Wabtec 10-Q Summary: Third Quarter 2012
Business context and period. Westinghouse Air Brake Technologies Corporation (Wabtec) supplies technology-based products and services to the global freight rail and passenger transit industries. This unaudited 10-Q covers the quarter and nine months ended September 30, 2012; comparisons are with the corresponding 2011 periods. About 50% of revenue in the first nine months came from outside the United States.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $587.6 million | $498.8 million | $1,780.7 million | $1,433.0 million |
| Gross profit | $171.3 million | $147.2 million | $514.1 million | $423.1 million |
| Gross margin | 29.1% | 29.5% | 28.9% | 29.5% |
| Operating income | $96.8 million | $75.5 million | $291.8 million | $198.2 million |
| Operating margin | 16.5% | 15.1% | 16.4% | 13.8% |
| Net income attributable to Wabtec shareholders | $63.0 million | $46.6 million | $187.0 million | $123.9 million |
| Diluted EPS | $1.30 | $0.96 | $3.85 | $2.56 |
- Cash flow: Nine-month operating cash flow was $113.5 million versus $100.0 million. Investing used $126.1 million, including $102.1 million for acquisitions and $24.7 million in capital expenditures. Financing provided $9.3 million. Cash declined $3.6 million to $282.1 million.
- Liquidity and debt: Current assets were $1,184.0 million and current liabilities $540.7 million at September 30. Total debt was $432.9 million, up from $395.9 million at year-end 2011. The company had a $600 million revolving facility, with approximately $264.6 million of available borrowing capacity net of letters of credit. The $150 million 6.875% senior notes mature in August 2013; management said it intends and is able to refinance them using the credit facility.
- Other balance-sheet items: Receivables were $430.2 million, inventories $391.6 million, and shareholders’ equity $1,231.0 million. Goodwill increased to $656.9 million, mainly reflecting acquisitions and currency effects.
Changes and operating drivers
- Q3 sales rose 17.8%; operating income rose 28.3% and net income rose 35.2%. Nine-month sales rose 24.3%, operating income 47.2%, and net income 50.9%.
- Growth reflected acquisitions, higher demand for specialty products and electronics, locomotive remanufacturing and overhaul, and brake products. Q3 Freight sales increased 12.3% and Transit sales 27.3%; nine-month increases were 34.7% and 8.5%, respectively.
- Acquisitions contributed $38.4 million to Q3 sales and $96.6 million to nine-month sales. Wabtec acquired Mors Smitt and Tec Tran in the Transit segment and Winco in Freight during 2012. It acquired UK-based LH Group for about $47.8 million on October 1, after quarter-end.
- Gross margin declined 0.4 percentage point in Q3 and 0.6 point year to date. The filing cites higher labor and overhead costs in some areas and increased warranty expense, partly offset by lower raw-material costs as a percentage of sales in Q3. Nine-month warranty expense was $5.7 million above 2011 and was 1.0% of sales versus 0.8%.
- Operating margins improved, supported by higher sales volume and lower operating expenses as a share of sales. The prior-year comparison included an $18.1 million court-ruling charge and a $2.4 million acquisition-related settlement benefit, both recorded in Q2 2011.
Outlook, commentary and risks
- Management’s stated long-term priorities are cash generation, margin improvement through cost control and the Wabtec Performance System, and revenue growth through market expansion, new products, aftermarket sales and acquisitions. The filing does not provide formal earnings or revenue guidance.
- Management expected 2012 positive train control (PTC) revenue to exceed $200 million, compared with about $125 million in 2011. It also cited expectations for about 1,200 new locomotive deliveries and 60,000 new freight-car deliveries in 2012.
- Management said current operations and forecast earnings, cash flow and liquidity should be sufficient for working capital, capital equipment and debt service. It cautioned that alternative financing, if needed, might not be available or could be more costly.
- Risks highlighted include economic and rail-industry downturns, reduced or delayed customer orders, reliance on major OEM customers, raw-material and supply disruptions, foreign-exchange and interest-rate movements, acquisitions and integration, technology development, transit funding levels, and litigation or environmental matters. North American freight traffic through mid-October was mixed: carloadings decreased 2.7% and revenue ton-miles 1.7%, while intermodal loadings rose 3.7%.
- The company reported no material changes during the first nine months to previously disclosed asbestos, other litigation, environmental contingencies, or risk factors. The IRS was auditing tax years 2009 and 2010; uncertain tax-position liabilities were $9.7 million. Interest-rate exposure remained: a 1% rate change on variable-rate debt would affect annual interest expense by about $1.8 million. Swaps hedged part of the exposure.
- Share repurchases totaled $28.0 million in the first nine months; 376,300 shares were repurchased at an average $74.40. The company had $96.0 million remaining under its authorization at September 30.
Important facts for investors to verify
- How much of reported growth and future earnings reflects acquired businesses versus organic demand, particularly in Freight and Transit.
- Whether gross-margin pressure, higher warranty costs, and the mix of service and original-equipment sales persist.
- PTC deployment, related revenue timing, and customer investment plans, alongside the disclosed 2012 market and delivery expectations.
- Refinancing of the $150 million notes due in August 2013, revolver availability, and compliance with credit-agreement covenants.
- Working-capital conversion and acquisition spending, given receivables and inventories increased while investing cash outflow exceeded operating cash flow.
- Outcomes of tax examinations, litigation and environmental matters; the filing does not quantify a clear maximum exposure for these contingencies.