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Article by DailyStocks_admin    (02-16-09 04:16 AM)

The Daily Magic Formula Stock for 02/16/2009 is WABCO Holdings Inc. According to the Magic Formula Investing Web Site, the ebit yield is 37% and the EBIT ROIC is 50-75%.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

Overview

Except as otherwise indicated or unless context otherwise requires “WABCO.”, “WABCO Holdings Inc.,” “we,” “us,” “our,” and “our company” refer to WABCO Holdings Inc. and its consolidated subsidiaries.

WABCO is a leading provider of electric and electromechanical products for the world’s leading commercial truck, trailer, bus and passenger car manufacturers. We manufacture and sell control systems, including advanced braking, stability, suspension, transmission control and air compressing and processing systems, that improve vehicle performance and safety and reduce overall vehicle operating costs. Based on internal estimates, we estimate that our products are included in approximately two out of three commercial vehicles with advanced vehicle control systems and offered in sophisticated, niche applications in cars and sport utility vehicles (SUVs). We continue to grow in more parts of the world as we provide more components and systems throughout the life of a vehicle, from design and development to the aftermarket.

History of Our Company

WABCO was founded in the United States in 1869 as Westinghouse Air Brake Company. We were purchased by American Standard Companies Inc. (or “American Standard”) in 1968 and operated as the Vehicle Controls Systems business division within American Standard until we were spun off from American Standard on July 31, 2007. Subsequent to our spin off, American Standard changed its name to Trane Inc., which we refer to herein as “Trane”.

The Separation of WABCO from Trane

The spin off by Trane of its Vehicle Controls Systems business became effective on July 31, 2007, through a distribution of 100% of the common stock of WABCO to the holders of record of Trane’s common stock on July 19, 2007 (the “Distribution”). The Distribution was effected through a separation and distribution agreement pursuant to which Trane distributed all of the shares of WABCO common stock as a dividend on Trane common stock, in the amount of one share of WABCO common stock for every three shares of outstanding Trane common stock to each stockholder on the record date. Trane received a private letter ruling from the Internal Revenue Service and an opinion from tax counsel indicating that the spin-off was tax free to the stockholders of Trane and WABCO. Please refer to Item 1A of Part I “Risk Factors” below for information on the tax risks associated with the spin off from Trane.

Our Relationship with Trane

On July 16, 2007, we entered into definitive agreements with Trane that, among other things, set forth the terms and conditions of our separation from Trane (“Separation”) and provide a framework for the relationship between WABCO and Trane following the Separation. These agreements govern our relationship with Trane subsequent to the completion of the Separation and provide for the allocation between WABCO and Trane of assets, liabilities and obligations attributable to periods prior to the Separation. In addition to the Separation and Distribution Agreement, which contains many of the key provisions related to the Separation of WABCO and the Distribution of WABCO’s common stock to Trane’s shareholders, the parties also entered into a Tax Sharing Agreement, a Transition Services Agreement, an Employee Matters Agreement and an Indemnification and Cooperation Agreement. A summary of each such agreement is set forth below:

Separation and Distribution Agreement – sets forth WABCO’s agreements with Trane regarding principal transactions necessary to separate WABCO from Trane. This agreement also sets forth the other agreements that govern certain aspects of WABCO’s relationship with Trane after the completion of the Separation from Trane and provides for the allocation of certain assets to be transferred, liabilities to be assumed and contracts to be assigned to WABCO and Trane as part of the Separation.

Tax Sharing Agreement – governs the parties’ respective rights, responsibilities and obligations after the Distribution with respect to taxes, including ordinary course of business taxes and taxes, if any, incurred as a result of any failure of the Distribution of all of the common shares of WABCO to qualify as a tax-free distribution for U.S. federal income tax purposes within the meaning of Section 355 of the Internal Revenue Code of 1986, as amended.

Transition Services Agreement – governed the orderly transition of WABCO becoming an independent company. Under the Transition Services Agreement, WABCO and Trane agreed to provide each other with various services, including services relating to human resources, payroll, treasury and risk management, environmental technology, tax compliance, telecommunications services and information technology services. The cost of each transition service was generally on the same payment terms and calculated using the same cost allocation methodologies for the particular service as those associated with the costs in the historical financial statements. The majority of the services provided under the transition services agreement expired on February 1, 2008.

Employee Matters Agreement – allocates liabilities and responsibilities relating to employee compensation and benefit plans and programs and other related matters in connection with the Separation, including the treatment of outstanding incentive awards and certain retirement and welfare benefit obligations, both in and outside of the United States. For further detail, please refer to Note 5 – Stock-Based Compensation in the notes to the consolidated financial statements.

Indemnification and Cooperation Agreement – Pursuant to this agreement, WABCO Europe BVBA (an indirect wholly-owned subsidiary of WABCO), has agreed to be responsible for and to indemnify American Standard (now Trane) and its subsidiaries (including certain subsidiaries formerly engaged in the Bath and Kitchen business) and their respective affiliates against any fines related to the European Commission’s investigation, as outlined in a Statement of Objections received by American Standard and certain of its European subsidiaries on March 28, 2007, into possible infringement of European Union competition regulations. For further detail, please refer to Legal Proceedings below and Note 13 – Warranties, Guarantees, Commitments and Contingencies in the notes to the consolidated financial statements.

Products and Services

We develop, manufacture and sell advanced braking, stability, suspension and transmission control systems primarily for commercial vehicles. Our largest-selling products are pneumatic anti-lock braking systems (ABS), electronic braking systems (EBS), automated manual transmission systems, air disk brakes, and a large array of conventional mechanical products such as actuators, air compressors and air control valves for heavy- and medium-sized trucks, trailers and buses. We also supply advanced electronic suspension controls and vacuum pumps to the car and SUV markets in Europe and North America. In addition, we sell replacement parts, diagnostic tools, training and other services to commercial vehicle aftermarket distributors, repair shops, and fleet operators.

WABCO is a leader in improving highway safety, with products that help drivers avoid accidents by enhancing vehicle responsiveness and stability. For example, we offer a stability control system for trucks and buses that constantly monitors the vehicle’s motion and dynamic stability. If the system detects a vehicle instability such as the driver swerving to avoid another vehicle—it responds by applying the brakes at specific wheels, or slowing the vehicle down to minimize the risk of instability or a rollover.

Key Markets and Trends

Electronically controlled products and systems are an important growth segment of our business. The market for these products is driven primarily by the growing electronics content of control systems in commercial vehicles. The electronics content has been increasing steadily with each successive platform introduction, as original equipment manufacturers (OEMs) look to improve safety and performance through added functionalities, and meet evolving regulatory safety standards. Although the pace varies, there are growth trends in all major geographies, and braking systems are part of this broader shift from conventional to advanced electronic systems. In addition to increasing safety, improving stopping distances, and reducing installation complexity, advanced EBS also allow for new functionality to be introduced into vehicles at a lower price. The new functionality includes stability control, adaptive cruise control, automated transmission controls, brake performance warning, vehicle diagnostics, driver assistance systems and engine braking/speed control. Adaptive cruise control uses sensors to detect proximity to other vehicles and automatically adjusts speed. Automated transmission controls reduce the amount of gear shifting, resulting in less physical effort and training required for drivers, less component wear, fewer parts, better fuel efficiency, and enhanced driver safety and comfort.

A fundamental driver of demand for our products is commercial truck production. Commercial truck production generally follows a multi-year cyclical pattern. While the number of new commercial vehicles built fluctuates each year, we have demonstrated the ability to grow in excess of these fluctuations by increasing the amount of content on each vehicle. For example, over the past 5 years, WABCO’s European sales to truck and bus (“T&B”) OEM customers grew at an average annual rate of approximately 12%, excluding the impact of currency exchange rates, which outperformed the Western European T&B production.

Customers

We sell our products primarily to four groups of customers around the world: truck and bus (OEMs), trailer (OEMs), commercial vehicle aftermarket distributors for replacement parts and services, and major car manufacturers. Our largest customer is Daimler, which accounts for approximately 14% of our sales. Other key customers include Arvin Meritor, Cummins, Fiat (Iveco), Ford, General Motors, Hino, Hyundai, International Truck & Engine Corporation (ITE), MAN Nutzfahrzeuge AG (MAN), Meritor WABCO (a joint venture), Nissan Diesel, Paccar (DAF Trucks N.V. (DAF), Kenworth, Leyland and Peterbuilt), Otto Sauer Achsenfabrik (SAF), Scania, Volvo (Mack and Renault) and ZF Friedrichshafen AG (ZF). For the fiscal year ended December 31, 2007, our top 10 customers accounted for approximately 54% of our sales. In 2007, WABCO was nominated to become Daimler’s future exclusive supplier of ABS and EBS wheel speed sensors for Europe, North America, and South America. In addition, WABCO’s success in serving emerging markets was evidenced by receiving several distinguished supplier awards from Yutong and CNHTC in 2007.

The largest group of our customers, representing approximately 60% of sales, consists of truck and bus OEMs who are large, increasingly global and few in number due to continued consolidation (driven largely by European players). As truck and bus OEMs grow globally, they expect suppliers to grow with them beyond their traditional markets and become reliable partners, especially in the development of new technologies. WABCO has a strong reputation for technological innovation and often collaborates closely with major OEM customers to design and develop the technologies used in its products. Our products play an important role in vehicle safety and there are few other suppliers who compete across the breadth of products that we supply. As a result, pricing pressure, though increasing, is generally lower than for providers of more commoditized products or passenger cars and light truck product suppliers.

The second largest group, representing approximately 21% of sales, consists of the commercial vehicle aftermarket distributor network that provides replacement parts to commercial vehicle operators. This distributor network is a fragmented and diverse group of customers, covering a broad spectrum from large OE-affiliated or owned distributors to small independent local distributors. The increasing number of commercial trucks in operation world-wide that are equipped with our products continuously increases demand for replacement parts and services, thus generating a growing stream of recurring aftermarket sales. Additionally, we intend to develop an array of service offerings such as diagnostics, training and other services to repair shops and fleet operators that will further enhance our presence and growth in the commercial vehicle aftermarket.

The next largest group, representing approximately 14% of sales, consists of trailer manufacturers. Trailer manufacturers are also a fragmented group of local or regional players with great diversity in business size, focus and operation. Trailer manufacturers are highly dependent on suppliers such as WABCO to provide technical expertise and product knowledge. Similar to truck and bus OEMs, trailer manufacturers rely heavily on our products for important safety functions and superior technology.

The smallest group, representing approximately 5% of sales, consists of car and SUV manufacturers to whom WABCO sells electronic air suspension systems and vacuum pumps. Electronic air suspension is a luxury feature with increasing penetration and above market growth. Vacuum pumps are used with diesel engines and, therefore, enjoy higher than average growth rates associated with increasing diesel applications in Europe and Asia. These customers are typically large, global, sophisticated and demand high product quality and overall service levels.

We address our customers through a global sales force that is organized around key accounts and customer groups and interfaces with product marketing and management to identify opportunities and meet customer needs across its product portfolio.

Europe represents approximately 76% of our sales, with the remainder coming primarily from the Americas and Asia. Our products are also manufactured in Europe, Asia and in the Americas.

Backlog

Information on our backlog is set forth under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Backlog” of this annual report.

Cyclical and Seasonal Nature of Business

Information on the cyclical and seasonal nature of our business is set forth under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Cyclical and Seasonal Nature of Business” of this annual report.

Growth Strategy

Our growth strategy is focused on four key platforms: technology innovation, geographic expansion, aftermarket growth and opportunistic automotive application of our products and systems. Drivers of growth for both our aftermarket and advanced car systems are discussed in “Customers” above.

We continue to expand our product and technology portfolio by introducing new products and functionalities, and by improving the penetration of recently launched technologies. Advanced products and functionalities are typically developed and adopted first in Europe and then migrate to North America and Asia. Important examples include the adoption of ABS and automated transmission systems that were first widely adopted in European markets before starting to penetrate North America. Over the last three years, we spent approximately $230 million for research activities, product development and product engineering.

We are also focused on longer-term opportunities, particularly in the areas of emissions controls and Driver Assistance Systems (DAS). DAS is a technology concept that involves connecting advanced sensors with truck control devices, such as braking and steering systems as well as engine controls, to improve safety and avoid collisions. We have already launched some of the elements that would allow this concept to be brought to market, such as the adaptive cruise control already in use by several OEMs, and are well positioned for future growth in this area.

Geographic Expansion

We continue to drive sales in high growth markets in Eastern Europe, China and India. In Eastern Europe, we have been manufacturing products since 2001. The market in Eastern Europe has been experiencing rapid growth and we have established relationships with local customers.

China is a key growth market for us. The number of trucks built in the country is continuing to increase and adoption of the advanced systems and products made by us is increasing. We have been in China since 1996 and are the leading provider of ABS systems, with a strong brand and established customer relationships. In the short-to medium-term, growth will be driven by the enforcement of existing regulations making ABS mandatory on trucks, buses and trailers, of which we are well positioned to take advantage. Additional near term growth will be driven by introducing new products into the local market such as air compressors, clutch servos and automated manual transmission systems. To serve the growing demand for products both in China and for export, we have two facilities to manufacture conventional products, advanced systems such as ABS, and new modular air compressors. In order to make sure opportunities in Asia receive enough focus and management attention we have increased our management presence in the region.

India is another future growth market for us due to the number of trucks being built as well as the expected future adoption of more advanced systems in commercial vehicles. We participate in the market through a joint venture with the TVS Group (Sundaram-Clayton Ltd.) (“SCL”), which sells primarily conventional braking products, as the more advanced systems have only started to be introduced. India also provides us a strong base for sourcing and engineering activities, which we are actively developing. The joint venture is described further below in the section entitled “Joint Ventures.”


CEO BACKGROUND

PROPOSAL 1—ELECTION OF DIRECTORS

The company has three classes of directors. The number of directors is split among the three classes as equally as possible. The term of each directorship is three years so that one class of directors is elected each year. All directors are elected for three-year terms and until their successors are duly elected and qualified. The total number of directors established by resolution of the Board of Directors is eight.

At this annual meeting, the shareholders will vote to elect two directors to Class I for a term expiring at the 2011 Annual Meeting of Shareholders. The current Class I directors are Mr. G. Peter D’Aloia and Dr. Juergen W. Gromer. Mr. D’Aloia and Dr. Gromer were appointed to the Board as Class I directors at the time of our Spin-off from Trane on July 31, 2007. The Board is nominating each of these directors to continue serving as Class I directors.

The Board of Directors has no reason to believe that either of the nominees will not serve if elected. If either nominee should become unavailable to serve as a director, and if the Board designates a substitute nominee, the company representatives named on the proxy card will vote for the substitute nominee designated by the Board unless you submit a proxy withholding your vote from the nominee being substituted. Under the company’s amended by-laws, vacancies are filled by the Board of Directors.

Recommendation

The Board of Directors unanimously recommends that shareholders vote FOR Proposal 1, the election of G. Peter D’Aloia and Juergen W. Gromer as Class I directors.

Nominees for Election for Class I Directors—Terms Expiring at 2011 Annual Meeting

G. Peter D’Aloia—Age 63

Director since July 2007

Mr. D’Aloia is Senior Vice President and Chief Financial Officer of Trane Inc., a position he has held since 2000. Before joining Trane, Mr. D’Aloia worked for Honeywell where he most recently served as Vice President—Business Development. He spent 27 years with Honeywell’s predecessor company, AlliedSignal, in diverse finance management positions. During his career with AlliedSignal, he served as Vice President—Taxes; Vice President and Treasurer; Vice President and Controller; and Vice President and Chief Financial Officer for the Engineered Materials Sector. Early in his career, he worked as a tax attorney for the accounting firm, Arthur Young and Company. Mr. D’Aloia is a Director of FMC Corporation and AirTran Airways.

Juergen W. Gromer—Age 63

Director since July 2007

Dr. Gromer is the retired President of Tyco Electronics, a position which he held from April 1999 until December 31, 2007. Dr. Gromer also served as the Vice Chairman of Tyco Electronics from January 2006 until December 31, 2007. Dr. Gromer formerly held senior management positions from 1983 to 1998 at AMP (acquired by Tyco in April 1999) including Senior Vice President of Worldwide Sales and Services, President of the Global Automotive Division, and Vice President of Central and Eastern Europe, and General Manager of AMP Germany. Dr. Gromer has over 20 years of AMP and Tyco Electronics experience, serving in a wide variety of regional and global assignments. Dr. Gromer serves as a member of the boards of directors of Tyco Electronics Ltd., Bermuda, Marvell Technology Group Inc. and RWE Rhein Ruhr AG. He is also Chairman of the Board of the Society for Economic Development of the District Bergstrasse/Hessen, a member of the Advisory Board of Commerzbank, and a Director of the Board and Vice President of the American Chamber of Commerce in Germany.

Directors Continuing in Office

Class II Directors—Terms Expiring at 2009 Annual Meeting

James F. Hardymon—Age 73

Director since July 2007

Mr. Hardymon currently serves as, and is expected to continue serving as, our Chairman of the Board. Mr. Hardymon served as a director of Trane from 1999 to 2007. Mr. Hardymon was the Chairman and Chief Executive Officer of Textron, Inc., a manufacturing and financial services business, from 1993 to 1998 and continued as Chairman until his retirement in 1999. Previously, Mr. Hardymon had been Chief Executive Officer since 1992, and President and Chief Operating Officer since 1989. Prior to his affiliation with Textron, he served from 1961 to 1989 in various executive capacities with Emerson Electric Co. Mr. Hardymon is a director of Circuit City Stores, Inc. and Lexmark International, Inc. Mr. Hardymon is also a member of the Advisory Board of Investcorp International, Inc. Including WABCO, Mr. Hardymon has served on 11 corporate boards and as chairman of four NYSE-traded companies.

Michael T. Smith—Age 64

Director since July 2007

Mr. Smith served as the Chairman of the Board and Chief Executive Officer of Hughes Electronics Corporation from 1997 to 2001, before retiring in 2001. Prior to his election to those positions, Mr. Smith had been Vice Chairman of Hughes Electronics and Chairman of the Hughes Aircraft Company. Mr. Smith joined Hughes Electronics in 1985 as Senior Vice President and Chief Financial Officer after spending nearly 20 years with General Motors in a variety of financial management positions. In 1992 he was elected Vice Chairman of Hughes Missile Systems, and in 1995 he was elected Chairman of Hughes Aircraft Company. Mr. Smith is a member of the board of directors of Alliant Techsystems, Inc., Ingram Micro, Inc., Teledyne Technologies, Inc. and Flir Systems, Inc.


John F. Fiedler—Age 69

Director since September 2007

Mr. Fiedler served as Chairman of the Board of Directors of BorgWarner, Inc from 1995 to 2003, before retiring in 2003. Prior to that, Mr. Fiedler served as President and Chief Operating Officer of Borg Warner, Inc. Before joining BorgWarner in 1994, Mr. Fiedler was an Executive Vice President with The Goodyear Tire & Rubber Company, culminating a 29-year career with the company by leading its North American tire division. He is a member of the board of directors of Mohawk Industries, Snap-On Corporation and AirTran Airways. He is also a member of the Kent State Foundation Commission, an advisor to the Board of Trustees of the Manufacturers Alliance/MAPI and a member of the Board of Advisors of Prism Funds.

Class III Directors—Terms Expiring at 2010 Annual Meeting

Jacques Esculier—Age 48

Director since July 2007

Mr. Esculier has served as our Chief Executive Officer and director since July 2007. Prior to July, 2007, Mr. Esculier served as Vice President of Trane and President of its Vehicle Control Systems business, a position he had held since January 2004. Prior to holding that position, Mr. Esculier served in the capacity of Business Leader for the Trane Commercial Systems’ Europe, Middle East, Africa, India & Asia Region from 2002 through January 2004. Prior to joining Trane in 2002, Mr. Esculier spent more than six years in leadership positions at AlliedSignal/Honeywell. He was Vice President and General Manager of Environmental Control and Power Systems Enterprise based in Los Angeles, and Vice President of Aftermarket Services—Asia Pacific based in Singapore.

Kenneth J. Martin—Age 53

Director since July 2007

Mr. Martin served as the Chief Financial Officer and Vice Chairman of Wyeth (formerly American Home Products) from 2000 to 2007, before retiring in 2007. Mr. Martin joined American Home Products in 1984 as Assistant Director of Corporate Compliance and subsequently held the positions of Assistant Vice President of Finance for American Home Food Products. In 1989, he was appointed Vice President and Comptroller of American Home Products Corporation. In 1992, he became Executive Vice President for American Home Food Products. Two years later, he was promoted to Executive Vice President of Whitehall-Robins Healthcare and in 1995, President of American Home Food Products. He was named President of Whitehall-Robins Healthcare in 1997 and Senior Vice President and Chief Financial Officer of Wyeth-Ayerst Pharmaceuticals in 1998. In 2000, he was appointed Senior Vice President and Chief Financial Officer of Wyeth and in 2002, he was named Executive Vice President and Chief Financial Officer. Mr. Martin is also a director of Talecris Biotherapeutics Holdings Corp.

Donald J. Stebbins—Age 50

Director since September 2007

Mr. Stebbins is President and Chief Operating Officer of Visteon Corporation, a position he has held since 2005. Mr. Stebbins joined Visteon from the Lear Corporation where he spent 13 years in a number of executive positions, the most recent of which was President and Chief Operating Officer for the corporation’s Europe, Asia and Africa region. Before assuming this position, Mr. Stebbins served as President and Chief Operating Officer for the Americas. He started his career at Lear as Vice President and Treasurer in 1992 and was appointed Senior Vice President and Chief Financial Officer in 1997. Mr. Stebbins is a member of the board of directors of Visteon.

Board Matters and Committee Membership

Our business, property and affairs are managed under the direction of our Board of Directors. Members of our Board are kept informed of our business through discussions with our Chief Executive Officer and other officers and employees, by reviewing materials provided to them during visits to our offices and plants and by participating in meetings of the Board and its committees.

The Board of Directors held a total of three meetings in 2007. The standing committees of the Board of Directors are the Audit Committee and the Compensation, Nominating and Governance Committee (the “CNG Committee”). All directors attended at least 75 percent of the combined total number of meetings of the Board of Directors and the Board committees on which they served during 2007. Our non-management directors meet without the Chief Executive Officer present at the end of each Board meeting.

The Board of Directors has determined that Mr. Martin, chair of the Audit Committee, is an audit committee financial expert as defined by the SEC. In addition, the Board has determined that each member of the Audit Committee is financially literate as defined by the NYSE.

Compensation, Nominating and Governance Committee

Our Board of Directors has delegated its compensation, nominating and governance functions to a single standing committee, the Compensation, Nominating and Governance Committee or “CNG Committee.” Each member of the CNG Committee is independent as defined by the NYSE listing standards and the company’s independence standards. The committee’s responsibilities, as set forth in its charter, include:

• identifying individuals qualified to become members of the Board and recommending to the Board director nominees to be presented at the annual meeting of shareholders as well as nominees to fill vacancies on the Board;


• recommending Board committee memberships, including committee chairpersons;


• considering and making recommendations concerning director nominees proposed by shareholders;


• developing and recommending to the Board corporate governance principles for the company and processes for Board evaluations;


• reviewing and making recommendations concerning compensation of directors;


• reviewing and making recommendations concerning officers’ salaries and employee benefit and executive compensation plans and administering certain of those plans, including the company’s incentive compensation and stock incentive plans;


• reviewing and approving performance goals and objectives for all elected officers, including the Chief Executive Officer, evaluating performance against objectives and based on its evaluation, approving all officers’ base and incentive compensation; and



• revaluating executive succession plans, the quality of management, and leadership and management development.

For a description of the Committee’s responsibility in determining executive compensation, see “Compensation Discussion and Analysis—Role of WABCO CNG Committee” in this proxy statement.



MANAGEMENT DISCUSSION FROM LATEST 10K

This discussion summarizes the significant factors affecting the results of operations and financial condition of WABCO during the years ended December 31, 2007, 2006 and 2005 and should be read in conjunction with our consolidated financial statements and related Notes thereto included elsewhere herein. Certain information in this discussion and analysis regarding industry outlook, our expectations regarding the future performance of our business and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Risk Factors” above. Our actual results may differ materially from those contained in any forward-looking statements. You should read the following discussion together with the sections entitled “Risk Factors,” “Information Concerning Forward-Looking Statements,” “Selected Financial Information,” “—Liquidity and Capital Resources” and consolidated financial statements and related notes thereto included elsewhere herein.

Description of the Company and Its Products

WABCO is a leading provider of electric and electromechanical products for the world’s leading commercial truck, trailer, bus and passenger car manufacturers. We manufacture and sell control systems, including advanced braking, stability, suspension, transmission control and air compressing and processing systems, that improve vehicle performance and safety and reduce overall vehicle operating costs. Our largest-selling products are pneumatic anti-lock braking systems (ABS), electronic braking systems (EBS), automated manual transmission systems, air disk brakes and a large variety of conventional mechanical products such as actuators, air compressors and air control valves for heavy- and medium-sized trucks, trailers and buses. We also supply advanced electronic suspension controls and vacuum pumps to the car and SUV markets in Europe and North America. In addition we sell replacement parts, diagnostic tools training and other services to commercial vehicle aftermarket distributors, repair shops and fleet operators.

Separation of WABCO from Trane

The spin off by Trane of its Vehicle Controls Systems business became effective on July 31, 2007, through a distribution of 100% of the common stock of WABCO to the holders of record of Trane’s common stock on July 19, 2007 (the “Distribution”). The Distribution was effected through a separation and distribution agreement which sets forth WABCO’s agreements with Trane regarding principal transactions necessary to separate WABCO from Trane. This agreement also sets forth the other agreements that govern certain aspects of WABCO’s relationship with Table of Contents

Trane after the completion of the Separation from Trane and provides for the allocation of certain assets to be transferred, liabilities to be assumed and contracts to be assigned to WABCO and Trane as part of the Separation. Trane distributed all of the shares of WABCO common stock as a dividend on Trane common stock, in the amount of one share of WABCO common stock for every three shares outstanding of Trane common stock to each stockholder on the record date. Trane received a private letter ruling from the Internal Revenue Service and an opinion from tax counsel indicating that the spin-off was tax free to the stockholders of Trane and WABCO.

A significant portion of the expenses to effect the Separation were incurred by Trane, such as investment banking fees, external legal and accounting fees, legal reorganization and restructuring tax costs, and costs to separate information systems. WABCO incurred the following separation costs: indemnification and other tax related costs, stock compensation expense relating to the Distribution, costs associated with early bond redemption, external legal and consulting fees, and other items such as relocation expenses associated with hiring senior management positions new to the Company.

Basis of Presentation

WABCO has historically operated as the Vehicle Control Systems business of Trane. The financial statements included herein have been derived from the financial statements and accounting records of Trane, principally representing the Vehicle Control Systems segment, using the historical results of operations, and historical basis of assets and liabilities of the Vehicle Control Systems segment, prior to the July 31, 2007 spin-off from Trane, in addition to WABCO’s actual results for the period subsequent to July 31, 2007. Historically, stand-alone financial statements have not been prepared for WABCO. We believe the assumptions underlying the allocations included in the financial statements are reasonable.

Executive Overview of Management’s Discussion and Analysis

We analyze the performance of our business using the following general framework and describe the performance of the business in this context throughout the remainder of this discussion and analysis of financial condition and results of operations.

Sales—We analyze sales activity based on the impact of pricing, volume and mix of our products. The management of pricing conditions and the execution of a strategy to improve sales mix to more profitable products and customers are important to us in order to grow sales and profitability.

Productivity—We identify the impact of key productivity programs in the areas of materials procurement, labor and other productivity programs. The successful execution of productivity programs is important to offset the impacts of price decreases, commodity inflation and other cost escalations.

Commodities—We use commodities such as aluminum, copper, zinc and steel in our manufacturing process. The cost of these commodities can have a significant impact on our financial performance.

Investments—We analyze the costs for the development of new products, investments in sales and marketing programs and other infrastructure investments in support of productivity improvements. Investments in new products and sales are important to sustaining organic growth.

Please see the following paragraphs “Results of Operations for 2007 compared with 2006” and “Results of Operations 2006 compared with 2005” for an analysis of our results of operations excluding the effects of foreign exchange translation.

Our Markets and Our Customers

Our sales are affected by changes in truck and bus production, especially in Europe. Europe is our largest geographic market and sales to truck and bus OEMs represent our largest customer group. The table below shows the relationship between our European sales to truck and bus OEMs, which, account for approximately 79% of our global sales to truck and bus OEMs and Western European truck and bus (T&B) production, for the last five years. Sales data is shown at a constant Euro to U.S. dollar exchange rate for year to year comparability and to make comparisons to unit production meaningful.

In general, our sales track directionally with truck and bus builds. However, individual year to year sales changes are also influenced by other factors such as timing of orders and deliveries to T&B OEM customers, application content, new product introduction, price and introduction of new customer platforms. The level of truck build activity is influenced by general economic conditions, including interest rate levels and inflation. On average for the last five years, our European sales have performed 3 percentage points above the change in Western European truck and bus builds.

In regions outside Europe, there is less correlation between our sales and regional truck and bus builds. This is because of our smaller presence (which magnifies changes in content on individual truck platforms) as well as less stringent safety regulations. As other regions adopt additional safety regulations in the future, similar to or approaching Europe’s, we expect the resulting increase in content will bring higher correlation between our regional sales and changes in regional truck and bus production.

Our aftermarket sales account for approximately 21% of total sales and are affected by a variety of factors: content on specific vehicles and breadth of our product range, number of commercial trucks in active operation, truck age, miles driven, demand for transported goods and overall economic activity. On average, our aftermarket sales (on a constant exchange to the U.S. dollar rate) have grown by 8% annually for the last five years as shown in the table below. Our 2007 aftermarket sales were negatively impacted by certain supply chain constraints which improved by the fourth quarter of 2007.

Results of Operations

The following discussion and analysis addresses year-over-year changes in the line items shown in the above paragraph “Executive Overview.” Approximately 93% of our sales are outside the U.S. and therefore, changes in exchange rates can have a significant impact on the reported results of our operations, which are presented in U.S. Dollars. Year-over-year changes in sales, expenses and net income for 2007 compared with 2006 and 2006 compared with 2005, are presented both with and without the effects of foreign currency translation. Changes in sales, expenses and net income excluding foreign exchange effects are calculated using current year sales, expenses and net income translated at prior year exchange rates. Presenting changes in sales, expenses and net income excluding the effects of foreign currency translation is not in conformity with GAAP, but we analyze this data because it is useful to us in understanding the operating performance of our business. We believe this data is also useful to shareholders for the same reason. The changes in sales, expenses and net income excluding the effects of foreign exchange translation are not meant to be a substitute for measurements prepared in conformity with GAAP, nor to be considered in isolation. Management believes that presenting these non-GAAP financial measures is useful to shareholders because it enhances their understanding of how management assesses the operating performance of the company’s business.

Sales

Our sales for 2007 were $2.4 billion, an increase of 19.9% (10.5% excluding favorable foreign currency translation effects) from $2.0 billion in 2006. The increase was attributable primarily to increased truck and bus production in Europe, expanded content per vehicle including new applications, global expansion and growth in our aftermarket business. Sales in Europe, our largest market, increased approximately 23.9% (14.2% excluding favorable foreign currency translation effects), which based on our estimate, exceeded the growth in European truck production. Sales decreased in North America, which was less than the decrease in North American truck production. The decrease in the North American truck production was primarily influenced by increased sales volume in 2006 ahead of regulations mandating better emissions standards that became effective in 2007. In Asia and South America sales increased 24.5% and 33.2%, respectively (20.6% and 18.7% excluding favorable foreign currency translation effects, respectively). The sales growth in Asia was driven by an increase in China sales of 106.4% (96.7% without foreign currency translation impact).

Gross Profit

Gross profit increased by $100.0 million ($45.8 million excluding favorable foreign currency translation effects). Also, included in gross profit was approximately $10.1 million of foreign currency transaction losses related mainly to the sale of products in countries (with different currencies) outside of the country where they are manufactured.

Gross profit benefited from volume and mix increases of approximately $64.0 million primarily attributable to the sales increase discussion above, productivity improvements of approximately $48.2 million, and a reduction of warranty expenses of $9.8 million. These improvements were partially offset by sales price decreases of approximately $54.0 million, labor and other cost escalation of approximately $10.0 million, higher spending on streamlining programs of approximately $1.4 million, and other net costs of $0.7 million.

Operating Expenses

Operating expenses, which include selling and administrative expenses and product engineering expenses, increased by $56.8 million ($29.3 million excluding unfavorable foreign currency translation effects). The increase in operating expense was primarily driven by incremental investments in product engineering and new product development programs of approximately $10.6 million, labor cost inflation and escalation of approximately $8.5 million, increases in spending on streamlining programs of approximately $3.1 million and an increase of $2.4 million of expenses due to a change in certain pension obligations. In the second half of 2007, WABCO incurred separation costs of approximately $4.7 million.

Equity in Net Income of Unconsolidated Joint Ventures

Equity in net income of unconsolidated joint ventures decreased $14.2 million to $9.1 million in 2007 as compared to $23.3 million in 2006. The decrease was partially due to WABCO’s joint venture in North America, driven by the production decline in the North American market. As described above, the North American commercial vehicle production decreased in 2007, influenced by increased sales volume in 2006 ahead of regulations mandating better emissions standards that became effective on January 1, 2007. As a result, Meritor WABCO was impacted by lower sales volumes in 2007. Additionally, the decrease was driven by WABCO’s Indian joint venture, SCL, which was mainly driven by difficult market conditions in the non-brakes divisions of the group, start-up costs associated with new business development, and a write-off of one of its investments.

WABCO and its Indian joint venture partner have agreed to separate the non-brakes division from the brakes division through a plan of demerger, which is conditioned on various Indian regulatory and court approvals. If these conditions are met, the brakes business of SCL will be transferred to a new subsidiary, WABCO-TVS (INDIA) Ltd. (“WABCO-TVS”), the shares of which are intended to be listed in India as are the shares of SCL currently. Subsequent to the demerger, it is intended that within a period of two years from such listing, WABCO’s Indian joint venture partner will transfer to WABCO its shares in WABCO-TVS, and WABCO’s percentage ownership in WABCO-TVS is expected to increase to approximately 75-80%. Similarly, during this same period, it is intended that WABCO will transfer to its Indian joint venture partner its shares in SCL post demerger, and WABCO’s percentage ownership in SCL post demerger, which will then consist of the non-brakes division of the joint venture, is expected to decrease to zero.

Other expense, net

Other expense increased by $24.8 million to $35.6 million for the full year 2007 as compared to $10.8 million for the fully year 2006. The increase was primarily attributable to the following items: $13.6 million of charges resulting from the legal reorganization, in connection with the spin-off from Trane, in various countries in the second, third and fourth quarters of 2007, $6.0 million of early-redemption premiums on the $40.0 million outstanding bonds that were redeemed on April 30, 2007, and $0.8 million relating to costs associated with environmental liabilities transferred from Trane. Additionally, contributing to the increase was higher foreign exchange losses on non operating items and higher minority interest expense.

Net Interest/Expense—Includin g Related Party Interest Expense

Net interest expense (including related party interest expense) was $4.5 million for 2007 as compared with $11.3 million in 2006. The decrease in net interest expense is primarily driven by a $4.7 million decrease in related party net interest expense, which in 2007 only included a partial year of related party interest versus a full year in 2006. Additionally, WABCO’s capital structure at the time of separation was more favorable when compared to 2006.

Income Taxes

The income tax provision for 2007 was $111.3 million. The effective income tax rate was 47.0% of pre-tax income in 2007. The income tax provision for 2006 was $87.9 million, an effective tax rate of 38.9%. The effective income tax rate for 2007 increased primarily due to a provision of $50.7 million related to the separation of the WABCO business from Trane and a charge of $10.2 million related to the net reduction in deferred tax assets pursuant to tax rate changes in Germany, UK and China, partially offset by a $7.5 million benefit as a result of the settlement of a foreign tax audit during the second quarter, and benefits associated with foreign tax planning for 2007 following WABCO’s separation from Trane.

Backlog

Backlog, which represents valid sales orders that have not yet been filled as of the end of the reporting period, was $1.2 billion at the end of the fourth quarter, up 44.2% (or 30.2% excluding favorable foreign currency translation effects) from the fourth quarter of 2006. Backlog is not necessarily predictive of future business as it relates only to some of our products, and customers may still change future delivery dates.

Sales

Our sales for 2006 were $2.0 billion, an increase of 10.1% (8.8% excluding favorable foreign currency translation effects) from $1.8 billion in 2005. The increase in sales of $160.5 million, excluding favorable foreign currency translation impacts, was attributable primarily to increased truck and bus production of approximately $83.3 million, expanded content per vehicle, including new applications of approximately $78.1 million, and strong growth in our aftermarket business of approximately $39.1 million. This was partially offset by net price erosion of approximately 2% or $40 million. The price erosion was primarily driven by annual price reductions included in many of our OEM long-term sales contracts, primarily in Europe. Sales increased 3% in North America and 16% in Asia (15% excluding favorable foreign currency translation effects). Asia was helped by robust growth in China of 66% (61% without foreign currency translation impact). In South America, our sales increased 3%, but decreased 8% excluding favorable foreign currency translation effects. In all of our markets, except North America, our sales continued to outpace the growth in heavy vehicle manufacturing.

Gross Profit

Gross profit increased by $33.2 million ($26.6 million excluding favorable foreign currency translation effects) in 2006 as compared with 2005. Gross profit benefited from volume and mix increases of approximately $48 million primarily attributable to the items mentioned above in the discussion of sales, productivity improvements of approximately $67 million, benefits from previously announced operational consolidation programs of approximately $4 million and lower spending on operational consolidation programs of approximately $8 million. These improvements were partially offset by price decreases of approximately $40 million, commodity cost increases of approximately $17 million (mainly driven by increased aluminum prices and to a lesser extent zinc and copper prices), $8 million of foreign currency transaction losses related to the sale of products in countries outside of the country they are manufactured in, the absence of foreign exchange transaction gains recognized in 2005 for approximately $9 million, labor cost escalation of approximately $6 million, higher warranty cost of approximately $10 million and higher transportation costs of approximately $10 million (mainly driven by higher fuel prices and volume increase). Approximately $48 million of the productivity improvements were driven by direct material cost reductions with the remainder mainly driven by the transfer of production to lower cost countries and higher capacity utilization.

We incurred $8.2 million of operational consolidation expenses during 2006 of which $7.4 million is associated with severance relating to 2006 plans and $0.8 million pertaining to prior period plans. The majority of the 2006 plan expenses are associated with the consolidation of administrative functions. We expended $3.0 million of cash on operational consolidation expenses in 2006. We expect to realize annualized cost savings of approximately $5.0 million as a result of these plans. Operational consolidation expenses were $13.7 million in 2005.

Operating Expenses

Operating expenses increased by $20.2 million ($16.9 million excluding unfavorable foreign currency translation effects). The increase in operating expense was primarily driven by incremental investments in sales growth initiatives of approximately $5 million, labor and other cost inflation of approximately $10 million, $2.5 million of costs relating to the expensing of stock options in 2006 and higher operational consolidation expenses of approximately $2 million. This increase was partially offset by benefits from previously announced operational consolidation programs of approximately $3 million.

Equity in Net Income of Unconsolidated Joint Ventures and Other Expense

Equity in net income of unconsolidated joint ventures decreased $1.2 million to $23.3 million in 2006 as compared to $24.5 million in 2005. The decrease was driven by our Meritor WABCO joint venture in the U.S.

Other expense increased by $5.4 million to $10.8 million in 2006 as compared to $5.4 million in 2005. The increase was primarily attributable to increased costs relating to our participation in the securitization programs of $1.1 million, higher minority interest expense of $0.8 million and higher foreign exchange transaction losses of $0.9 million.

Net Interest Expense/(Income)—Includin g Related Party Interest Expense/(Income)

Including related party interest, total interest expense was $11.3 million in 2006 compared with $(2.1) million of total interest income in 2005. The increase in interest expense in 2006 as compared to 2005 was primarily driven by payments received by WABCO from Trane during 2006 to settle certain related party receivables, which reduced interest income by approximately $2.5 million in 2006, and WABCO did not charge any interest income on its loans receivable from Ideal Standard WABCO Trane Ind. Com. Ltda. in 2006, which reduced interest income by approximately $4.2 million. Additionally, in the fourth quarter of 2005, WABCO paid a related party dividend which it funded with related party debt, which increased interest expense by approximately $3.5 million in 2006.

See Note 16, Related Party Transactions, of Notes to Consolidated Financial Statements for a detailed summary of the intercompany loans and related interest rates.

Income Taxes

The income tax provision for 2006 was $87.9 million. The effective income tax rate was 38.9% of pre-tax income in 2006. The income tax provision for 2005 was $87.4 million, an effective tax rate of 37.6%. The income tax provision for 2005 included benefits of $18.3 million from the resolution of tax audits and $4.5 million related to the impact of certain tax planning initiatives on prior tax years. Partially offsetting these benefits was a charge of $16 million associated with remitting foreign earnings to the U.S. under Section 965 of the American Jobs Creation Act of 2004.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Executive Overview

WABCO is a leading provider of electronic and electromechanical products for the world’s leading commercial truck, trailer, bus and passenger car manufacturers. We manufacture and sell control systems, including advanced braking, stability, suspension, transmission automation controls and air compressing and processing systems, that improve vehicle performance and safety and reduce overall vehicle operating costs. Our largest-selling products are pneumatic anti-lock braking systems (ABS), electronic braking systems (EBS), transmission automation systems, air disk brakes and a wide variety of conventional mechanical products such as actuators, air compressors and air control valves for heavy- and medium-sized trucks, trailers and buses. We also supply advanced electronic air suspension controls and vacuum pumps to the car and SUV markets in Europe and North America. In addition we sell replacement parts, diagnostic tools, training and other services to commercial vehicle aftermarket distributors, repair shops and fleet operators. Company management analyzes the performance of the business using the following general framework and describes the performance of the business in this context throughout the remainder of this discussion and analysis of financial condition and results of operations.

Sales

The Company analyzes its sales activity based on the impact of pricing, volume and mix of its products. The management of pricing conditions and the execution of a strategy to improve sales mix to more profitable products and customers are important to us in order to grow sales and profitability.

Productivity

The Company identifies the impact of key productivity programs in the areas of materials procurement, labor and other programs. The successful execution of these programs is important to offset the impacts of price decreases, commodity inflation and other cost escalations.

Commodities

The Company uses commodities such as aluminum, copper, zinc and steel in its manufacturing process. The cost of these commodities can have a significant impact on the Company’s financial performance.

Investments

The Company analyzes the costs for the development of new products, investments in sales and marketing programs and other infrastructure investments in support of productivity improvements. Investments in new products and sales are important to sustaining organic growth.

The Separation

The spin off by Trane of its Vehicle Controls Systems business became effective on July 31, 2007, through a distribution of 100% of the common stock of WABCO to the holders of record of Trane’s common stock on July 19, 2007 (the “Distribution”). The Distribution was effected through a Separation and Distribution Agreement which sets forth WABCO’s agreements with Trane regarding principal transactions necessary to separate WABCO from Trane. This agreement also sets forth the other agreements that govern certain aspects of WABCO’s relationship with Trane after the completion of the Separation from Trane and provides for the allocation of certain assets to be transferred, liabilities to be assumed and contracts to be assigned to WABCO and Trane as part of the Separation. Trane distributed all of the shares of WABCO common stock as a dividend on Trane common stock, in the amount of one share of WABCO common stock for every three shares outstanding of Trane common stock to each stockholder on the record date. Trane received a private letter ruling from the Internal Revenue Service and an opinion from tax counsel indicating that the spin-off was tax free to the stockholders of Trane and WABCO.

Results of Operations

The following discussion and analysis addresses changes in the statements of income for the three and nine months ended September 30, 2008, compared to the three and nine months ended September 30, 2007. Approximately 94% of WABCO sales are outside the U.S. and therefore, changes in exchange rates can have a significant impact on the reported results of our operations, which are presented in US Dollars. Quarter-over-quarter changes in the statements of income for 2008 compared with 2007 are presented both with and without the effects of foreign currency translation. Changes in the statements of income excluding foreign exchange translation effects are calculated using current year sales, expenses and net income translated at prior year exchange rates. Presenting changes in sales, expenses and net income excluding the effects of foreign currency translation is not in conformity with GAAP, but management analyzes the data in this manner because it is useful to them for understanding the operational performance of the business. Management believes this data is also useful to shareholders for the same reason. The changes in sales, expenses and pre-tax income excluding the effects of foreign exchange translation are not meant to be a substitute for measurements prepared in conformity with GAAP, or to be considered in isolation.

Sales

Sales for the third quarter of 2008 were $655.0 million, an increase of 10.0% (1.8% excluding favorable foreign currency translation effects) from $595.5 million in 2007. The increase was primarily attributable to increased commercial vehicle production in Europe and expanded content per vehicle, partially offset by the drop in trailer demand and the decline in the North American truck & bus market. Sales in Europe, our largest market, increased approximately 8.7% (0.8% excluding favorable foreign currency translation effects). In Asia and South America sales increased 6.5% and 37.2%, respectively (0.7% and 19.1% excluding favorable foreign currency translation effects, respectively). The sales growth in Asia, which based on our estimates outperformed the markets in all countries within Asia, was driven by an increase in Japan sales of 21.6% (11.0% excluding favorable foreign currency translation effects), by continued content growth, and by the increasing penetration of ABS in India. Sales increased 1.4% in North America, which was driven by the growth in our compressors joint venture, partially offset by a decline in sales to our Meritor-Wabco joint venture. Total aftermarket sales growth (included in the above sales number) in the quarter was 10.5% (2.5% excluding the favorable effects of foreign currency translation effects), which was driven by continued growth in the independent aftermarket channels but has been negatively impacted by a slow down in maintenance activities.

We have reduced our full-year projections to reflect our current view of the fourth quarter given recent developments in the global commercial vehicle industry as well as the current situation in the global macro-economy. They incorporate various improvements that we have made since our last projections, impacts of the strengthening US dollar, as well as the degradation in the demand for commercial vehicles we are now seeing in Europe. Based on our solid progress for the first three quarters of 2008 and the slowdown we are seeing thus far in the fourth quarter, we are projecting sales growth for 2008 to be between 5.5% and 6.5% excluding favorable foreign currency translation effects. This reflects an anticipated sales decrease during the fourth quarter in the range of 3% to 7%.

In response to industry reports of a potential slowdown in the demand for new commercial vehicles, the Company implemented a comprehensive profit improvement program in the third quarter. The program covers among other things, certain cost reductions within our operating expenses, as well as our cost of goods sold, which is expected to improve the profits of the Company by approximately $20 million for the second half of the year, of which $4 million was realized in the third quarter.

Gross Profit

Gross profit increased by $16.9 million (an increase of $2.2 million excluding favorable foreign currency translation effects) in the third quarter of 2008 as compared with the third quarter of 2007. Gross profit included approximately $2.0 million of foreign currency transaction gains related mainly to the purchase of materials and sale of products in countries (with different currencies) outside of the country where they are manufactured. Gross profit benefited from productivity improvements of approximately $15.6 million and volume/mix increases of approximately $2.3 million primarily attributable to the sales increase discussed above. These improvements were partially offset by sales price decreases of $13.4 million, labor and other cost escalation of approximately $3.0 million and separation, streamlining and other expenses of $1.3 million.

Operating Expenses

Operating expenses, which include selling and administrative expenses, product engineering expenses and other operating expenses, increased by $9.3 million ($0.3 million excluding unfavorable foreign currency translation effects) in the third quarter of 2008 as compared to the third quarter of 2007. The increase in operating expense was driven by labor cost inflation and escalation, investments in product development and other cost increases of approximately $4.6 million partially offset by decreases of $4.3 million relating to separation and streamlining expenses.

Streamlining Expenses

The Company incurred $4.2 million of streamlining expenses during the third quarter of 2008 which is associated with severance of which $2.7 million was charged to selling and administrative expenses and $1.5 million was charged to cost of sales. The Company incurred $2.7 million of streamlining expenses during the third quarter of 2007 of which $1.8 million was charged to selling and administrative expenses and $0.9 million was charged to cost of sales.

Equity in Net (Income) of Unconsolidated Joint Ventures

Equity in net income of unconsolidated joint ventures increased $6.8 million ($6.6 million excluding foreign currency translation effects) in the third quarter of 2008 as compared to the third quarter of 2007. The increase was primarily driven by the profit of WABCO’s Indian joint ventures SCL and WABCO-TVS of $2.6 million compared to a loss of $3.6 million in the third quarter of 2007. The income from our South African joint venture amounted to $2.1 million in the third quarter of 2008 compared to income of only $0.6 million in the third quarter of 2007.

Other Non-Operating Expense, Net

Other non-operating expense, net increased by $0.3 million (decreased by $0.1 million excluding foreign currency translation effects) in the third quarter of 2008 as compared to the third quarter of 2007.

Interest (Income)/Expense, Net

Interest (income)/expense, net improved by $3.9 million ($3.7 million excluding foreign exchange translation effects) to $(1.8) million in the third quarter of 2008 compared to $2.1 million in the third quarter of 2007. The improvement is largely driven by a more favorable average net cash position in the third quarter of 2008 compared to 2007, as well as more favorable interest rates.

Income Taxes

The income tax provision for the third quarter of 2008 was $4.0 million, or 5.9% of pre-tax income, compared with a provision of $50.0 million, or 100.6% of pre-tax income in the third quarter of 2007. The effective tax rate for the third quarter of 2008 decreased primarily due to a $9.9 million reduction of an unrecognized tax benefit recorded in the third quarter of 2007 related to the separation of the WABCO business from Trane. This reduction results from the filing of the Company’s and Trane’s 2007 US Federal income tax returns in September 2008. This reduction also results from other immaterial items principally related to recording interest on unrecognized tax benefits and changes in estimated tax liabilities associated with the filing of various foreign income tax returns for prior years.

The effective tax rate for the third quarter of 2007 primarily includes a provision of $37.1 million related to the separation of the WABCO business from Trane and a charge of $8.9 million in a deferred tax asset related to the reduction in German tax rates enacted in the third quarter of 2007 but effective January 2008.

The income tax provision reflects certain foreign tax planning that benefits WABCO. The tax benefit associated with this planning is reflected in the annual effective tax rate for 2008. Additionally, the accompanying provision includes a valuation allowance for losses in certain foreign jurisdictions in which it is more likely than not that the losses will not be realizable in the foreseeable future.

Sales

Sales for the first nine months of 2008 were $2,133.3 million, an increase of 22.8% (9.9% excluding favorable foreign currency translation effects) from $1,736.6 million in 2007. The increase was attributable primarily to increased commercial vehicle production in Europe, expanded content per vehicle including new applications and global expansion. Sales in Europe, our largest market, increased approximately 22.9% (9.6% excluding favorable foreign currency translation effects). In Asia sales increased 32.1% (22.8% excluding favorable foreign currency translation effects). The sales growth in Asia was driven by an increase in China sales of 55.5% (42.2% excluding favorable foreign currency translation effects) which was primarily driven by a successful introduction of the Company’s compressor product line in the market as well as the increasing penetration of ABS. Total aftermarket sales growth (included in the above sales numbers) in the first nine months was 18.7% (6.5% excluding the favorable effects of foreign currency translation effects), which was driven by stronger demand in the independent aftermarket channels, partially offset by weaker demand in the Original Equipment Supply channel.

We have reduced our full-year projections to reflect our current view of the fourth quarter given recent developments in the global commercial vehicle industry as well as the current situation in the global macro-economy. They incorporate various improvements that we have made since our last projections, impacts of the strengthening US dollar, as well as the degradation in the demand for commercial vehicles we are now seeing in Europe. Based on our solid progress for the first three quarters of 2008 and the slowdown we are seeing thus far in the fourth quarter, we are projecting sales growth for 2008 to be between 5.5% and 6.5% excluding favorable foreign currency translation effects. This reflects an anticipated sales decrease during the fourth quarter in the range of 3% to 7%.

In response to industry reports of a potential slowdown in the demand for new commercial vehicles, the Company implemented a comprehensive profit improvement program in the third quarter. The program covers among other things, certain cost reductions within our operating expenses, as well as our cost of goods sold, which is expected to improve the profits of the Company by approximately $20 million for the second half of the year, of which $4 million was realized in the third quarter. Gross Profit


CONF CALL

Michael Thompson

Thank you, Michelle. Good everyone and welcome to WABCO’s quarterly conference call. Today we will present our third quarter results as well as our outlook for the remainder of this year. With us this morning is Jacques Esculier, our Chief Executive Officer and Ulrich Michel, our Chief Financial Officer. Jack will start the call of with his perspectives on the quarter, and Ulrich will follow with more detail on our financial performance. We will then open the line for your questions.

Before we begin I would like to remind you of a few things. First this call, webcast, and the presentation that we will be using this morning are available on our website www.wabco-auto.com under the heading WABCO Third Quarter Results. Replay of this call will be available through Thursday, November 6th. Second, as shown on chart two of the presentation, certain forward-looking statements that we will make today are based on management's good faith expectations concerning future developments. As you know, actual results may differ materially from these expectations as a result of many factors, relevant examples of which are set forth in our company’s Form 10-K and quarterly reports. Lastly, some of our remarks contained certain non-GAAP financial measures as defined by the SEC. Reconciliations of the non-GAAP financial measures to the most comparable GAAP measures are attached as an appendix to this presentation and to our press release from this morning, both of which are posted on our website. With that, I will turn the call over to Jacques Esculier.

Jacques Esculier

Thank you for joining us on this call today. Before starting, I wanted to just share with you that it’s going to be probably the strangest quarterly report that I would ever have to make today because we will report and share with you the results of what is our 26th consecutive quarter of growth, both at the top and bottom lines, and then we’re going to immediately shift into major actions that we have taken and are still taking to anticipate the impact of these turbulent times that we will most probably affect most industries across most of the countries around the world.

First, let’s spend a little time reviewing, again, what has been a very good quarter for us, again demonstrating our continued ability to outperform our markets everywhere in the world. Our sales growth of 2% in local currencies or 10% reported at $655 million translated into a performance EBIT of 11% in local currencies, or 27% reported, resulting in $0.94 of EPS at 45%, and then an EPS reported of $0.97. I think it’s noteworthy to also describe the fairly exceptional conversion rate of 123% for free cash flow of $78.4 million for the quarter. We continue to repurchase shares, and we actually repurchased $1.3 million of those during the quarter, but suspended the program in early October momentarily given the obvious circumstances we had to face at that time.

Now looking ahead, our fourth quarter looks significantly less attractive than what we had anticipated, and it leads us to adjust our performance EPS projections from the prior guidance of $4.12 to $4.26 to $3.90 to $4.00 at equal exchange rate and anticipating obviously an impact of the exchange rate down to $1.3 per euro, it would go down to $3.85 to $3.95. To just put things in perspective, when we last reviewed our guidance, we had forecasted a drop in revenues or in growth more exactly for the second half of the year between +4% to +10% coming out of our first half of the year at +14%. After revision, we are right now seeing second half of the year to be a -5% to -1% decrease in our revenue base.

Turning to page 4, I would say that in these turbulent times and for the last three years, we have refocused on two things that we will keep focusing on actually as we move ahead. One is our ability to anticipate any downturn, any trend, or any change of trend in the industry. Obviously, we’re talking about right now negative trends, but I think it’s going to be very important moving forward that we also fully anticipate a reverse in trend that will lead to a recovery in our industry because we certainly want to fully take advantage of future recovery in the overall business environment.

The second area of focus is definitely to maintain the essence of our intent, which is to continue our passion for growth across these turbulent times. Now, looking at what happened around the first area of focus in the third quarter, just after we turned the page and actually reported to you all an outstanding second quarter result, and I think it’s going to stay probably as one of the best quarters in terms of growth, as we had reported at that 16% growth and still admitting that the second half was again not as strong as what we had seen during the first two quarters. Shortly after that, we received some first signals of a potential slowdown even, again, beyond the forecasted slowdown that we had shared with you, and we immediately triggered actions to mitigate the challenges that were identified on the horizon, so we launched a program to decrease costs and progressively along the last 2 to 2-1/2 months approximately, we ended up with a program that was actually identifying $20 million of savings during the last 5 months of the year, $4 million of which actually kind of positively affected the third quarter, the remaining $16 million being affecting the fourth quarter.

A few weeks ago and I would say even a few days ago, we realized that because of this unprecedented financial crisis that would obviously lead to a likely recession across the industrial world leading to a much lower need of transportation that would obviously impact the need for new trucks and trailers. We then realized again that we had to trigger another wave of reflection and actions to further adapt our cost structure to a much larger downturn in our industry and specifically in our business at WABCO.


We went back and revisited again all sources of expenses across the company and found still some further areas of opportunities that we rapidly realized again in the last few days that we needed to go beyond that and decisively adapt the structure of WABCO to again a slower demand, so we triggered a process with the intent to reduce our workforce by about 1000 positions, half of them covering temporary workers or open positions that were left vacant by people who left the company in the last months of 2008. Obviously, this process calls for the involvement of unions and work councils in all affected countries as we will fully respect the local labor laws and practices, and this is what we did starting this morning.

The second area of focus and passion is for us to continue to position our company to fully advantage of any growth opportunity, and I would like to take this opportunity to report what I think is an outstanding and very successful presence of WABCO at the IAA 2008 which is the largest trade show for commercial vehicles in the world that is held in Hanover every two years, and it was exceptional for different reasons, but I would say the most important one is it was a platform for us to launch 14 new products and technologies, two of them that I would qualify as breakthrough technologies. The first one is what we call OnGuardMax. It is a revolutionary technology that allows a truck to decelerate all the way to a full stop automatically in case of collision is identified with a vehicle either moving or stopped.

I presented this breakthrough technology to a panel of 500 industrial leaders, European country representatives, local transport authorities, and industry analysts who definitely showed a lot of interest, and it was even further emphasized by the fact that outside of the room, we physically demonstrated this system on a truck that was heading full speed towards a stopped vehicle. I have to mention that one of the senior executives of a leading commercial vehicle brand was on board the truck, and I can report to you that actually everything went fine, and it was kind of warm to get a round of applause from, again, a very broad panel of representatives of our industry.

The second thing is our continued success in globalizing our reach in growing our presence across the world. We just signed a letter of intent with Fuwa which is a company from southern China which happens to be the largest manufacturer of commercial trailer axles, and the purpose of this joint venture is to manufacture air disk brakes to equip these axles with an ambition in the next few years to equip up to 250,000 axles or 500,000 air disk brakes, and it is also for us a great opportunity to establish a footprint in China and localize the production of air disk brakes that will meet the future needs in the local market.

As you see in this kind of periods and challenges and exceptional stress across the world, the temptation is to only focus on cost-cutting measures, talking about recession, downtrends and all those things which are fundamental to ensure obviously and secure the integrity of a business like WABCO and many other businesses, but again we don’t want to lose focus on growth, and what will make our company not only successful as we weather this storm but more importantly position it as an agile, rapid, efficient company to fully take advantage of any future growth opportunity on the horizon.

Let’s turn to page 5 where we are going to give you some more information again on the third quarter, starting with this growth structure. 2% in local currency, 10% reported, and reviewing the three main channels that feed that growth, one is our sales to OEMs that still went up 3%, and in spite of a very sharp drop in the trailer market. The trailer market has grown fairly nicely, 16% in the first half of the year, but in the third quarter, it suddenly decreased with a -17% year-over-year decrease. We are by the way expecting a further decrease in the fourth quarter of 27%, so that overall for the year, it’s going to be a decrease of about 3% in 2008 versus 2007. More than compensating again this decrease in trailers, we have benefited from the continued growth in truck and bus manufacturers. When you look at it in Europe, for example, it’s an 8% growth overall.

The second channel is aftermarket, and for the first time in many quarters, we have seen a slowdown in the growth. We ended the quarter with only 3% of growth driven by the slowdown of maintenance activities across the world, mostly actually in Europe and the US, driven by the fact that obviously fleets had to face the reality of having less business to deal with as well as obviously an incredibly strong pressure on costs driven by the very fast increase of fuel price. WABDO has again been able to still generate positive growth whereas some other companies involved in the aftermarket have seen already a negative growth for the quarter, and when you look at the two channels that feed that aftermarket revenues, we have still seen a 9% increase in the independent aftermarket channel, unfortunately affected by 8% drop in the revenues generated through the OES channel.

The third channel is for us is sales to our JVs, which represent mostly the sales through Meritor WABCO joint venture covering our activities in North America, and again this has seen another drop in revenues with a continued decline in the North American truck and bus market with a 7% drop in demand, but also actually a continuous drop in the trailer market. The first half has a seen a drop of more than 40%. The third quarter has continued to see a drop of 34% year over year in the trailer bus.

On the right side of the page region by region how we were able to perform in our truck and bus sales versus the local regional production. Again in Europe, there was still a fairly good strong increase in the number of trucks manufactured, 8%, and we were able to outperform by 1% through out continuous increased content per vehicle. North America again continued erosion of demand, -7%, but we were able to outperform by 5%, most driven by the continued success of Cummins to increase its market penetration, and as you know, we have a joint venture with them, and we equip each one of their engines with one of our compressors. South America continues to be a very strong source of growth for us, even though we started seeing a slowdown, even maybe an erosion of demand actually in the latter parts of this year.

For the first time in many years, we are seeing a decrease in demand for Asia Pacific, driven by actually a fairly sharp decrease in China of -8%, but we again outperformed that by 4%, and that is due to the pre-buy that we have gone through in the first half of the year during which we actually benefited from a growth of over 70% at the revenue level for WABCO and an overall growth of demand of 28% in the number of trucks. So, 28% for the first half because it was a pre-buy ahead of the introduction of the Euro-III emission control regulations in the third quarter, and we will continue in Q4 to see weakness in this market. We think that progressively it’s going to recover obviously as move ahead next year.

Again, overall demand was surprisingly weak in Asia. It was still fairly strong in Europe, but WABCO was able to fully leverage the growth everywhere and actually outperform every one of these markets. With this, I will ask Ulrich to give you some more detail around the third quarter.

Ulrich Michel

I will quickly walk you through the results of Q3 and September year to date, then we will turn the outlook for the remainder of the year and talk about actions we are taking to address the current slowdown in our markets. Turning to chart 6, we’ll walk through the details from sales to earnings before interest and taxes for the quarter, looking at both reported and performance numbers. Performance numbers for 2008 are adjusted to remove operational streamlining and separation costs. In addition comparisons to 2007 are adjusted for currency translation effects.

As Jacques mentioned, sales growth for the quarter was 1.8% in local currencies, which is several percentage points lower than we would have expected the last time we talked to you. The impact of pricing pressure was 2.2% for the quarter, once again at the low end of the range we typically see for our business, which reflects our continued efforts to manage price decreases and pass on material increases to our customers. Gross profit grew at a 2.1% rate, with adjusted gross profit margins expanding 9 basis points compared to last year. Operating expenses expanded at a rate of 2.9%, which was an increase as a percentage of sales of 16 basis points versus last year. Operating income therefore increased over 1.1% for the quarter, with adjusted operating margins increasing by 7 basis points versus last year.

As you can see, this was the result of a positive volume mix and productivity benefit of nearly $18 million being offset by a nearly $19 million impact of price erosion, labor inflation, operating expense, investments, and transaction of foreign exchange. Let me add some context. As we entered into the quarter, our industry was still bullish. In the guidance we gave, we had already added a fair degree of conservatism from what our customers told us at the time. As the quarter developed, we started seeing more signs of a potential slowdown in our industry and took immediate actions to anticipate the impact. We developed a $20 million profit improvement plan for the second half of the year of which $4 million was realized in the third quarter. The remainder will be in the fourth quarter. Without these timely actions, the income for the second half of 2008 would be significantly lower.

Performance EBIT was nearly $75 million for the quarter with margins expanding by 97 basis points in local currencies. EBIT alone benefited by an increase in equity income of over $6 million in local currently from Q3 2007 due mainly to our Indian joint venture In summary, it was another quarter of growth, and our results show that we continue to perform markets throughout the world.

Turning to chart 7, let’s review our financial details from earnings before interest and taxes to performance earnings per share. As you can see, EBIT was impacted by streamlining and separation related expenses of $8.9 million for the quarter, down from $9.8 million in the same quarter last year. Net interest income was $1.8 million as interest income more than offset $1.6 million in expenses. We have maintained the performance tax rate of 21% that we projected last quarter which excludes separation, streamlining, discrete tax items. As a result, our reported net income for Q3 was $63.7, up a loss of $300,000 last year. Removing separation, streamlining, and one-time and discrete items, performance net income was $61.3 million versus $45 million a year ago, an increase of 36%. Updated estimations of separation, tax, and indemnification liabilities resulted in a benefit of approximately $10 million this quarter.

Furthermore, earnings per share on a reported basis was $0.97, while performance earnings per share for the quarter was $0.94 versus $0.65 a year ago, an increase of 45%.

Turning to chart eight, let's go through our cash flow for the quarter. As you can see, working capital decreased by approximately $36 million. This was driven by a reduction in accounts receivables due to lower business volumes and improvements in day sales outstanding, partially offset though by decreases in payables due to lower business volumes and timing of our payment cycle.

Next, you can see that the net cash provided by operating activities was $103.9 million and net cash used in investing activities was $25.5 million, resulting in record free cash flow of $78 million for the quarter. This yields a free cash flow conversion rate of 123% for the third quarter, and combined with the first half of 2008, 97% for the nine months ended September 30, 2008. In addition, we spent approximately $54 million repurchasing 1.3 million shares of our stock during the quarter. Accounting for transaction settlement timing in Q3 and Q2, we paid out $57 million relating to our share buyback program during the quarter. In total, since our spin-off in August last year, we have repurchased 6 million shares or 8.8% of our initial diluted outstanding shares. As in previous quarters, we paid dividends to shareholders in the amount of $4.5 million yielding a total of approximately $62 million of cash returned to shareholders for the quarter. Due to current conditions of the financial markets and the economic development in our industry, we have decided to suspend purchases under our stock buyback program for the time being.

Turning to chart nine, you can see year to date 2008 performance versus same period a year ago. While I understand that this is not everybody’s principal focus today, I would still like to draw your attention to it for a brief moment. Sales have increased by 10% in local currencies. Performance operating incomes has improved by 32%, and operating margin has expanded by 83 basis points. Excluding transactional effects, margins have expanded by 139 basis points, which demonstrates the operational improvements we have made by continuing to deploy our WABCO operating system. Finally, performance earnings per share have increased by 56% for the nine months ended September 30, 2008. By all measures, this has been an outstanding first nine months for 2008.

Now let’s shift gears from looking backward to looking forward. Turning to chart 10, we will now review an update of our financial projections for the year. These projections reflect our current view of the fourth quarter given recent developments in the global vehicle industry as well as the current situation in the global macro economy. They incorporate various improvements that we have made since our last projections, impact of the strengthening US dollar, as well as the degradation in demand for commercial vehicles we are now seeing in Europe. As usual, they do not include the potential impact of an EC fine.

Based on our solid progress for the first three quarters of 2008 and the slowdown we are seeing thus far in the fourth quarter, we are projecting sales growth for 2008 to be between 5.5% and 6.5% in local currencies. This reflects an anticipated sales contraction during Q4 of between 7% and 3%. Using the exchange rate as per our prior guidance, this would lead to a performance earnings per share estimate of between $3.90 and $4.00, down our prior estimate of $4.12 to $4.26. Adjusting these to the Q3 actual exchange rate and using $1.30 per euro exchange rate for Q4 leads us to an updated projection of between $3.85 and $3.95 for performance earnings per share which is $0.27 and $0.31 than the low and high end of our previous guidance respectively. This implies a Q4 performance earnings per share estimate between $0.74 and $0.84. This decrease in the range includes $0.49 to $0.53 due to lower sales volume from the slowing market conditions, $0.05 from the impact of a weaker euro versus the US dollar, partially offset by an additional $0.24 coming from our profit improvement plans implemented for Q3 and Q4, as well as $0.03 coming from the lower share count expected for the full year.

As the industry continues to change rapidly, we feel continuing to provide a range at this point in the year is still appropriate. We are committed to take all necessary actions to align our capacity with market demand and adjust our cost structure as necessary, while maintaining excellent service levels for our customers and continue to advance our superb technology base. Today, we have initiated actions to reduce 1000 positions, with about half of these related to permanent employees. We estimate these actions to cost us between $45 and $55 million and to deliver between $40 and $45 million in annualized savings. We believe these measures are appropriate to align with the range of market declines that are currently being discussed in the industry for the next year.

Now, I will turn it back over to Jacques for his summary.

Jacques Esculier

Thank you, Ulrich. I’m not going to spend more time recapping all those things that made Q3 a decent quarter. Actually, I just want to emphasize the efforts that we had to through in a very short period of time shifting from an operational mindset fed by growth that we had again experienced for 7 years to a rapidly degrading situation and having to, again, as rapidly and even faster react and implement timely and appropriate measures across the business to mitigate the challenges ahead. That’s what we have done so far. That’s what we are committed to and continue to do, and again right now we’re talking a lot about cost-cutting measures because, again, we’re talking about the integrity of our performance, but we don’t want to forget during these difficult times to maintain and preserve the integrity of our business as one of the most powerful creative companies in this industry that has and will continue to experience enormous amount of success in the business. Thank you, and now we’re opening the lines for questions.

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