WAB

Business Context and Reporting Period

Company: Westinghouse Air Brake Technologies Corporation (Wabtec)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2003
Business Overview: Wabtec is a leading provider of technology-based equipment and services for the global rail industry, including brakes, electronic controls, and locomotives. Operations are divided into two segments: Freight Group and Transit Group.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Net sales for the nine months ended September 30, 2003, decreased 1.3% to $511.6 million compared to $518.6 million in 2002. This was driven by a 16.5% increase in the Freight Group (due to higher new freight car components and commuter locomotive sales) offset by a 30.7% decline in the Transit Group (due to the completion of a major New York City subway contract).
• Profitability: Net income from continuing operations for the nine-month period increased significantly to $16.7 million ($0.38 diluted EPS) from $11.2 million ($0.26 diluted EPS) in the prior year. The 2002 prior-year results included a one-time $61.7 million non-cash goodwill write-down charge.
• Operating Expenses: Operating expenses increased slightly ($0.99 million) for the nine-month period, primarily due to higher insurance costs, partially offset by capitalized engineering costs for a new transit order.
• Interest Expense: Interest expense decreased 54.3% for the nine-month period to $7.2 million from $15.8 million, driven by lower debt levels and interest rates, and the absence of an early bond repayment charge recorded in 2002.

Guidance, Outlook, and Risks

• Capital Structure: In August 2003, the company issued $150 million of 6.875% Senior Notes due 2013. Proceeds were used to repay debt under the existing credit agreement. The company expects interest expense to increase in Q4 2003 and 2004 due to these new notes.
• Liquidity: As of September 30, 2003, the company had approximately $165 million in available borrowing capacity under its credit agreement. Management expects to refinance the existing bank facility with a new $175 million five-year facility before December 31, 2003.
• Major Contracts: The company capitalized design engineering costs associated with a $60 million base order for 660 New York City transit cars, with options for an additional 1,040 cars potentially bringing the total value to $150 million.
• Risks and Contingencies:
  • Asbestos Litigation: The company faces increasing claims regarding bodily injury from asbestos exposure, primarily against its subsidiary Railroad Friction Products Corporation (RFPC). While most claims are submitted to insurance, the ultimate liability cannot be estimated with certainty.
  • Legal Proceedings: A motion filed by GE Transportation Services Global Signaling (GETS-GS) alleges the company acted beyond the authority of a 2000 settlement agreement regarding sales to Australian customers. A court decision is pending.
  • Market Risks: Exposure to foreign currency fluctuations (specifically the Canadian dollar) and interest rate changes, though the company currently has no variable-rate debt due to hedging.

Investor Verification Checklist

• Verify the status of the pending court decision regarding the GE Transportation Services Global Signaling (GETS-GS) motion and potential financial impact.
• Monitor the progress of the $175 million credit facility refinancing expected before year-end 2003.
• Assess the timeline and execution risk of the New York City transit order (660 base cars + options) to confirm future revenue recognition.
• Review the company's insurance coverage adequacy regarding the increasing volume of asbestos-related claims against RFPC.
• Confirm the impact of the new $150 million senior notes on future interest expense and cash flow projections for 2004.