美國西屋制動公司 (WAB) 2013 Q4 法說會逐字稿

Good morning, and welcome to the Wabtec fourth-quarter earnings conference call.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Tim Wesley, Vice President of Investor Relations. Mr. Wesley, please go ahead.

Thanks, Ed. Good morning, everybody, and welcome to our fourth-quarter earnings call. Let me introduce the other Wabtec people who are here with me, Al Neupaver, our Chairman and CEO; our President and COO, Ray Betler; our new CFO, Pat Dugan. And I also want to introduce to you our new Corporate Controller, John Mastalerz. John joined us recently after many years with Heinz, most recently as their corporate controller.

As usual, on the call today, we'll make our prepared remarks and then be happy to take your questions. During the call, we will certainly make forward-looking statements, and we just ask you to review today's press release for the appropriate disclaimers. Al?

Thanks, Tim. Good morning, everyone. We had a good operating performance in the fourth quarter. We had record sales of $682 million. We had earnings of $0.76 per diluted share. These results were impacted by after-tax expenses for some restructuring actions of about $0.03 per diluted share. These items were unusual in nature, so we wanted to point them out to you. As a result of the strong finish to the year, we ended 2013 with record sales, record earnings, and a record year-end backlog of about $1.7 billion.

We also continued a very important streak. Wabtec finished 2013 as the only company in North America on any exchange whose year-end stock price has increased for 13 consecutive years. Our business is performing well, and that's thanks to our diversified business model, our strategic growth initiatives, and the power of our Wabtec Performance System. We are very optimistic and excited about the long-term growth opportunities in our freight and transit rail markets, which are being driven by compelling trends around the world.

Today, we also issued our 2014 guidance. We expect full-year earnings per diluted share to be about $3.45, with sales growth of about 15% for the year. This EPS guidance is about 15% higher than our 2013 results. We had some assumptions with our guidance, and I would like to go through those with you. Continued modest growth in our global economy. The US and European transit markets remain stable, with the emerging markets driving growth. Our transit revenues should grow based on our existing backlog of projects in the US and internationally. US freight rail traffic rose modestly, with OEM locomotive and car builds also growing. So far this year, traffic is about flat.

Our guidance assumes no major changes in foreign exchange rates, a tax rate of about 31.5% for the year. We have also assumed that the acquisition that we announced last week, Fandstan Electric, will close by the end of the first quarter, so it is included in our guidance. As always, we will be disciplined when it comes to controlling costs. We're going to stay focused on generating cash to invest in growth opportunities, and we will be ready to respond if market conditions change.

I thought I might talk a little bit about our markets. One of the reasons we are so optimistic about Wabtec's future is that we are involved in very compelling markets. These markets, freight rail and passenger transit, are large, they're global, and they're growing. According to a UNIFE study, the world rail supply market exceeds over $100 billion, with annual growth of about 3%. Western Europe, Asia Pacific, and NAFTA represent about 75% of that total market. Rolling Stock, the segment that we are involved in, is the largest segment, and Outsourced Services is the fastest-growing segment. We play in both of these. Around the world, our customers are focused on improving safety and efficiency, and that's where Wabtec plays an important role.

The markets are also compelling because of an efficient transportation system and a robust infrastructure are essential to global economic growth in both developed and emerging countries. Finally, secular trends are also driving investment. That's awareness of environmental issues and benefits, urbanization, deregulation, energy evolution. I would like to ask Ray Betler to dive a little deeper into our markets and explain how we view them going into 2014. Ray?

Thank you, Al. In NAFTA, freight traffic was up about 2.1% last year, led by 4.4% increase in intermodal. So far this year, traffic is off to a slow start. It is down about 1%, mostly due to weather issues across the country. The OEM Rolling Stock deliveries in 2013 were lower than in prior years, with about 53,000 freight cars and 1,000 locomotives delivered. In 2014, we expect about 60,000 freight cars and about 1,100 locomotives to be delivered.

Globally, freight traffic is also mixed. China is growing, but not as fast as expected, and as you might expect, that has a ripple effect on the mining countries, like Austria, Brazil, and South Africa, so we have seen some weakness there. As you know, we are focused on increasing our global footprint where we see opportunities in markets that are larger than our traditional NAFTA market. For example, the global install base for locomotives is about 110,000, with about 35% of that fleet in Asia Pacific, 25% in Russia, and 20% in the US. The global install base of freight cars is about 5.2 million, and about 30% of that is in the US, 30% in Russia, followed by 20% in Asia Pacific.

On the transit side, stability is still the theme, both in the US and abroad. In the US, ridership is up about 1.5% in the third quarter and was flat year to date. In the UK, ridership is up actually about 3.9% in the most recent quarter. In Germany, estimates show about an increase of about 1%. In 2013, North American transit car deliveries were about 1,000; bus deliveries were about 4,500; and we expect that to be essentially the same for 2014. Transit funding in the US is stable. It stays around $10 billion, and that's about where it's been over the past several years. This stability in the North American market continues, despite budget issues and uncertainties about long-term transit spending and the long-term transit bill, which is up for discussion sometime this year.

Just as with the freight market, we are focused on global growth where market trends are larger than in NAFTA. We estimate the global install base for transit cars to be around 330,000, with about 55% of those in Asia Pacific, about 20% in Europe, and only about 5% in NAFTA. And even in these larger markets, more established than ours, investment is still strong. For example, the transit agency in Munich plans to double its spending this year to expand and modernize their system. Al?

Thanks a lot, Ray. As we go forward, we will continue to focus on growth and cash generation. Our priorities for allocating this free cash remain the same. Fund our internal growth programs; that includes CapEx. Fund acquisitions; we spent about $220 million on three acquisitions in 2013. Return money to shareholders through a combination of dividends and stock buybacks. During 2013, we bought back 507,000 shares of stock for about $33 million, and we announced a new $200 million buyback authorization.

We have also increased our quarterly dividend for the third year in a row. We remain focused on increasing cash flow by managing costs, driving down working capital, and controlling capital expenditures. Our growth strategies remain the same, global and market expansion, aftermarket expansion, new products and technology, and acquisition.

As we look at some of the progress we've made on each of these strategies, global and market expansion, our sales outside of the US were a record $1.2 billion. That's 3% higher than last year's total, just under 50% of total sales versus about 1/3 five years ago. We continue to grow our presence in Australia, South America, and China from both internal growth and acquisitions. We recently won a locomotive brake order in South Africa that we believe positions us well for future business there. We are working to develop new business opportunities in Russia as well.

Aftermarket expansion, overall, our aftermarket sales were $1.5 billion, another record year. That made up 57% of our total, a growth of 13% compared to the prior year. This growth is due in part to acquisitions and internal growth initiatives. We are expanding our service offerings around the world, especially in the UK where we are the leading provider of Rolling Stock overhauls and maintenance.

In the area of new products and technology, we continue to have tremendous focus on this area, with about 38% of our 2013 sales came from new products. That was 30% the year before. We define a new product as any product that was introduced in the last five years. We have many internal development projects, such as electronic braking, oil free compressors, locomotives services, and internal brake system, and integrated brake system for the European freight market. And, of course, Positive Train Control, which gets the headlines. PTC represented about $235 million of our sales in 2013. That's about a 10% growth from 2012.

We expect more growth this year, probably in the range of another 10% to 15%, as we continue to work with the railroads and other industry suppliers to deliver an 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 a delay would impact Wabtec, and we do not think that it will have a meaningful impact on our business. In the acquisition area, we completed three transactions last year and have already announced one this year. Combined, in 2013 -- combine the 2013 acquisitions and the ones we closed in 2012, two of those contributed revenues of about $160 million, with about half in each group.

Let's talk a little bit about our recent acquisition, and that's Fandstan Electric. We are extremely excited to sign an agreement to acquire this company, and expect to complete the transaction by the end of the first quarter. Fandstan makes highly engineered components, mainly pantographs and third-rail products, including shoe gears. They have strong intellectual property. They have a strong engineering and technical capability. About 60% of their business is transit, and 40% is industrial/energy.

This acquisition meets all of our strategic criteria. New products. There is no product overlap whatsoever with Wabtec. Aftermarket. 30% of their sales are in the aftermarket. They have an install base in more than 100 different countries. If you look at their distribution of their business, 50% of it is on the continent in Europe, obviously a target area for us; 20% in the UK, where we already have a good platform; 20% in Asia, where we're focused on growing; and 10% here in the US. They have a strong management team that will continue in with the business.

Annual revenues are about $235 million, with margins slightly less than our current transit margins. We see significant opportunities to improve the margins using our lean and sourcing activities, applying the Wabtec Performance System, but this will take time and lots of hard work. In 2014, we will see significant sales from Fandstan, but minimal earnings accretion due to integration costs and purchase price accounting charges. Long term, we think Fandstan will be an excellent addition to our portfolio.

Just to mention the other acquisitions in 2013, Napier, a manufacturer of engine turbochargers and components for a variety of markets; Turbonetics, a specialty turbocharger for smaller engine; and Longwood Industries, a manufacturer of specialty rubber and seal products the rail and industrial markets. What I'd like to do is turn it over to Pat Dugan, our new Chief Financial Officer, and have him talk a bit about the numbers. He is replacing our good friend, Alvaro Garcia-Tunon, that's probably listening in today.

Thank you, and I'm happy to speak to these numbers, and I appreciate the opportunity. Sales for the fourth quarter were a record $682 million, which is 12% higher than last year. Of this increase, a little more than half was from organic growth. In the freight segment, the sales increased 14%. A portion of that is due to acquisitions, and our organic growth is from increases in our electronics business and from the freight car companies that supply the freight car build. Transit segment sales also increased 9%, and that really is spread across a number of different product lines in different business units.

For 2014, we expect to see revenues increase in both of our operating segments, so we are expecting that to continue. Operating income for the quarter was a record $111 million, which is about 16.3% of sales. As Al discussed earlier, in this quarter, we did record some pretax charges of about $3.8 million, which is spread between our cost of goods sold and our SG&A, and that's really primarily for restructuring actions. And we point these out simply because, as you are aware, of those larger items.

For the full year 2013, our operating margin was 17%. That is a 60 basis point improvement from last year. Interest expense for the quarter was $4.6 million. That's slightly higher compared to a year ago. That's really the result of some additional average outstanding borrowings, and those additional borrowings were caused by the timing of our acquisitions and the money that we used to complete those transactions.

Other income is about $950,000, and that really stems from some accounting that we did at year end related to various joint ventures. Our tax rate for the quarter was 31.2%. Last year it was 33.3%, and we expect our annual rate going forward to be roughly 31.5%. Although, we expect individual quarters to have some variability simply due to the timing of certain discrete tax items.

When you look at our balance sheet, our working capital has improved slightly, despite our higher sales. Our year-end accounts receivables were $555 million. Inventories were $403 million, and payables were $327 million. Just something to point out, as our businesses because more global and we expand our sales and our sourcing programs into various countries, that does affect our working capital requirements. Even so, we expect that we have plenty of opportunity to continue to reduce our working capital.

Cash at year end was $286 million. That's mostly outside of the United States, and if you compare that to September 30, the September 30 balance was $281 million. Our debt at year end was $451 million, and you compare that to the third quarter, which was $540 million. And our cash from operations, in our cash flow, we generated $236 million for the year, which is about the same as last year. I will point out that, that is the third year in a row that we've generate more than $230 million in cash from operations. A good performance, we're happy with that, but hope to continue to have improvement in that area into 2014.

Just a couple miscellaneous items that we always get questions on, on our earnings calls I just wanted to point out. Our depreciation expense for the quarter was $9 million, compared to $7.6 million in last year's quarter, a slight increase really related to the acquisitions that we completed in the year. Amortization expense is $5 million, which is flat with both quarters. And our CapEx for the quarter was $17.6 million versus $11.3 million. For the year, CapEx expense -- expenditures were $41 million versus $36 million, and in 2014, we expect to spend about $50 million, including the Fandstan acquisition.

Some information on our backlog. We ended the year with a record year-end high of $1.7 billion in backlog. That's higher than September 30 and about 2% higher than a year ago. You can split that backlog between transit and freight as $1.2 billion for transit and $512 million for freight. When you look at our rolling 12-month backlog, which is a subset of the total backlog, the 12-month backlog is $1.1 billion, which is also higher than September 30.

The transit portion of that $1.1 billion is $651 million, and freight, $447 million. I just want to point out that those figures do not include about $250 million of contract options. We don't count them in our backlog until the customer exercises those options. So with that, I'll turn it back over to Al.

Okay. Thanks a lot, Pat. Before I summarize, I'd just like to take this opportunity, especially to this group of people that know Alvaro, I just want to personally thank him for his tremendous contributions over the eight years that I'd been here and longer than that. He's really been here since about 1995 when his company was acquired by Wabtec, and he truly was a major contributor, and probably most importantly, was a tremendous business partner and was definitely a good contributor to our success. I am very happy to say that he will continue in an advisory capacity working with us into the future. Thanks ever so much for your years of service, Alvaro, and our continued friendship.

In summary, once again, we had a good performance in the fourth quarter and for the full year. Let's take one final look at 2013, and then I'd like to -- I know in the Company, we're focused on 2014 and moving forward. Our revenues increased 7% to a record $2.57 billion. Income from operations increased 12% to a record $437 million. EPS increased 16% to a record $3.01. And our backlog ended the year at a near-record $1.7 billion. Quite an accomplishment for 2013.

Now, looking ahead in 2014, we are anticipating another record year, with an EPS guidance of about $3.45 on a revenue growth of about 15%. 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 costs. 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'd be more than happy to answer your questions.

We will now begin the question-and-answer session.

(Operator Instructions)

Allison Poliniak, Wells Fargo.

For 2014, Al, could you give us a sense of where that revenue growth is coming from in terms of acquisitions, and then both freight and transit, how you are breaking that out?

Sure. If you look at the 15% growth, what you are going to have is the Fandstan acquisition will make up about, say that contributes 50%. And if you look at the other 50%, half of that will be acquisitions that were closed in 2013 and other half internal growth. So what does that mean? That means that we'll probably end up with mid single-digit to internal growth for the year, and that's really in line with our long-term strategic plan.

Perfect. And then just on the transit side --

One other thing. I forgot to answer your second part Allison. I apologize.

I forgot that, too.

The second part of that question is, it's really going to split, probably, right down the middle. We're going to get half in freight and half in transit.

Okay, perfect. And then just touching on transit. With the uncertainty with funding as we enter the end of this year, are you guys sensing any inquiries slowing down in terms of new projects until they get some color on what's going to happen there?

I think that what we have seen over the last few years and what we are seeing right now and will continue to see in the future is there's this -- just an assumption that it was accepted across the industry, that the funding will be there. It may not go up, but the $10 billion that is allocated to transit across the US will be there. Ray, I don't know if you want to add anything to that.

Yes, thanks, Al. I agree with Al, Allison. There's some momentum associated with the transit industry because of the long-term nature of the contracts. It takes multiple years to get them funded, multiple years in the bid process, and then once they are funded, they last three to five years, followed by the aftermarket opportunities. So there's plenty of momentum in the transit market, and there's no indication in the government side that it's not going to support transit. We've seen a lot of new contracts come in. We're in the bid process for some pretty big ones, so I feel pretty confident.

Justin Long, Stephens.

Congrats on the quarter, and good morning. Looking back at 2013, your incremental margins were very strong, and this is even more impressive given your growth was primarily driven -- or really driven by transit. It tends to be lower margin relative to freight. As we look ahead to 2014 and look at your guidance, it seems like it implies a lower level of incremental margins. Could you just talk about what's driving this, whether it's a mix in freight and transit, and you touched on that a little bit, or something cost related?

When you look at contribution margin, we've openly discussed that we feel that a good number for us would be 25% contribution margin on incremental revenue. And we have had some great success this year. I think if you look at the year -- total year, it was at 25%. Obviously, less than the fourth quarter, but some of that -- you talk about what impact is that. There's a number of things. Number one, is our continuous drive to improve margins through our Wabtec Performance System, and we target improvements in our plan, and we expect people to deliver on that. You mentioned the second aspect, and that's our transit margins are generally lower than our freight margins, so that mix has an impact.

The other positive impact that we've had in -- if you look at 2013, our aftermarket business grew very nicely, and that is typically a good margin business. The other thing it impacts -- margins is, quarter to quarter -- we talk about all this internal growth, and it's our number-one target for what we do with cash generation. This internal growth doesn't always show up in a way that we discuss it because it's costs that we incur in order to develop a market, certification costs in Russia, establishing a marketing organization in Europe, building our platforms in South America. All these costs sometimes so differently through the P& L throughout the year, so that has an impact.

We are very pleased on how we did perform in 2013. If we take a look at 2014 and how our plan rolls out, the internal growth will be the most profitable growth. We will have expenses associated with trying to grow our business in each of those strategic initiatives, so that will have an impact. We feel that there will be an impact -- when I talked about the mix being 50%-50% freight and transit, the absolute number -- the percentage growth will be about the same, but freight is a bigger portion of our business, so from an absolute standpoint, that should have somewhat of a positive impact. So that mix will have that impact.

And we are very conscious about continuously improving those margins over time. If you look at the Fandstan acquisition, as I stated, their margins are right around or slightly lower than our transit margin, so that will have an impact. In addition to that, we have integration costs that will impact it. We also have the PPA than what impact it, PPA being the purchase price accounting. Those are some headwinds that we must try to overcome, but we still think that we should see good margin growth as we go through the year in 2014.

That's really helpful detail. I appreciate it. As a follow-up, my second question, I was just wondering what the level of activity was like in terms of your pipeline of potential PTC-related projects. Are people sitting on their hands right now, waiting to see if we get an extension? Or are there still some opportunities you're working on that are pretty close?

I don't believe anyone has ever just stepped back and hoped for -- that they are going to be an extension so they wouldn't do anything. I think the Class I railroads have been feverishly working to try to get this project implemented, and the transit authorities, as well. Some of the problems with the transit authorities, I think, are really related to funding. And what you're seeing -- we are not seeing any letup whatsoever. We still see a lot of projects that we're working on. We hope that we're in a position that we could announced a few of these in near term, but there's tremendous amount of activity going on.

And I think the biggest effort that you'll see in 2014 is that almost all the railroads -- the Class I railroads will be shifting from laboratory testing to field testing. You'll even see some of the Class I's will be going into probably almost the approval stage for the product safety plan as well. And you have some of the transit authorities, like Metrolink, that is really looking at trying to put this in revenue service in the short term. So you've got a tremendous amount of activity that's going on. It's a very complex project. It's a very costly project for those involved, but I do not see anyone taking their foot off the pedal.

And then maybe one last quick one. On your conversations with potential joint venture partners in Russia, is there any update on that front?

Not at this point. We continue to work with two different groups. Right now, we're working hard to try to get a formal arrangement, and it creates a nice long-term opportunity. We're obviously very cautious in entering any new market, and Russia is one of those that we're taking our time and making sure that we don't get too far ahead of ourselves without understanding the market. So nothing to report, but I think in the near term, we should be up to give you more information.

Great. I'll leave it at that. I appreciate the time today.

Art Hatfield, Raymond James.

Al, I want to go back to this margin question because based on the guidance that you've given and just going through a rough cut of the numbers, I am getting a pretty flattish or flat or very small improvement in operating margins for 2014. You'd talked about some gives and takes. But can you talk about what may be the biggest headwinds, one, the biggest headwinds to margin improvement in 2014? And secondly, given the size of the Company now, and you've had great success the last few years in improving that operating margin, going forward, should we expect a lower level of incremental improvement there, just given the size of the Company?

First, let's start out Art, by -- every time you improve on margins, the next increment is more difficult. There's just no question about it. As we look at 2014, we have a goal and our plan. We will improve margins, and those margins -- improvement will come from all the things we've ever done in the past, and we will continue to drive those. If you look at the headwinds, I will try to explain them again. I think part of it is that you have a large acquisition that won't be -- that will be a headwind.

I think I talked about it, even with their margins, but we got integration expenses, and we got this purchase price accounting. How that works is that all the profit that's inside the -- whether it is in the backlog or in inventory, has to flow out, and then you have an ongoing amortization of your goodwill. So there is an impact from those as it flows out on a large acquisition like this, and then you add in the integration costs.

As far as other headwinds, that's probably the biggest one. I think you're going to see us improve our costs related to sourcing. We're going to improve our costs related to our efficiency and productivity in the plants. We're going to go our aftermarket business, which is going to help. We've got internal growth that will be kicking in. But we also -- and I want to tell you that it's not a headwind, but it's a reality. We do invest in internal growth. And if we want to take advantage of a market in China, if we want to take advantage of a market in Russia, if we want to take advantage of these markets, we fund it as we go.

We are funding it straight out of the profits, so those costs are impacted, and it's hard for us to try to explain to you when those costs will hit nor how much they will be in any given quarter, let alone a year. So we do the best we can in the planning process to identify those costs, and that's where are our guidance is. But I think that -- my numbers show a pretty nice -- it shows improvement in margin, even with the things I talked about. I don't know if my math was off. Sometimes it is. Not too often. (laughter)

I can tell you, 15%, and maybe my interest expense is too high on how I calculated it for the acquisitions, but I'm getting a flat margin year-over-year, so maybe I need to take this off line later.

You should talk to Tim. We're able to at least -- if there's something wrong with your model, but we can't provide you any more than we have legitimately. So If there's a question -- we actually -- I believe the numbers show an improvement in margin.

Look, I could come up with a small improvement, also. What I'm trying to figure out is the last several years, you have been able to grow margin close to 100 basis points on average a year, and what I'm hearing from you in your explanation is that if you didn't have some of these internal investments -- if you didn't have Fandstan as a headwind, that, that kind of growth is still a ballpark of where the Company should be.

What I am trying to gather from all this is whether -- if that is reality and maybe I am looking at it differently for 2014. Or if there is a new reality given the size of the Company -- as you said, each incremental margin point gets more difficult to obtain. If we're getting to a level there where we should think inherently about that type of growth -- that margin improvement in the Company to a lower level going forward as we have in the past.

Our goals in incremental improvement are no less than what they were in the past, so I would say that we still are not at the point where we think that margin expansion isn't a good opportunity for us. All right?

I am just not -- that's helpful. I'll talk off line. What I'm really trying to get is, when we say margin expansion, are we talking 30 to 50 basis points a year or 100-plus, and that's a huge differential between those two. So I'm trying to gather within my head really how we should be thinking about margin improvement going forward.

I think we have the opportunity for good margin improvement going forward.

Scott Group, Wolfe Research.

I don't want to keep this margin discussion going, but one quick follow-up on it. If I just do the math on adding -- roughly $200 million of revenue for Fandstan but very little operating profit based on what it seems like you guys are guiding to, that's about 100 basis point margin drag this year. So implying that the rest of the business is seeing 100-plus or better of margin improvement -- I think that's the point you've been trying to make, Al? Are we on the same page on that?

Yes. I hate to give numbers, as you know, but we are on the same page. Your explanation of my explanation, you probably did a better job than I did.

Just two other things. One, what are the implications of all the weather we're having here in the states? Is there going to be a good aftermarket opportunity for you guys this year, or are your products different, that wouldn't see a benefit from that?

No, we do see a benefit, and it's primarily in our aftermarket area, that this weather has just been extremely difficult to keep the equipment running. It's hard on the equipment, and we see pickup in a lot of the overhaul products that we have.

When you think that start to show? Does that show up in first quarter, or does that take a couple of quarters to play out?

It usually shows up almost immediately. We don't have much of a backlog in the area. I think our lead times are four to six weeks max.

And then just last thing, on the -- just an update on balance sheet and uses of cash. Any final decisions on -- with the Fandstan deal, how much of that's with cash and how much with revolver? And then, do you have just a -- you've got a new buyback announcement. What's your view on incremental uses of cash flow? Do you think it's buybacks and acquisitions? Do you think this is a big enough deal where maybe you slow down and don't look for other deals this year? Just how you're thinking about use of cash going forward.

The use of cash will continue. Number one priority will be internal development. Number two will be acquisitions, and we will not slow down. Number three is stock buyback and dividends. We've increased the dividend three years in a row. Our stock buyback was taken -- we had used up a good portion, almost -- more than half of $150 million. We went back up to $200 million to give us that flexibility. So those are the ones.

As far as the financing of Fandstan, obviously, we haven't closed the deal, but maybe, Pat, you could give some color on what we think we're going to do.

Yes. We have cash reserves and balances that are overseas that we're going to take advantage of using those. We're not going to have to finance the whole acquisition. We're still studying and assessing the most efficient and cost-effective way in order to complete the deal, but we are looking at a range here of 40%, 50%, maybe higher, of the acquisition being -- using available cash reserves, and the remainder being borrowed.

Pat, do you just have a view on where you want to take the leverage of the Company? Anything different what Alvaro has said in the past?

No. Nothing will be different than Alvaro said in the past. We are committed to maintaining our credit ratings, and we are in constant communication with the rating agencies, and so they are aware of our acquisition profile and our plans and our growth expectations. So we'll continue to execute as we always have.

Matt Brooklier, Longbow Research.

Just a question on Fandstan. Did carry with it a lower margin profile than some of the deals you've done over the past, let's say, 12 to 18 months. It sounds like it's not going to contribute that much with respect to earnings in 2014, and you've walked through the reasons for that. But my question boils down to, where do you think you can take margins on Fandstan? Can you get it up to where transit is currently? Could it be above that? And then what's the timing of improving the overall margin profile on that business?

Fandstan -- let me explain the business a little bit, and it will help you understand. The business was privately held. It was held by a Lord and a Lady Tanlaw was their names. And they had it in their names, a trust, and they hired an individual by the name of Michael Bostelmann, who was their managing director that ran the business. He ran it out of London, and what you had is a lot of separate businesses that are located -- you got a manufacturing in Germany; you got manufacturing in the Netherlands; you got manufacturing in the UK; you got some manufacturing in China, Australia, the US, sales offices throughout the world.

They built a nice business over the years really focusing on high tech products, with 60% of it going into the rail business and about 40% into industrial businesses. Their technology is really the ability to take and transfer energy from one position to another, and that's what mainly their reason for existence was, was electrical current, data collection, and distribution solutions. So it is a great basic business that was run as just a mini Wabtec, in a sense, with divisions out there.

What we need to do is we need to take a look, understand the business, and find ways to integrate that business into our business model. There is a lot of opportunities in order to do that. We think it will take some time. We think by the end of 2014, most of that integration will be complete. Most of the opportunity that we see in the business -- this is not a fixer-up business. Just keep in mind their business goals and objectives was based on a family business and not a public business. That is the culture that you need to transform.

This is not a problematic business. It's a good business, sound business, that if we apply our Wabtec performances, we apply our international platform, if you look at us, 30% of it is aftermarket. They have an install base of 100 countries. We could grow that. If you take a look at these industrial markets, and also their rail products, and you look at our distribution throughout the world, we will improve their revenue over time. It won't happen at first.

So we are really -- this is a great acquisition. We want to be honest and up front with everyone, but it's going to take a little bit of time to get the results we're going to get out. There's no reason why this couldn't be equal or better than average of the Company, not just a transit business.

Very helpful color there. And then as we're looking out to 2014, PTC revenue, what does the growth composition of that look like? You gave us the aggregate number for the year, but how much contribution are we getting from the freight side, and then how much contribution comes from transit?

If you look at the amount of revenue we've had from PTC in total since we started reporting it back in 2010, it's been about $600 million, and about a little more than 50% of that has come from US freight, and US transit has been about 25%, and a little less than 25% -- more like 20% from our international opportunities. In 2014, we expect that distribution to be about the same. We don't see either one -- I think that if there would be any -- if you went into 2015 and beyond, probably transit and international may get a different percentage. But in 2014, I think that breakdown is pretty accurate of what we think we're going to see right now.

And then just final question, if you could remind us -- or if you talked to it in the past, is there a big difference between PTC margins within freight versus transit?

No. No difference.

Samuel Eisner, Goldman Sachs.

Just going back on PTC. My understanding -- or I could have had this wrong. I thought PTC revenue in 2013 was going to be closer to $250 million. It sounds like it came in at $235 million. Is that $15 million differential, is that just me being wrong, or is that maybe a timing issue that's been pushing out to 2014?

It's a timing issue, Sam. Your number was right. That's a good catch on your part, but it's not that this is lost business or anything. It really comes down to a timing issue. We expected a little more hardware being delivered in the fourth quarter, and a lot of that has been put off. So on these projects -- the other thing that happens on large projects, we had anticipated some revenue recognition potentials by meeting milestones on our MRS project, and those milestones really were not met and moved into first quarter of 2014. So those two impacts brought us down a little bit, but it's not a -- I think it's just a timing situation. Okay?

Yes, understood. And then on your backlog, I think about 30% of your backlog now is freight, with about 70% being transit. That mix has moved around a pretty good amount of the last few years, so just curious how you guys are thinking about mix going forward in 2014. Should we maintain current levels?

And then a second part of that, freight orders this quarter of close to $390 million I think, are highest on an absolute basis, perhaps, in the Company's history? So just curious what's really driving the significant strength in freight orders.

Let's deal with the first question, and that question is, do we expect the mix between transit and freight to continue? In 2014, yes, we're going to see an equivalent growth, so the percentage breakdown of those two businesses should be about the same when you look at the annual percentage, not necessarily fourth quarter or the third or second. Just take the annual percentage of freight and transit, and you'll see about that mix in 2014. What's driving freight? I think if you take a look at freight and you compare it to the fourth quarter of last year, there is a gain, obviously, coming from the rail build. I think that fourth quarter last year, deliveries were probably around [11 or 12]. This year, we are up around almost [16], so you have some growth there.

The other thing that we've seen that we really didn't think we'd see -- we saw some locomotive business that had picked up. We also had a few large contracts that came to an end in the fourth quarter. The other thing that happened is that the acquisition amount in the fourth quarter was -- a lot of the freight was from acquisitions. If you look at the 2012 to 2013, the fourth quarter, about $40 million-plus -- $47 million was freight, and $33 million of that $47 million was acquisitions.

Napier, Longwood, and Turbonetics all ended up in the freight. Third to fourth quarter, the whole growth was freight, very little growth in transit, and that was about 17% -- or $17 million of the [$49 million, $50 million] was acquisitions at 30%. I think the one thing that is good, and we're looking at third to fourth, and if you look at the fourth quarter 2012 to 2013 is that in both cases, most of that growth was internal growth. Where we had not seen that in the previous quarter. So that's a real plus, that our internal engine is starting to pick up, and that's what drove some of that business, Sam.

Thanks. And just two more housekeeping items here. The restructuring charges announced in the quarter, what specifically were they for, and what you expect the payback to be on those?

What we're doing, there's two things that -- two primarily things. One is we announced in the -- late last year that we were going to relocate most of the manufacturing for one of our transit lines from a plant in California to our plant down in San Luis Potosi in Mexico. This should have a very positive impact going from a high-cost platform, a high real estate area, to an already existing infrastructure in a low-cost labor platform, so we should see good margin improvement based on that.

The other thing is, as I mentioned, we finished some large orders, especially in the locomotive area, and with the completion of some of those orders, we needed to restructure our business, and there's severance costs related to that. So that is not so much an improvement as putting the right level of cost in with the business, but there is a bit of restructuring that's related to that.

Can I just sneak one more just on the acquisition, on Fandstan? Have you guys called out how much purchase accounting or PPA should be? My estimate is close to maybe $6 million or $7 million, but just curious how you guy are thinking about that.

We don't have an exact number at this point on the purchase accounting. We estimate it -- and then Pat, why don't you explain the process? And then when we understand it, we could maybe give you more color.

We'll have short-term expense amortization costs related to step-up and backlog value and inventory value. We estimate that to be in the $5 million range, but we expect that also to change because that's -- we have to get into some of the integration process and really make sure we understand and account for that properly. There will also be some additional long-term amortization expense related to other intangibles, and all those things are being worked on, and we expect to finalize as we go through 2014.

Liam Burke, Janney Capital Markets.

Al, you announced a contractor in the quarter to supply a Canadian transit company with low-emission locomotives. Is this a trend with increasing environmental standards throughout the world, is this an opportunity that you could take worldwide, or is this just a one-off?

It's something really you're probably going to see more and more of, and that's taking some of the older locomotives and getting it upgraded to Tier 4 capabilities. I think this might be the first Tier 4 repowered locomotive delivered. We hope to see that as a business opportunity going forward. Ray, you may want to expand because I know you're close to that project.

Yes, it's exactly that, Liam. It's a first opportunity to introduce Tier 4 technology, which is a specification requirement for 2015. So we'll be the first to introduce it in North America, and it's for application at GO Transit where we have a strong install base, and we have other ongoing contracts.

And then Al, a big part of aftermarket growth was in services. Is that -- I guess Pat's question. Are the margins on aftermarket service equal or approximate the aftermarket product profitability?

Generally, yes, our aftermarket business usually gets better margins, as many companies. I think the service part of it is less than the parts, but both, when you average them together, we have better margins in our aftermarket business. But service is less than parts.

Thom Albrecht, BB&T.

A lot of my questions have been answered, but I would like to clarify a couple things. On the $3.8 million charge, I know you have said it was split between SG&A and COGS, but just as a run rate going forward, especially now with Fandstan. What should we think about, at least right now, for a quarterly SG&A rate?

We think our SG&A rate going forward should be somewhere in the $75 million range. Fourth quarter was slightly over $70 million, and we think with the addition of Fandstan, it could creep up to the $75 million. But again, that's also something we will assess and review, make sure that we're all catching the cost consistently.

And then I calculate about $142 million of acquired revenues last year, including the little bitty Transdyne, I'm penciling in about $2 million there. But what was the purchase price for all of the acquisitions? I think you gave it earlier in the call, how much you spend on acquisitions last year.

$220 million.

Okay. And then, were there any adverse foreign currency issues in the quarter? I'm thinking especially Australia, but maybe other places.

Let me give you just a few. If you look at third, and 2013 third to fourth, revenue was impacted positively $6.7 million. If you look at -- comparing fourth quarter 2012 to 2013, it was a negative about $1 million. And if you look at year to date, it was negative about $15 million, $16 million. And you are right. The main ones were Australia and Brazil.

Greg Halter, Great Lakes Review.

Thanks for taking the questions. Regarding the MRS, you made some comments earlier about the milestones. What are your expectations there on their implementation of their PTC system?

We feel that we'll be in good position to have that system totally operating no later than the first quarter of 2015. Most of it should be running later this year. Because of the pullback in China for some of the mining demands and resources, I think the option that we have talked about will be delayed. I think that was worth another $80 million or so.

That's delayed but not lost from that contract--

No. We have every indication that they are getting the advantages that they had anticipated and the benefits that they had planned for out of the system, and I think as the system becomes fully operable, it will even be better.

And regarding the ECP business, can you discuss how that is performing and whether or not there is any movement afoot in the US given crude being shipped by rail and accidents and so forth? I know you guys have a big stress on safety at Wabtec.

We still see a lot of interest, as well as a implementation of ECP trains throughout the world. Australia, Brazil, a lot of pilots running in South Africa. As far as the US, we have seen little or no interest at this point. I think they're preoccupied by a lot of other things. I think ECP gets mentioned sometime when you talk about what could happen if you had an electrified train -- a line that ran through the train. Could it help somewhat when you look at safety of handbrakes and other things, but there isn't a lot going on in the area.

And a couple of housekeeping items. Pat, do you have the approximate equity balance and total assets at the end of the year?

Yes. Shareholders' equity, $1.57 billion, and the total assets, $2.8 billion.

And regarding the OEM and aftermarket, do you have that breakdown either for the year or the quarter in both freight and transit, either in percents or dollars or whatever you may have available?

Yes. I have it. For the year, the freight breakdown was 49% OEM, 51% aftermarket. And transit, the breakdown was 36% OEM, 64% aftermarket.

And then one last one on the PTC, I've read a couple stories about some contracts from a couple of the transit agencies that are purportedly awarded, but I haven't seen you guys put out a release on that yet, and just wondering how that process works? And maybe this is what you were mentioning earlier, Al.

Yes, we're working with all the transit authorities. What you did see was related to the New York Metropolitan Transit Authority. There was a contract that was announced that Bombardier and Siemens would upgrade the access system. That's a different system that's used in the Northeast Corridor. That is not the type of system that we sell to the freight lines, as well as the transit lines that use computer rails. This system is a system that requires -- that they announced was electrified system that is upgrading the current system. I think the system was originally installed -- Alstom was the designer of the original system, and I think this is just to upgrade it to make sure that it fully is positive train control on all segments of their railroad. So it's a different product and a different application market.

Greg, you are right. You do see -- sometimes the agencies will make awards, but that doesn't mean we've actually signed contracts. That's pretty typical in transit, that there can be a lag between when they may make a contract award and when we may sign it.

Okay, yes, there were a couple that were outside of New York that I had noticed. Thank you. We'll be looking for those in the near future hopefully.

(Operator Instructions)

Steve Barger, KeyBanc Capital Markets.

This is actually Ken Newman filling in for Steve. A couple of questions regarding Fandstan. Wondering if you could talk about -- give some color on Fandstan's seasonality, if that's anything like the rest of your business? And you also talked as to how the product exposure doesn't really overlap with any of your other businesses, and I was wondering if you can give some color as to how tough you think that's going to be to integrate and how to grow those product lines?

First one, seasonality is probably similar to ours. The fact that they have a larger percentage of business in the European community might suggest that third-quarter vacation period, holiday periods could impact that, but I don't think it's that much different than ours.

As far as the integration, I think it will be a complex integration, not because we're not familiar with the product or the markets -- we call on the same customers. It just -- there's always cultural issues that we need to make sure that we're sensitive to and we do a proper integration and take advantage of all the opportunity that's there.

And then one last question for you. Could you talk to the capital structure of Fandstan going forward, just give us an idea what kind of incremental interest expense we should be looking at?

We talked a little bit about how we're going to finance this, and we're still assessing the most optimal and efficient way to do it. So we're thinking that it's going to be a combination of the cash available on hand in Europe and financing from our existing revolver, and we're thinking 40% to 50%, we'll be using cash we have available.

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

Thank you very much. We'll talk to you in April.

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