Business Context and Reporting Period
Company: Westinghouse Air Brake Technologies Corporation (Wabtec)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2002
Overview: Wabtec is a leading provider of technology-based equipment and services for the rail industry, operating through two primary segments: the Freight Group (64% of sales) and the Transit Group (36% of sales). The company serves both Original Equipment Manufacturers (OEMs) and the aftermarket. In 2002, the company faced a challenging economic environment characterized by a weak U.S. freight market, reduced rail traffic, and deferred maintenance spending by railroads.
Key Financial Metrics
| Metric (in thousands) | 2002 | 2001 |
|---|---|---|
| Net Sales | $696,195 | $783,698 |
| Gross Profit | $179,471 | $209,926 |
| Gross Margin | 25.8% | 26.8% |
| Income from Operations | $47,534 | $54,058 |
| Net Income (Loss) | $(45,479) | $61,780 |
| Diluted EPS (Net) | $(1.04) | $1.43 |
| Operating Cash Flow | $15,658 | $119,097 |
| Total Debt | $195,151 | $241,870 |
| Shareholders' Equity | $199,262 | $245,271 |
EBITDA: $73,047 (2002) vs. $87,119 (2001).
Liquidity: Cash and equivalents totaled $19,210 at year-end. Available bank borrowing capacity was approximately $159 million.
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 11.2% to $696.2 million. This was driven by lower component sales for new freight cars and locomotives (industry deliveries dropped significantly) and the completion of a major New York City subway contract in the Transit Group.
- Net Loss: The company reported a net loss of $45.5 million, a sharp reversal from the $61.8 million profit in 2001. This was primarily due to a one-time, non-cash charge of $61.7 million (net of tax) for the cumulative effect of adopting SFAS No. 142 (Goodwill accounting).
- Adjusted Earnings: Excluding the goodwill charge, the extraordinary loss on debt extinguishment ($1.2 million), and discontinued operations, earnings from continuing operations were $17.5 million ($0.40 per share), compared to $21.1 million ($0.49 per share) in 2001.
- Debt Reduction: Total debt decreased by approximately $46.7 million. The company redeemed $175 million of 9.375% Senior Notes in July 2002 to take advantage of lower interest rates.
- Cash Flow: Operating cash flow dropped significantly to $15.7 million from $119.1 million. This decline was largely due to a $30 million tax payment related to the 2001 asset sale to GE Transportation Systems and working capital changes.
Guidance, Outlook, and Risks
Outlook: Management expects railroads to return to typical maintenance spending patterns as the U.S. economy strengthens. However, new freight car and locomotive deliveries are expected to remain below historical averages in 2003. Transit vehicle deliveries are projected to be lower in 2003 due to the completion of a major New York City order, though a new order is expected to commence deliveries in 2005.
Strategy: The company is focusing on increasing OEM sales, expanding globally, accelerating new product development (particularly in electronics and braking), and implementing lean manufacturing principles.
Risks and Contingencies:
- Customer Concentration: One customer in the Transit Group represented 11% of consolidated sales in 2002.
- Legal Proceedings: The company is involved in a dispute with GE Transportation Services Global Signaling regarding a 2000 settlement agreement, with the plaintiff seeking substantial damages.
- Environmental: Ongoing remediation costs are accrued for sites in Boise, ID; Mattoon, IL; and Racine, WI. The company believes these costs will not be material.
- Market Conditions: Results are heavily dependent on the financial condition and capital spending plans of the global railroad industry.
Investor Verification Checklist
- Goodwill Impairment: Verify the assumptions used in the SFAS No. 142 goodwill impairment test that resulted in the $61.7 million charge.
- Discontinued Operations: Review the status of the assets held for sale from the 2001 GE sale and other exited businesses, as market conditions have delayed their sale.
- Debt Covenants: Confirm compliance with the credit agreement covenants, specifically the interest expense coverage ratio and debt-to-cash flow ratio, given the reduced operating cash flow.
- Customer Concentration: Assess the risk associated with the single Transit Group customer accounting for 11% of sales.
- Legal Exposure: Monitor the outcome of the litigation with GE Transportation Services Global Signaling regarding the 2000 settlement.