Business Context and Reporting Period
Company: Westinghouse Air Brake Technologies Corp (WABCO)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 1999
Business Overview: North America's largest manufacturer of value-added equipment for locomotives, railway freight cars, and passenger transit vehicles. Operations are divided into three segments: Railroad Group, Transit Group, and Molded Products Group.
Key Financial Metrics
| Metric (in thousands) | Q3 1999 | Q3 1998 | 9M 1999 | 9M 1998 |
|---|---|---|---|---|
| Net Sales | $172,471 | $160,476 | $557,656 | $490,664 |
| Gross Profit | $58,174 | $51,334 | $183,051 | $158,177 |
| Gross Margin % | 33.7% | 32.0% | 32.8% | 32.2% |
| Income from Operations | $28,978 | $25,181 | $88,122 | $76,020 |
| Net Income | $12,519 | $10,846 | $37,652 | $30,674 |
| Diluted EPS (Net) | $0.48 | $0.42 | $1.45 | $1.19 |
| Cash from Operations (9M) | $46,247 | $35,249 | ||
| Total Debt (Sept 30, 1999) | $441,394 (Current: $27,666; Long-term: $413,728) | |||
| Cash and Equivalents | $7,487 (as of Sept 30, 1999) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 7.5% in Q3 and 13.6% for the nine-month period. Growth was driven by acquisitions (RRE, Comet, Hadady, Lokring, RFS) contributing approximately $48.5 million in incremental revenue for the nine months, and increased aftermarket sales across all segments.
- Profitability: Operating income rose 15.1% in Q3 and 15.9% for the nine months. Gross margins improved due to favorable aftermarket sales volumes offsetting lower OEM freight car volumes.
- Acquisition Impact: Operating expenses increased significantly (25.7% in Engineering, 70.4% in Amortization for Q3) primarily due to the integration of acquired businesses and amortization of goodwill/intangibles.
- Debt Restructuring: In January 1999, the company issued $75 million in Senior Notes (9 3/8%, due 2005) to repay higher-cost acquisition debt and reduce revolving credit usage. This resulted in a one-time extraordinary loss of $469,000 (net of tax) in Q1 1999 for debt extinguishment costs.
Guidance, Outlook, and Risks
- Pending Merger: On September 26, 1999, WABCO amended its merger agreement with MotivePower Industries, Inc. The deal involves an exchange of 0.66 shares of WABCO for each share of MotivePower. It is expected to close in Q4 1999, subject to shareholder approval scheduled for November 19, 1999. Approximately $2 million in merger costs will be charged in Q4.
- Capital Expenditures: Expected to be approximately $25 million to $30 million for the full year 1999, focused on equipment upgrades and efficiency improvements.
- Liquidity: Management believes cash flow from operations and available credit ($65.7 million remaining under the revolving facility) are sufficient to meet debt service and capital needs for the next 12 months.
- Year 2000 (Y2K): The company is substantially Y2K compliant with a total project cost of approximately $10 million. While contingency plans exist for supplier failures, management does not anticipate material financial impact from Y2K issues.
- Legal Proceedings: GE Harris Railway Electronics has sued WABCO for patent infringement regarding a communications system. The company cannot currently estimate the cost of resolution.
- Market Risks: Exposure to interest rate fluctuations on $216 million of variable-rate debt. A 100 basis point increase would reduce annual earnings by approximately $1.4 million (net of tax).
Investor Verification Checklist
- Merger Completion: Verify the outcome of the shareholder vote on November 19, 1999, regarding the MotivePower merger.
- Q4 Expenses: Monitor the impact of the anticipated $2 million merger-related charge and integration costs in the fourth quarter.
- OEM Volume Trends: Confirm if the softening in OEM freight car volumes (16,400 units in Q3 1999 vs. 18,400 in Q3 1998) continues into 2000 as management anticipates.
- Legal Exposure: Track developments in the GE Harris patent infringement lawsuit for potential liability estimates.
- Debt Service: Review the company's ability to service $441 million in total debt, particularly given the high leverage and substantial interest obligations.