Business context and reporting period
Westinghouse Air Brake Technologies Corporation (Wabtec) filed this unaudited Form 10-Q for the quarter ended June 30, 2011. It supplies technology-based products and services to freight rail and passenger transit markets, operating through Freight and Transit groups in 17 countries. Approximately 47% of first-half revenue came from outside the United States.
Financial performance and position
Unless otherwise noted, amounts are in millions of dollars. Comparisons are with the corresponding 2010 period.
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Net sales | $478.9 | $374.1 | $934.2 | $738.1 |
| Gross profit / margin | $142.7 / 29.8% | $113.5 / 30.3% | $275.9 / 29.5% | $221.9 / 30.1% |
| Operating income / margin | $56.4 / 11.8% | $49.7 / 13.3% | $122.7 / 13.1% | $100.8 / 13.7% |
| Net income attributable to Wabtec shareholders | $36.3 | $31.2 | $77.3 | $61.6 |
| Diluted EPS | $0.75 | $0.65 | $1.60 | $1.28 |
| Operating cash flow | Not separately provided for the quarter | $66.0 | $24.4 |
- First-half investing cash outflow was $64.3 million, including $51.8 million for acquisitions and $12.8 million in capital expenditures. Financing cash outflow was $25.1 million. Cash decreased $15.5 million to $221.5 million.
- At June 30, cash was $221.5 million, current assets $931.9 million and current liabilities $456.1 million. Total debt was $396.3 million, down from $422.1 million at year-end 2010; net debt was approximately $174.8 million. Available bank borrowing capacity was approximately $113.1 million, net of letters of credit and subject to covenants.
- Management reported compliance with credit-agreement covenants and said forecast cash flow and liquidity should fund working capital, capital equipment and debt service. The $300 million revolving and $200 million term facilities expire in January 2013; $150 million of 6.875% senior notes mature in August 2013.
Material changes versus the prior comparable period
- Q2 sales rose 28.0%; first-half sales rose 26.6%. Freight Group sales increased 47.4% in Q2 and 53.4% in the first half, driven by freight original-equipment and aftermarket demand, electronics and acquisitions. Transit Group sales rose 8.0% in Q2 and 1.7% in the first half.
- Management attributed sales growth to higher freight original-equipment and aftermarket sales, acquisitions, and favorable foreign exchange. These were partly offset by lower transit locomotive builds and transit product sales, including contract completions, project delays and municipal budget constraints.
- Gross profit increased, but gross margin declined 0.5 percentage points in Q2 and 0.6 points for the first half, primarily from product mix. Operating margin also declined, reflecting higher operating expenses, including an $18.1 million litigation charge.
- Q2 SG&A increased 44.3% to $73.9 million; first-half SG&A increased 34.3% to $128.8 million. Higher acquisition, incentive and non-cash compensation costs also contributed. Engineering expense decreased; amortization rose with acquired intangibles.
- First-half operating cash flow improved to $66.0 million from $24.4 million, though receivables and inventories absorbed $65.6 million and $46.8 million, respectively. Cash flow also benefited from accrued liabilities and customer deposits, including a $47.1 million increase in customer deposits.
Outlook, management commentary, risks and unusual items
- Management described North American freight conditions as improved, citing higher rail traffic and demand for freight equipment and aftermarket products. Passenger transit conditions were described as stable, while municipal budget constraints and uncertainty over government funding could weigh on demand. No numerical earnings or revenue guidance was provided.
- Wabtec reported approximately $20.0 million of positive train control revenue in the first half. Federal legislation requires certain railroads to equip locomotives with this technology by the end of 2015; management expects to benefit as deployment progresses.
- On July 29, 2011, after the quarter-end jury award, the court entered a final $18.1 million verdict plus interest in litigation brought by Faiveley-related entities. Wabtec recorded an $18.1 million second-quarter charge and intends to appeal. The filing describes other asbestos claims; management says the ultimate loss cannot be estimated but does not expect the resolution to materially affect overall results or financial position.
- The effective tax rate was 30.3% in Q2 and 33.0% for the first half, below the respective 2010 rates. A $1.7 million benefit from tax settlements and expired review periods contributed. Uncertain tax positions were $7.8 million; approximately $1.5 million of unrecognized tax benefits could change within 12 months.
- Interest-rate swaps covering $137.0 million of notional debt effectively fixed the applicable bank-debt rate at 2.24% at June 30, 2011. A 1% rate change on variable-rate debt would change annual interest expense by about $1.1 million. Risks also include economic and rail-market weakness, customer order delays, raw-material or supply disruptions, acquisition integration, foreign exchange, government transit funding and legal outcomes.
- The board increased the share repurchase authorization to $150 million in May; $6.2 million had been used by June 30, leaving $143.8 million. The company repurchased 95,000 shares during the first half at an average $65.14 per share.
Important facts for investors to verify
- Whether freight demand and aftermarket growth persist, and how much reported growth reflects acquisitions and currency rather than underlying volume.
- The final cost, interest and appeal outcome of the Faiveley verdict, and whether other litigation or asbestos claims change materially.
- Cash conversion and working-capital trends, particularly receivables, inventories and the timing or sustainability of customer deposits.
- Debt refinancing plans ahead of the January and August 2013 maturities, covenant headroom, and liquidity after acquisitions and repurchases.
- Transit segment recovery amid project delays and constrained public-sector budgets, and the timing and commercial uptake of positive train control deployments.