Westinghouse Air Brake Technologies Corporation (Wabtec) — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual report, not a standalone fourth-quarter filing; quarterly figures are identified separately below. Unless noted, amounts are U.S. dollars.
Business context
Wabtec supplies rail equipment, technology, aftermarket parts and services through its Freight and Transit segments. Aftermarket sales and services were about 54% of total sales; approximately 50% of sales were to customers outside the U.S. Freight generated 63% of sales and Transit 37%. The filing describes mixed North American freight conditions: locomotive and freight-car deliveries rose, while U.S. rail traffic and carloadings declined.
Financial performance and position
| Metric | FY 2012 | FY 2011 | Change / context |
|---|---|---|---|
| Net sales | $2,391.1 million | $1,967.6 million | Up 21.5% |
| Gross profit / margin | $694.6 million / 29.0% | $570.4 million / 29.0% | Profit rose with higher volume; margin unchanged |
| Operating income / margin | $392.3 million / 16.4% | $270.7 million / 13.8% | Up 44.9%; improved operating leverage |
| Net income | $251.7 million | $170.1 million | Up 47.9% |
| Diluted EPS | $5.19 | $3.51 | Up from prior year |
| Operating cash flow | About $237.4 million | $248.6 million | Lower year over year; see cash-flow discrepancy below |
Cost of sales remained 71.0% of revenue. Operating expenses were $302.3 million, or 12.6% of sales, versus $299.7 million, or 15.2%, in 2011. The 2011 comparison included an $18.1 million court-ruling charge. The 2012 effective tax rate was 33.3%.
Segments: Freight sales were $1,501.9 million, up 24.1%, with operating income of $316.1 million. Transit sales were $889.2 million, up 17.4%, with operating income of $93.4 million. Acquisitions contributed $138.3 million to consolidated sales growth; foreign exchange reduced sales by $19.9 million.
Fourth quarter: Sales were $610.4 million, gross profit $180.5 million, operating income $100.5 million, and net income $64.8 million. Diluted earnings per share were $1.34.
Cash, investment and liquidity: Cash was $215.8 million at year-end, down from $285.6 million. Investing activities used $184.9 million, including $149.9 million net cash paid for acquisitions and $36.0 million of capital expenditures. The company reported a $600 million revolving facility, with about $400.5 million available after letters of credit, subject to covenants. Management said projected cash flow and liquidity should cover working capital, capital needs and debt service.
Debt: Total debt was $317.9 million, down from $395.9 million; cash less debt was approximately negative $102.1 million (net debt). Debt included $150 million of 6.875% senior notes due August 2013 and $167 million drawn on the revolving facility. Wabtec said it intended and had capacity to refinance the notes using its credit facility. Variable-rate debt had a 1.21% weighted-average rate at year-end; a $150 million interest-rate swap was scheduled to take effect in July 2013.
Material changes and notable items
- Growth reflected stronger freight original-equipment demand, PTC and other electronics, locomotive overhaul and aftermarket work, and acquisitions. Freight rail traffic was weaker despite higher new locomotive and freight-car deliveries.
- Year-end backlog rose to $1.66 billion from $1.55 billion. Freight backlog fell to $491.8 million from $712.9 million, while Transit backlog increased to $1.17 billion from $836.5 million. Backlog may be delayed, adjusted or cancelled; much aftermarket work is not included.
- 2012 acquisitions included Mors Smitt, Tec Tran, Winco and LH Group. Napier Turbochargers was acquired in January 2013 for approximately $112.5 million, after the reporting period.
- Positive Train Control (PTC) generated about $215 million of 2012 revenue. The statutory implementation deadline was December 31, 2015; a House committee had proposed extending it, which could alter the pace of customer spending.
- The February 2013 appellate ruling in the Faiveley dispute vacated the prior damages judgment and remanded the matter for a new damages trial unless plaintiffs accepted $15 million plus interest. Wabtec had recorded an $18.1 million charge in 2011; the filing reports no further proceedings as of its date.
Outlook, risks and contingencies
For 2013, management expected demand for new locomotives to be roughly in line with 2012, freight-car demand to be slightly lower, and U.S. transit spending to remain around current levels. The company also expected capital expenditures generally in the $40–$50 million annual range. These are management expectations, not guaranteed results.
Key risks include economic and rail-market cyclicality, customer order delays or cancellations, government transit funding, PTC mandate changes, competition and pricing pressure, acquisition integration, international and currency exposure, raw-material supply and costs, labor negotiations, product warranty/liability, and environmental obligations. Asbestos claims remain pending; management said ultimate exposure could not be estimated, while believing resolution would not be material overall. Approximately 16% of employees were covered by agreements expiring at various times in 2013.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Internal-control assessment excluded three 2012 acquisitions (Mors Smitt, Winco and LH Group).
Important facts for investors to verify
- The cash-flow statement reports operating cash flow of $237.438 million, while the MD&A summary reports $237.738 million; confirm the correct figure against the filed financial statements.
- Track refinancing or repayment of the $150 million notes due August 2013, revolver availability, and compliance with credit-agreement covenants.
- Monitor the PTC deadline and customer spending, along with the mix and conversion of the $1.66 billion backlog; orders may be cancelled or revised.
- Assess acquisition integration and returns, especially given acquisition spending and the increase in goodwill and intangible assets.
- Follow the Faiveley damages proceedings, asbestos claims, pension obligations and 2013 labor negotiations for changes in exposure or cost.