Wabtec Corporation — 2011 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011. The filing also reports unaudited fourth-quarter results. Unless noted otherwise, financial amounts are in U.S. dollars.
Business context
Wabtec supplies equipment, components and services to the global freight rail and passenger transit industries through its Freight and Transit groups. Aftermarket parts and services were approximately 57% of 2011 sales; customers outside the United States accounted for approximately 47%. Freight generated 61% of sales and Transit 39%.
Financial performance and liquidity
| Metric | 2011 | 2010 |
|---|---|---|
| Net sales | $1,967.6 million | $1,507.0 million |
| Gross profit / margin | $570.4 million / 29.0% | $449.1 million / 29.8% |
| Operating income / margin | $270.7 million / 13.8% | $202.8 million / 13.5% |
| Net income | $170.1 million | $123.1 million |
| Diluted earnings per share | $3.51 | $2.56 |
| Cash from operations | $248.6 million | $176.1 million |
| Cash and cash equivalents | $285.6 million | $236.9 million |
| Total debt | $395.9 million | $422.1 million |
Sales rose 30.6% and net income rose 38.6%. Operating cash flow improved, though working capital absorbed cash: receivables increased $68.7 million and inventories $79.5 million, partly offset by a $60.0 million increase in payables. Investing activities used $146.2 million, including $109.0 million for acquisitions and $38.0 million for capital expenditures. Cash less total debt was approximately negative $110.3 million at year-end. Current assets of $1,055.8 million and current liabilities of $541.4 million imply a current ratio of approximately 1.95.
At December 31, the company had a $600 million revolving facility, with approximately $306.1 million of borrowing capacity available after letters of credit, subject to covenants. The 2011 refinancing agreement runs to November 2016. The $150 million 6.875% senior notes mature in 2013.
Fourth quarter: Sales were $534.6 million versus $393.2 million in Q4 2010; gross profit was $147.3 million versus $118.0 million; operating income was $72.5 million versus $51.3 million; and net income was $46.3 million versus $31.0 million.
Material changes and notable items
- Freight sales increased 54.2% to $1,210.1 million, driven by demand for freight original equipment, electronics and aftermarket products, acquisitions and foreign exchange. Transit sales increased 4.9% to $757.6 million; acquisitions and electronics demand were partly offset by completed locomotive-build contracts and lower original-equipment sales.
- Gross margin declined from 29.8% to 29.0%. Management cited higher costs on certain Transit long-term contracts and a sales mix with higher raw-material content, partly offset by higher-margin Freight and aftermarket sales.
- Operating expenses included an $18.1 million charge tied to a court ruling in litigation with Faiveley-related plaintiffs. The company appealed; the appeal was pending at filing. The jury award was $18.1 million plus interest.
- Wabtec acquired Brush Traction, a GE Transportation transit aftermarket-parts business, Bearward Engineering and Fulmer in 2011. Cash paid for acquisitions, net of cash acquired, was $109.0 million. Acquisitions contributed $128.3 million to the reported year-over-year sales increase.
- Year-end backlog was $1.549 billion, up from $1.079 billion a year earlier. Backlog can be delayed or cancelled, and much aftermarket business is not included because orders typically have short lead times.
- Dividends declared were $0.08 per share, compared with $0.04 in 2010. The company repurchased $26.0 million of stock during 2011.
Outlook, risks and contingencies
Management provided no specific numerical earnings or revenue guidance. It described North American freight conditions as improved in 2011 and said future demand would depend substantially on the economy and rail traffic. Transit demand was described as broadly consistent with prior years, while government budget pressures remained a concern. Management expects to pursue international expansion, aftermarket growth, product development and acquisitions, and said it expects annual capital expenditures generally in the $35 million to $45 million range.
- Positive Train Control (PTC) generated approximately $125 million of 2011 revenue. The statutory implementation deadline was December 31, 2015; a House committee had proposed extending it to 2020. Changes in timing, scope or requirements could affect revenue and resources deployed.
- Key exposures include economic and rail-market cycles, customer order delays or cancellations, transit funding levels, raw-material costs and supply availability, competition, foreign-exchange and interest-rate movements, and acquisition integration.
- Approximately 25% of employees were unionized; agreements expiring during 2012 covered about 17% of the workforce.
- Asbestos claims remain outstanding; management said the potential loss range could not be reasonably determined, while believing ultimate resolution would not materially affect the company overall. Insurance and third-party indemnities may not cover all claims.
- Environmental monitoring and remediation obligations include an approximately $0.5 million accrual for the Boise facility. The company reported material compliance with applicable environmental requirements.
- The company reported effective disclosure controls and internal control over financial reporting; the independent auditor gave unqualified opinions on the financial statements and internal controls. The internal-control assessment excluded three recently acquired businesses.
Important facts for investors to verify
- Whether Freight demand, aftermarket sales and the substantial backlog convert into sustained revenue and cash flow, considering cancellation provisions and working-capital needs.
- Progress and profitability on Transit long-term contracts, including whether contract cost estimates or margins require further revisions.
- The outcome of the appeal concerning the $18.1 million Faiveley-related judgment, including interest and any additional costs.
- PTC implementation pace and any change to the 2015 deadline, scope or funding.
- Acquisition integration results and the final purchase-accounting allocations for acquisitions reported as preliminary.
- Debt maturity and covenant capacity, including refinancing of the $150 million notes due in 2013 and the availability of revolving credit.
- Potential exposure from asbestos, environmental matters, pension obligations and other contingencies; some loss amounts or timing are not clearly quantifiable in the filing.