Wabtec Q1 2012 Form 10-Q Summary
Business context and period: Westinghouse Air Brake Technologies Corporation (Wabtec) supplies technology-based products and services to the global rail industry. This unaudited filing covers the three months ended March 31, 2012, compared with the same period in 2011. About 50% of quarterly revenue came from outside the United States.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $583.3 million | $455.3 million | +28.1% |
| Gross profit / margin | $169.4 million / 29.0% | $133.2 million / 29.3% | Margin down 0.3 percentage points |
| Operating income / margin | $94.1 million / 16.1% | $66.4 million / 14.6% | +41.8% |
| Net income attributable to Wabtec shareholders | $59.3 million | $41.0 million | +44.7% |
| Diluted earnings per share | $1.22 | $0.85 | Up $0.37 |
| Cash from operating activities | $1.0 million | $16.5 million | Down $15.5 million |
| Capital expenditures | $10.2 million | $7.4 million | Up $2.8 million |
Operating cash flow was constrained mainly by working-capital investment, including a $47.4 million increase in receivables and a $20.5 million increase in inventory. Cash declined $16.3 million during the quarter to $269.3 million.
At March 31, 2012, total debt was $385.9 million, including $150 million of 6.875% senior notes due in 2013 and $235 million outstanding under the revolving facility. The company reported approximately $313.8 million of available bank borrowing capacity, net of letters of credit and subject to covenants. The current ratio, calculated from reported balances, was approximately 2.1.
Material changes and operating trends
- Freight segment sales rose 50.0% to $397.3 million; operating income increased to $75.6 million from $47.6 million.
- Transit segment sales declined 2.3% to $186.0 million; operating income decreased to $22.6 million from $24.1 million. Management attributed the sales decline mainly to completed transit locomotive build contracts and lower sales on certain original-equipment contracts.
- Sales growth reflected higher specialty products and electronics, freight locomotive remanufacturing and services, and $33.1 million of acquisition-related revenue. Specialty products and electronics contributed $73.3 million of the year-over-year sales increase.
- Cost of sales rose to 71.0% of sales from 70.7%, and gross margin eased. Operating expenses increased 12.7%, but fell as a share of sales to 12.9% from 14.7%, supporting improved operating margin.
Outlook, risks and notable items
- Management expected 2012 positive train control (PTC) revenue to exceed $200 million, compared with approximately $125 million in 2011. This is a specific revenue expectation; the filing does not provide broad full-year revenue or earnings guidance.
- Management stated that expected operating levels, earnings, cash flow and liquidity should be sufficient for working capital, capital equipment and debt service. It cautioned that additional financing might be needed if funds were insufficient and could be more costly or burdensome.
- Market risks include economic weakness and rail-traffic changes, reduced demand or delayed customer orders, reliance on major original-equipment customers, government transit funding, raw-material or component shortages, acquisition integration, foreign exchange and interest rates. North American freight rail carloadings fell 2.5% and revenue ton-miles fell 1.7% through March 31, while intermodal loadings rose 2.5%.
- The $600 million revolving credit agreement includes financial covenants, including minimum interest coverage of 3.0 and maximum debt to cash flow of 3.25. The company said it did not expect these tests to constrain operations. Interest-rate swaps fixed rates on $107 million of debt at 2.08%; a forward-starting swap covers a further $150 million beginning in July 2013. A 1% change in variable rates was estimated to change annual interest expense by about $1.2 million.
- The Faiveley-related U.S. jury verdict of $18.1 million plus interest was recorded in Q2 2011 and is under appeal. A separate 2009 arbitration award required a $3.9 million royalty payment.
- Asbestos bodily-injury claims remain pending; management said the potential loss range cannot presently be determined, but believes ultimate resolution will not materially affect the company overall. Coverage and insurer or indemnitor ability to pay are not assured.
- Unrecognized tax benefits were $8.2 million; the IRS was auditing tax years 2009 and 2010. Management said approximately $1.8 million of unrecognized benefits could change within 12 months. The filing reports effective tax rates of 34.4% in 2012 and 35.2% in 2011.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether Freight growth, including PTC-related demand and acquisition contributions, is sustainable, and whether Transit weakness persists.
- Whether working-capital needs continue to weigh on operating cash generation despite higher earnings.
- Progress toward the stated 2012 PTC revenue expectation and any subsequent revisions or customer deployment delays.
- Debt refinancing and covenant capacity, especially the $150 million senior-note maturity in 2013 and variable-rate exposure.
- Developments in the Faiveley appeal, asbestos claims, and tax audits or uncertain tax positions.