Wabtec Corporation (WABTEC) — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. The filing also reports unaudited fourth-quarter results; this is an annual report, not a standalone quarterly filing. Amounts below are in U.S. dollars.
Business context and reporting period
Wabtec supplies technology-based equipment and services to global freight rail and passenger transit markets through its Freight and Transit groups. Aftermarket products and services were about 55% of 2010 sales, and approximately 46% of sales were to customers outside the United States.
Financial performance and liquidity
| Metric | FY 2010 | FY 2009 |
|---|---|---|
| Net sales | $1,507.0 million | $1,401.6 million |
| Gross profit / margin | $449.1 million / 29.8% | $393.3 million / 28.1% |
| Operating income / margin | $202.8 million / 13.5% | $180.0 million / 12.8% |
| Net income | $123.1 million | $115.1 million |
| Diluted EPS | $2.56 | $2.39 |
| Cash from operations | $176.1 million | $162.3 million |
| Capital expenditures | $20.8 million | $18.3 million |
- At year-end, cash was $236.9 million, total debt $422.1 million, and shareholders’ equity $903.4 million. Cash less debt was approximately $185.1 million.
- Current assets were $802.0 million and current liabilities $348.4 million. The company reported approximately $137.1 million of additional borrowing capacity, net of letters of credit and subject to covenants.
- Debt included $150 million of 6.875% notes due 2013, $137.5 million under the term loan, and $134 million under the revolving facility. The credit facilities also mature in January 2013. Wabtec was in compliance with stated debt covenants.
- Unaudited Q4 2010 sales were $393.2 million, operating income $51.3 million, and net income $31.0 million, versus $359.2 million, $41.8 million, and $24.2 million, respectively, in Q4 2009.
Material changes versus prior periods
- Full-year sales rose 7.5%, operating income 12.7%, and net income 7.0% year over year. Higher volume and product mix lifted gross and operating margins.
- Freight Group sales increased 33.3% to $784.5 million, supported by stronger freight demand and acquisitions. Transit Group sales fell 11.2% to $722.5 million, reflecting completed major contracts, project delays, and municipal budget constraints.
- Operating cash flow rose to $176.1 million. Receivables increased $34.3 million, while payables increased $44.3 million; acquisitions used $138.2 million of net cash.
- Wabtec completed acquisitions including Xorail, G&B, Bach-Simpson, and Swiger Coil Systems. Reported sales included $86.1 million from acquisitions. Goodwill increased to $545.8 million; the company reported no goodwill impairment.
- Backlog increased to $1.079 billion from $950.7 million. The filing cautions that aftermarket work is generally not included and that orders may be delayed or cancelled.
Outlook, risks, contingencies, and unusual items
- Management expected freight rail conditions to improve in 2011 if the economy continued to strengthen, with higher locomotive and freight-car demand. It expected passenger transit to be slightly weaker; stable funding and ridership could support stable demand, but public-budget pressures remained a concern. This is management’s outlook, not quantified earnings guidance.
- Management highlighted positive train control deployment, mandated on much of the U.S. rail network by December 31, 2015, as a potential growth opportunity. It also planned continued global expansion, aftermarket growth, product development, and selective acquisitions.
- Key exposures include economic and rail-market cyclicality, customer order delays or cancellations, government transit funding, competition, acquisition integration, international and currency risks, raw-material and supply availability, labor negotiations, product warranty/liability, and debt covenants and refinancing needs.
- Faiveley entities asserted $17.2 million in compensatory and other unspecified damages in a pending dispute; Wabtec contested the claims and did not believe they would create material liability. Trial was scheduled for June 2011. Asbestos claims’ ultimate exposure was not estimable; management considered the likely overall impact immaterial, citing insurance and defenses.
- The effective tax rate rose to 34.1% from 29.6%, in part because 2009 benefited from a $9.7 million tax settlement benefit. Warranty expense was $22.8 million, and the year-end warranty reserve was $35.5 million, up from $29.2 million.
- The independent auditor issued an unqualified opinion on the financial statements and internal control. Management reported effective controls, while excluding four businesses acquired during 2010 from its control assessment.
Important facts for investors to verify
- Whether freight-market recovery and higher new-equipment orders materialized, and whether transit demand stabilized amid funding constraints.
- How much of revenue and earnings growth was organic versus acquisition-related, and whether recent acquisitions deliver expected returns and integration benefits.
- Debt refinancing and repayment capacity ahead of the 2013 maturities, covenant headroom, and availability of revolver capacity.
- Developments in the Faiveley litigation, asbestos claims, warranty experience, and other environmental or contingent liabilities.
- Conversion of backlog into revenue: contracts may be adjusted, delayed, or cancelled, and backlog principally reflects original-equipment orders.