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WAB > SEC Filings for WAB > Form 10-Q on 31-Oct-2013All Recent SEC Filings

Show all filings for WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORP | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORP


31-Oct-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the information in the unaudited condensed consolidated financial statements and notes thereto included herein and Westinghouse Air Brake Technologies Corporation's Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included in its Annual Report on Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission on February 22, 2013.

OVERVIEW

Wabtec is one of the world's largest providers of value-added, technology-based products and services for the global rail industry. Our products are found on virtually all U.S. locomotives, freight cars and passenger transit vehicles, as well as in more than 100 countries throughout the world. Our products enhance safety, improve productivity and reduce maintenance costs for customers, and many of our core products and services are essential in the safe and efficient operation of freight rail and passenger transit vehicles. Wabtec is a global company with operations in 19 countries. In the first nine months of 2013, about 49% of the Company's revenues came from customers outside the U.S.

Management Review and Future Outlook

Wabtec's long-term financial goals are to generate cash flow in excess of net income, maintain a strong credit profile while minimizing our overall cost of capital, increase margins through strict attention to cost controls and implementation of the Wabtec Performance System, and increase revenues through a focused growth strategy, including global and market expansion, new products and technologies, aftermarket products and services, and acquisitions. In addition, management evaluates the Company's current operational performance through measures such as quality and on-time delivery.

The Company monitors a variety of factors and statistics to gauge activity in key freight rail and passenger transit markets such as North and South America, Europe and the United Kingdom, and Asia-Pacific. In these and other markets, the freight rail industry is largely driven by general economic conditions, which can cause fluctuations in rail traffic and the level of investment spending by railroads and governments to expand, upgrade, and modernize their networks. Based on those fluctuations, railroads and governments can increase or decrease purchases of new locomotives and freight cars, and spending on rail-related infrastructure. The passenger transit industry is driven mainly by the spending of government agencies and authorities as they maintain, expand and modernize their transit systems. In doing so, they will increase or decrease spending on new locomotives, transit/subway cars, buses and related infrastructure. Farebox revenues, the fees paid by riders to use public transit, also provide funding for maintaining and operating the systems. Many government entities at all levels are facing budget issues, which could have a negative effect on demand for the Company's products and services.

In North America, the AAR compiles freight rail industry statistics such as carloadings, generally referred to as "rail traffic," and the Railway Supply Institute (RSI) releases data on freight car orders, deliveries, and backlog. Through October 12, 2013 carloadings in North America increased 1.6%, including a 3.7% increase in intermodal traffic. According to the RSI, in the third quarter of 2013, the industry multi-year backlog of freight cars on order increased to about 74,000, the highest since the fourth quarter of 2007. In 2013, with some carbuilders already at capacity, we expect deliveries of new locomotives and new freight cars to be slightly lower than in 2012. Future demand depends largely on the strength in the overall economy and in rail traffic volumes.

The American Public Transportation Association (APTA) provides quarterly transit ridership statistics for the U.S. and Canada. In its most recent report, APTA said second quarter 2013 ridership increased 1.2% in the U.S. and 1.0% in Canada. In 2012, the U.S. Congress passed a new, two-year transportation funding bill, which maintained transit spending at about the same level, about $10.7 billion, as in prior years. Spending in 2013 is expected to remain at about the same level. The Company also expects deliveries of new subway cars and buses in 2013 to remain about the same as in 2012.

In 2008, the U.S. federal government enacted a rail safety bill that mandates the use of PTC technology, which includes on-board locomotive computer and related software, on a majority of the locomotives and track in the U.S. With our Electronic Train Management SystemŽ, we are the leading supplier of this on-board train control equipment, and we are working with the U.S. Class I railroads, commuter rail authorities and other industry suppliers to implement this technology by the December 31, 2015 deadline set in the rail safety bill. The railroads and commuter rail authorities have said they cannot complete full implementation by the deadline. In 2012, the U.S. Congress discussed extending the deadline but did not do so. An extension of the deadline could affect the rate of industry spending on this technology. Wabtec's PTC revenue was about $170 million for the nine months ended September 30, 2013.

Wabtec continues to expand its presence in freight rail and passenger transit markets outside the U.S., particularly in Europe, Asia-Pacific and South America. In Europe, the majority of the rail system serves the passenger transit market, which is larger than the transit market in the U.S. Our presence in the U.K., Germany and Italy has positioned the Company to take advantage of this market. Asia-Pacific is a growth market and our various joint ventures and direct exports to China have positioned the Company to take


advantage of this growth. Economic growth in Australia has been an area of expansion for the Company as commodity suppliers use our products to meet the demands of their regional customers. In Brazil, the Company is delivering on a PTC contract, has expanded locations and has completed two acquisitions, allowing us to increase our sales in that market.

Current conditions in these international markets vary based on general economic factors and specific freight rail and passenger transit drivers, as mentioned above. In its most recent quarterly data, the Office of Rail Regulation in the U.K. reported an increase in passenger ridership of 7.3% and a 3.7% increase in freight moved. In Germany, the government statistics bureau reported an increase of 0.4% for bus and rail ridership in the first half of 2013, and a decrease in rail freight transport of 1.1% for the same period. In France, SNCF, the country's largest rail system operator, had a 0.6% decrease in regional train ridership in the first half of 2013. Brazil's National Association of Rail Transport reported a 1.3% increase in freight rail traffic in 2012, and a 6.6% increase in spending on new infrastructure and equipment. In China, spending on rolling stock increased about 3% in 2012, and earlier this year the government established China Railway Corp. to manage its rail system. Russian Railways announced an increase of 4.4% in passenger ridership in the first nine months of 2013 compared to the year-ago period, and a decrease of 3.0% in freight tons loaded.

In 2013 and beyond, general economic and market conditions in our key markets could have an impact on our sales and operations. To the extent that these factors cause instability of capital markets, shortages of raw materials or component parts, longer sales cycles, deferral or delay of customer orders or an inability to market our products effectively, our business and results of operations could be materially adversely affected. In addition, we face risks associated with our four-point growth strategy including the level of investment that customers are willing to make in new technologies developed by the industry and the Company, and risks inherent in global expansion. When necessary, we will modify our financial and operating strategies to reflect changes in market conditions and risks.

RESULTS OF OPERATIONS

The following table shows our Consolidated Statements of Operations for the
periods indicated.





                                                      Three Months Ended                 Nine Months Ended
                                                         September 30,                     September 30,
In millions                                          2013            2012             2013              2012
Net sales                                          $   631.4       $   587.6       $   1,884.9       $   1,780.7
Cost of sales                                         (443.3 )        (416.3 )        (1,321.0 )        (1,266.6 )
Gross profit                                           188.1           171.3             563.9             514.1
Selling, general and administrative expenses           (63.4 )         (59.8 )          (191.6 )          (180.9 )
Engineering expenses                                   (10.9 )         (10.8 )           (33.5 )           (31.1 )
Amortization expense                                    (3.9 )          (3.9 )           (12.7 )           (10.3 )
Total operating expenses                               (78.2 )         (74.5 )          (237.8 )          (222.3 )
Income from operations                                 109.9            96.8             326.1             291.8
Interest expense, net                                   (3.8 )          (3.0 )           (10.7 )           (10.3 )
Other income (expense), net                             (1.7 )          (1.4 )            (1.8 )            (1.3 )
Income from operations before income taxes             104.4            92.4             313.6             280.2
Income tax expense                                     (30.4 )         (29.4 )           (95.4 )           (93.2 )
Net income attributable to Wabtec shareholders     $    74.0       $    63.0       $     218.2       $     187.0

THIRD QUARTER 2013 COMPARED TO THIRD QUARTER 2012

The following table summarizes the results of operations for the period:





                                           Three months ended September 30,
                                                                              Percent
In thousands                      2013                   2012                  Change
Freight Segment              $      340,533         $      354,659                   (4.0 )%
Transit Segment                     290,865                232,934                   24.9  %
Net sales                           631,398                587,593                    7.5  %
Income from operations              109,871                 96,842                   13.5  %
Net income attributable
to Wabtec shareholders       $       73,943         $       62,994                   17.4  %


The following table shows the major components of the change in sales in the third quarter of 2013 from the third quarter of 2012:

In thousands                                       Freight Segment          Transit Segment            Total
Third Quarter 2012 Net Sales                      $         354,659        $         232,934        $   587,593
Acquisitions                                                 14,828                   20,017             34,845
Change in Sales by Product Line:
Brake Products                                               (2,157 )                 10,491              8,334
Specialty Products & Electronics                             (5,774 )                 10,821              5,047
Other Transit Products                                           -                       937                937
Remanufacturing, Overhaul & Build                           (13,219 )                 13,201                (18 )
Other                                                           477                      446                923
Foreign Exchange                                             (8,281 )                  2,018             (6,263 )
Third Quarter 2013 Net Sales                      $         340,533        $         290,865        $   631,398

Net sales increased by $43.8 million to $631.4 million from $587.6 million for the three months ended September 30, 2013 and 2012, respectively. The increase is due to sales from acquisitions of $34.8 million; $8.3 million for Brake Products sales due to higher demand for aftermarket brakes from certain transit authorities; and $5.0 million for Specialty Products and Electronics sales from higher demand for transit original equipment electronic products. Company net sales decreased $6.3 million and income from operations decreased $0.9 million due to unfavorable effects of foreign exchange. Net income for the three months ended September 30, 2013 was $74.0 million or $0.76 per diluted share. Net income for the three months ended September 30, 2012 was $63.0 million or $0.65 per diluted share. Net income increased due to higher sales volume and a decrease in the effective income tax rate discussed below.

Freight Segment sales decreased by $14.1 million, or 4.0%, due to a decrease of $13.2 million for freight original equipment locomotives as contract mix shifted to transit locomotives; $5.8 million decrease for Specialty Products and Electronics sales from lower demand for freight original equipment rail products; and $2.2 million from decreased demand for original equipment brake products. These decreases were partially offset by $14.8 million in sales from acquisitions. For the Freight Segment, net sales decreased by $8.3 million due to unfavorable effects of foreign exchange.

Transit Segment sales increased by $57.9 million, or 24.9%, due to $20.0 million from acquisitions; higher sales of $13.2 million for original equipment transit locomotives as contract mix shifted from freight locomotives; $10.8 million for Specialty Products and Electronics sales from higher demand for transit original equipment electronic products; and $10.5 million from increased demand for original equipment brakes. For the Transit Segment, net sales increased by $2.0 million due to favorable effects of foreign exchange.

Cost of Sales and Gross Profit. Cost of Sales increased by $27.0 million to $443.3 million in the third quarter of 2013 compared to $416.3 million in the same period of 2012. In the third quarter of 2013, cost of sales, as a percentage of sales was 70.2% compared to 70.9% in the same period of 2012.

Raw material costs were approximately 43% as a percentage of sales in the third quarter of 2013 and 2012. Labor costs were approximately 12% as a percentage of sales in the third quarter of 2013 and 2012. Overhead costs decreased as a percentage of sales to approximately 15% in the third quarter of 2013 from approximately 16% in the same period of 2012. Freight Segment raw material costs decreased as a percentage of sales to approximately 39% in the third quarter of 2013 from 43% in the same period of 2012. Freight Segment labor costs were approximately 11% as a percentage of sales in the third quarter of 2013 and 2012, and overhead costs were approximately 15% as a percentage of sales in the third quarter of 2013 and 2012. Transit Segment raw material costs increased as a percentage of sales to approximately 47% in the third quarter of 2013 from approximately 43% in the same period of 2012. Transit Segment labor costs were approximately 13% as a percentage of sales in the third quarter of 2013 and 2012, and overhead costs decreased as a percentage of sales to approximately 17% in the third quarter of 2013 from approximately 19% in the same period of 2012. Freight Segment material costs decreased as a percentage of sales and transit material costs increased as a percentage of sales due to a shift in contract mix for original equipment locomotives from freight in the third quarter of 2012 to transit in the third quarter of 2013. Overhead costs vary as a percentage of sales depending on product mix and changes in sales volume

Included in cost of sales is warranty expense. The provision for warranty expense is generally established for specific losses, along with historical estimates of customer claims as a percentage of sales, which can cause variability in warranty expense between quarters. Warranty expense was $0.4 million lower in the third quarter of 2013 compared to the same period of 2012. As a percentage of sales, warranty expense was 0.8% for the third quarter of 2013 compared to 0.9% for the same period in the previous year.


Gross profit increased to $188.1 million in the third quarter of 2013 compared to $171.3 million in the same period of 2012, due to higher sales volume and the reasons discussed above. For the third quarter of 2013, gross profit, as a percentage of sales, was 29.8% compared to 29.1%, for the third quarter of 2012.

Operating expenses The following table shows our operating expenses:

                                                               Three months ended September 30,
                                                                                            Percent
In thousands                                                2013             2012            Change
Selling, general and administrative expenses             $    63,402       $  59,743              6.1  %
Engineering expenses                                          10,921          10,753              1.6  %
Amortization expense                                           3,939           3,941             (0.1 )%
Total operating expenses                                 $    78,262       $  74,437              5.1  %

Selling, general, and administrative expenses increased $3.7 million in the third quarter of 2013 compared to the same period of 2012 primarily due to $3.4 million of expenses from acquisitions. Engineering expense increased by $0.2 million in the third quarter of 2013 compared to the same period of 2012 due to $0.8 million of engineering expense from acquisitions. Costs related to engineering for specific customer contracts are included in cost of sales. Amortization expense remained about the same in the third quarter of 2013 compared to the same period in 2012 due to amortization of intangibles associated with acquisitions. Total operating expenses were 12.4% of sales for the third quarter of 2013 compared to 12.7% for the same period in the previous year.

The following table shows our segment operating expense:

                                          Three months ended September 30,
                                                                       Percent
         In thousands                   2013             2012           Change
         Freight Segment             $    38,004       $  37,621            1.0 %
         Transit Segment                  36,496          33,571            8.7 %
         Corporate                         3,762           3,245           15.9 %
         Total operating expenses    $    78,262       $  74,437            5.1 %

Segment operating expenses consist of specific segment costs such as, sales and marketing, information technology, insurance, and audit and tax fees, allocated corporate costs, and other segment specific discrete charges. Corporate costs are allocated to the Freight and Transit Segments based on segment revenues. Certain corporate departmental expenses are not allocated.

Freight Segment operating expenses increased $0.4 million in the third quarter of 2013 compared to the same period of 2012 because of $0.9 million of incremental selling, general and administrative expense from acquisitions and $0.8 million of incremental engineering expense from acquisitions, partially offset by a $1.1 million decrease in allocated operating expenses. Freight Segment operating expenses were 11.0% and 10.4% of Freight Segment sales for the third quarter of 2013 and 2012, respectively.

Transit Segment operating expenses increased $2.9 million in the third quarter of 2013 compared to the same period of 2012 because of $2.5 million of incremental selling, general and administrative expense from acquisitions. Allocated operating expenses increased $0.4 million. Transit Segment operating expenses were 12.4% and 14.5% of Transit Segment sales for the third quarter of 2013 and 2012, respectively.

Corporate non-allocated operating expenses increased $0.5 million in the third quarter of 2013 compared to the same period of 2012.

Income from operations Income from operations totaled $109.9 million or 17.4% of sales in the third quarter of 2013 compared to $96.8 million or 16.5% of sales in the same period of 2012. Income from operations increased due to higher sales volume, partially offset by higher operating expenses discussed above.

Interest expense, net Overall interest expense, net, was comparable to the prior period.

Other income (expense), net The Company recorded foreign exchange losses of $1.0 million and $1.4 million, in the third quarter of 2013 and 2012, respectively, due to the effect of currency exchange rate changes on intercompany transactions that are non U.S. dollar denominated and charged or credited to earnings.

Income taxes The effective income tax rate was 29.2% and 31.8% for the third quarter of 2013 and 2012, respectively. The decrease in the effective rate is primarily due to a benefit recorded for the enacted reduction of a foreign statutory tax rate.


Net income Net income for the third quarter of 2013 increased $11.0 million, compared with the same period of 2012. The increase in net income is due to higher sales volume and lower effective tax rate, partially offset by higher operating expenses discussed above.

FIRST NINE MONTHS OF 2013 COMPARED TO FIRST NINE MONTHS OF 2012

The following table summarizes the results of operations for the period:





                                                               Nine months ended September 30,
                                                                                             Percent
                                                            2013               2012          Change
Freight Segment                                         $  1,009,069       $  1,159,653          (13.0 )%
Transit Segment                                              875,841            621,069           41.0  %
Net sales                                                  1,884,910          1,780,722            5.9  %
Income from operations                                       326,092            291,817           11.7  %
Net income attributable to Wabtec shareholders          $    218,194       $    186,967           16.7  %

The following table shows the major components of the change in sales in the first nine months of 2013 from the first nine months of 2012:

In thousands                                       Freight Segment            Transit Segment           Total
First Nine Months of 2012 Net Sales               $       1,159,653          $         621,069       $  1,780,722
Acquisitions                                                 39,747                     85,463            125,210
Change in Sales by Product Line:
Brake Products                                              (18,300 )                   46,688             28,388
Remanufacturing, Overhaul & Build                           (72,033 )                   95,100             23,067
Other Transit Products                                           -                       3,420              3,420
Specialty Products & Electronics                            (85,405 )                   21,560            (63,845 )
Other                                                          (571 )                    1,726              1,155
Foreign Exchange                                            (14,022 )                      815            (13,207 )
First Nine Months of 2013 Net Sales               $       1,009,069          $         875,841       $  1,884,910

Net sales increased by $104.2 million to $1,884.9 million from $1,780.7 million for the nine months ended September 30, 2013 and 2012, respectively. The increase is due to sales related to acquisitions of $125.2 million; higher Brake Products sales of $28.4 million due to higher demand for transit original equipment brakes; higher Remanufacturing, Overhaul and Build sales of $23.1 million from increased demand for transit original equipment locomotives and aftermarket services for locomotives; and an increase in Other Transit Products of $3.4 million. These increases were partially offset by a $63.8 million decrease for Specialty Products and Electronics sales from lower demand for freight original equipment rail products. Company net sales decreased $13.2 million and income from operations decreased $1.3 million due to unfavorable effects of foreign exchange. Net income for the nine months ended September 30, 2013 was $218.2 million or $2.25 per diluted share. Net income for the nine months ended September 30, 2012 was $187.0 million or $1.93 per diluted share. Net income increased due to higher sales volume and a decrease in the effective income tax rate discussed below.

Freight Segment sales decreased by $150.6 million, or 13.0%, due to a decrease of $85.4 million for Specialty Products and Electronics sales from lower demand for freight original equipment rail products; $72.0 million decrease for freight original equipment locomotives as contract mix shifted to transit locomotives; and $18.3 million from decreased demand for original equipment brake products. These decreases were partially offset by $39.7 million in sales from acquisitions. For the Freight Segment, net sales decreased by $14.0 million due to unfavorable effects of foreign exchange.

Transit Segment sales increased by $254.8 million, or 41.0%, due to higher sales of $95.1 million for original equipment transit locomotives as contract mix shifted from freight locomotives; $85.5 million from acquisitions; $46.7 million from increased demand for original equipment brakes; $21.6 million from increased demand for positive train control electronics; and an increase of $3.4 million from certain transit car build contracts. For the Transit Segment, net sales increased by $0.8 million due to favorable effects of foreign exchange.

Cost of Sales and Gross Profit Cost of Sales increased by $54.4 million to $1,321.0 million in the first nine months of 2013 compared to $1,266.6 million in the same period of 2012. In the first nine months of 2013, cost of sales, as a percentage of sales was 70.0% compared to 71.1% in the same period of 2012.

Raw material costs decreased as a percentage of sales to approximately 42% in the first nine months of 2013 from approximately 43% in the same period of 2012. Labor costs increased as a percentage of sales to approximately 12% in the first nine


months of 2013 from approximately 11% in the same period of 2012. Overhead costs as a percentage of sales decreased as a percentage of sales to approximately 16% in the first nine months of 2013 from approximately 17% in the same period of 2012. Freight Segment raw material costs decreased as a percentage of sales to approximately 40% in the first nine months of 2013 from approximately 44% in the same period of 2012. Freight Segment labor costs were approximately 11% as a percentage of sales in the first nine months of 2013 and 2012, and overhead costs as a percentage of sales were approximately 15% in the first nine months of 2013 and 2012. Transit Segment raw material costs increased as a percentage . . .
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