Westinghouse Air Brake Technologies Corporation (Wabtec) — Q3 2013 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2013; results are unaudited. Wabtec supplies products and services to freight rail and passenger transit markets, with operations in 19 countries. Approximately 49% of revenue in the first nine months came from outside the U.S.
Financial performance
Amounts in millions, except per-share data and percentages.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $631.4 | $587.6 | $1,884.9 | $1,780.7 |
| Gross profit | $188.1 | $171.3 | $563.9 | $514.1 |
| Gross margin | 29.8% | 29.1% | 29.9% | 28.9% |
| Operating income | $109.9 | $96.8 | $326.1 | $291.8 |
| Operating margin | 17.4% | 16.5% | 17.3% | 16.4% |
| Net income attributable to Wabtec shareholders | $73.9 | $63.0 | $218.2 | $187.0 |
| Diluted EPS | $0.76 | $0.65 | $2.25 | $1.93 |
- Third-quarter sales increased 7.5%; nine-month sales increased 5.9%. Net income rose 17.4% and 16.7%, respectively.
- Nine-month operating cash flow was $85.0 million, down from $113.5 million. Cash used in investing was $239.5 million, including $222.1 million for acquisitions; financing provided $219.1 million. Cash increased $65.2 million to $281.0 million.
- At September 30, 2013, current assets were $1,344.4 million and current liabilities $541.8 million. Total debt was $539.7 million, up from $317.9 million at year-end 2012; cash exceeded debt by approximately $258.7 million. The $600 million revolver had approximately $250.9 million of available capacity after letters of credit, subject to covenants.
Material changes and operating drivers
- Q3 Transit sales rose 24.9% to $290.9 million, while Freight sales fell 4.0% to $340.5 million. For the first nine months, Transit sales rose 41.0% and Freight sales declined 13.0%.
- Management attributed growth mainly to acquisitions and stronger transit demand, including brakes, electronics, and locomotive work. Freight declines reflected weaker freight original-equipment demand and locomotive contract mix shifting toward transit. Foreign exchange reduced nine-month sales by $13.2 million.
- Wabtec acquired Longwood, Turbonetics, Transdyne, and Napier in 2013. Net purchase prices totaled approximately $221.7 million; the acquisitions contributed $125.2 million of reported nine-month sales growth. Goodwill and other intangibles increased substantially.
- Q3 gross margin improved to 29.8% from 29.1%; management cited higher volume and lower overhead as a share of sales. Nine-month operating margin rose to 17.3% from 16.4%.
Outlook, risks, and unusual items
- Management expected 2013 new locomotive and freight-car deliveries to be slightly below 2012 levels, while subway-car and bus deliveries were expected to remain about level. These are market expectations, not specific company earnings guidance.
- Management reported North American carloadings up 1.6% through October 12, 2013, and an industry freight-car backlog of about 74,000. U.S. transit ridership increased 1.2% in Q2 2013. Wabtec reported approximately $170 million of positive train control revenue for the first nine months; rail operators had indicated they could not meet the statutory December 31, 2015 implementation deadline, and a deadline extension could affect spending pace.
- Key risks include economic and rail-market weakness, government transit funding, customer order delays or cancellations, raw-material and supply constraints, foreign exchange, acquisition integration, and execution of long-term contracts. Management said it expected cash flow and liquidity to fund operations, capital needs, and debt service, but noted refinancing or additional financing might be needed if funding sources were insufficient.
- Wabtec issued $250 million of 4.375% senior notes due 2023 and repaid $150 million of 6.875% notes that matured in July 2013. It used a $150 million interest-rate swap to fix part of its variable-rate exposure. A 1% rate change on variable-rate debt was estimated to affect annual interest expense by about $1.4 million.
- The Faiveley litigation was closed after Wabtec paid approximately $15.8 million. The filing reported no material changes to other disclosed litigation; asbestos-related claims remain among the contingencies described in its prior annual report.
Important facts for investors to verify
- How much of reported revenue and earnings growth came from acquisitions versus organic demand, particularly in Transit.
- Whether Freight original-equipment demand and segment sales stabilize, and how locomotive contract mix affects margins.
- Cash conversion and working-capital trends: receivables used $167.2 million of operating cash in the nine-month period, while inventory provided $29.0 million.
- Debt capacity and covenant headroom, acquisition integration, and the effect of PTC timing or any deadline change on future sales.
- Potential cash exposure from warranty obligations, uncertain tax positions, and asbestos-related claims.