Wabtec Q2 2012 Form 10-Q Summary
Business context and reporting period
Westinghouse Air Brake Technologies Corporation (Wabtec) supplies rail products and services through Freight and Transit segments, operating in 19 countries. The unaudited quarter and six-month periods ended June 30, 2012; about 51% of first-half revenue came from outside the U.S. Comparative figures are for the corresponding 2011 periods.
Financial results and position
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Revenue | $609.8m | $478.9m | $1,193.1m | $934.2m |
| Gross profit | $173.4m | $142.7m | $342.8m | $275.9m |
| Gross margin | 28.4% | 29.8% | 28.7% | 29.5% |
| Operating income / margin | $100.9m / 16.5% | $56.4m / 11.8% | $195.0m / 16.3% | $122.7m / 13.1% |
| Net income attributable to Wabtec shareholders | $64.7m | $36.3m | $124.0m | $77.3m |
| Diluted EPS | $1.33 | $0.75 | $2.56 | $1.60 |
| Operating cash flow | Not presented by quarter | $30.5m | $66.0m |
At June 30, 2012, cash was $234.1m, total debt $443.1m, and shareholders’ equity $1,154.2m. Debt comprised $150m of 6.875% senior notes due August 2013, $292m drawn on a $600m revolving facility, and $1.1m of capital leases. Available revolver capacity was approximately $259m, net of letters of credit and subject to covenants. Current assets were $1,143.5m and current liabilities $550.3m (derived current ratio: approximately 2.1).
Material changes versus prior comparable periods
- Q2 revenue rose 27.3%; first-half revenue rose 27.7%. Freight segment sales increased 45.6% in Q2 and 47.7% for the first half, while Transit sales were up 1.6% in Q2 and down 0.3% year to date.
- Growth was led by freight specialty products and electronics, including positive train control (PTC), aftermarket products, locomotive remanufacturing and acquisitions. First-half acquisitions contributed $58.2m of sales.
- Net income rose 78.1% in Q2 and 60.4% for the first half. Operating margins expanded, helped by higher volume and lower operating expenses. The prior-year comparison included an $18.1m court-ruling charge and a $2.4m acquisition-related settlement benefit in Q2 2011.
- Gross margin declined 1.4 percentage points in Q2 and 0.8 points for the first half. Management cited a higher mix of freight original-equipment sales and increased raw-material costs; warranty expense also increased.
- Operating cash flow fell to $30.5m from $66.0m, mainly reflecting working-capital needs, including higher receivables and inventory. Investing cash outflow was $104.7m, including $88.4m for acquisitions. Cash decreased $51.5m.
- Debt increased $47.3m from year-end 2011. The company repurchased 298,800 shares for $21.9m in the first half and paid $2.9m in dividends.
Outlook, management commentary, risks and contingencies
- Management expected 2012 PTC revenue to exceed $200m, compared with about $125m in 2011. The filing gives no company-wide revenue or earnings guidance.
- Management said current operations and forecast earnings, cash flow and liquidity should fund working capital, capital expenditures and debt service; it noted that additional financing might be needed if available sources prove insufficient, with no assurance it would be available on favorable terms.
- Demand risks include economic and rail-traffic conditions, customer order delays or cancellations, transit funding and budgets, raw-material costs, supply disruptions, foreign exchange, interest rates, and successful execution and integration of acquisitions. Management noted freight carloadings were down 2.8% and revenue ton-miles down 2.0% through June 30 year over year, while intermodal loadings rose 3.4%; transit ridership increased 5% in Q1 2012.
- The $150m senior notes mature in 2013. Credit facility covenants include minimum interest coverage and maximum debt-to-cash-flow limits; management said it did not expect these to constrain operations. Variable-rate debt was 42% of total long-term debt; a 1% rate change would affect annual interest expense by about $1.9m. Interest-rate swaps hedge a portion.
- Asbestos bodily-injury claims, ordinary-course litigation and environmental contingencies remained outstanding; the filing reported no material changes from the 2011 Form 10-K. Uncertain tax positions totaled $7.5m; the IRS was auditing tax years 2009 and 2010.
- Wabtec acquired Mors Smitt for approximately $88.4m net of cash on June 14, 2012. After quarter-end, it acquired Tec Tran for approximately $8.3m net of cash on July 13, 2012.
Important facts for investors to verify
- How much of revenue and earnings growth reflects organic demand versus acquisitions, particularly in Freight and PTC products.
- Whether working-capital growth, especially receivables and inventory, converts into operating cash flow in subsequent periods.
- Gross-margin pressure from raw materials, freight original-equipment mix and warranty costs, and the sustainability of operating-margin improvement.
- Plans and financing for the $150m notes due in 2013, and continued compliance with credit-facility covenants and access to undrawn capacity.
- Execution, integration and purchase accounting for Mors Smitt and Tec Tran, and developments in asbestos, other litigation and tax audits.
- The MD&A cash-flow summary reports first-half financing cash flow of $26.648m, while the financial statements report $24.648m; verify the correct amount. The financial statements report $24.648m.