Westinghouse Air Brake Technologies Management Discusses Q4 2012 Results - Earnings Call Transcript

Feb.19.13 | About: Westinghouse Air (WAB)

Westinghouse Air Brake Technologies (NYSE:WAB)

Q4 2012 Earnings Call

February 19, 2013 10:00 am ET

Executives

Timothy R. Wesley - Vice President of Investor Relations and Corporate Communications

Albert J. Neupaver - Chief Executive Officer, President and Director

Alvaro Garcia-Tunon - Chief Financial Officer and Executive Vice President

Analysts

Scott H. Group - Wolfe Trahan & Co.

Allison Poliniak-Cusic - Wells Fargo Securities, LLC, Research Division

Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division

Matthew S. Brooklier - Longbow Research LLC

Thomas S. Albrecht - BB&T Capital Markets, Research Division

Gregory W. Halter - LJR Great Lakes Review

Steve Barger - KeyBanc Capital Markets Inc., Research Division

Rhem Wood

Operator

Good day, and welcome to the Wabtec Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Tim Wesley, Vice President of Investor Relations. Mr. Wesley, please go ahead, sir.

Timothy R. Wesley

Thank you, Denise. Good morning, everybody, and thanks for joining us on our earnings call for the fourth quarter and full year. Let me introduce the Wabtec people who are here with me: Al Neupaver, our President and CEO; our Chief Financial Officer, Alvaro Garcia-Tunon; Ray Betler, our Chief Operating Officer; and Pat Dugan, our Senior Vice President, Finance and Corporate Controller. As usual, we'll make our prepared remarks with Al and Alvaro, and then we'll be happy to take your questions.

And we'll, of course, make some forward-looking statements during the call, so we encourage you to review today's press release for the appropriate disclaimers. Al?

Albert J. Neupaver

Thanks, Tim. Good morning. We had a strong operating performance in the fourth quarter with record sales of $610 million and record earnings of $1.34. As a result of this strong finish to the year, we ended the year 2012 with record sales and earnings and a record backlog of more than $1.6 billion. Wabtec finished 2012 as the only company in the United States on any exchange whose year-end stock prices increased for 12 consecutive years. We accomplished this during a period that included 2 recessions, one of which I think you'd all agree was probably the worst that we'll ever experience. Clearly, our business is performing very well, thanks to our diversified business model, our strategic growth initiatives and the power of our Wabtec Performance System. We are optimistic and excited about the long-term growth opportunities in our freight and transit rail markets, which are being driven by the mega trends around the world. These trends include ongoing demand for natural resources, increasing global trade, increasing urbanization, continuing need for infrastructure investment and the demand for more environmentally friendly technology.

Today, we also issued our 2013 guidance. Based on our current backlog and our outlook, we expect full year earnings per diluted share to be about $5.85. Along with this will come sales growth of 8% to 10% for the year. This EPS guidance is about 13% higher than 2012.

Our guidance assumes the following. Slow growth in the global economy, the U.S. and European transit markets will remain stable with the emerging countries' transit market's driving growth. Our transit revenues should grow based on our existing backlog of projects in the U.S. and internationally. The third assumption is that U.S. freight rail traffic will be stable with OEM locomotive and car build slightly down. So far this year, traffic is slightly down from a year ago. Fourth assumption, no major changes in foreign exchange rates, and we expect to have a slightly lower tax rate. And we have also included our most recent acquisition, Napier, in our guidance. As always, we will be disciplined when it comes to controlling cost, focused on generating cash, cash to invest in growth opportunities and ready to respond decisively to any changes in market conditions.

Let's first look at the freight rail market. In the U.S., rail traffic is mixed and was mixed in 2012. For the year, car loadings were down 3.1%, and revenue ton miles were down 2.4 %. However, excluding coal, car loadings were actually up 3%. Intermodal traffic was up 3.2%. Of the 20 traffic categories, 10 were up, with particular strength in autos, petroleum products and lumber.

So far in 2013, total rail traffic is down slightly, 0.7%, although it was up 2.2 % in the most recent week. In 2012, it was a good year for OEM deliveries, with 2013 expected to be slightly lower. About 1,200 new locomotives were delivered last year, we expect that to be around 1,000 to 1,100 this year. Forecasters are expecting anywhere from 50,000 to maybe 55,000 new freight cars to be delivered in 2013. This compares to 59,000 in 2012. About 11,800 cars were delivered in the fourth quarter. Orders were about 11,000, so the backlog remained about steady at around 60,000 cars. This compares to deliveries of 12,300 in the third quarter and 16.7 -- or 16,700 in the fourth quarter of 2011.

Globally, freight traffic is also mixed. Looking at transit, we continue to see stable markets in the U.S. and abroad. In the U.S., ridership was up 2.6% through the third quarter of 2012. In 2012, transit car backlog increased about 10%. We expect deliveries of about 900 units for 2013. Bus deliveries will be about 4,500 in 2013, and that's about the same number that we had in 2012. The stability in North American market continues despite budget issues and uncertainties about a long-term transportation bill.

As you all remember, after a period of about 3 years, a short-term extensions and uncertainty, Congress did pass a new transportation bill, it's a 2-year bill called MAP-21. This 2-year bill maintains funding for transit programs at about $10 billion, about where it's been for the past several years. This bill was passed in the fall of 2012.

Outside of the U.S., transit is more of a part of the culture and the economy, and we're seeing stability in the developed markets and growing in emerging markets. In Germany, for example, the Deutsche Bahn had 4% increase in ridership in the first half of the year. In France, SNCF saw a 6% increase. Now even in these difficult economic times in Europe, transit agencies are serving their customers and moving ahead with existing products and projects.

We continue to focus on growth and cash generation. Our priorities for allocating free cash remained the same, fund internal growth programs first. This accounted for 67% of our sales increase in 2012. We invested $36 million in capital expansion with most of that focused on growth opportunities. Secondly, we'll focus our cash generation use on acquisitions. We spent about $115 million on 4 acquisitions in 2012.

We will also return money to shareholders through a combination of dividends and stock buybacks. In 2012, we bought back 607,000 shares of stock for about $47 million. In the fourth quarter, we bought 231,000 shares for about $19 million. We also increased our quarterly dividend from $0.03 per share to $0.05 per share earlier in 2012. We are focused on increasing free cash flow by managing costs, driving down working capital and controlling capital expenditures. Our growth strategies also haven't changed.

Let's talk about some progress in these strategies. First, global end-market expansion. Our sales outside of the U.S. were a record $1.2 billion in 2012. That's 30% higher than last year's total. Now, 50% of total sales versus 1/3 5 years ago. We showed good growth in Australia, South America and China. We also had growth in non-rail, which is now about 15% of our total sales.

In aftermarket expansion, we saw sales of $1.3 billion, another record. It accounted for about 54% of our total. This is growth of 16% compared to the prior year. This growth is due to both acquisitions and internal growth initiatives such as expansion of our locomotive services in the U.S. and continued expansion of our service center in Brazil.

The third strategy, new products. We continue to have tremendous focus on this effort, with about 1/3 of our total annual sales coming from new products. We define new products as those introduced in the last 5 years. We have many internal development projects such as electronic braking, an oil-free compressor, locomotive services and an integrated brake system for the European freight market and of course, positive train control, which skips most of the headlines. PTC represented about $215 million of our sales in 2012. We expect more growth in 2013 as we continue to work with the railroads and other industries' suppliers to deliver on interoperable system by the 2015 deadline. As you know, there has been discussions about extending the deadline. We certainly can't predict whether that will happen or not. But we have analyzed how the delay would affect Wabtec, and we do not think it will have a meaningful impact on our business.

The last growth strategy is acquisitions. As I stated, we completed 4 transactions last year and have already closed one this year. Combined, the 2012 acquisitions and the ones we closed at different points in 2011 contributed incremental revenues of about $128 million in 2012. About half of that growth was in transit and half in freight. That total represented 33% of our growth in 2012.

Let's talk about our most recent acquisition, Napier Turbochargers, for a minute. Napier has about $55 million in revenues. They manufacture turbochargers and components for high-horsepower engine. It's a growing business and good markets. Power generation represent about 70% of their revenue, and sales within the marine area contribute about 30% of their sales. They have good IP and strong technical capabilities. Their installed base of more than 18,000 turbochargers and use around the world provides a strong reoccurring aftermarket revenue. They have a strong customer base, Caterpillar, Hyundai, Wartsila and other OEM engine manufacturers. This acquisition meets all of our strategic goals.

New products. Aftermarket was 60% of their total. And global expansion, they have sales of about 50% in Europe, 35% in the U.S. and 15% in Asia and growing. The other acquisition that we had in 2012 was Tec Tran, the only U.S.-owned manufacturer of hydraulic braking equipment and related components for light rail transit cars; Winco, a marketing and sales company in Brazil, with capabilities including value-added engineering and assembly service technical support and logistics; and the LH Group in the U.K., that's a provider of maintenance and engineer -- or engine overhaul services for transit; and lastly, Mors Smitt, a European-based manufacturer of electronic components for rail and industrial markets.

I will now ask Alvaro to discuss our financials.

Alvaro Garcia-Tunon

Great. Thanks, Al, and good morning, everyone. I'm pleased to be able to discuss the financial results for the quarter, which we believe were pretty good.

Sales for the fourth quarter were a record $610 million, which is 14% higher than last year. Of this increase, about 1/2 was from organic growth and the remainder from acquisitions -- from the acquisitions were discussed by Al. Transit Group sales increased 45% due to revenues from our backlog of existing projects and from acquisitions as well. Freight group sales were relatively stable and in line with the prior year's quarter. Overall, rail traffic was slightly lower in the fourth quarter of '12, as were deliveries of new locomotives and freight car. And earlier in the year, which affects the comparison, we completed deliveries of new locomotives, which had started last year.

Turning to the margins and cost information. As we've discussed in the past, we're always striving to drive our operating margins higher. In dollar terms, SG&A expense increased due mainly to acquisitions, but it was 10.6% of sales compared to 11.4% of sales in the year-ago quarter. For the quarter, for this year's quarter, operating income was $101 million or 16.5% of sales compared to 13.6% of sales in the year-ago quarter. The improved margin performance was driven by several factors, mainly higher sales volume, a favorable product mix and benefits from the Wabtec Performance System. Again, for comparison purposes, we should also note that we recorded charges of $5.5 million in the fourth quarter of '11. If you add back these items to our operating income again in the fourth quarter of '11, the operating margin back then would have been 14.6%. So I think the appropriate comparison is 14.6% to 16.5%, but still a very significant improvement. For the full year of '12, our operating margin was 16.4%.

In terms of other expenses, interest expense for the quarter was $3.9 million, a bit higher compared to the year-ago quarter due to low returns on cash investments and cash borrowed for acquisitions.

Other income. Sometimes that's other expense, sometimes that's other income, depending on FX rates. And it's typically the charge, or the income is just pay per FX translation gains or losses. The effective tax rate showed a slight improvement. Last year, it was 33.8%; this year, it's 33.3%. We expect the rate to be slightly lower in '13, and we've included that assumption in our guidance for the year.

Turning to cash, which is always critical for Wabtec. Cash from operations was $123 million in the quarter and $237 million for the year. That's a good performance and we hope to continue that momentum in 2013. Working capital during the quarter improved slightly despite our higher sales. At year end, receivables were $390 million, inventories were $407 million and payables were $249 million. Our GAAP working capital, which when we calculate, we exclude cash, was about 14% of sales for the quarter, is about 16% of sales at the end of the third quarter, which shows obviously our improvement or our efforts, our continuing efforts, to reduce working capital. As our business becomes more global and as we expand our sourcing programs into other low-cost countries, this will affect our working capital requirements. Even so, we think there are opportunities to reduce working capital going forward, and that's one of our critical goals.

Cash at year-end was $216 million, mostly outside the U.S. It was $282 million at September 30. We used some of the cash -- oh, no, I'm sorry, and Napier didn't occur till January, it's just a normal decrease in cash. Debt at year end was $317 million compared to $433 million at September 30.

A few miscellaneous items. One is share buybacks. We bought back 231,000 shares during the quarter for about $19 million. We still have ample room remaining on our $150 million buyback authorization from the board of about $75 million.

A few of the other plenary items. Depreciation was $7.7 million compared to $6.7 million in last year's quarter. Amort was $5.5 million -- I'm sorry, $5 million in the quarter versus $4.4 million last year and CapEx was $11.3 million versus $15.7 million. For the year, CapEx was $36 million versus $38 million last year. So relatively stable.

For 2013, our budget is about $45 million in CapEx. We tend to underspend our budget somewhat. But right now, the budget is about $45 million for next year. In terms of backlog, at the end of the year, we had a record-high backlog, and it was 7% higher than a year ago. The total multi-year backlog, so this is the backlog in total, is $1.6 billion versus $1.5 billion at September 30. The rolling 12-month backlog, this is what we expect to execute in the next 12 months, was $1.1 billion, which is the same as it was in September 30. Those figures don't include about $250 million of contract options that are not counted in the backlog until the customer exercises them, but hopefully we'll be able to get a good chunk of that.

And with that, I think that concludes the financial review. And I'll turn it back over to Al.

Albert J. Neupaver

Okay. Thanks, Alvaro. Once again, we had a good performance in the fourth quarter and for the full year. Taking one final look back at 2012, revenues increased 22% to a record $2.4 billion, income from operations increased 45% to a record $392 million, EPS increased 48% to a record $5.19 and our backlog ended the year at a record $1.6 billion.

Looking ahead, 2013, we are anticipating another record year with EPS guidance of about $5.85 on a revenue growth of 8% to 10%. With stable market conditions, this guidance is our best estimate at this time. We couldn't be more pleased with our strategic progress and the long-term growth opportunities we see. As countries around the world continue to invest in freight rail and passenger transit infrastructure, we continue to benefit from our diverse business model and the Wabtec Performance System, which provides the tools we need to generate cash and reduce cost. We have an experienced management team that is poised to take advantage of our growth opportunities and ready to respond to any changes in market conditions.

With that, we'll be happy to answer your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from Scott Group of Wolfe Trahan.

Scott H. Group - Wolfe Trahan & Co.

Alvaro, can you give us the breakdown of the backlog for freight and transit, like you've done in the past?

Alvaro Garcia-Tunon

Sure. The total backlog for transit is $1.2 billion versus $970 million at September 30. For freight, it's about $492 million versus $558 million at September 30. So it's down slightly. But again, I think the backlog's more significant for transit than for freight. The rolling 12-month backlog, again, what we hope to execute in the next 12 months, for transit, it's $703 million versus $654 million. The $703 million is a record, I believe. And for freight, it's $414 million versus $447 million.

Scott H. Group - Wolfe Trahan & Co.

Okay, that's very helpful. So with that, as the transit backlog's been growing and the freight's been kind of leveling off a little bit, we saw the first quarter of, I guess, negative freight revenue in fourth quarter. Within the guidance for 2013 revenue growth, can you just give us a sense on how you're thinking about freight versus transit? Is freight kind of flattish in the expectations and transit's up a lot? How do you think about that?

Albert J. Neupaver

Yes, we think that we should see growth in both transit and freight, and almost 50-50. We expect both markets to support that.

Scott H. Group - Wolfe Trahan & Co.

Okay, that's helpful. A couple other things. On the acquisition front, can you just give us a sense on how you're feeling about potential for additional opportunities? If I look back the past couple of years, you spend typically $100-plus million on deals and we've already done that this year. Is there room to do a few more deals and accelerate the pace of acquisitions relative to what you've done in the past few?

Albert J. Neupaver

Yes. The pipeline, it's adequate right now. We continue to always try to develop new potentials. I think those potentials, we're going to be as opportunistic, but we're also going to be very disciplined and structured with our acquisition program. We have enough potential there to say that hopefully that we could continue what we've done in the past. I think the other thing that's worth noting is that we're in a unique situation, being a company that is -- we've proven now that we're an acquirer. We've proven we could find them. We've proven that we could close them. We've proven that we could integrate them. But we also have the beauty of a great balance sheet that allows us to be opportunistic if the larger acquisitions come available, and we're able to do that. We've said time and time again that we feel that we could take on debt to 2, 2.5x our EBITDA, which would give you a very large acquisition. So I would answer your question by saying that we continue to be excited. We think it's an important part of our growth strategies going forward.

Scott H. Group - Wolfe Trahan & Co.

Okay, that's really helpful. And just a follow-up on the acquisition side. Alvaro, can you just refresh us on to kind of how you treat these acquisitions from a purchase price accounting? And so we've seen, what, 8 or 9 deals over the past 2 years? Does the amortization of some intangibles, does that start coming down at this point where the accretion from these deals can look even bigger in '13 the than what we saw in '11 and '12?

Alvaro Garcia-Tunon

Yes. Well, to answer to your last question, they will improve somewhat. But in terms of the accounting, I'll just see if I can just do this in 2 minutes. But basically, when you do an acquisition, you write up all the assets, obviously recognize the liabilities. But you write up all the assets in a fair market value and to the extent that the price paid exceeds what you paid for the hard assets, they go in, in intangibles. What really affects it, and I think it's kind of what you were referring to in your question, is what we call purchase price accounting, or PPA for short, which makes you write up as an intangible asset the entire amount of unrealized profit in inventory and backlog at the time of acquisition. And you amortize that as you sell off that inventory and as you fulfill your backlog. So basically, until you have in inventory turn, you almost recognize very, very little profit in the acquisition. Until you work off the backlog, now that backlog's slightly different, you'll recognize diminished profits. But the amounts that we had for this type of PPA, say in the fourth quarter, was just about $2 million. So I think you'll see some increase. You'll see some increased benefit from this PPA eventually going away, but it'll be relatively small. And to be honest, hopefully, we'll make additional acquisitions and their PPA will offset that. So it's kind of a recurring cycle.

Operator

Our next question will come from Allison Poliniak of Wells Fargo.

Allison Poliniak-Cusic - Wells Fargo Securities, LLC, Research Division

Al, could you give us a breakdown of the PTC in terms of what came from U.S. freight and transit? And then, I guess, global is the other piece of that?

Albert J. Neupaver

Okay. If you look at the sales that we've discussed now, we have -- I think it was 2010 with $25 million, $125 million in '11 and now in '12, it was around $215 million. So that would give you about $200 million and what -- $365 million in sales. Of that, around $200 million of that would be freight, about $100 million is in international and about $50 million in transit. And we would expect that proportion going forward as well.

Allison Poliniak-Cusic - Wells Fargo Securities, LLC, Research Division

Okay, great. And then I guess just going back to the top line growth that you guys are looking for. On the freight side, obviously, it sounds like at this point, anyway, that we're looking for a headwind from the OEM deliveries. Should we be assuming that PTC is going to somewhat offset that? Or is international -- I mean, where is the other growth coming from on the freight side?

Albert J. Neupaver

Yes, I think that what we'll see is we have offsetting growth from PTC. There'll be internal growth from that. Right now, it's hard to predict the exact amount. But we do expect it to grow, because spending is going to grow with the railroads and we're finishing up our project. Hopefully, we'll be done with the project in Brazil this year. So we expect that to grow. I think that -- the other growth, we have some freight acquisitions that will also add to it incrementally. And we think internationally, we'll be able to grow in the freight markets. We do have a concern about car -- railcar build, as well as the traffic, as well as locomotive builds. But we do have a large international market that will more than offset that.

Operator

Our next question will come from Art Hatfield of Raymond James.

Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division

Alvaro, real quick question on -- as we think about interest expense going forward with Napier now in the fold and some of the things that went on in fourth quarter, can you help us now from a modeling standpoint kind of what a normalized interest expense number should be?

Alvaro Garcia-Tunon

Yes, I think so. Going forward, obviously, the bonds that we have outstanding, I think, pretty much everybody's aware of that, they'll mature in July. They're at 6 7/8. Right now, I think in the short term, what we'll probably do is refinance those with bank debt. But in the longer-term, the public market yields are very attractive right now and it could be that we go back out to the public market. So right now, we haven't made up our mind. But there'll be some savings with the refinancing of those bonds. Either way. And right now, like I said, you have to make up your mind how to model that. Bank rates are very low. Right now, all in, we're paying about 1.5% on our bank financing. And if we went up for refinancing, we've been told that the bond rates right now are about 4.5%, again, I'm not sure where that's going to end up right now. We have plenty of capacity under the bank revolver to finance those bonds, and that's what we intend to do short term. And after that, the debt balance should be relatively stable. We have a large amount of cash. Obviously, we used about $25 million to $30 million to buy Napier. But some of the other cash is in foreign jurisdictions like Mexico, Australia and Canada, that we can't use it for an acquisition in the U.K. We didn't ask to use about $30 million of it for Napier. But the rest will be offset through cash flow. So I think I would assume for modeling purposes that you have a stable principal balance and then you're just going to have to make some assumptions on the interest.

Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division

All right. So the major impact will be in the back half of the year when you decide how you're going to refinance those bonds.

Alvaro Garcia-Tunon

Yes, I think so.

Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division

Getting back to your guidance for the year. The Napier acquisition, have you -- within your guidance, are your purchase price adjustments included in that guidance?

Albert J. Neupaver

Yes, they are.

Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division

Okay. And then when I think about the revenue growth for the year and just kind of the range that you gave out, I would say that probably, just initially today, maybe about 1/4 of your growth is already accomplished to the Napier acquisition ballpark. To get to that midpoint of that range, are you pretty comfortable speaking the balance of the growth comes organically? Or do you have other acquisitions teed up in the U.S.?

Albert J. Neupaver

We have no other acquisitions in our guidance, okay. We do not plan on them. They're all opportunistic, they're all upside.

Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division

Great. And then finally on Napier, I know I should know this, but it just hit me. I can't remember, is that going to be in transit or in freight?

Albert J. Neupaver

Primarily in transit. However, if any of the products end up in the freight markets, then it would be included in freight. We have a number of divisions that go into transit and freight, not just one or the other, but it will be reporting through the transit organization.

Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division

And then finally, as you acquired Napier and you kind of look at the opportunities that are out there with their existing customers and maybe some of the existing markets, are you finding any opportunities and new potential markets where those turbocharger products could find another area of customers that you can serve?

Albert J. Neupaver

Without a doubt, that's the main -- strategic for us is to look at market expansion. If you remember, we talked about global end market expansion. Market expansion is a way to take our existing technologies and products and introduce them into new markets. And as we look at these adjacencies, the non-rail markets, we're looking on how they can contribute to the rail markets, but we're also looking for new markets that will help in our overall strategic initiative, which is to really focus on trying to dampen the cyclicality. I mean the brutal fact that we've accepted and tried to maintain and we've successfully done is we know that we're going to have deep cycles in the rail industry, especially the U.S. freight market.

Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division

Have you been able to identify opportunities yet or is that something you guys are still looking at?

Albert J. Neupaver

We obviously have an integration plan that includes exploring those. And whenever we look at an acquisition, we're looking for what synergies we have and those end up in the sales synergy category. And sales synergies are not always easy to accomplish. As a matter fact, those are the ones that usually have the greatest pie-in-the-sky type of thing. And you really have to work over a period of time to help develop those. I think the other thing that I should mention is the importance that Napier is a great service organization, and it will allow not only new markets, but it will allow us to expand our product offering from a service standpoint as well.

Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division

That's very, very helpful. And last one, and I'll get off. Al, how would you characterize your acquisition pipeline today versus maybe 1 year ago, 24 months ago?

Albert J. Neupaver

Yes. I think that there was a little bit of a rush toward the end of last year where a lot of the private owners and private equity were worried about -- unsure about the uncertainty related to taxes. But if I compare the pipeline, I'd say it was adequate. Freight right now and the last year was about the same. I think it's about the same. There's obviously a lot of competition out there for the acquisitions as there's always been, and private equity is definitely back in the mix full steam.

Operator

Our next question will come from Matthew Brooklier of Longbow Research.

Matthew S. Brooklier - Longbow Research LLC

I just wanted to circle back to PTC. I think for the first 3 quarters of 2012, we're at roughly a $50 million run rate, and it sounds like that number was more like $65 million in the fourth quarter, if my math is correct. I'm curious to see, if that is the case, what pushed up or accelerated the PTC revenue in the fourth quarter?

Albert J. Neupaver

Your math was pretty good and we always -- the actually number was closer to $60 million. And then there was a little bit of peak on some of our larger backlog projects.

Matthew S. Brooklier - Longbow Research LLC

Okay. Was that within the U.S. freight market or was that...

Albert J. Neupaver

Some of it was international and some of it was transit market, but more so than those from the freight expenditures as we've seen.

Matthew S. Brooklier - Longbow Research LLC

Okay. And I think we -- you had preliminarily offered a 13 PTC revenue target of above $200 million for -- already at $215 million, should we assume that '13 is above that number?

Albert J. Neupaver

Yes, '13 would be above that number. And I guess for a target range, it's very difficult to give an exact number because we're not sure how the capital spend will go and how many onboard computers will be ordered and delivered and installed during 2013. But a rough number, we expect to see 15%, maybe 20% growth and we'll update you quarterly as we go on.

Matthew S. Brooklier - Longbow Research LLC

Okay. That 15% to 20% growth, I think it's a little bit north of what the rails had announced as they went through their budgets and made those public. Just curious to hear if we're getting more spend this year from the rails on the locomotive side versus track and signaling, or could you maybe talk a little bit about what's been spent, where that money has been spent and kind of future spend going forward?

Albert J. Neupaver

Yes, a lot of -- the onboard computer only makes up a portion of our PTC sales, I want to make sure you understand that. We've got the turnkey project in Brazil. And as I mentioned earlier, we'll be finishing that project up in 2013. So we definitely will see some growth in there. And we're also progressing on a number of transit programs, one at the Metrolink, out in LA, and there's other -- a couple other transit authorities. So we'll see growth in those areas. As far as the amount from the railroads, our best estimate says that on an equivalent installed base, there is about 18,000 to 20,000 total locomotives that will have to be equipped for PTC eventually. A lot of the railroads are done putting in provisional kits, which trying to do some of the wiring and some of the hard work, time-consuming work now, then will later, once the specifications has been better defined, which it has not up to this point, they will go further. So we try to estimate on an equivalent installed base, and we think maybe of the total, about 4,000 to 4,500 equivalent installations have occurred. So that's out of 18% to 20%. It gives you a view of what has to happen over the next couple of years, from an installation standpoint.

Operator

The next question will come from Tom Albrecht of BB&T.

Thomas S. Albrecht - BB&T Capital Markets, Research Division

A couple of housekeeping items, and I'll go to a little bigger picture. Alvaro, I know in your guidance you said you expect a slightly lower tax rate. Can you give us a little more specific than slightly lower for this year?

Alvaro Garcia-Tunon

If you make me, I guess, I will. It is slightly lower. I think our tax rate for the year was about 33% -- 33.3% to be exact. And I would expect a similar number for next year, somewhere between, I would say the overall tax rate for next year will be about 33% to 33.5%, somewhere in there, maybe probably a little bit closer to the 33%, but when you're cutting it pretty fine there. So I would say 33% to 33.5%, shading probably towards the 33% again. And first quarter, we do expect a couple of tax items to come in, basically as a result of some of the tax bills that they recently passed. They extended the R&D credit, but we can't recognize that until Q1, and a couple other items. And you'll probably see about a 50 to 100 basis point reduction in the average tax rate that we'll do in the first quarter. So it is very slight.

Thomas S. Albrecht - BB&T Capital Markets, Research Division

Okay. That's helpful. And then SG&A was quite a bit higher than what we were looking for. And now with Napier, do you have at least for the next quarter...

Alvaro Garcia-Tunon

Yes. I'll give you analysis of SG&A. But it's mostly -- the increases have mostly been driven by acquisitions. For example, last year's quarter SG&A, I think, was about $61.1 million and acquisitions added $7 million. So as in other items, you would've expected SG&A to be at $68 million. However, because of couple of other factors, and there's always a few factors in there, as well as cost savings initiatives, it ended up at $64.7 million. So basically, the increase in SG&A is almost 100% due to acquisitions. In terms of a run rate, at this quarter, it was $64.7 million. There weren't really any unusual items in this quarter. So I would expect it, going forward, to be above that $64.5 million to $65 million. Napier is going to add about $1 million. Napier took place in '13, so that's not in Q4. Napier is going to add about $1 million in the quarter.

Thomas S. Albrecht - BB&T Capital Markets, Research Division

Okay. That's helpful. And then on the whole revenue growth, I know, Al, you've said that you would expect both divisions to post revenue growth in 2013, but there's a reason we analysts are anal. When I look at just kind of where we are, we're talking really super high growth rates the last 2 quarters in transit for a lot of reasons. I mean, could it be the second half of 2013 before freight reestablishes positive revenue growth again?

Albert J. Neupaver

I think we're no different than other industrial companies. And I think it's all based on the fact that most people think that the recovery is going to be slow. And hopefully, it will accelerate as the year goes on. And we do not provide quarterly guidance, but I would say that we're no different than other industrials and I've read enough guidance reports myself from other people out there to know that right now, the economy is kind of just moving along at a pretty stable rate and hopefully, it would accelerate as the year goes on, is what most people feel. We have a lot of assumptions that I stated in our guidance. And I think that, like I said, we don't provide the quarterly guidance for you.

Thomas S. Albrecht - BB&T Capital Markets, Research Division

Okay. Alvaro, what did you guys pay for Napier? I know it had $55 million of annual revenue.

Albert J. Neupaver

Yes, I'll handle that. Generally, it's almost 2x the revenue. We were asked not to provide that information. So that's the reason it wasn't there, but it's about 2x the revenue.

Operator

The next question will come from Greg Halter of Great Lakes Review.

Gregory W. Halter - LJR Great Lakes Review

Back on Napier again. Will the management team be remaining there? And also, could you give some guidance relative to their margins being above or below your own?

Albert J. Neupaver

Okay. Yes, the management team is on board. To give you an example, the General Manager of that division, 2 days after we acquired the company, attended our leadership conference where we get all the Vice Presidents, General Managers together, and he was a great participant in that event. Key to when we do acquire companies is that we're really looking for strong management, a management that will stick with the company. And I think in this case, it's really been a home run so far as far as the management team. So we make them part of the integration team. And yes, it's a critical part of the success that you have with integrating new acquisitions.

Alvaro Garcia-Tunon

And hopefully they're listening to this call.

Albert J. Neupaver

And the second part of your question again?

Gregory W. Halter - LJR Great Lakes Review

Margins, whether or not they're above or below your own.

Albert J. Neupaver

Now I know why I didn't remember it. It's -- as stated, they're better than our average. We have not provided the specific margin data. They told me I'm not allowed.

Gregory W. Halter - LJR Great Lakes Review

Not just this time? Alvaro, do you have a preliminary figure for your equity at end of the year?

Alvaro Garcia-Tunon

Sure. Hold on a second. Let me dig it out real quick. Total shareholders' equity at the end of the year should be about $1.282 billion.

Gregory W. Halter - LJR Great Lakes Review

All right. And what was the impact of foreign exchange on sales and operating profit?

Albert J. Neupaver

For the year, it was down $19 million. And for the quarter it was down $3 million. And the fourth was up $3 million.

Alvaro Garcia-Tunon

You got it right. He got it right. It was minimal, but those numbers are exactly right.

Gregory W. Halter - LJR Great Lakes Review

And any flow through the operating profit?

Alvaro Garcia-Tunon

It was very minimal again. Less than $0.01 a share either way in both quarters.

Gregory W. Halter - LJR Great Lakes Review

Okay. And for the year, can you provide a breakdown of -- which I think you do in the K, and maybe you don't have it yet, but the freight OEM versus the aftermarket and then transit OEM and aftermarket in terms of percentage?

Alvaro Garcia-Tunon

Yes, for the year freight was 53% OE and aftermarket, obviously, 47%. And for the year, transit was 34% OE and 66% aftermarket. Overall, for the company as a whole, 46% OE and 54% aftermarket. Very much in line with our targets.

Gregory W. Halter - LJR Great Lakes Review

All right. That's excellent. And I think you are in the process of doing a field test on the PTC and just wondering how that has gone.

Albert J. Neupaver

Yes. I don't -- the field tests that are going on, the MRS has a field test going on right now, and that's the railroad down in Brazil. There are some field testing going on at Metrolink and the BNSF has done some field testing on some of the products. I think the other railroads are still in the laboratory test phase and expect to move into field testing later this year.

Operator

The next question will come from Steve Barger of KeyBanc Capital Markets.

Steve Barger - KeyBanc Capital Markets Inc., Research Division

Obviously, your non-U.S. sales are becoming a more important part of the company. Can you just frame up the growth rate for that half of the business that's coming from outside the U.S.?

Alvaro Garcia-Tunon

Sure. Just in general, compared to last year, international sales in '11 were about $666 million and at the end of '12, increased significantly. It was almost $1.2 billion.

Steve Barger - KeyBanc Capital Markets Inc., Research Division

Wow. Okay. And can you break out how much of that was acquisition versus organic?

Alvaro Garcia-Tunon

That, I'd have to calculate.

Albert J. Neupaver

It has to probably follow up with Tim. Overall, the percentage -- and I don't know, if you look at the growth in international and domestic, it was about the same, really, maybe a little more internationally. So earlier we said that internal growth accounted for 67% and acquisitions was 33%. I think international, probably would be more acquisition and a little less on the -- but the exact number, we don't have. I would guess it'd be probably 50% internationally, but I'm not -- but Tim can follow up.

Timothy R. Wesley

I know the CAGR over the last 5 or 6 years has been about 15% for non-U.S sales growth.

Steve Barger - KeyBanc Capital Markets Inc., Research Division

Perfect. And I know it's a diverse group of businesses, but can you help us frame up the margin profile for that half of sales that comes from outside the U.S.?

Albert J. Neupaver

Generally, the margins are a little better in the international markets, primarily because we're a small player in larger markets, and we try to be very particular about what opportunities we go after. So in general, we do better.

Steve Barger - KeyBanc Capital Markets Inc., Research Division

And as you look, you guys have obviously done a great job in terms of driving margin expansion from internal initiatives. If those margins are already better than, say, the aggregate or the corporate average, is there still the same kind of opportunity to drive incremental margin expansion in those non-U.S. businesses?

Albert J. Neupaver

Yes, we're firm believers that there's always opportunity to expand margins. And the only thing I would say is that as your margins improve, the incremental improvement gets more difficult, but there's always room for improvement and really, that's our mantra when it comes to continuous improvement in the Wabtec Performance System that we're going to incrementally continue to improve over time. Yes, there may be 1 quarter or 2 quarters where we have some type of impact that we can't manage, but over time, our goal is to continue to expand those margins, whether domestic or international.

Steve Barger - KeyBanc Capital Markets Inc., Research Division

So I mean, obviously, you drove a lot of margin expansion from -- in 2011 from 2010. You did it again in 2012. Your guidance implies more of a flattish or a smaller increase in operating margin. Is that just a function of mix and is there any -- do you expect that you can get back to those magnitude increases going forward just as you think about the portfolio of businesses and what you expect you can do internally?

Albert J. Neupaver

I think one of the things that we have to be honest about is that volume is the great -- it helps cover our problems and issues. So volume is a large contributor to margin improvement a lot of time. And we have some extremely good growth in both '10 to '11, '11 to '12. With that, we still have a very focused targeted improvement on margin, division by division, group by group and company-wide, focusing on improvement through the Wabtec Performance System, improvement on pricing, improvement on sourcing, improvement on movement to lower cost manufacturing platforms. So yes, we expect to continuously improve.

Steve Barger - KeyBanc Capital Markets Inc., Research Division

Great. And last question, you talked a lot about acquisition on the call. It's an important part of the strategy. Given the pipeline that you can see, do you think it's possible to match the pace and magnitude of deal activity that you did in 2012?

Albert J. Neupaver

Yes, it's impossible to predict acquisitions. Well we, that's why we don't allow people to put them in their plan or count on them. You just have to be opportunistic. There could be years where we don't have acquisitions. And I think our track record shows that we at least have a trend go on and that trend's supported us in the past and hopefully, it would support us in the future, but it's impossible to predict them. We're not going to do acquisitions just to do acquisitions. Our focus is on internal growth first and then acquisitions after that.

Operator

The next question will be a follow-up from Scott Group of Wolfe Trahan.

Scott H. Group - Wolfe Trahan & Co.

Just 2 things. Al, you talked about, I think, about a quarter of the locomotive that you think need PTC have the on-board recorder now?

Albert J. Neupaver

Equivalent locomotives. There's been a lot more touch, but it's provisioned, so we tried to get an estimate on the total. But yes, go ahead Scott.

Scott H. Group - Wolfe Trahan & Co.

Do you think it's fair to take the U.S. freight part of the PTC sales that you've already done and kind of think about multiplying that by 4 or does that seem too aggressive?

Albert J. Neupaver

I think that it's probably -- there's still some uncertainty. There's uncertainty related to the mandate, completion date of 2015. I think there's uncertainty related to the actual specification. I think there's still things that have to flow. I think that's an indicator, but I would definitely not start multiplying those numbers and saying that's exactly what going to happen. And okay?

Scott H. Group - Wolfe Trahan & Co.

Okay. That's helpful. And then last thing, the -- people have talked in the past transit margins being better -- worse than freight margins. How do you think about incremental margins, though, on freight versus transit, are those more -- are those closer?

Albert J. Neupaver

I think that the incremental margins, they're probably about the same. I don't think there's a lot of difference. The problem with transit is that a lot of these large contracts can have an impact on your margin. And I think we were very open with everyone as we were completing some of the large projects and you get down to the end of a, say a locomotive deal then you're going to make more money on the last 5 locomotives than you did the first 5. Then you're going to make more money on a system later on as you're supplying a braking system, than you do start now. I think it's just one of those kind of things. And there's projects that good margins and others are not so good. So it's really hard to say, but I would say in general, incremental, and we do okay.

Scott H. Group - Wolfe Trahan & Co.

And that comment about the end of a big contract you tend to do better, I'm guessing you're referring to just like some of the big New York City subway programs and things like that. It feels like those are maybe a little bit less a part of the overall transit piece and growth right now than maybe historically.

Albert J. Neupaver

Yes, they've gone from very large projects to smaller orders. So that is changing.

Alvaro Garcia-Tunon

And I'll add one small proviso. Part of it can depend on the accounting, too. Some of these large contracts you use percentage of completion and in general, you estimate your profit at the beginning and you try and recognize ratably. What happens is, when you get to the end of a contract, you can have a much better idea of what your cost picture is because you're not longer relying on estimates. You have a large actual cost base to choose from, so you can refine your estimates, and that will result sometimes in larger profits than you originally estimate, just because you have better data. But the percentage of completion does tend to smooth that out a little bit. But some of the other contracts, you just recognize the profit based on as you deliver. And there is a learning curve and you do recognize it a little bit more towards the back end as well. It depends.

Albert J. Neupaver

That's why we love accountants.

Alvaro Garcia-Tunon

We can complicate the simplest things. That's what we get paid good money for.

Operator

The next question will come from Rhem Wood of BB&T Capital Markets.

Rhem Wood

I think most of mine have been answered. I just have one last. Al or maybe Alvaro, can you help us a little bit with net interest line? I know you mentioned you've it had to do with foreign exchange, but it's moving around a fair bit. Can you just help us?

Albert J. Neupaver

You mean the other line, other income?

Alvaro Garcia-Tunon

You mean other income and expense?

Rhem Wood

Sorry, yes, that's the one.

Alvaro Garcia-Tunon

Basically, that relates to FX, for the most part, on intercompany balances. We sell goods to units abroad. They sell goods to units over here. And we advance funds, they pay our funds and basically have a number of intercompany balances. And in general, you just have to recognize the changes and the effects on that. That can bounce around -- it can be -- our goal is to minimize it, to keep it as small as possible. Some quarters it will be a gain, a small gain like it is this quarter. Some quarters, it will be a small loss like it was last quarter. But our goal is really to minimize it rather than predict what's going to happen. And so typically, it has an effect of about $0.01 per share one way or the other, which is not too material.

Rhem Wood

Okay. And does it depend on maybe the quarter whether you gain or loss, does that have any impact?

Alvaro Garcia-Tunon

Yes, it depends on the FX, where the rates are going.

Operator

The next question will be a follow-up from Greg Halter of Great Lakes Review.

Gregory W. Halter - LJR Great Lakes Review

Have you seen any -- and I know it's early, but any changes in the competitive landscape, given the events of steam and steel a few months ago?

Albert J. Neupaver

Not at this point. I think it obviously hasn't closed yet, so there's not much that they can really do. I know that -- I'm sure that they're working on integrating it, but no, we haven't seen anything.

Gregory W. Halter - LJR Great Lakes Review

And relative to the freight side, with the car build, I just wanted to confirm that your content is generally the same no matter if it's a tank car or a coal car or...

Albert J. Neupaver

Yes, exactly, Greg.

Gregory W. Halter - LJR Great Lakes Review

Okay. And I think I saw something about Amtrak replacing the Acela. Whenever we see those types of news stories, I presume you have a role in that as a -- maybe not as a primary, but as a sub along the way?

Albert J. Neupaver

Yes, I think the only program that they actually -- I think is actually going on right now is that they're upgrading some of their cars. As far as the locomotive there, they haven't even decided what they want. I mean, they're kind of saying maybe they want locomotives that go 150 mile an hour, 125 mile an hour high-speed, whatever, and that has not even been put out to bid. So we're unsure exactly. But yes, we'll participate if there are locomotives being built, we'll participate in some way.

Gregory W. Halter - LJR Great Lakes Review

And one last one for you. Your business in China, how did that do in 2012 and what do you see going forward?

Albert J. Neupaver

Yes, I think in 2012, we showed growth that was high single-digits, and we expect it to continue to grow into 2013 and beyond.

Operator

And at this time, we have no more questions. I would like to turn the conference back over to Mr. Neupaver for his closing remarks.

Albert J. Neupaver

Okay. Thanks to everyone. Thanks for the questions, and we'll talk to you at the end of the first quarter. We look forward to it. Bye-bye.

Alvaro Garcia-Tunon

Thanks, everybody.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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