Westinghouse Air Brake Technologies Corp. (Wabtec) - 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2009. Wabtec is a global provider of technology-based products and services for the rail industry, operating in 16 countries. Approximately 39% of revenues in the first nine months of 2009 originated from customers outside the U.S. The company operates two primary segments: the Freight Group (locomotives and freight cars) and the Transit Group (passenger transit vehicles).
Key Financial Metrics (Nine Months Ended Sept 30, 2009)
| Metric | 2009 (YTD) | 2008 (YTD) |
|---|---|---|
| Net Sales | $1,042.4 million | $1,169.5 million |
| Gross Profit | $292.9 million | $321.4 million |
| Income from Operations | $138.2 million | $162.3 million |
| Net Income (Wabtec Shareholders) | $90.9 million | $99.4 million |
| Diluted EPS | $1.89 | $2.03 |
| Operating Cash Flow | $89.2 million | $77.3 million |
| Cash and Equivalents (End of Period) | $255.2 million | $186.4 million |
| Total Debt | $432.3 million | $387.1 million |
Margins: Gross profit margin improved to 28.1% in 2009 from 27.5% in 2008. Operating margin was 13.3% in 2009 compared to 13.9% in 2008.
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 10.9% year-over-year, driven primarily by a 23.4% drop in Freight Group sales due to the global recession and lower rail traffic. Transit Group sales increased slightly by 1.2%.
- Profitability: Net income decreased 8.6% to $90.9 million. Despite lower sales, gross margins improved due to cost-saving initiatives and downsizing actions.
- Acquisitions: The company acquired assets from Chardon Rubber Company for $3.4 million in July 2009. Subsequent to the quarter end (Oct 1, 2009), Wabtec acquired Unifin International LP for $93.3 million.
- Debt Structure: Total debt increased to $432.3 million, reflecting additional borrowings to fund acquisitions. The company utilized its revolving credit facility, increasing the balance from $36.0 million to $104.0 million.
- Foreign Exchange: Unfavorable foreign exchange rates reduced net sales by approximately $46.4 million for the nine-month period, though net earnings were largely insulated.
Outlook, Risks, and Management Commentary
- Market Conditions: Freight rail markets have declined significantly (U.S. revenue ton-miles down 17%), while passenger transit markets remain stable, supported by increased U.S. federal funding.
- Cost Management: Management continues to focus on cost controls, having realized savings from downsizing Canadian operations and consolidation actions.
- Liquidity: The company maintains a strong liquidity position with $255.2 million in cash and $142.9 million in available borrowing capacity under its credit facility. It is in compliance with all financial covenants.
- Risks: Key risks include economic uncertainty, fluctuations in raw material costs, foreign currency volatility, and the potential for customer spending curtailment. Legal proceedings include ongoing asbestos-related claims (management believes these will not be material) and a trade secret dispute with Faiveley Transport (management contests the $91 million claim).
- Stock Repurchases: The company repurchased 669,700 shares during the first nine months of 2009. No repurchases occurred in the third quarter.
Investor Verification Checklist
- Verify the impact of the global recession on the backlog of freight car orders (19,343 units as of Sept 30, 2009).
- Monitor the integration and financial contribution of the recent Unifin International LP acquisition ($93.3 million).
- Review the status of the Faiveley Transport arbitration and potential liability exposure.
- Assess the sustainability of improved gross margins amidst potential raw material cost inflation.
- Track the utilization of the $142.9 million available credit facility and debt service coverage ratios.