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Riley English

WABCO Holdings (NYSE:WBC) produces electric control systems for automobile manufacturers. The company estimates that two out of three commercial vehicles with advanced vehicle control systems use Wabco products. ^[1]

In FY 2007, Wabco earned $125 million on $2.4 billion in sales. ^[2] These results compare to earnings of $138 million on sales of $2.0 billion in FY 2006 (a decrease of 9% and an increase of 20% respectively). ^[2] Though a US company listed on the NYSE, Wabco maintains headquarters in Brussels, Belgium and European sales accounted for 76% of 2007 results. ^[3]

Wabco’s operating results depend heavily upon macroeconomic conditions, especially the health of the auto industry. Since Wabco's top ten clients compose more than 50% of sales ^[4], the loss of a large customer would materially affect the company. Lastly, Wabco expects to incur a substantial charge - up to $1 billion - in an ongoing price-fixing scandal stemming stemming from the company's past involvement in the bath fixtures market.

Business Overview

Wabco manufactures braking, stability, suspension and transmission control systems for commercial vehicles. The company’s main products include anti-lock brakes, electronic braking systems, automated manual transmission systems, and air disk brakes, as well as traditional mechanical products such as actuators and air compressors. In addition, the company sells replacement parts and diagnostic tools to aftermarket distributors and repair shops. These parts are mainly sold to commercial vehicle manufactures in Europe and North America, the company’s most important secondary markets by sales volume.^[5] In order to generate growth, Wabco is seeking to expand its presence in emerging markets such as India and China. The company is the leading ABS (Anti-lock Braking System) supplier to China and has established an Indian joint venture to sell braking products. ^[4]

The following table gives a breakdown of Wabco's products:

Spin-off

Wabco was founded in 1969 and known as the Westinghouse Air Brake Company. In 1968, American Standard (now referred to as Trane) bought the company and operated it as the Vehicle Controls Systems division. ^[7] On July 31, 2007, Wabco and Trane officially separated, leading to a separate listing for both companies. ^[7] While Wabco remains a separate and distinct company, it retains legal liabilities relating to its previous association with Trane. These liabilities are detailed further in the Trends and Forces section.

Business and Financial Information

Source:Wabco 2007 10-K ^[2]

Source:Wabco 2007 10-K ^[8]

Source:Wabco 2007 10-K ^[9]

In FY 2008, Wabco earned $213.3 million on sales of $2.6 billion. ^[10] These results represent a 7% increase in revenue and a 10% increase in net income as compared to FY 2007. The increase in net income resulted from a 31.8% decrease in the effective tax rate, due to mainly to an unrecognized tax benefit related to Wabco's separation from Trane ^[11].

In addition, the company’s after-market sales continued to produce excellent results, improving 21%, 13% and 10% year-over-year from FY 2006 to FY 2008. ^[12] As a percentage of total sales, the company’s other segments (truck and bus, trailer, and car manufacturers) have remained constant during the same period.

Wabco operates chiefly in Europe and North America. Other sales stem mainly from Brazil, Japan, India, and China. In FY 2008, the company generated 76% of its sales in Europe, the same percentage as FY 2008. ^[12] Solid results in the company's core European markets, Germany, France, and Sweden, positively contributed to this result. Contrarily, sales to the United States decreased from 7% in FY 2007 to 6.5% in FY 2008. ^[13] Other sales during this period increased slightly from 17% to 18%. ^[13]

In terms of cash flow, cash and cash equivalents more than doubled from $183 million in FY 2007 to $393 million in FY 2008 ^[14]. This increase stems mainly from an increase in net income from $125.4 million to $213.3 million and a dramatic increase from accounts receivable from -$115.9 million to $233.9 million ^[15].

Customer Breakdown

Since Wabco solely produces products for the commercial vehicle market, the company can be broken into customer groups rather than business segments. The four main groups include: truck and bus OEMs (generally companies that actually produce vehicles), trailer OEMs, commercial vehicle aftermarket distributors, and major car companies. The company’s largest customer, Daimler , accounts for 14% of sales. ^[16] Moreover, Wabco’s top ten customers comprise 54% of sales. ^[4]

Truck and Bus OEMs (60% of 2007 sales) ^[4]

Truck and Bus OEMs are large, operate globally, and are relatively few in number due to continued industry consolidation. Examples include Mack, Renault, Nissan Truck, and International Truck.^[4] As these companies expand and consolidate, major suppliers, such as Wabco, are expected to develop simultaneously. Moreover, Wabco's established reputation and excellent safety record gives the company an excellent competitive position. This strong position lets Wabco drive prince increases, which enhances profit margins.

Aftermarket (21% of 2007 sales) ^[4]

Wabco’s second largest customer group consists of aftermarket distributors selling replacement parts to vehicle owners. The aftermarket distributors differ immensely, from large international OEMs to small retail operations. Since Wabco supplies parts to a majority of commercial vehicles in operation, the demand for replacement parts provides a consistent stream of revenue.

Trailer Market (14% of 2007 sales) ^[4]

This next group consists of trailer manufacturers that rely upon Wabco products for important safety features. These OEMs differ immensely in size, scope, and trailer type. However, the company’s product offerings tend to adapt to the needs of each manufacturer. For example, the company’s anti-lock brakes can be fitted to a large semi-trailer or a smaller truck trailer. In each case, the core technology remains the same.

Car and SUV manufacturers (5% of 2007 sales) ^[4]

Wabco sells electronic air suspension systems and vacuum pumps to car and SUV manufacturers, including Ford and Nissan. Electronic air suspension is a luxury feature that enhances vehicle comfort. Vacuum pumps are installed in diesel engines. With the development of clean diesel cars that enjoy much better mileage, the company views these products as areas for additional growth.

Key Trends and Forces

Wabco retains significant liabilities in an ongoing price-fixing scandal ^[17]

In November 2004, Wabco’s former parent company, American Standard, was contacted by the European Commission as a part of a multi-company investigation into price-fixing in the bathroom fixtures and fittings market. While Wabco has no current association with American Standard (now known as Trane), the company is liable for any fines levied against American Standard through clauses set forth in the separation agreement. Although no fines have been imposed, Wabco expects to incur a penalty in the investigation. Under the relevant guidelines, Wabco faces a maximum fine of $1.1 billion. ^[18] However, the actual amount could vary tremendously, as the commission retains considerable discretion in determining the final amount ^[17]. While Wabco has access to an $800 million credit line, a fine of $1.1 billion would bankrupt the company. Considering Wabco only has $183 million in cash, any considerable fine would seriously diminish Wabco's ability to operate ^[18].

Wabco’s operating results depend heavily upon macroeconomic conditions, especially the health of the auto industry and the Big 3 automakers

During FY 2008, Wabco’s top ten customers yielded 56% of the company’s sales. Furthermore, the company’s top three customers accounted for 15% (Daimler), 11%, and 5% of yearly sales. ^[19] Other key clients include Ford, General Motors, Hyundai, International Truck, and Nissan Diesel. ^[4] Daimler and General Motors have received significant money from the federal government to remain in operation. Similarly, Ford lost $1.4 billion in Q1 2009. ^[20] These challenging results demonstrate the perilous nature of commercial vehicle manufacturing. Since these financially problematic companies represent a significant portion of Wabco's sales, the company faces significant headwinds in the near future.

The health of the entire auto industry, and by extension Wabco, depends heavily upon macroeconomic conditions. During recessions, consumers delay large capital expenditures until more sound economic periods. As recessions have been officially declared in both Europe and the United States, which together account for 88% of Wabco’s sales, the company faces a challenging near-term environment. ^[3] In the United States alone, auto sales have fallen 18% year-over-year. ^[21] Consequently, Wabco’s available market in the United States effectively diminished by the same amount (excluding aftermarket sales).

95% of Wabco's collective bargaining agreements expire during the year, leaving open the possibility of strikes and work stoppages

Wabco employs 7,700 employees, 50% of which are salaried.^[4] 83% of employees are located in Europe, 10% are located in Asia, and 7% are located in the Americas. ^[4]Employees at all three sites are organized under collective bargaining agreements made on the regional level. These agreements cover 97% of the non-salaried workforce and 95% stand to expire within one year (agreements covering 5% of the workforce have been extended beyond the current year). ^[4] While there have been few past work stoppages, the significant number of agreements expiring within the year raises the risk involved if negotiations stall.

Competition

Given Wabco’s narrow focus upon advanced vehicle control systems, the company has few direct competitors. In addition, Wabco collaborates heavily with OEMs to design vehicle specific products. This further cements Wabco’s competitive position.

The company's primary competitors are as follows:

Knorr-Bremse

(Knorr’s U.S. subsidiary is Bendix Commerical Vehicle Systems) Knorr competes with Wabco in the advanced braking systems segment. In FY 2007, Knorr had earned $275 million on sales of $4.6 billion. ^[22]

Haldex

Haldex is based in Stockholm, Sweden and is listed on the Swedish stock exchange. The company competes with Wabco in the advanced braking systems segment, which comprises about 57% of Haldex's sales. In FY 2007, Haldex earned $229 million on $1070 million. ^[23]

Continental

Continental competes with Wabco in the advanced electronics segment for commercial vehicles. Specifically, Continental produces sensor and dynamic control systems. In FY 2007, Continental earned $1.39 billion on $23 billion. ^[24]

Bosch

Bosch also competes with Wabco in the advanced electronics segment. In FY 2007, Bosch had $6.2 billion in U.S. automotive sales. ^[25]

Comparison

References

1. ↑ Wabco 2007 10-K, page 2
2. ↑ ^{2.0 2.1 2.2 2.3}
3. ↑ ^{3.0 3.1} Wabco 2007 10-K, page 5
4. ↑ ^{4.00 4.01 4.02 4.03 4.04 4.05 4.06 4.07 4.08 4.09 4.10 4.11} Wabco 2007 10-K, page 4
5. ↑
6. ↑ ^{6.0 6.1} Wabco 2007 10-K, page 3
7. ↑ ^{7.0 7.1} Wabco 2007 10-K, page 1
8. ↑ Wabco 2007 10-K, page25
9. ↑ Wabco 2007 10-K, page 42
10. ↑ Wabco 2009 10-K, page 46
11. ↑ Wabco 2008 10-K, page 31
12. ↑ ^{12.0 12.1} Wabco 2008 10-K, Page 6
13. ↑ ^{13.0 13.1} Wabco 2008 10-K, page 75
14. ↑ Wabco 2008 10-K, page 47
15. ↑ Wabco 2008 10-K, page 48
16. ↑ Wabco 2008 10-K, page 65
17. ↑ ^{17.0 17.1} Wabco price-fixing
18. ↑ ^{18.0 18.1}
19. ↑ Wabco 2008 10-K, page 11
20. ↑ Ford losses
21. ↑ sales
22. ↑ ^{22.0 22.1} Knorr Facts and Figures
23. ↑ ^{23.0 23.1} Haldex financial information
24. ↑ ^{24.0 24.1} Continental 2007 fact book
25. ↑ ^{25.0 25.1} About Bosch