Westinghouse Air Brake Technologies Corporation (Wabtec) — Q1 2011 10-Q
Reporting period: Three months ended March 31, 2011; comparisons are with Q1 2010 unless otherwise noted. Wabtec supplies technology-based products and services to the global rail industry, operating in 17 countries. Approximately 44% of Q1 revenue came from outside the U.S. Financial statements are unaudited.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $455.3 million | $363.9 million | +25.1% |
| Gross profit / margin | $133.2 million / 29.3% | $108.4 million / 29.8% | Margin down 0.5 percentage points |
| Operating income / margin | $66.4 million / 14.6% | $51.2 million / 14.1% | +29.7% |
| Income before taxes | $63.2 million | $46.5 million | Increased |
| Net income attributable to Wabtec shareholders | $41.0 million | $30.4 million | +34.9% |
| Diluted EPS | $0.85 | $0.63 | Increased |
| Operating cash flow | $16.5 million | $12.4 million | Increased |
- Cash and liquidity: Cash was $200.7 million at March 31, down from $236.9 million at year-end 2010. The company reported approximately $120.2 million of available borrowing capacity, net of letters of credit, subject to covenant restrictions.
- Debt: Total debt was $400.1 million, down from $422.1 million at December 31; cash exceeded debt by approximately $199.4 million. Debt included $150 million of 6.875% senior notes due in 2013, term loans and revolver borrowings. Interest-rate swaps fixed rates on $137 million of debt at 2.26% through maturities ending by December 2012.
- Cash uses: Investing activities used $38.4 million, including $31.0 million for acquisitions and $7.4 million for capital expenditures. Financing activities used $20.6 million, primarily reflecting net debt repayments. Cash dividends were $0.01 per share; no shares were repurchased in the quarter.
- Balance sheet: Current assets were $844.9 million and current liabilities $381.5 million. Receivables and inventory rose by $47.5 million and $31.5 million, respectively, from year-end.
Material changes and operating trends
- Freight Group external sales rose 60.4% to $264.9 million, supported by electronics and specialty products, stronger rail demand and acquisitions. Transit Group sales declined 4.2% to $190.4 million, reflecting completed major contracts, project delays and municipal budget constraints.
- Sales by product showed particularly strong growth in electronics and other freight-related products, to $185.2 million from $97.5 million. Transit products declined to $50.9 million from $59.5 million.
- Higher sales volume lifted gross profit, but gross margin eased due to product volume and mix. SG&A rose 22.8%, partly because of acquisitions and incentive and non-cash compensation; engineering expense fell 16.9%, while amortization rose 65.0% due to acquisitions.
- Operating cash flow improved, but higher working-capital needs—including increases in receivables and inventory—partly offset earnings and non-cash charges.
- Wabtec acquired the U.K.-based Brush Traction business in February for approximately $31 million. Goodwill increased to $575.2 million from $545.8 million, including acquisition and currency effects.
Outlook, risks and unusual items
- Outlook: No numerical full-year earnings or revenue guidance is provided. Management expected North American freight conditions to generally improve in 2011 if the economy continued improving, with higher demand for freight cars and locomotives. It expected the North American passenger transit market to be slightly weaker; stable funding and ridership could support stable demand, but public-sector budget constraints remain a concern.
- Management cited improving freight traffic through mid-March 2011 and anticipated opportunities from positive train control requirements, international growth, new technology and aftermarket demand. It may adjust capacity or costs through plant consolidation, workforce reductions or spending controls as markets change.
- Litigation: On April 13, 2011, after quarter-end, a court granted Faiveley entities partial summary judgment on three of four claims and denied Wabtec’s summary-judgment motion. Plaintiffs had asserted $17.2 million in compensatory and unspecified damages; trial was scheduled for June 2011. Wabtec said it would contest liability and did not believe the matter would result in material liability. A prior arbitration award required a $3.9 million royalty payment. The filing does not provide a clear estimate of potential loss for the later lawsuit.
- Other contingencies: Asbestos-related claims are largely submitted to insurers or other parties for defense and indemnity, but coverage and indemnitor solvency are not assured; management said the ultimate loss range was not reasonably determinable and did not expect a material overall impact. Uncertain tax positions totaled $10.0 million; approximately $3.4 million of unrecognized tax benefits could change within 12 months. The IRS was auditing tax years 2008 and 2009.
- Key risks: Economic and rail-market weakness, customer order delays or cancellations, transit funding constraints, raw-material or supply disruptions, foreign-exchange and interest-rate movements, acquisition integration, long-term contract performance, technology adoption, and legal outcomes. Management reported compliance with credit covenants and effective disclosure controls.
Important facts for investors to verify
- Whether freight-market growth and positive train control deployments translated into sustained orders, and whether Transit Group weakness continued.
- Whether working capital, especially receivables and inventory, converted into cash as sales expanded.
- Integration and performance of Brush Traction and other recent acquisitions, including purchase-accounting estimates and acquired warranty obligations.
- Developments in the Faiveley litigation, subsequent court opinion, trial outcome and any resulting financial exposure.
- Debt maturities and refinancing needs in 2013, borrowing availability and continued compliance with credit-agreement covenants.
- Warranty reserve adequacy: the reserve reached $50.6 million, including $13.4 million added through acquisitions, while quarterly warranty expense increased year over year.