Business Context and Reporting Period
Company: Westinghouse Air Brake Technologies Corporation (Wabtec)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: Wabtec is a global provider of technology-based products and services for the rail industry, operating in 16 countries. Approximately 38% of revenues in the first six months of 2009 originated from outside the U.S. The company operates two primary segments: Freight Group and Transit Group.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 |
|---|---|---|
| Net Sales | $334,013 | $711,973 |
| Gross Profit | $91,633 | $198,118 |
| Income from Operations | $36,727 | $92,475 |
| Net Income (Attributable to Shareholders) | $30,836 | $63,502 |
| Diluted Earnings Per Share | $0.64 | $1.32 |
| Cash and Cash Equivalents (Balance Sheet) | $121,333 (as of June 30, 2009) | |
| Total Debt (Current + Long-term) | $351,887 (as of June 30, 2009) | |
| Operating Cash Flow (Six Months) | $38,016 |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 14.4% in Q2 2009 and 8.0% in the first six months of 2009 compared to the same periods in 2008. This was primarily driven by a significant decline in the Freight Group due to the global recession, which reduced demand for new locomotives and freight cars.
- Segment Performance:
- Freight Group: Sales dropped 31.8% in Q2 and 19.3% for the six months ended June 30, 2009.
- Transit Group: Sales increased 3.9% in Q2 and 3.6% for the six months, supported by government funding and international expansion.
- Profitability: Net income decreased 8.7% in Q2 and 4.2% for the six months. Operating margins were compressed by lower sales volumes and restructuring costs, partially offset by cost-saving initiatives.
- Tax Rate: The effective income tax rate dropped significantly to 6.7% in Q2 and 24.6% for the six months (vs. 37.4% in 2008) due to a $9.7 million tax benefit from the settlement of examinations in various jurisdictions.
- Acquisitions: The company recorded increased amortization expense due to acquisitions completed in 2008 (Standard Car Truck Company and Poli S.p.A.), which contributed to higher operating expenses.
Outlook, Risks, and Management Commentary
- Market Conditions: Management notes that freight rail markets have declined significantly due to the global recession, with U.S. revenue ton-miles down 18% through mid-July 2009. Conversely, the passenger transit market remains stable, bolstered by expected increases in U.S. federal government funding.
- Liquidity and Capital: The company maintains a strong credit profile with approximately $231.5 million in available bank borrowing capacity. It continues to repurchase shares under an authorized program, having repurchased 669,700 shares in the first six months of 2009.
- Restructuring: Ongoing downsizing of Canadian operations continues, with total expenses since 2006 reaching $16.5 million. No new restructuring charges were recorded in the first six months of 2009.
- Legal Contingencies:
- Asbestos Litigation: Claims continue to be filed against subsidiary Railroad Friction Products Corporation (RFPC). Management believes the ultimate liability will not be material to financial position, citing insurance coverage and successful defenses.
- Faiveley Arbitration: An ongoing dispute with Faiveley Transport Malmo AB regarding trade secrets and breach of contract. Faiveley reduced its damages claim to $91 million. Management contests the claims as frivolous and does not anticipate material liability.
- Foreign Exchange: Unfavorable currency exchange rates reduced net sales by $17.1 million in Q2 and $38.6 million for the six months, though net earnings were generally not impacted.
Investor Verification Checklist
- Freight Market Recovery: Monitor U.S. freight rail revenue ton-miles and the industry backlog of freight cars to gauge the timing of a sales recovery in the Freight Group.
- Transit Funding: Verify the status of U.S. federal government funding for transit projects, which is a key driver for the Transit Group's growth.
- Debt Covenants: Review compliance with the 2008 Refinancing Credit Agreement covenants, specifically the minimum interest expense coverage ratio (3.0) and maximum debt-to-cash flow ratio (3.25).
- Legal Exposure: Track developments in the Faiveley arbitration and asbestos litigation to assess potential future liabilities or injunctions.
- Acquisition Integration: Evaluate the financial contribution of recent acquisitions (SCT and Poli) against the increased amortization and engineering expenses they generate.