WAB

Business Context and Reporting Period

Company: Westinghouse Air Brake Technologies Corporation (Wabtec)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2001
Business Overview: A leading provider of technology-based equipment and services for the rail industry, operating through two segments: Freight Group (locomotives, freight cars) and Transit Group (passenger vehicles). Approximately 57% of sales are to the aftermarket.

Key Financial Metrics

Margins (9 Months 2001 vs 2000):
- Gross Margin: 25.8% vs 27.7%
- Operating Margin: 8.8% vs 9.3%
- Adjusted Operating Margin (excl. restructuring): 9.4% vs 12.0%

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 3.5% year-over-year for the nine-month period ($26.4 million drop). This was driven by a 38% decline in OEM freight car deliveries (27,227 units in 2001 vs. 43,828 in 2000) and lower locomotive overhauls. The Transit Group saw a sales increase due to New York City subway contracts.
• Profitability: Net income increased 18% to $24.7 million, primarily due to a significant reduction in restructuring charges ($4.4 million in 2001 vs. $19.4 million in 2000) and a $2 million R&D tax credit. However, core operating income declined due to volume and mix changes.
• Debt Reduction: Total debt decreased by approximately $85 million year-over-year, largely due to repayments of the revolving credit facility ($84.5 million in the first nine months of 2001).
• Cash Position: Cash on hand dropped significantly from $6.1 million to $61,000, reflecting the aggressive debt paydown strategy.

Guidance, Outlook, and Risks

• Asset Disposition: On November 1, 2001, the Company completed the sale of certain locomotive aftermarket assets to GE Transportation Systems for $240 million in cash. Proceeds are designated for debt reduction. Pro forma adjustments indicate this sale would have reduced debt by $200 million and interest expense significantly.
• Restructuring Plans:
  • Merger Plan: Total estimated charges of $84 million pre-tax. Approximately $82 million has been incurred; $2 million remains for 2001.
  • Transit Plan: New plan initiated in Q3 2001 with estimated total charges of $3 million pre-tax. $1 million incurred to date; $2 million expected in the remainder of 2001.
• Liquidity: The Company maintains a $275 million revolving credit facility with approximately $187 million available capacity. Management believes cash flow and liquidity are sufficient to meet working capital and debt service needs.
• Risks: Key risks include softening OEM markets for freight cars, dependence on government funding for transit projects, interest rate fluctuations on variable-rate debt ($214 million exposure), and foreign currency exchange rates (approx. 26% of sales outside the U.S.).

Investor Verification Checklist

• Asset Sale Impact: Verify the final closing details and net proceeds of the $240 million sale to GE Transportation Systems and the resulting impact on the balance sheet.
• Freight Market Recovery: Monitor OEM freight car delivery volumes and locomotive overhaul backlogs to assess revenue stabilization.
• Debt Service Coverage: Confirm that the reduced debt load and improved operating cash flow ($86.9 million YTD) are sufficient to cover interest obligations without refinancing risk.
• Restructuring Completion: Track the remaining $4 million in restructuring charges ($2M merger + $2M transit) to ensure no unexpected cost overruns.
• Transit Contract Execution: Review the status of the New York City subway contract and other government-funded transit projects driving the Transit Group's growth.