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Westinghouse Air Brake Technologies (NYSE:WAB)

Q4 2010 Earnings Call

February 22, 2011 10:00 am ET

Executives

Raymond Betler -

Timothy Wesley - Vice President of Investor Relations and Corporate Communications

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

Albert Neupaver - Chief Executive Officer, President and Director

Analysts

Gregory Halter - Great Lake Review

Kristine Kubacki - Avondale Partners, LLC

Arthur Hatfield - Morgan Keegan & Company, Inc.

Thomas Albrecht - BB&T Capital Markets

James Lucas - Janney Montgomery Scott LLC

Steve Barger - KeyBanc Capital Markets Inc.

Scott Group - Wolfe Research

Allison Poliniak-Cusic - Wells Fargo Securities, LLC

Operator

Good morning, and welcome to the Wabtec Corporation Fourth Quarter 2010 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Tim Wesley. Please go ahead.

Timothy Wesley

Thank you, Andrew. Good morning, everybody, and welcome to our Fourth Quarter 2010 Earnings Conference Call. Like to introduce the rest of our team members who are here, our President and CEO, Al Neupaver; Alvaro Garcia-Tunon, our CFO; Ray Betler, our Chief Operating Officer; and our Corporate Controller, Pat Dugan.

We have some prepared remarks that we'll make, as usual, and then we'll take your questions. And I do want to refer you to today's press release for the appropriate disclaimers on our forward-looking statements. With that, go ahead, Al.

Albert Neupaver

Okay. Thanks, Tim. Good morning. Wabtec had a solid performance in the fourth quarter with strong sales and strong earnings growth. For the full year, we had our second best performance in company history. That was next to 2008 for sales and earnings. We also had record cash flow from operations of $176 million. This was the 13th straight year that our cash from operations exceeded net income and the fifth straight year with cash generation of more than $140 million.

Our backlog stands at about $1.1 billion. This is about 14% higher than a year ago and the highest level in more than two years. To top it off, Wabtec ended 2010 as the only company on the New York Stock Exchange whose year-end stock price has increased for 10 consecutive years. We accomplished this during a period that included two recessions, one of which was probably the worst recession any of us will ever experience. This performance demonstrates the strength and the sustainability of our diversified business model, the benefits of our strategic initiatives and the power of our Wabtec performance system.

Today, we issued guidance for 2011 for sales and earnings per share based on our current backlog and our outlook. We estimate earnings per share of about $2.90 with sales growth of about 10%. This is driven by the execution of our growth strategies and the continuing recovery of the freight rail markets. The following major assumptions are critical to our guidance: The global economy will continue to grow; freight rail traffic will continue to improve with the economy; the North American freight car delivery will be between 25,000 and 30,000 railcars; and the locomotive build will be about 700.

We assume that the global transit market will remain stable with North American OEM deliveries of about 1,000 new cars and about 4,800 new buses, both slightly lower than last year. We also assume no major changes in foreign exchange rates. As always, we will stick to our long-held philosophy, and that is to be disciplined when it comes to cost and focus on generating cash to invest in our growth opportunities.

Let's take a look at our two markets. First, freight rail market. Freight traffic rebounded strongly in 2010 and has continued to be up so far this year. For 2010, ton miles increased 8.5% and intermodal traffic was up 14%. Through the first six weeks of 2011, ton miles are up 7.4% and intermodal traffic is up 7.8% year-on-year. This increase in traffic has led to a similar rebound for our North American aftermarket business, with aftermarket sales in the fourth quarter up sequentially and compared to the year-ago quarter. The traffic increase has also led the railroads to pull more parked cars and locomotives out of stowage, which is also helping those OEM markets.

The new railcar outlook continues to improve nicely. Fourth quarter deliveries were about 7,000. Orders come in around 11,000. That puts the backlog at 23,000 railcars, the highest in nearly two years. In the fourth quarter, our freight revenues hit a quarterly record high of $221 million, even with OEM markets still well below historical averages, which bodes well for continued growth.

Take a look at the transit market. In the short term, as we've discussed before, we're seeing some challenges in the U.S. transit market, with budget issues at our transit agency customers affecting aftermarket demand and delaying some OEM project. As the economy improves, the federal government should be able to sort out its funding matters. We think this trend will reverse, but it will take some time. The 2011 transit spending, our current extension runs to March 4 as with all other government funding. This funding for transit is likely to get a temporary extension. As for the new transportation bill, President Obama is asking for a significant funding increase for transportation, and specifically for transit. Both House and Senate say they are committed to a new bill this year, but no specific numbers. President Obama is asking for $119 billion for transit over the next six years; this is 2x that of the last bill.

Another positive related to transit funding is that the House recently rejected cuts in Amtrak funding just last week. Also, the Administration is asking for $53 billion over the next six years for high-speed rail. High-speed rail is obviously a hot topic from both aspects. Three states had rejected funding because of concerns of ongoing costs and funding of the program. However, 28 states still have ongoing projects. As we have stated in the past, high-speed rail is a long way off.

As these issues play out, we are confident that the diversity of our Transit business, our transit revenues and margins shall remain stable. One fact is that ridership was only down 1% in 2010; this is after being down 4% in 2009. Our volume in transit orders booked actually increased by 2% in 2010. And according to industry reports, car builders have a backlog of almost 3,500 new cars for the U.S. market, with another 1,500 in orders possible this year. That's several years of backlog based on historic production rates.

We also continue to make good progress with qualifying our components and braking systems in the European and Asian markets. These markets have remained strong and remember, these markets are much larger than that of the U.S. and our current share is small. Overall, Wabtec is in a good position to take advantage of the global expansion of the mass transit market around the world.

We will remain focused on growth and cash generation. Cash is a priority. It provides the opportunity to invest in organic growth and acquisitions. We will stay focused on increasing free cash flow by managing cost, driving down working capital and controlling capital expenditures. This will enable us to continue to invest in our four strategic growth opportunities: Global and market expansion, aftermarket expansion, new product and technologies and acquisitions.

Like to take just a few moments and discuss our progress on these strategies. The first one is global market expansion. Our sales outside of the U.S. were a record $692 million. That's 23% higher than in 2009, almost half of the total sales versus 1/3 only five years ago. We are actively bidding on projects in Europe and Asia, for both brake and door systems. There is also a strong demand for our high-speed friction products globally. We are currently finalizing a second transit JV in China. We currently have four others: One in freight, one in transit, one in friction and one in power generation. We also have seen growth in our non-rail business section, which is about 15% of our total business, with strong performance by our heat exchanger business in the standby power generation market.

Looking at our aftermarket expansion strategy. Overall aftermarket sales were $828 million, another record, 55% of the total in 2010. And that's a 10% growth from the prior year. This organic growth is due to rail traffic increasing and cars and locomotives coming out of stowage. Our new service center in Brazil continues to grow faster than expected, and we see other opportunities to participate in that market.

In the new product area, over the past few years, we have had tremendous focus on this effort, with about 1/3 of our annual sales coming from new products. Although positive train control gets the headline, we have made some progress in a number of areas I'd like to just mention. During the year, MotivePower, our locomotive division, won a major contract with Boston MBTA, thanks to a new higher speed design. Our European transit division, Polley [ph], successfully tested a new braking system that reduces stopping distance and then extends rail life and has already booked orders.

Two of our divisions, Global Services and Freight Pneumatics, combined to introduce the next-generation version of our automated single car tester. This is a device that you use to test brakes that is mandated to be done every 1,500 or 3,000 miles. The unit reduces the time it takes to test these air brakes on freight trains.

Now moving to PTC or positive train control. As you know, this is a major opportunity for Wabtec. Our current product and market position could result in incremental sales growth of $250 million to $500 million over the next four years. We expect this to ramp up late this year. The addition of the acquisition of Xorail last year opened a door to other opportunities, both domestic and international. And we are actively pursuing these projects.

Currently, we are working closely with the Class 1 railroads who choose to standardize the Wabtec onboard locomotive product. We've developed our product so that it's interoperable for all the railroads and commuter agencies. These efforts are currently moving into the testing phase. While this development process continues, the railroads are seeking more clarifications on the positive train control law, which they hope will reduce their potential investment. We don't expect these changes would have any material impact on our market opportunity. And we strongly support the industry's efforts to obtain government funding for this mandate.

With acquisitions, we're very pleased that the integration of Swiger Coil Systems, acquired late last year, is moving along well. Swiger, the traction motor manufacturer is a good strategic fit. It allows expansion in our core markets with our core customers. We see both growth and margin opportunities. Their sales were about $40 million and margins were about equal to our corporate average.

Adantech, which we acquired earlier this year, makes friction products, and it gives us another platform from which to grow in Brazil. It serves both transit and freight markets with sales of about only $2 million, but the acquisition is quite strategic. We also have an active pipeline of other acquisition opportunities. With that, I'll turn it over to Alvaro.

Alvaro Garcia-Tunon

Thanks, Al, and good morning, everyone. Like Al said, we feel we had a very good performance in the quarter and full year, and we continue to be optimistic about the future.

Turning to the quarter at hand, sales for the quarter were $393 million, 10% higher than last year and the highest total since the fourth quarter of '08. This is the third highest total of all time and the fifth quarter in a row that sales have been up. So I think we have some positive momentum there. Of this increase, about 1/3 was organic growth and about 2/3 was due to acquisitions.

In the Freight group, sales were up 49% with about three quarters of that coming from organic growth as the market started to rebound. That increase in the Freight group also includes growth in the aftermarket, due to increasing rail traffic and more rolling stock coming out storage. OEM sales are also starting to increase.

Turning to the Transit Group, sales were slightly lower than the year-ago quarter -- I'm sorry, a little bit more than slightly, but this was mainly due to the completion of major OE programs, but it was actually 3% higher than the third quarter, indicating a little bit of stability in the market. Margins, we continue to focus on driving margins higher with particular attention on the operating margin.

For the quarter, operating margin was 13.1% and for the year, it was 13.5%. Both of these figures were higher than the year-ago periods. SG&A was higher than the year-ago quarter, mainly due to the acquisitions of Xorail, G&B, Bach-Simpson and Swiger, and increased accruals for incentive comp, which was very low last year. Also, this year's quarter included about $1.4 million of what we call PPA or purchase price accounting. This mainly relates to the inventory and backlog of acquisitions, which have to be, the profit of which has to be amortized right away. This compares to about $2.2 million in the year-ago quarter.

Interest and other, not much happening there. Interest expense was down slightly due to lower net debt compared to last year. And other income, typically, that varies due to some paper FX translation gains or losses. The effective tax rate was pretty much what we thought heading into the quarter at 35.2%, a little bit higher than the year-ago quarter. I think going forward, you can probably expect that to be around 36%, plus or minus.

Working capital. In general, the working balance has increased. Working capital balance has increased compared to December 31, '09. This was mostly due to acquisitions and sales growth. To give you a couple of numbers, receivables at year end were $258 million, up $50 million from last year, but again, primarily due to acquisitions and higher sales. Inventories were $253 million, up $15 million, again mostly due to acquisitions there. Without acquisitions, it was actually pretty stable. And payables were at $171 million, up about $50 million and again, largely due to acquisitions and sales growth and preparing for the coming year.

Cash at year end, we had a very healthy balance of $237 million in cash, up from $177 million at September 30. In terms of debt, we had $422 million of debt at year end compared to $410 million at September 30. The debt consists of about $150 million in bonds due in 2013 and $138 million on a term loan. The balance is on a revolver and both the term loan and the revolver expire in 2013. As you can see, I think from taking a look at our balance sheet and cash on hand, we have plenty of capacity for investing in growth opportunities.

Turning to a few of the plenary items that we always provide you. Depreciation was at $8.2 million for the quarter versus $6.5 million last year, up mostly due to acquisitions. Typically, when you do an acquisition, you have to write off the assets, which results in higher depreciation and amortization expense. Amortization was pretty stable, $3.5 million this quarter versus $3.7 million last year. CapEx, like Al says, we maintain a constant focus on cash flow and expense control, and I think CapEx reflects that. It was $8.5 million versus $7.4 million last year. For the year, CapEx was $20.8 million versus $18.3 million last year. And considering the acquisitions we had and considering that we tightened our belts pretty much last year, I think that's a good result.

And in terms of backlog, the multiyear, the 12-month backlog, which I'll give you the numbers in a second, were both up significantly. The multiyear backlog, that includes the 12-month numbers, compared to the last quarter, compared September 30 of '10, the total right now stands at $1.1 billion versus $1.04 billion last quarter. This $1.1 billion is the highest in more than two years. Transit, again this is the total number, was $695 million versus $748 million on September 30. And freight was $384 million versus $289 million last quarter.

And then the rolling 12-month backlog, this is what we expect to execute in the next 12 months, the total was $590 million versus $535 million in September. Transit was $293 million versus $329 million. And then freight was $297 million versus $206 million. And that's pretty much it for the financial wrap-up. And I'll turn it back to Al.

Albert Neupaver

Thanks, Alvaro. Once again, we've had a good performance in the fourth quarter and the full year of 2010. Longer term, we couldn't be more pleased with our strategic progress and the growth opportunities that we see ahead. We continue to benefit from our diverse business model and the Wabtec performance system. We have an experienced management team that managed extremely well through the downturn, and is poised to take advantage of our growth opportunities. With that, we'll be happy to answer your questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Allison Poliniak of Wells Fargo.

Allison Poliniak-Cusic - Wells Fargo Securities, LLC

Just touching on positive train control, can you tell us what the number was in terms of revenue contribution in 2010? And I know you talked about ramping up in 2011, what can we expect on that point?

Albert Neupaver

Okay. The positive train control revenue in 2010 was about $20 million. Where we're at in the process is that the specifications have been set. We'll be moving into the testing phase, and this testing phase is done in the laboratory at first. And that's going to take a number of months to complete. And then it'll go into field testing. When we get to the field testing is when we should start seeing an increase in revenues related to hardware that's needed to do the testing. So what we think we're going to see is equivalent type of revenues for good portion of the year, then into the fourth quarter, it should start to ramp up.

Allison Poliniak-Cusic - Wells Fargo Securities, LLC

Okay, great. And then just on the Transit, on the aftermarket side, I think I heard you correctly, you feel like we're at the, sort of the bottom here in terms of the revenue generation volume and maybe, at least worst case is we're stable for 2011?

Albert Neupaver

Yes, that's correct. We feel that we really stabilized the Transit business. There's still going to be some softness in the U.S. market as we work our way through the local and state funding issues that exist. Our other opportunities in Transit on an international basis is very good. So we think that the Transit market has really stabilized at the level with that, which is not a bad level.

Operator

The next question comes from Jim Lucas of Janney Capital Markets.

James Lucas - Janney Montgomery Scott LLC

First, a housekeeping question, Alvaro. Total acquisition spend in 2010?

Alvaro Garcia-Tunon

Acquisition spend?

James Lucas - Janney Montgomery Scott LLC

Yes.

Alvaro Garcia-Tunon

Yes, I'm going to give it off the top of my head, but we probably spend about $1.5 million all told.

Albert Neupaver

No.

James Lucas - Janney Montgomery Scott LLC

No.

Alvaro Garcia-Tunon

I thought you said acquisition spend?

James Lucas - Janney Montgomery Scott LLC

Sorry, in terms of how much cash outlay for acquisitions?

Alvaro Garcia-Tunon

How much cash outlay for acquisitions. I'm sorry, Jim. I thought you were talking how much we...

Albert Neupaver

About $140 million to $150 million.

Alvaro Garcia-Tunon

Yes, $140 million. Yes.

James Lucas - Janney Montgomery Scott LLC

And then just given the state of your balance sheet, I mean, you guys have done a good job in terms of getting the acquisition fly wheel going, a lot of the little, we'll call them singles for lack of a better term...

Alvaro Garcia-Tunon

Couple of them are a little better than singles, actually. Sorry, I don't mean to interrupt, but…

James Lucas - Janney Montgomery Scott LLC

That's from a size standpoint.

Alvaro Garcia-Tunon

Yes.

James Lucas - Janney Montgomery Scott LLC

Cumulatively, they definitely have added up and they're scoring the runs. But when you look at the composition of the M&A pipeline today, is it still more of these smaller $30 million to $50 million? Are there potential bigger deals in there? And what are you seeing from a valuation standpoint these days?

Albert Neupaver

What we see is continued opportunities in the rail markets, which we're very happy about. The beauty of Wabtec is that we have the balance sheet and the capability to explore larger acquisitions. And there's not as many of those available, but the fact that we could look at this large opportunities at any time is really the strength of our model. Our pipeline is very robust right now. What we're seeing in the marketplace is pricing has strengthened. You're seeing a lot of private equity. You're seeing a lot of strategic buyers that have come out and are looking for acquisitions. So I think it's a healthy market out there. We've got a lot of opportunities. And again, we can go after that big one if we find the right one there that is a strategic fit for Wabtec.

James Lucas - Janney Montgomery Scott LLC

Okay. And, Al, just a little bit more on the Transit side. You mentioned in your prepared remarks about some cancellations that you're seeing. Could you talk a little bit more about that particular side of the Transit backlog of actual cancellations versus delays, what you're seeing out there today?

Albert Neupaver

Yes, we really don't have any cancellations. What we do have is delays. If I stated cancellations, I misstated it. What you see is projects that are out there that are going to get awarded. One thing I mentioned in the prepared remarks about the backlog of some 3,500 transit cars and that includes light vehicles as well as heavier subway cars. But they expect, they should be another 1,500 transit cars ordered this year. And there's a number of projects now that are in the position where they've been awarded to a car builder and the car builder is now working with the sub-contractors which, that would be us, then we're going to get a share, a good share, of those projects. To name a few, there's a project in Miami, there's one at Metro, there's a project at PATCO [Port Authority Transit Corporation] in New York. New York itself has a small order out there. The thing is, is they're not headline type of projects. What they are is 100 cars here, 100 cars there. But they're out there. And in fact, if that 1,500 of orders come in, we expect deliveries of around 1,000 in our assumption and it's plus or minus a small percentage. But as you could see, that backlog will actually improve during the year. So when we say that it's kind of bottomed out, 1,000 cars is not a bad number of cars to be delivered in a year. If you go back to history, things have changed in that a lot more than New York drives this market. It used to be if you had an order from New York City, it was a gigantic order, it lasted a few years. But then the market would go down the drain a bit. And that's not the case. We're seeing a lot of activity, a lot of different municipalities that have already gone forward. It's just that it hasn't got to the stage where they've named a supplier of the components that we supply.

James Lucas - Janney Montgomery Scott LLC

Okay, that's very helpful. And final question, Alvaro, just wanted to touch for a moment on the tax rate, that with international sales now approaching 50%, is it a case that this is just still mostly export? Or are there opportunities to bring down the effective tax rate going forward from here because 35% still seems a tad high?

Alvaro Garcia-Tunon

You sound just like our Board of Directors there, Jim. And we probably have a couple of them on the call, so they know what I'm talking about. I think there are opportunities, but they're difficult to come by. And that's why I've said, going forward I think in the past, I used to say 37% or so. We ended up this year at 35.2%. A preliminary estimate is somewhere around 36%, maybe a shade lower next year. That's something that we're constantly taking a look at. And I think, big picture going forward, there's some opportunity there. Part of the problem is to get that opportunity, you have to spend a little bit. And you have a very uncertain picture coming out of Washington, D.C. these days. When our President first got elected, he came down hard on foreign earned income. Then he eased up on it, and then he introduced the budget again and came down hard on it again. And what you don't want to do is make a significant investment and have the rug pulled out from under you. So you have to be a little prudent in how you make your investment. But that's something we look at all the time, and we are committed to driving it down.

Operator

The next question comes from Steve Barger of KeyBanc Capital Markets.

Steve Barger - KeyBanc Capital Markets Inc.

Just wanted to clarify on the revenue side for Transit, I think you said, you think it stabilized. Does that mean you expected to be flat to maybe up in 2011 or is flat to down more realistic?

Albert Neupaver

I think flat to flat is more realistic. And a little fine after that.

Steve Barger - KeyBanc Capital Markets Inc.

And you're looking at, you said at least $20 million in PTC, maybe a bit more than that depending on the timing of the ramp in the fourth quarter, is that right?

Albert Neupaver

Yes, we should see growth in the fourth quarter. We can't quantify that now because it depends on the completion of these testing phases as I explained. So but once that starts ramping up, it should be a nice ramp-up. We've been waiting a long time for that ramp.

Steve Barger - KeyBanc Capital Markets Inc.

Got it, right. So but for 2011, most of the $150 million implied revenue increase is on the Freight side?

Albert Neupaver

Yes.

Steve Barger - KeyBanc Capital Markets Inc.

So if I look at the $2.90 guidance number, if I hold the variables like share count and interest expense constant, it looked like you're thinking about 30 or 40 bps of operating margin expansion. But it seems like you should be getting a richer mix and the rolling 12-month backlog certainly suggests that. Are you expecting any pressure from input cost inflation or anything like that?

Albert Neupaver

Well, I think as everyone on the call knows, I mean inflation has raised its ugly head here in the last number of months. And I think there's going to be a lot of pressure from that standpoint. However, that said, we have really tried to make sure that our divisions, our management team is very focused and disciplined on how we handle these commodity prices and other inflationary aspects. Now that said, you know that sometimes people get a little complacent, so we can't say we're 100% covered against all these types of inflations. But I could tell you that it's been a major focus and it continues to be a major focus on our part to make sure that when we take an order, that these commodities has either a surcharge or some other mechanism that would cover changes in FX, changes in commodity pricing. So yes, I think inflation will be there, but I think we're going to be able to manage it well.

Steve Barger - KeyBanc Capital Markets Inc.

Okay. So I mean, between the Wabtec Performance System, which has certainly paid a lot of dividends to you, and the increase in freight, which should help absorption, and your ability to just hold those costs in line, it sounds like maybe there's some upside in terms of incremental margins as we go through the year, especially if the revenue really comes through on the Transit side. Is that a fair statement?

Albert Neupaver

We always strive to improve. We have a continuous improvement aspect, and we're going to work very hard to keep the fixed cost down as low as we can and not add back cost as we ramp up during this recovery. So we would hope that we would perform to our expectations.

Operator

The next question comes from Tom Albrecht of BB&T.

Thomas Albrecht - BB&T Capital Markets

I wanted to just double check a couple of statistics. I got kind of cut off at one point. Alvaro, on the SG&A, the quarterly guidance had been about $48 million to $50 million; obviously you came in higher with the acquisition. So should we think about that as what, $53 million to $55 million now?

Alvaro Garcia-Tunon

Yes, I think, Tom, I think you hit the nail right on the head going forward. For the quarter, obviously, it was $53.4 million. Going forward, once you get the full impact of the acquisitions and we're expecting slightly higher pension costs, slightly higher healthcare costs and probably a small increase in our stock-based comp. And once you factor all those in, I think a number about $55 million, plus or minus, is probably what I'd use as a run rate. If you compare it to the fourth quarter of last year, it was up by about $10 million, and I would say over half of that, about $5.5 million, was due to acquisitions. And again, you'll feel the full effect of those acquisitions in the run rate this year. But a little bit more than half has been acquisitions. And then compared to last year, last year was, all of us in management are a little, hate to admit this but last year was a very low year for comp overall and particularly, the stock-based comp and bonuses. And in '10, you saw a return to a more normal level and that added about another $5 million, and that pretty much accounts for the increase.

Thomas Albrecht - BB&T Capital Markets

Okay. So I'm delighted to hear that the incentive comp was up, that means a lot of good things. But just in terms of kind of an absolute number, where did that come in, in 2010 so that we know how to think about that as we model? I think you said slightly higher.

Alvaro Garcia-Tunon

Yes. I would say the SG&A, for modeling purposes, you can use about $55 million a quarter. And then obviously, we'll have to adjust that as acquisitions come in. And that can be impacted by one-time events too as well, but we'll explain those.

Thomas Albrecht - BB&T Capital Markets

Yes. No, I understand. But where did the incentive comp finish 2010 for the whole year?

Alvaro Garcia-Tunon

We have various elements of it. We're looking at the stock-based comp because that comes right out of the funds flow statement for you. The stock-based comp this year was about $11.8 million compared to about $3.6 million last year. So I'd say that the number this year is a pretty normal ongoing number. And as you can see, it was very, very low last year. The year before that, it was at $10.5 million. So it was $10.5 million, $3.6 million and then $11.7 million. So you can see the difference between the two years.

Thomas Albrecht - BB&T Capital Markets

Yes, definitely. And then similar question for the amortization, the guidance had been about $2.5 million.

Alvaro Garcia-Tunon

Yes.

Thomas Albrecht - BB&T Capital Markets

It looked like the new bump rate is $3.5-ish million for the time being?

Alvaro Garcia-Tunon

Yes, see, amortization is a tough number. Basically going forward – and what makes it hard is the acquisitions because you have this one-time -- you mentioned you may have missed part of the early part of the call, but we have what we call purchase price accounting or PPA where you have to basically capitalize the inventory on hand when you made the acquisition and the backlog, and you basically don't record any profit until it turns over. And that can cause amortization expense to yoyo a little bit. For this quarter, it was $3.5 million. Looking forward, assuming no changes, it'll probably be about $3 million, $3.1 million next quarter. Some of these items will lapse and the amortization expense will decrease, but then if we have an acquisition it'll bounce back up again. So but on an apples-to-apples basis, it'll be about $3 million, $3.1 million.

Thomas Albrecht - BB&T Capital Markets

Okay. Stockholders' equity, do you have that and can you give us any glimpse into the segment operating margins?

Albert Neupaver

$903 million.

Alvaro Garcia-Tunon

Yes, it's been around $900 million, and I think that's a good number going forward. In terms of margins, I think Al -- I'm not sure what your question about margins may be. I think Al just talked to that a while back. But what are you…

Thomas Albrecht - BB&T Capital Markets

Yes, the consolidated -- I meant for the Freight and Transit within the fourth quarter, did you have those or do we have to wait for the 10-K to kind of…

Alvaro Garcia-Tunon

Yes, they'll be in the K, which we expect to file, I guess, within a week.

Thomas Albrecht - BB&T Capital Markets

Okay, I'll look for that. And I guess the last question would be, there's some big differences in the industry forecast for railcar production this year, one number's over 40,000 couple of numbers barely get to 25,000. I heard your comments earlier about 25,000 to 30,000. But maybe this is a question for you, Al, what is your gut really saying? We've seen an increase in the backlog, the fourth quarter orders were well over 10,000. Where are you kind of coming out on your gut? Could production really be closer to 40,000?

Albert Neupaver

I think it's really difficult to say right now. I think there's a number of factors that'll play into it. We mentioned about the parked cars and is that a red herring or is that truly an indicator that all these cars have to come back, or what percentage? I've asked that question to every person that I meet in the industry and no one has an answer. If you look at how many orders were actually placed in what was a year that we didn't expect to see many orders, you got 30,000 orders that come in during 2010 with deliveries around 16,500 or so. So you're seeing the orders coming in, you're seeing the backlog go up at the same time. I think it's a healthy situation, and I think it'll continue to improve. I think that our number is a number that we based our numbers on. And we hope that it's a little higher than that and I really doubt it's going to be any lower than that.

Operator

The next question comes from Art Hatfield of Morgan Keegan.

Arthur Hatfield - Morgan Keegan & Company, Inc.

Just a couple follow-ups on a couple things that you talked about. Al, when you talk about PTC and add in your interactions with the railroads, do you get the sense at all that they may be trying to delay as much as possible in hopes that they get a more friendly administration after 2012 that will really reduce the impact to their business from PTC?

Albert Neupaver

I think there's a tremendous amount of activity going on in that area. Let me just speak to a couple of them and hopefully, this will answer the question. The AAR, which is an organization of the railroads, I mean they've actually have pushed ahead to try to get some activity related to their route miles. Now why is that? I mean, what happened is when the FRA put the specification together, they said you've got to use whatever route miles were traveled in 2008, that's where you've got to install PTC. Well, that's obviously unfair, I mean, because they can take hazardous material through a different route and preclude them from having to put PTC on all this territory. They estimate that they could eliminate about 10,000 miles out of the total of 73,000 miles that are required under the mandate to be fitted for PTC. So I think it's a logical thing and that's what Hutchison from Texas had presented the bill saying, hey, let's look at this realistically. The second thing is, is they're required at this point to put two displays in the cab. One is all they think that they need, why would you have two there? And they're trying to create some litigation around the fact that, why do I have to put that extra expense there? When you look at some of the studies that have been done, G.O.A. [G.O.A. Freight Systems] and others have looked into, can this be done by 2015? And I think the railroads and others are concerned about the ability to do it. It's a very complex thing to get this installed and running on all the different players. Probably the most difficult area is in the transit area or the short line railroads that are required to have this. And there's a number of those that are required to do this. And some of those have jumped out in front and are being proactive in trying to work on a program. But at the same time they're coming back to the government and saying, hey, I need funding and I may need more time. Who's going to fund all these municipalities to do it? So I think there's a little bit of effort on the railroads' part to jump on that a little bit and say, hey, if they're going to get funding, should I get funding? At the end of the day, we're pushing forward as hard as we can to meet every deadline that we can, and we'll see what happens. I don't think there's any kind of traction at all to kill this effort. I think that it's way early to find out whether you need more time in order to get it fully implemented. And I think that'll play out. Actually, I think that they need to be reporting this somewhere, maybe in 2012 or late in 2012. So yes, it's a lot of talk. I think that it's way early to say whether it can be met or not. We think that it's a viable technology. We've been operating this technology with BNSF on 600 locomotives since 2004. So we're just going to push ahead, and we do support the fact that there should be some funding for the railroads and the transit authorities to do this mandate as I stated.

Arthur Hatfield - Morgan Keegan & Company, Inc.

Well, let me follow-up on a couple things you said. I mean, if the funding isn't there and in some cases, we just don't know, with the locals and at the state level, if they're unable to do it on the passenger lines, doesn't that effectively kill the system?

Albert Neupaver

Well, you have Metrolink and Denver and other programs that are already moving forward. So these programs have to move forward and they are. Metrolink gave an order to Parsons for $120 million to install PTC on their system. And Denver has a consortium with Fluor and Rotem and others that have putting in a new railroad in Denver that is looking. We've been working with Metro for a number of years when we started working with BNSF. So that is moving forward. What they're asking for is let's state where the funding is coming from. They're going to have to be funded.

Arthur Hatfield - Morgan Keegan & Company, Inc.

The comment you made about them kind of fighting the two monitors in the cab, the guidance that you've given us on the $250 million to $500 million, is that based on them having to put two monitors in or one?

Albert Neupaver

One.

Arthur Hatfield - Morgan Keegan & Company, Inc.

Okay, okay. So if they got that, that wouldn't impact the guidance you've given us?

Albert Neupaver

Right.

Arthur Hatfield - Morgan Keegan & Company, Inc.

Secondly, I want to follow up on the margin question. You commented on lowering your fixed cost, but as I've kind of seen what you guys have done over the last several years, I would view you not so much just lowering the fixed cost of the business, but really shifting the business away from being a fixed cost business to being more of a variable cost business. And if my thinking on that is correct, is it more appropriate to think on the go-forward that the margin growth within the business is going to be kind of limited to maybe that 30 to 40 basis points that we're talking about in 2011?

Albert Neupaver

Our fixed base, as hard as we are to be focused on it, you got to realize that when you look at fixed cost and the definition of it, it's usually about 15% of your revenues, even after you've driven it down. There are certain businesses have some high and some low, but on average, it's about 15% of your revenues.

Arthur Hatfield - Morgan Keegan & Company, Inc.

You said 50%?

Albert Neupaver

15%. Okay. And so there's plenty of opportunity.

Operator

The next question comes from Kristine Kubacki of Avondale Partners.

Kristine Kubacki - Avondale Partners, LLC

Just on the aftermarket transit side and I hope you didn't answer this already. But I just wanted to know, talking about Transit Authorities, have they really ended kind of the deferring of maintenance as you guys have seen it in the past few quarters and kind of the pulling from inventories? And I guess then my question is in order for them to cut aftermarket further, if we were to see that, would they have to take cuts in existing service, like actually taking equipment offline to cut aftermarket further from kind of the level it's at, at this point?

Albert Neupaver

Yes, by no means did we want to infer that they're deferring any kind of maintenance or aftermarket. What they were doing is using up inventory, driving it down. And you're exactly correct. I mean, that we've actually seen has rebounded, and the decline of that now has fully recovered. But the concern is if you do start impacting ridership and service cuts, that could have an impact because they don't have the right funding to do the service they need. So that is a concern.

Kristine Kubacki - Avondale Partners, LLC

Okay. And then, I guess, you talked a little bit about the fragmented nature of the orders kind of on the transit side. And I know in the past when you guys have talked about some of the best operating margins you get are on those long runs, you get better at the business like in New York City. So does that kind of impact kind of where we could see margins, I guess, the leverage in the business on the transit side if the orders are, in fact, more fragmented, or am I thinking about that wrong?

Albert Neupaver

I think that there is always a -- if you have a long run, and the learning curve gives you a better opportunity to perform. But it's really, we've been focused on continuous improvement on margins. And as you could see, with the performance we've had in the third quarter, you had the margins with the drop in transit sales. I think it indicates that we have a good handle on our cost and margin opportunities.

Kristine Kubacki - Avondale Partners, LLC

Okay. And then my final one, a more esoteric question. I guess there's been some news coming out of China, the Chinese Ministry of Rail (sic) [Railways] and there's been some people removed and there's been some rumors of scandal. Have you seen anything over there? Are there any immediate concerns? Is it related or is it really on their high-speed rail only? Are there any impacts to your business at least in the near term because there's kind of the upheaval over there?

Albert Neupaver

Yes, the only thing we know is that the head of the Ministry of the Railroad was arrested and it was related to high speed rail as far as we know. And that's the extent of it. We have no other facts that we could really speak to.

Operator

The next question comes from Scott Group of Wolfe Trahan.

Scott Group - Wolfe Research

Just wanted to follow up on the earlier question about the legislation to reduce the PTC mandate. If they reduce the number of miles by 10,000, does that impact the number of locomotives that need the on-board computer?

Albert Neupaver

No, not at all. What it does is there's about 75,000 switches out there that would need to be touched, and signals, like the red lights and stuff. Each one of those has to have a transmitter. And what it does is, if any of that route miles does not need to be fitted for PTC, that just eliminates the wayside business and that's not the part of the business that we're involved in. Normally, the locomotive change would be insignificant.

Scott Group - Wolfe Research

Okay. So maybe a little bit of a headwind for the Xorail opportunity, but for the core on-board computer, no impact?

Albert Neupaver

Right.

Scott Group - Wolfe Research

Also, you talked about you're actively involved in some bids on the international side. Can you give a little bit more color, where are those bids and what's the size and timing of them?

Albert Neupaver

There's a number of bids that are there. Most of them are, there are some in Europe, there's some all over the world. We're actively bidding programs and what we manufacture in 17 countries and ship to 125. So and some of these projects range from $20 million up to $100 million projects. And without naming any specifics, I could tell you that we're not short of opportunity, but it just takes time to break through some of the barriers of entry that exist in some of these countries and we're making good progress. If you look at where our international sales were five years ago, 1/3 of our business to today, it's almost 50%. That's the kind of progress we're making. And these opportunities, there's projects in South America, Rio; there's projects in Australia that we're bidding on; there's projects in South Africa; there's projects all over Europe; there's projects in Turkey. I mean so there's tremendous opportunity, as I've always said. This market is a very huge market and we're a small player. So if you want specific programs, I think you could follow up with Tim sometime and he could give you a flavor of those.

Scott Group - Wolfe Research

Okay, great. Can you give an update on the latest for the upcoming New York Transit projects? And then, Alvaro, I don't think I heard, can you give cash from ops in the quarter?

Albert Neupaver

I'll answer the cash from ops and save Alvaro some breath. It was $176 million…

Raymond Betler

In the quarter. It was $101 million…

Albert Neupaver

Yes.

Alvaro Garcia-Tunon

$176 million for the year, about $100 million for the quarter.

Albert Neupaver

Right. Okay, and the other question was related to…

Alvaro Garcia-Tunon

New York.

Albert Neupaver

New York. New York has a small program that they call R188. It's only for, I don't know, 20, 30 cars, it's 23 cars. And that program has been awarded to a car builder and we're working with that car builder now to see what our portion of that business is. And they have a follow-up program called R179, which is a larger order of well over 100 subway cars and that program is moving forward as well. I think that we should hear something on that later this year.

Operator

The next question comes from Greg Halter of Great Lakes Review.

Gregory Halter - Great Lake Review

You detailed the capital spending the last couple of years. Just wonder what your projections are for 2011?

Albert Neupaver

It's $25 million on '11.

Gregory Halter - Great Lake Review

Okay. And given this recent surge in oil prices, just wonder if you could again elaborate your thoughts on rail versus over land, trucking and so forth in terms of cost savings and so forth and so on, and how that would or could impact your Freight business?

Albert Neupaver

Yes, two aspects of the oil price is that, one is there's no other more efficient way to move freight, as well as people than by rail. I mean, there's so many statistics out there. On one gallon of diesel fuel, you could go almost 500 miles with one ton of freight. One intermodal train takes 280 trucks off the road. So that is one of the factors why this is such a compelling industry that we play in. But the increase, obviously causes increased price or cost for the railroads, it has a negative impact. So I think you'll find people moving more toward mass transit than driving their cars because of it. So it's a positive for the industry without a doubt.

Gregory Halter - Great Lake Review

Okay. And you mentioned some acquisitions and maybe some large ones. Just wondered if you could give us a frame of reference on how high you would go on a debt to cap basis, what…

Albert Neupaver

We would feel comfortable, we've said this in the past, with 2x, 2.5x our EBITDA debt. So that gives you a flavor of size there.

Gregory Halter - Great Lake Review

Okay. And would you be willing to issue new stock?

Albert Neupaver

I see no reason why not.

Gregory Halter - Great Lake Review

Okay. And last one, given the situation in the Eastern Corridor in terms of the storms and so forth, has your service business seen any impact in terms of a pickup from train repair and so forth that may have needed to be done there?

Albert Neupaver

Yes, we saw they had a lot of problems, especially with one of the heavy snows and then the deep freeze. There was a lot of mechanical problems, which, really, we had to activate our service people and repair centers to try to support the municipalities in the Northeast.

Operator

The next question is a follow-up from Art Hatfield of Morgan Keegan.

Arthur Hatfield - Morgan Keegan & Company, Inc.

You may have mentioned this, but your guidance assumptions for this year do not include any more acquisitions, is that correct?

Albert Neupaver

That's correct. We never include acquisitions.

Operator

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Al Neupaver, President and CEO, for any closing remarks.

Albert Neupaver

I just want to thank everyone for joining us today, and we look forward to talking to you soon. Thank you very much.

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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