Risks

• Management Commentary: Management attributes the drop in net income to volume and mix issues rather than operational inefficiencies. Operating expenses improved year-over-year after adjusting for prior-year restructuring charges and goodwill amortization.
• Liquidity: The company maintains a $275 million revolving credit facility with approximately $146.4 million available. Management believes cash flow and liquidity are sufficient to fund working capital and debt service requirements.
• Unusual Items:
  • Goodwill Impairment: A $61.7 million non-cash charge was recorded retroactively to January 1, 2002, following the adoption of SFAS No. 142.
  • Extraordinary Item: A $1.2 million net-of-tax loss was recorded on the early extinguishment of debt.
  • Discontinued Operations: The company sold locomotive aftermarket assets to GE Transportation Systems in November 2001; results are now classified as discontinued operations.
• Risks: Key risks include economic downturns affecting rail industry demand, consolidation in the rail sector, supply disruptions, and fluctuations in interest rates. The company notes that 69% of its long-term debt is variable-rate, though interest rate swaps are used to mitigate risk.

Investor Verification Checklist

• Goodwill Valuation: Verify the methodology used for the $90 million goodwill write-down and the remaining $109.5 million balance under SFAS No. 142.
• Volume Trends: Monitor industry data on new freight car and locomotive deliveries to assess the sustainability of the revenue decline.
• Cash Flow Usage: Review the $28 million cash outflow for income taxes in the first nine months of 2002, which was driven by payments related to the 2001 asset sale gain.
• Debt Covenants: Confirm compliance with financial covenants in the credit agreement, especially given the reduction in operating income.
• Discontinued Operations: Ensure future financial statements exclude the locomotive aftermarket business sold to GE Transportation Systems.