Wabtec 2010 Q2 Form 10-Q Summary
Business context and reporting period
Westinghouse Air Brake Technologies Corporation (Wabtec) supplies technology-based products and services to the global rail industry. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2010; about 48% of first-half revenue came from outside the United States.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net sales | $374.1 million | $334.0 million | $738.1 million | $712.0 million |
| Gross profit | $113.5 million | $91.7 million | $221.9 million | $198.8 million |
| Gross margin | 30.3% | 27.4% | 30.1% | 27.9% |
| Operating income | $49.7 million | $36.7 million | $100.8 million | $92.5 million |
| Operating margin | 13.3% | 11.0% | 13.7% | 13.0% |
| Net income attributable to Wabtec shareholders | $31.2 million | $30.8 million | $61.6 million | $63.5 million |
| Diluted EPS | $0.65 | $0.64 | $1.28 | $1.32 |
Cash flow and liquidity: First-half operating cash flow was $29.5 million, versus $38.0 million a year earlier. Capital expenditures were $7.0 million; operating cash flow less capital expenditures was approximately $22.5 million. Investing activities used $44.5 million, including $39.9 million for the Xorail acquisition. Cash declined $22.2 million to $166.5 million, including a $20.7 million unfavorable currency effect. Current assets were $731.6 million and current liabilities $310.5 million at June 30.
Debt: Total debt was $407.9 million, up from $391.8 million at year-end 2009. The company had $166.5 million in cash and approximately $160.9 million of available borrowing capacity, net of letters of credit and subject to covenants. It reported compliance with debt covenants. Interest-rate swaps fixed the rate on $137.0 million of bank debt at 2.28%; a 1% rate change on variable-rate debt was estimated to change annual interest expense by $1.2 million.
Changes versus the prior comparable period
- Q2 sales increased 12.0% and operating income rose 35.2%; net income increased 1.2%. First-half sales increased 3.7% and operating income rose 9.0%, while net income declined 3.0%.
- Freight Group sales rose 39.6% in Q2 and 12.4% in the first half, supported by stronger electronics and specialty products, aftermarket activity and acquisitions. Transit Group sales fell 7.0% in Q2 and 3.3% in the first half.
- Gross margins improved, which management attributed to higher sales and cost savings from downsizing and consolidation actions. SG&A increased 21.7% in Q2 and 18.9% in the first half, in part due to acquisitions, non-cash compensation and legal costs.
- Effective tax rates were 33.1% for Q2 and 33.9% for the first half, compared with 6.7% and 24.6%, respectively, in 2009. The prior-year comparison benefited from a $9.7 million tax benefit from settling tax examinations.
Outlook, management commentary, risks and unusual items
- Management reported U.S. freight rail traffic improving: through mid-July, revenue ton-miles were 9% above the year-earlier period, and railroads were returning stored equipment to service. New locomotive and freight-car deliveries were expected to remain below 2009 levels, although the freight-car order backlog had risen to about 15,000.
- Transit demand remained pressured by agency budget constraints and deferred equipment and aftermarket purchases. Management expected longer-term support from federal funding and stable ridership; SAFETEA-LU was extended through December 2010, with funding at approximately 2009 levels. Management also cited China’s planned $120 billion rail spending in 2010 and potential demand from positive train control requirements.
- Management said forecast cash flow and liquidity should fund working capital, capital equipment and debt service. It planned to continue cost reductions, including plant consolidations, workforce reductions and spending cuts, while pursuing growth initiatives. No specific earnings or revenue guidance was provided.
- Key risks include economic weakness, lower rail-equipment demand, delayed or canceled orders, customer concentration, government funding, foreign exchange and interest rates, raw-material costs, supply disruptions, acquisition integration, technology adoption and litigation.
- Contingencies include asbestos-related claims, for which management said the potential loss range was not reasonably determinable but believed ultimate resolution would not materially affect the company overall. A Faiveley arbitration resulted in a $3.9 million royalty payment in 2009; related entities filed a separate complaint in 2010, which Wabtec was contesting. The company said it did not expect material liability.
- After quarter-end, on July 28, 2010, Wabtec acquired G&B Specialties for approximately $35 million. Xorail was acquired in March for $39.9 million net of cash acquired. Goodwill and preliminary purchase accounting reflect acquisitions and currency movements.
Important facts for investors to verify
- Whether improved freight volumes and the freight-car order backlog translate into sustained demand, and whether weaker transit sales persist.
- Cash conversion and working-capital trends: first-half receivables growth reduced operating cash flow, while cash also absorbed acquisition spending and currency impacts.
- Debt levels, facility availability and covenant headroom as acquisitions and repurchases continue; management’s expectation of adequate liquidity is forward-looking.
- Progress integrating Xorail and G&B, and the final purchase-price allocations and goodwill balances.
- Developments in Faiveley-related litigation, asbestos claims, warranty reserves for transit products, and uncertain tax positions.
- Whether margins remain improved despite higher SG&A, elevated warranty provisions on certain transit products, and ongoing market uncertainty.