Executive Overview

WABCO is a leading provider of electronic, mechanical and mechatronic 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. 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 productivity programs. The successful execution of productivity 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.

Results of Operations

The following discussion and analysis addresses changes in sales, gross profit, expenses and pre-tax income for the three and nine months ended September 30, 2009, compared to the three and nine months ended September 30, 2008. Approximately 92% 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 U.S. Dollars. Quarter-over-quarter changes in sales, gross profit, expenses, pre-tax income and net income for 2009 compared with 2008 are presented both with and without the effects of foreign currency translation. Changes in sales, gross profit, expenses, pre-tax income and net income excluding foreign exchange effects are calculated using current year sales, gross profit, expenses, pre-tax income and net income translated at prior year exchange rates. Presenting changes in sales, gross profit, expenses, pre-tax income and net income excluding the effects of foreign currency translation is not in conformity with accounting principles generally accepted in the United States ("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, gross profit, expenses, pre-tax income and net income excluding the effects of foreign currency exchange translation are not meant to be a substitute for measurements prepared in conformity with GAAP, or to be considered in isolation.

Third Quarter Results of Operations for 2009 Compared with 2008

(amounts in millions)



                                                          Three months ended September 30,
                                                                                      Excluding foreign
                                                                                     exchange translation
                                                                                     2009             %
                                                                    % change       adjusted         change
                                           2009         2008        reported        Amount         adjusted
Sales                                     $ 382.0      $ 655.0         (41.7 )%    $   403.1          (38.5 )%
Cost of sales                               295.2        480.2         (38.5 )%        310.7          (35.3 )%

Gross profit                                 86.8        174.8         (50.3 )%         92.4          (47.1 )%
Operating expenses                           89.8        112.6         (20.2 )%         94.7          (15.9 )%

Operating (loss) / income                    (3.0 )       62.2             *            (2.3 )            *
Equity income of unconsolidated joint
ventures                                     (1.6 )       (5.0 )       (68.0 )%         (1.6 )        (68.0 )%
Other non-operating expense, net            (37.4 )        0.3             *           (37.4 )            *
Interest income, net                         (0.2 )       (1.8 )       (88.9 )%         (0.3 )        (83.3 )%

Income/ (loss) before income taxes           36.2         68.7         (47.3 )%         37.0          (46.1 )%
Income taxes                                  0.7          4.0             *             1.4              *

Net income / (loss) including
noncontrolling interests                     35.5         64.7         (45.1 )%         35.6          (45.0 )%
Less: net income attributable to
noncontrolling interests                      1.7          1.0          70.0 %           1.8           80.0 %

Net income / (loss)                       $  33.8      $  63.7         (46.9 )%    $    33.8          (46.9 )%

* Percentage change not meaningful

Sales

Sales for the third quarter of 2009 were $382.0 million, a decrease of 41.7% (38.4% excluding foreign currency translation effects) from $655.0 million in 2008, which includes approximately 4% of incremental sales due to the consolidation of WABCO-TVS which was acquired during the second quarter of 2009. The decrease was attributable to the significant decline in commercial vehicle production that was evident in most of our markets. In addition to the deterioration in the end market demand, inventory reductions that continued across most commercial vehicle manufacturers contributed to the production decline. In due course, as it relates to the European market, once inventories have been exhausted, we would expect to see an uptick in production to be more in line with sales. Sales in Europe, our largest market, decreased approximately 51.7% (48.6% excluding foreign currency translation effects), which based on our estimate, was better than European truck production. Sales decreased 17.0% in North America, which was less than the decrease in North American truck production. In Asia sales increased 34.0% (30.5% excluding foreign currency translation effects). The sales increase in Asia included an increase in China sales of 19.0% (18.8% excluding foreign currency translation effects) which was impacted by a higher production of trucks for the domestic markets. However, sales growth in China was less than the increase in production of new commercial vehicles due to the significant decline in trucks produced for export which carry a higher content per vehicle than trucks for the domestic market. The Company currently has two customers from Asia within the top five customers, compared to the prior year, when there were no customers from Asia within the top five. Total aftermarket sales, included in the geographic numbers provided above, decline in the quarter was 13.1% (7.4% excluding foreign currency translation effects), which was impacted by both the Original Equipment Supply channel and the Independent Aftermarket channel experiencing declines due to the decrease in transportation.

Gross Profit

Gross profit decreased by $88.0 million (a decrease of $82.4 million excluding foreign currency translation effects) in the third quarter of 2009 as compared with the third quarter of 2008. The decrease in gross profit was primarily driven by volume and mix decreases of approximately $52.0 million primarily attributable to the sales decline discussed above, overhead underabsorption, labor and other cost escalations of approximately $24.0 million, as well as higher spending on streamlining programs of approximately $9.5 million and sales price decreases of $8.6 million. A partial offset to gross profit decline came from $15.8 million of materials and conversion productivity, which we consider a significant achievement given the severe sourcing environment and the very difficult market conditions experienced during the quarter. In addition, gross profit was negatively impacted by $4.1 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 were reported.

Operating Expenses

Operating expenses, which include selling and administrative expenses, product engineering expenses and other operating expenses, decreased by $22.8 million ($17.9 million excluding foreign currency translation effects) in the third quarter of 2009 as compared to the third quarter of 2008. The Company's timely actions in anticipation of a continued market slowdown as well as the efficient execution of related cost cutting efforts was the primary driver of a $20.9 million decrease in operational spending. Additionally, separation costs were reduced by $3.3 million compared to the prior year. These improvements were partially offset by streamlining costs which have increased by $4.8 million compared to the prior year as a result of an additional restructuring program in the third quarter as well as labor and other cost inflation and escalations of approximately $1.5 million.

Streamlining Expenses

The Company incurred $18.6 million of streamlining expenses during the third quarter of 2009 of which $7.6 million has been charged to selling and administrative expenses and $11.0 million was charged to cost of sales. The Company incurred $4.2 million of streamlining expenses during the third quarter of 2008 of which all is associated with severance relating to 2008 plans with $2.7 million charged to selling and administrative expenses and $1.5 million charged to cost of sales.

The Company expended $10.5 million of cash on streamlining activities in the third quarter of 2009. The balance of $60.7 million is included in other liabilities and streamlining liabilities as of September 30, 2009.

Equity Income of Unconsolidated Joint Ventures

Equity income of unconsolidated joint ventures decreased by $3.4 million ($3.4 million excluding foreign currency translation effects) in the third quarter of 2009 as compared to the third quarter of 2008. The decrease was primarily driven by the step acquisition of WABCO-TVS resulting in lower equity income in the current year of $2.6 million from the SCL joint venture. This is due to the fact that upon WABCO obtaining majority control of WABCO-TVS, 100% of WABCO-TVS' results of operations, beginning June 2009, are included in the condensed consolidated financial statements of the Company. Although equity income has decreased $2.6 million, the Company has generated approximately $5.2 million of pre-tax income from having acquired the majority of WABCO-TVS, resulting in a net year over year increase to pre-tax income of $2.6 million. WABCO's income from its South Africa joint venture also decreased $1.7 million when compared to 2008 results.

Other Non-Operating Expenses, Net

Other non-operating expense, net decreased by $37.7 million ($37.7 million excluding foreign currency translation effects) in the third quarter 2009 as compared to the third quarter of 2008. This decrease is primarily driven by the reversal of approximately $41.3 million of indemnification and other settlements in the statement of income due to the closing of a tax audit and other settlements.

Interest income amounted to $0.2 million ($0.3 million excluding foreign currency translation effects) in the third quarter 2009 compared to $1.8 million in the third quarter 2008. The overall decrease in interest income is related to the significant drop in interest rates as a result of the economic crisis.

Income Taxes

The income tax provision for the third quarter of 2009 was $0.7 million on pre-tax income after adjusting for noncontrolling interest of $36.2 million, compared with a provision of $4.0 million on $68.7 million of pre-tax income after adjusting for minority interest in the third quarter of 2008. The tax provision for the third quarter of 2009 is impacted by the limited tax benefits associated with restructuring costs and the negative effect of our European supply chain structure in a year of low profitability. 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.

Year to Date Results of Operations for 2009 Compared with 2008

(amounts in millions)



                                                          Nine months ended September 30,
                                                                                       Excluding foreign
                                                                                      exchange translation
                                                                                       2009            %
                                                                     % change        adjusted        change
                                         2009           2008         reported         Amount        adjusted
Sales                                  $ 1,031.9      $ 2,133.3         (51.6 )%    $  1,153.6         (45.9 )%
Cost of sales                              819.4        1,550.2         (47.1 )%         916.7         (40.9 )%

Gross profit                               212.5          583.1         (63.6 )%         236.9         (59.4 )%
Operating expenses                         253.1          352.9         (28.3 )%         282.6         (19.9 )%

Operating (loss) / income                  (40.6 )        230.2             *            (45.7 )           *
Equity income of unconsolidated
joint ventures                              (2.1 )         (8.1 )       (74.1 )%          (2.1 )       (74.1 )%
Other non-operating expense, net           (23.9 )          3.0             *            (19.8 )           *
Interest income, net                        (0.9 )         (2.8 )       (67.9 )%          (1.3 )       (53.6 )%

(Loss) / income before income taxes        (13.7 )        238.1             *            (22.5 )           *
Income taxes                                 3.7           43.4         (91.5 )%           4.3         (90.0 )%

Net (loss) / income including
noncontrolling interests                   (17.4 )        194.7             *            (26.8 )           *
Less: net income attributable to
noncontrolling interests                     2.5            2.7          (7.4 )%           2.7          (0.0 )%

Net (loss) / income                    $   (19.9 )    $   192.0             *       $    (29.5 )           *

* Percentage change not meaningful

Sales

Sales for the first nine months of 2009 were $1,031.9 million, a decrease of 51.6% (45.9% excluding foreign currency translation effects) from $2,133.3 million in 2008. The decrease was attributable to the significant decline in commercial vehicle production that was evident across the world. In addition to the deterioration in the end market demand, inventory reductions across most commercial vehicle manufacturers contributed to the production decline. Sales in Europe, our largest market, decreased approximately 57.3% (51.3% excluding foreign currency translation effects), which based on our estimate, was better than European truck production. Sales decreased 35.3% in North America, which was less than the decrease in North American truck production. In Asia and South America sales decreased 16.1% and 49.5%, respectively (15.4% and 38.4% excluding foreign currency translation effects, respectively). The sales decline in Asia included a decrease in China sales of 13.6% (15.6% excluding foreign

In the third quarter of 2009, the global commercial vehicle markets continued the significant decline that began in the latter part of 2008. The uncertainty of the development of the global economy makes it difficult to predict how demand for commercial vehicles will further develop in 2010. However, as it relates to the European market, the reduction of new truck inventory by the OEM's experienced in 2009 is expected to benefit the Company as production levels will need to increase to meet the level of end market demand of new trucks.

Gross Profit

Gross profit decreased by $370.5 million ($346.2 million excluding foreign currency translation effects) in the first nine months of 2009 as compared with the first nine months of 2008. The decrease in gross profit was primarily driven by volume and mix decreases of approximately $217.0 million primarily attributable to the sales decline discussed above, overhead underabsorption, labor and other cost escalations of approximately $112.6 million, as well as higher spending on streamlining programs of approximately $38.8 million and sales price decreases of $20.6 million. A partial offset to gross profit decline came from $39.2 million of materials and conversion productivity, which we consider a significant achievement given the very difficult market conditions experienced so far in 2009, as well as approximately $3.6 million of foreign currency transaction gains related mainly to the sale of products in countries (with different currencies) outside of the country where they are manufactured were reported.

Operating Expenses

Operating expenses, which include selling and administrative expenses, product engineering expenses and other operating expenses, decreased by $99.7 million ($70.3 million excluding foreign currency translation effects) in the first nine months of 2009 as compared to the first nine months of 2008. The Company's timely actions in anticipation of a continued market slowdown experienced in the first nine months of 2009 as well as the efficient execution of related cost cutting efforts was the primary driver of a $73.9 million decrease in operational spending. Also, the Company reduced spending on separation costs by $14.6 million, primarily driven by the reversal of tax indemnification liabilities related to the expiration of statute of limitations and closing of tax audits. These improvements were partially offset by spending on streamlining programs of $12.3 million, and labor and other cost inflation and escalations of approximately $5.9 million.

Cost Reduction Programs and Streamlining Expenses

Based on market declines occurring in the fourth quarter of 2008, WABCO commenced a streamlining program on October 28, 2008, which began with a consultative process with works councils and employee representatives globally. The initial intent, as previously disclosed, was to reduce the Company's global workforce by approximately 1,000 positions. As the Company continued to assess the impacts of the declining market conditions, the Company planned further reductions bringing the estimated total to 1,800 employees. As of September 30, 2009, approximately 1,600 of the 1,800 positions were terminated. This level of reduction in workforce has brought us in line with capacity, while still allowing us to continue our focus on core strategies, including technology, new products, globalization, and quality and productivity initiatives. The intention of these actions was to create sufficient flexibility in production and help to cope with anticipated demand volatility for the remainder of 2009.

The Company also continued its cost reduction program which was put in place during 2008. The Company achieved cost savings of $66 million in operating expenses. This success reflects major progress in containing the costs of our streamlining program, as well as cost reductions across our organization, including flexible work schedules, shortened work weeks in some locations, reductions in discretionary expenses, and our decision to decrease executive and senior management compensation, among other measures.

Equity Income of Unconsolidated Joint Ventures

Equity income of unconsolidated joint ventures decreased $6.0 million ($6.0 million excluding foreign currency translation effects) in the first nine months of 2009 as compared to the first nine months of 2008. The decrease was primarily driven by the step acquisition of WABCO-TVS resulting in lower earnings in the current year of $3.6 million from the SCL joint venture. This is due to the fact that upon WABCO obtaining majority control of WABCO-TVS, 100% of WABCO-TVS' results of operations, beginning June 2009, are included in the condensed consolidated financial statements of the Company. Income from the Meritor WABCO joint venture and the South Africa joint venture decreased $0.6 million and $1.8 million, respectively, when compared to 2008 results.

Other Non-Operating Expenses, Net

Other non-operating expense, net decreased by $26.9 million ($22.8 million excluding foreign currency translation effects) in the first nine months 2009 as compared to the first nine months of 2008. This decrease was primarily due to a reversal of approximately $41.3 million of indemnification and other settlements in the statement of income due to the closing of a tax audit and other settlements as well as a recorded gain on the sale of its investment in SCL of $0.7 million. These were partially offset by a remeasurement loss of $11.5 million of the investment in WABCO-TVS recorded prior to the step acquisition. This transaction is further explained in Note 14 - Business Combinations.

Interest Income, Net

Interest income, net decreased by $1.9 million ($1.5 million excluding foreign currency translation effects) to $0.9 million in the first nine months of 2009 compared to $2.8 million in the first nine months of 2008. The overall decrease in interest income is related to the significant drop in interest rates as a result of the economic crisis.

Income Taxes

The income tax provision for the first nine months of 2009 was $3.7 million on a pre-tax loss after adjusting for noncontrolling interest of $13.7 million, compared with a provision of $43.4 million on $238.1 million of pre-tax income after adjusting for minority interest in the first nine months of 2008. The tax provision for the first nine months of 2009 is impacted by the limited tax benefits associated with restructuring costs and the negative effect of our European supply chain structure in a year of low profitability. 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.

Liquidity and Capital Resources

Cash Flows for the nine months ended September 30, 2009

Net cash provided by operating activities was $126.4 million for the first nine months of 2009. This compared with net cash provided by operating activities of $245.7 million for the first nine months of 2008.

Although the Company recorded a net loss including noncontrolling interests of $17.4 million for the first nine months of 2009 compared with net income including noncontrolling interests of $194.7 million for the first nine months of 2008, the Company was still able to achieve strong cash flow. The net loss for the first nine months of 2009 included noncash elements such as the fair value adjustment of the noncontrolling interest prior to taking control of WABCO-TVS of $11.5 million, and depreciation and amortization of $63.9 million. In addition, the Company reduced its working capital during 2009. Accounts receivable was reduced by $73.3 million during the first nine months of 2009, primarily driven by a decline in sales volume and a reduction of our past due receivables, resulting in an improvement in days sales outstanding. The Company was also able to successfully reduce inventory levels by $12.5 million in the first nine months of 2009, notwithstanding the increase of inventory during the third quarter which was driven by higher business volumes and increased safety stock. Both impacts were partially offset by a reduction in accounts payable of $8.9 million which was primarily driven by the reduction in inventory.