Wabtec Corporation (NYSE: WAB) — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports fourth-quarter results. Wabtec supplies equipment, technology and services to global freight rail and passenger transit markets; aftermarket parts and services were approximately 57% of sales, and customers outside the U.S. represented approximately 48%.
Financial performance
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $2,566.4 million | $2,391.1 million | +7.3% |
| Gross profit / margin | $764.0 million / 29.8% | $694.6 million / 29.0% | Margin +0.8 percentage points |
| Operating income / margin | $437.3 million / 17.0% | $392.3 million / 16.4% | Income +11.5% |
| Net income attributable to Wabtec shareholders | $292.2 million | $251.7 million | +16.1% |
| Diluted EPS | $3.01 | $2.60 | +15.8% |
| Cash from operating activities | $235.7 million | $237.4 million | Down $1.8 million |
- Fourth quarter: Sales were $681.5 million versus $610.4 million in Q4 2012; operating income was $111.2 million versus $100.5 million; net income was $74.0 million versus $64.8 million.
- Segment sales: Freight declined 6.9% to $1,398.1 million; Transit rose 31.4% to $1,168.3 million. Freight operating income was $309.1 million versus $314.6 million; Transit operating income increased to $143.6 million from $94.9 million.
- Cash and liquidity: Year-end cash was $285.8 million, up from $215.8 million. The $800 million revolving credit facility had approximately $540.2 million of available borrowing capacity after letters of credit, subject to covenants.
- Debt and equity: Total debt was $450.7 million, compared with $317.9 million; shareholders’ equity was $1,587.2 million. Debt included $250 million of 4.375% senior notes due 2023 and $200 million drawn on the revolving facility. The company refinanced its revolver to $800 million and issued the notes during 2013.
- Investment and distributions: Investing activities used $258.7 million, including $223.5 million for acquisitions and $41.2 million for capital expenditures. Dividends paid were $12.6 million; share repurchases were $33.0 million.
Material changes versus the prior year
- Sales growth reflected $157.9 million from acquisitions and increased Transit demand, particularly for locomotives, brakes and overhaul services. These gains were partly offset by lower Freight specialty/electronics and original-equipment demand and $15.6 million of unfavorable foreign-exchange effects on sales.
- Gross margin improved from 29.0% to 29.8%, while operating margin rose from 16.4% to 17.0%. Management attributed improvement primarily to volume and cost mix; operating expenses also increased 8.1%, partly from acquisitions.
- Net income benefited from higher sales and a lower effective tax rate, 30.6% versus 33.3%. Foreign-currency transaction losses were $3.5 million, compared with $0.1 million in 2012.
- Operating cash flow was broadly flat despite higher earnings. Working-capital use included a $149.7 million increase in accounts receivable and unbilled receivables; inventory declined by $26.1 million. Cash used for acquisitions increased to $223.5 million from $149.9 million.
- Acquisitions included Napier Turbochargers, Transdyne, Turbonetics and Longwood. After year-end, Wabtec agreed to acquire Fandstan Electric for approximately $215 million, subject to closing conditions and competition clearance.
Outlook, risks and unusual items
- For 2014, management expected North American new-locomotive demand to be about the same as 2013 and new freight-car demand to be slightly higher. Transit spending was expected to remain around current levels; management also cited anticipated rail investment in China and India. These are expectations, not guarantees.
- Wabtec recorded approximately $235 million of 2013 revenue related to Positive Train Control (PTC). The statutory implementation deadline remained December 31, 2015, while railroads and transit authorities had said full implementation by that date was not achievable. A change or extension to the mandate could affect the timing and level of PTC revenue.
- Key risks include cyclical rail and transit spending, government funding, customer order deferrals or cancellations, acquisition integration, international and currency exposure, competition, raw-material availability and cost, labor negotiations, and product warranty/liability claims. Approximately 15% of the workforce was covered by collective bargaining agreements expiring at various times in 2014.
- Asbestos claims remain pending; management said ultimate liability could not be estimated, though it did not expect final resolution to materially affect the company overall. Environmental compliance and other ordinary-course claims are also disclosed.
- Unusual items included a $3.9 million release of certain legal reserves affecting 2013 SG&A and $3.5 million of foreign-exchange transaction losses. Goodwill and indefinite-lived intangibles were reported as not impaired. The auditor issued an unqualified opinion; management and the auditor reported effective internal controls, excluding specified recently acquired businesses from the control assessment.
Important facts for investors to verify
- Whether the 2013 Transit growth and margin gains are sustainable, given the decline in Freight sales and the contribution from acquisitions and contract mix.
- Receivables and contract billing: unbilled receivables rose to $205.0 million from $97.1 million, while operating cash flow lagged net income.
- PTC order timing, implementation progress, and any legislative change to the December 2015 deadline.
- Acquisition performance and integration, including the proposed Fandstan purchase and the financing required for it.
- Debt covenant headroom, variable-rate exposure and dividend restrictions; also review pension, asbestos, warranty and other contingent obligations.