Wabtec 2011 Q3 Form 10-Q Summary
Business context and reporting period
Westinghouse Air Brake Technologies Corporation (Wabtec) supplies technology, products and services to freight rail and passenger transit markets, operating in 18 countries. Approximately 47% of revenue in the first nine months came from customers outside the U.S. This unaudited filing covers the quarter and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods. Dollar amounts below are in millions unless noted.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $498.8 | $375.7 | $1,433.0 | $1,113.8 |
| Gross profit | $147.2 | $109.2 | $423.1 | $331.1 |
| Income from operations | $75.5 | $50.6 | $198.2 | $151.5 |
| Net income attributable to Wabtec shareholders | $46.6 | $30.5 | $123.9 | $92.1 |
| Diluted EPS | $0.96 | $0.63 | $2.56 | $1.92 |
- Q3 sales rose 32.8%; operating income rose 49.0% and net income rose 52.6%. Gross margin was 29.5% versus 29.1%; operating margin was 15.1% versus 13.5%.
- Nine-month sales rose 28.7%; operating income rose 30.9% and net income rose 34.5%. Gross margin was 29.5% versus 29.7%; operating margin was 13.8% versus 13.6%.
- Freight Group sales increased 51.4% in Q3 and 52.7% year to date; Transit Group sales increased 9.5% and 4.0%, respectively. Freight electronics and related products, aftermarket demand and acquisitions were key contributors. Transit sales were affected by completed locomotive and other original-equipment contracts.
- Operating cash flow was $100.0, up from $75.2 in the first nine months. Investing used $73.7, including $51.8 for acquisitions and $22.2 for capital expenditure. Financing used $33.9, including $23.8 of share repurchases and debt repayments. Cash declined $15.8 to $221.1.
- At September 30, total debt was $406.2, down from $422.1 at year-end 2010; cash was $221.1. Debt comprised $150.0 of 6.875% notes due 2013, $107.5 term loans, $148.0 revolving-credit borrowings and $0.7 capital leases. Available borrowing capacity under the existing facility was approximately $106.3, net of letters of credit.
- Current assets were $950.4 and current liabilities $453.6. Receivables increased to $346.4 from $258.1 and inventory to $324.9 from $253.5 since year-end.
Changes, outlook, risks and unusual items
- Management attributed growth to stronger freight original-equipment and aftermarket demand, acquisitions and favorable foreign exchange. Acquisitions contributed $23.7 of Q3 sales and $94.9 of nine-month sales. Cost savings and favorable product mix supported Q3 gross margin, while higher raw-material costs and certain long-term transit-contract costs pressured results.
- Nine-month SG&A included an $18.1 charge related to the Faiveley litigation ruling, acquisition costs, incentive and non-cash compensation, and other one-time charges. The company recorded an $18.1 charge in Q2 after a jury award of $18.1 plus interest; Wabtec appealed. A separate earlier arbitration resulted in a $3.9 royalty payment.
- Management described North American freight conditions as improved and passenger transit conditions as stable, while cautioning that economic weakness, government budget constraints and funding decisions could hurt demand. It expected about $100 million of positive train control revenue in 2011. No full-year earnings or EPS guidance is stated in the provided filing text.
- On November 7, after quarter-end, Wabtec refinanced its existing credit facilities with a $600 million, five-year revolving facility expiring in November 2016. The agreement carries financial covenants and restrictions, including limits on dividends and a maximum debt-to-cash-flow ratio of 3.25. On November 3, after quarter-end, Wabtec acquired Bearward Engineering for approximately $47.9 million.
- Key risks include freight and transit demand variability, customer concentration and order delays, raw-material and supply costs, performance on long-term contracts, acquisition integration, foreign-exchange and interest-rate movements, government transit funding, and legal proceedings. Asbestos claims remain subject to insurance and indemnity coverage; management said their ultimate loss range cannot presently be determined but does not expect the matters to be material overall.
- Interest-rate swaps covered $137.0 of debt and fixed the covered borrowing rate at 2.23% through maturities extending to December 2012. A 1% rate change on variable-rate debt was estimated to change annual interest expense by about $1.2.
Important facts for investors to verify
- Whether freight demand and positive train control deployment support management’s stated 2011 outlook, and how much growth reflects acquisitions versus underlying demand.
- Receivables and inventory growth, customer deposits, and the sustainability of operating cash flow as working-capital needs change.
- The final effects of the Faiveley appeal and other litigation, including potential interest or additional costs.
- Terms, covenant headroom and borrowing availability under the post-quarter $600 million refinancing, along with debt maturities and interest-rate exposure.
- Integration and returns from 2011 acquisitions, including the post-quarter Bearward purchase, and the impact of long-term transit-contract costs and raw-material inflation.