Business context and reporting period
Westinghouse Air Brake Technologies Corporation (Wabtec) filed this unaudited Form 10-Q for the quarter ended March 31, 2013, comparing the three months ended March 31, 2013 with the year-ago quarter. Wabtec supplies products and services to global freight rail and passenger transit markets; about 49% of first-quarter revenue came from outside the United States.
Financial performance and liquidity
Unless otherwise noted, amounts are in millions of dollars.
| Metric | Q1 2013 | Q1 2012 / prior date |
|---|---|---|
| Net sales | $615.5 | $583.3 |
| Gross profit / margin | $182.9 / 29.7% | $169.4 / 29.0% |
| Operating income / margin | $103.7 / 16.9% | $94.1 / 16.1% |
| Net income attributable to Wabtec shareholders | $69.6 | $59.3 |
| Diluted EPS | $1.44 | $1.22 |
| Operating cash flow | $32.0 | $1.0 |
| Capital expenditures | $6.4 | $10.2 |
| Cash and cash equivalents | $225.3 | $215.8 at Dec. 31, 2012 |
| Total debt | $417.6 | $317.9 at Dec. 31, 2012 |
Net sales rose 5.5%, operating income 10.2%, and net income 17.5%. Gross margin improved 0.7 percentage points. The effective tax rate declined to 30.0% from 34.4%, primarily reflecting the retroactive R&D tax credit extension and a greater share of foreign income taxed at lower rates.
Operating cash flow improved year over year, but working capital remained a significant use of cash: receivables increased $42.5 million and inventories increased $13.2 million. Investing activities used $120.8 million, including $115.1 million for acquisitions; financing activities provided $100.2 million, with $203.9 million of debt proceeds and $104.2 million of debt repayments. Cash increased $9.6 million during the quarter.
The $600 million revolving credit facility had approximately $271.1 million of available borrowing capacity at quarter-end, net of $61.9 million in letters of credit and subject to covenants. Variable-rate debt was 64% of total debt; a 1 percentage-point rate change would affect annual interest expense by about $2.7 million. A $150 million swap is scheduled to take effect July 31, 2013.
Material changes versus the prior comparable period
- Transit segment sales increased 66.5% to $309.6 million, while Freight segment sales declined 23.0% to $305.9 million. Transit’s increase reflected acquisitions and stronger locomotive, brake, positive train control, and transit-car activity; Freight was affected by lower demand for freight original-equipment products and a shift in locomotive contract mix.
- Acquisitions contributed $41.4 million to the sales increase. Wabtec acquired UK turbocharger provider Napier for approximately $112.3 million net of cash and distributor Transdyne for approximately $2.4 million during the quarter.
- Specialty Products and Electronics sales decreased $46.2 million; Remanufacturing, Overhaul and Build sales increased $24.4 million. Positive train control revenue was approximately $45.0 million.
- Other comprehensive income was a loss of $25.7 million, primarily due to foreign-currency translation, versus income of $11.2 million a year earlier. This reduced comprehensive income despite higher net income.
- Total debt increased about $99.7 million from year-end, largely reflecting borrowing associated with acquisitions. The $150 million of 6.875% senior notes mature in August 2013.
Outlook, management commentary, and risks
Management said it expects 2013 deliveries of new locomotives and freight cars to be slightly below 2012 levels, while new subway-car and bus deliveries are expected to be about flat. Transit spending in the United States was expected to remain near prior-year levels. These are market expectations, not company earnings guidance; the filing provides no specific full-year revenue or EPS forecast.
Management cited North American freight-car orders and backlog as supportive, but noted weaker general-merchandise rail traffic, including lower coal shipments. Wabtec was working toward the statutory December 31, 2015 positive train control implementation deadline; an extension could affect the pace of industry spending. Management stated that current operations and forecast earnings, cash flow, and liquidity should be sufficient for working capital, capital needs, and debt service, and that it intended and was able to refinance the notes due in August using the credit facility.
Risks include economic and rail-market weakness, government funding constraints for transit, customer order delays or cancellations, raw-material and supply disruptions, foreign-exchange and interest-rate movements, acquisition integration, long-term contract performance, and regulatory or political changes. Asbestos-related claims and other ordinary-course litigation remained outstanding; the company reported no material changes from its 2012 Form 10-K. Uncertain tax-position liabilities were $12.4 million, and management said approximately $3.1 million of unrecognized tax benefits could change within 12 months. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Execution and financing of the planned August 2013 refinancing of the $150 million senior notes, including borrowing capacity and covenant compliance.
- Whether the sharp difference between Freight and Transit segment trends persists, and how much growth is attributable to acquisitions versus underlying demand.
- Conversion of earnings into cash, particularly receivables, inventory, and other working-capital movements after acquisition spending.
- Progress, customer spending, and timing for positive train control projects and the December 2015 deadline.
- Acquisition integration and purchase-accounting estimates, alongside foreign-currency exposure and the status of asbestos, litigation, and tax contingencies.