Wabtec 10-Q Summary: Quarter Ended June 30, 2013
Business context and reporting period
Westinghouse Air Brake Technologies Corporation (Wabtec) supplies technology, products, and services to freight rail and passenger transit markets. It reports Freight and Transit segments and operated in 19 countries; approximately 49% of first-half revenue came from outside the U.S. This unaudited filing covers the three and six months ended June 30, 2013, compared with the corresponding 2012 periods.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $638.0 million | $609.8 million | $1,253.5 million | $1,193.1 million |
| Gross profit / margin | $192.9 million / 30.2% | $173.4 million / 28.4% | $375.8 million / 30.0% | $342.8 million / 28.7% |
| Operating income / margin | $112.6 million / 17.6% | $100.9 million / 16.5% | $216.2 million / 17.2% | $195.0 million / 16.3% |
| Net income attributable to Wabtec shareholders | $74.6 million | $64.7 million | $144.3 million | $124.0 million |
| Diluted EPS | $0.77 | $0.67 | $1.49 | $1.28 |
- Revenue increased 4.6% in Q2 and 5.1% in the first half; net income rose 15.3% and 16.4%, respectively. Gross and operating margins improved in both periods.
- First-half operating cash flow was $45.1 million, versus $30.5 million in 2012. Investing used $123.8 million, including $115.1 million for acquisitions; capital expenditures were $14.6 million. Financing provided $81.1 million. Cash declined $1.3 million to $214.5 million.
- At June 30, total debt was $397.0 million, including $246.4 million drawn on the revolving facility and $150.0 million of 6.875% senior notes. Debt was $317.9 million at year-end 2012. The $600 million revolver had approximately $295.6 million available, net of letters of credit, subject to covenants. Current assets were $1,190.0 million and current liabilities $524.3 million.
- Variable-rate debt carried a 1.24% weighted-average rate. A 1 percentage-point rate move was estimated to change annual interest expense by about $2.5 million; a $150 million interest-rate swap was scheduled to take effect July 31, 2013.
Material changes versus prior period
- Q2 Freight sales fell 13.0% to $354.9 million, while Transit sales rose 40.1% to $283.1 million. First-half Freight sales declined 17.0% to $668.5 million; Transit sales grew 50.7% to $585.0 million.
- Management attributed consolidated sales growth chiefly to acquisitions and stronger Transit locomotive and brake sales. These gains were partly offset by weaker freight original-equipment demand, including Specialty Products and Electronics, and unfavorable foreign exchange.
- Acquisitions contributed $49.0 million of Q2 sales and $90.4 million for the first half. The company acquired Napier Turbochargers and Transdyne in early 2013; goodwill increased to $715.0 million from $666.0 million at year-end.
- Q2 SG&A rose 8.0%, engineering expense 11.2%, and amortization 59.0%, largely reflecting acquisitions. Cost of sales fell as a percentage of sales, while warranty expense increased; Q2 warranty expense was 1.4% of sales versus 1.1%.
- The effective tax rate declined to 32.0% in Q2 from 33.7%, and to 31.0% for the first half from 34.0%. Management cited foreign income taxed at lower rates and, for the half-year, the retroactive R&D tax credit.
Outlook, commentary, risks, and unusual items
- No specific earnings or revenue guidance was provided. Management expected 2013 new locomotive and freight-car deliveries to be slightly below 2012 levels, and subway-car and bus deliveries about level with 2012. It expected transit spending to remain near $10.7 billion.
- Management cited North American freight-car backlog of about 74,000 in Q2, while North American carloadings through July 13 rose 1.3%. U.S. and Canadian first-quarter transit ridership declined 1.9% and 2.6%, respectively.
- Wabtec reported approximately $109 million of Positive Train Control revenue for the first half and was working toward the statutory December 31, 2015 implementation deadline. A deadline extension could affect the timing of industry spending.
- Management said cash flow and liquidity should be sufficient for working capital, capital needs, and debt service. The $150 million senior notes matured July 31, 2013; the company stated it intended and had capacity to refinance them through the revolver.
- Risks include economic and rail-market weakness, government transit funding, customer concentration and order delays, foreign exchange and interest rates, input costs and supply disruptions, long-term contract performance, acquisition integration, new-technology adoption, and litigation. Management reported no material changes to previously disclosed risk factors.
- Wabtec paid approximately $15.8 million to resolve the Faiveley Transport USA case; the case is closed. Asbestos-related claims and other ordinary-course litigation remain, with no other material changes reported. Unrecognized tax benefits were $10.7 million; about $1.6 million could change within 12 months.
- Common shares were split two-for-one effective June 11, 2013, and all per-share data were adjusted. The first-half comprehensive income was affected by $33 million of other comprehensive loss, primarily foreign-currency translation. The company reported effective disclosure controls and no material change in internal controls.
Important facts for investors to verify
- Whether the July 2013 senior-note maturity was refinanced as planned, and the resulting debt balance, interest cost, and covenant headroom.
- Whether Transit growth and margin improvement can offset continued weakness in Freight original-equipment demand, excluding acquisition contributions.
- Acquisition integration, purchase accounting, and performance of Napier and other acquired businesses, including the effect of goodwill and amortization.
- Cash conversion and working-capital trends, particularly receivables, customer deposits, and acquisition-related cash requirements.
- Warranty reserve adequacy, the outcome of asbestos and other litigation, and changes in uncertain tax positions.
- Progress toward Positive Train Control deployment and any changes to customer spending or the regulatory deadline.