Business Context and Reporting Period
Company: Westinghouse Air Brake Technologies Corporation (Wabtec)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2007
Business Overview: Wabtec is a global provider of technology-based products and services for the rail industry, operating in 11 countries. Approximately 38% of revenues in the first nine months of 2007 originated outside the U.S. The company operates two primary segments: Freight Group and Transit Group.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2006 |
|---|---|---|---|
| Net Sales | $354,834 | $994,820 | $793,200 |
| Gross Profit | $95,717 | $273,133 | $218,280 |
| Gross Margin % | 27.0% | 27.5% | 27.5% |
| Income from Operations | $45,644 | $133,530 | $93,167 |
| Net Income | $27,242 | $80,894 | $58,562 |
| Diluted EPS | $0.55 | $1.65 | $1.20 |
| Cash from Operating Activities | N/A | $44,536 | $109,908 |
| Cash and Equivalents (Sep 30, 2007) | $158,026 | ||
| Long-Term Debt | $150,000 (6.875% Senior Notes due 2013) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 32.0% in Q3 2007 and 25.4% for the nine-month period compared to 2006. Growth was driven by internal expansion (locomotive contracts, transit refurbishment, heat exchangers) and acquisitions (Ricon, Schaefer, Becorit).
- Profitability: Net income rose 56.8% in Q3 and 38.1% for the nine months. Operating income increased 79.1% in Q3, aided by sales volume and the absence of significant restructuring charges that impacted Q3 2006.
- Cash Flow: Operating cash flow decreased significantly to $44.5 million for the nine months ended Sep 30, 2007, from $109.9 million in the prior year. This decline was primarily due to changes in working capital, specifically a $77.4 million reduction in cash provided by accounts receivable compared to large collections in 2006.
- Acquisitions: The company acquired Ricon Corporation for $73.5 million in June 2007, adding $50.6 million in preliminary goodwill.
- Segment Performance: Transit Group sales surged 81.2% in Q3 and 72.8% for the nine months, outpacing the Freight Group, which saw modest growth of 5.1% and 2.5% respectively.
Guidance, Outlook, Risks, and Contingencies
- Market Outlook: Demand for new freight cars has slowed in 2007, with orders dropping significantly compared to 2006. However, the backlog remains at a relatively high level of 67,000 units. Management expects to offset freight market softness with growth in transit and aftermarket services.
- Restructuring: A restructuring plan approved in July 2006 to downsize Canadian plants resulted in total charges of $10.4 million to date. In Q3 2007, a curtailment gain of $361,000 was recorded.
- Legal and Contingencies:
- Bombardier Settlement: A framework for a settlement regarding Amtrak Acela brake disc issues has been reached, with a maximum provision of $4.4 million recorded as of September 30, 2007.
- India Investigation: The company agreed to pay a fine of approximately $675,000 to the DOJ and SEC regarding business transactions by a subsidiary in India.
- Asbestos Litigation: Claims continue to be filed against the subsidiary RFPC. Management believes the ultimate liability will not be material to financial position, citing insurance coverage and successful prior defenses.
- Trade Secret Dispute: Faiveley Transport has filed arbitration and a federal court proceeding alleging breach of contract and trade secret violations. Wabtec denies liability and intends to contest vigorously.
- Liquidity: The company maintains a $175 million revolving credit facility with approximately $152 million available. It is in compliance with all debt covenants.
Key Facts for Investor Verification
- Verify the sustainability of Transit Group revenue growth given the cyclical nature of rail transit projects and government funding.
- Monitor the resolution of the Bombardier settlement and the Faiveley trade secret litigation to assess potential future liabilities beyond current provisions.
- Assess the impact of slowing freight car orders on the Freight Group's future revenue, despite the current high backlog.
- Review the integration progress of the Ricon acquisition and its contribution to future earnings.
- Track the company's ability to maintain operating cash flow levels given the significant working capital fluctuations observed in the first nine months of 2007.