WAB

Business Context and Reporting Period

Company: Westinghouse Air Brake Technologies Corporation (Wabtec)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010
Business Overview: Wabtec is a global provider of technology-based products and services for the rail industry, operating in 17 countries. Approximately 49% of revenues in Q1 2010 were generated from customers outside the U.S. The company operates two primary segments: Freight Group and Transit Group.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 3.7% ($14.1 million) primarily due to lower Freight Group original equipment sales. This was partially offset by $12.7 million in sales from recent acquisitions and a $11.4 million favorable foreign exchange impact.
• Segment Performance: Freight Group sales dropped 8.2% ($14.8 million), while Transit Group sales remained relatively flat, increasing 0.4% ($0.8 million).
• Profitability: Despite lower sales, Gross Margin improved to 29.8% from 28.4% due to cost-saving initiatives and downsizing actions initiated in 2009. However, Operating Income declined 8.2% due to increased Selling, General, and Administrative (SG&A) expenses ($6.1 million increase) driven by acquisitions and non-cash compensation.
• Cash Flow: Operating cash flow turned positive, providing $12.4 million compared to a $5.7 million use of cash in Q1 2009. This improvement was driven by changes in working capital, specifically increases in accrued liabilities and accounts payable, though accounts receivable and inventory increases had a negative impact.
• Acquisitions: The company acquired Xorail LLC for $39.9 million (net of cash) in March 2010, adding signal engineering capabilities to the Freight Group.

Guidance, Outlook, and Risks

• Market Outlook: Management notes that U.S. freight rail traffic has increased due to economic improvement, leading to higher aftermarket sales. However, deliveries of new locomotives and freight cars are expected to remain at roughly half of 2009 levels due to vehicles in storage.
• Regulatory Drivers: The company expects to benefit from the 2008 U.S. rail safety legislation requiring Positive Train Control (PTC) technology by 2015, for which Wabtec is developing the on-board computer and software.
• Transit Sector: Demand is driven by government spending. While federal funding (SAFETEA-LU) has been extended through December 2010, some transit agencies are deferring purchases due to budget constraints.
• Legal Contingencies:
  • Asbestos Litigation: Claims exist against subsidiary Railroad Friction Products Corporation (RFPC). Management believes the ultimate liability is not reasonably determinable but does not expect a material impact on financial position.
  • Faiveley Transport Arbitration: An arbitration award dated December 21, 2009, required a $3.9 million royalty payment to Faiveley Malmo. The company contests further claims from Faiveley entities.
• Liquidity: The company maintains a $300 million revolving credit facility and a $200 million term loan. Available borrowing capacity was approximately $158 million as of March 31, 2010. The company is in compliance with all debt covenants.

Investor Verification Checklist

• Freight Market Recovery: Verify the pace of new locomotive and freight car orders versus the current reliance on aftermarket sales.
• Acquisition Integration: Monitor the financial contribution and integration progress of the Xorail and Unifin acquisitions.
• Cost Control Sustainability: Assess whether the improved gross margins can be sustained despite rising SG&A expenses related to acquisitions.
• Working Capital Trends: Review the trend in accounts receivable and inventory levels, which negatively impacted operating cash flow in Q1 2010.
• Legal Exposure: Track developments in the Faiveley arbitration and asbestos litigation to ensure no material unexpected liabilities arise.