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WABCO Holdings Inc. Reports Operating Results (10-Q)

July 27, 2012 | About:
10qk

10qk

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WABCO Holdings Inc. (WBC) filed Quarterly Report for the period ended 2012-06-30.

Wabco Holdings Inc. has a market cap of $3.29 billion; its shares were traded at around $52.79 with a P/E ratio of 10.6 and P/S ratio of 1.2.

Highlight of Business Operations:

Other financing receivables include sales to reputable state owned and public enterprises in China that are settled through notes receivable which are registered and endorsed to the Company. These notes receivable are fully secured and generally have contractual maturities of six months or less. These guaranteed notes are available to be discounted with banking institutions in China or transferred to suppliers to settle liabilities. The total amount of notes receivable discounted or transferred for the first six months of 2012 and 2011 were $21.3 million and $37.3 million, respectively, resulting in expenses of $0.1 million and $0.6 million for the six months ended June 30, 2012 and 2011, respectively, and are included in “Other non-operating expense, net.” The carrying amounts of these guaranteed notes receivable are $47.8 million and $23.5 million as of June 30, 2012 and June 30, 2011, respectively. The Company monitors monthly the credit quality of these notes through historical losses and current economic conditions with Chinese banks. As these receivables are guaranteed by banks and the Company has not experienced any historical losses nor is the Company expecting future credit losses, we have not established a loss provision against these receivables as of June 30, 2012 or December 31, 2011.

The income tax expense for the first six months of 2012 was $19.0 million on pretax income of $189.9 million before adjusting for noncontrolling interest. Income tax expense is the net result of taxes on earnings in profitable jurisdictions, income offset by fully valued net operating losses, the accrual of interest on uncertain tax positions, and certain foreign tax planning. The income tax expense for the first six months of 2012 is primarily offset by the release of tax accruals of approximately $13.6 million due to certain government filings submitted in January 2012, as the Company has previously disclosed in its 2011 Form 10K. During the third quarter of 2012, the Company expects to recognize an additional tax benefit of $5.2 million related to these government filings as previously disclosed in its 2011 Form 10K.

Our cost of sales for the second quarter of 2012 was $441.5 million, a decrease of $78.5 million (a decrease of $31.4 million excluding foreign currency translation effects) from $520.0 million in 2011. Within cost of sales, our largest expense is material costs, which mainly represents the purchase of components and parts. Our continued focus on productivity generated 5.4% of material savings before the impact of commodity inflation, which had a negative impact of 1.1%, bringing net materials productivity to 4.3% for the quarter. This productivity achievement resulted in $11.0 million of material cost savings. Our second largest expense within the cost of sales is for labor and other costs associated with converting our purchased components and parts into finished goods. Labor and other cost escalations increased conversion costs by approximately $4.9 million, while our productivity efforts generated $7.0 million of savings, or 7.3% of the conversion costs. Warranty expenses were lower compared to the second quarter of 2011 by $4.9 million, driven by an improvement in warranty claims experience and lower sales versus prior year. Absorption of overhead costs and other indirect costs were unfavorable by $13.9 million versus the prior year. Volume and mix reduced cost of sales by $12.8 million, but contributed $12.5 million to decline of gross profit. Sales price reductions had a negative impact of $4.4 million on gross profit, or 0.6% of sales, which is a very low level for the quarter. Foreign currency translational effects decreased cost of sales by $47.1 million and combined with translational effects on sales they negatively affected gross profit in the amount of $21.9 million. Foreign currency transactional impacts decreased cost of sales by $13.4 million and positively affected gross profit in the amount of $10.7 million. The net result of all these changes was a decrease in gross profit of $24.0 million (or $2.1 million excluding foreign currency translation effects).

Our sales for the first six months of 2012 were $1,292.5 million, a decrease of 8.7% (2.1% excluding foreign currency translation effects) from $1,415.9 million in 2011. The decrease, excluding foreign currency translation effects, was driven by lower levels of commercial vehicle production that was evident in most markets. This decrease was partially offset by increased WABCO content per vehicle on trucks, buses and trailers globally, as well as expansion of our aftermarket and car businesses. Total sales in Europe, our largest market, decreased approximately 12.3% (5.4% excluding foreign currency translation effects) for the first six months of 2012, driven mainly by lower levels of truck, bus and trailer production. Total sales increased 24.9% in North America, which continues to benefit from increased commercial vehicle production. Total sales in Asia decreased 4.9% (0.9% excluding foreign currency translation effects). The sales reduction in Asia included a decrease in total sales in India of 12% (increase of 1.4% excluding foreign currency translation effects), a decrease in Korea of 19.4% (16% excluding foreign currency translational effects), and a decrease in China of 12.5% (15.6% excluding foreign currency translational effects), partially offset by an increase in total sales in Japan of 36% (32.9% excluding foreign currency translation effects). Total sales in South America decreased 26.2% (15.9% excluding foreign currency translation effects) driven by the anticipated decline in production of new trucks and buses in Brazil resulting from higher levels of production in 2011 ahead of the 2012 emission mandate as well as the termination of a government sponsored incentive program at the end of 2011. Based on our analysis, we estimate that WABCO's sales growth for the six months ended June 30, 2012 has outperformed the aggregate global market growth. WABCO's aftermarket sales, included in the geographic numbers provided above, decreased by 5% at reported rates, but the growth was 2.4% excluding foreign currency translation effects.

Our cost of sales for the first six months of 2012 was $902.6 million, a decrease of $99.3 million (a decrease of $35.9 million excluding foreign currency translation effects) from $1,001.9 million in 2011. Within cost of sales, our largest expense is material costs, which mainly represents the purchase of components and parts. Our continued focus on productivity generated 5.3% of material savings before the impact of commodity inflation, which had a negative impact of 1.2%, bringing net materials productivity to 4.1% for the first six months of 2012. This productivity achievement resulted in $21.0 million of material cost savings. Our second largest expense within the cost of sales is for labor and other costs associated with converting our purchased components and parts into finished goods. Labor and other cost escalations increased conversion costs by approximately $4.6 million, while our productivity efforts generated $12.9 million of savings, or 6.4% of the conversion costs. Warranty expenses were lower compared to the first six months of 2011 by $4.9 million, driven by an improvement in warranty claims experience and lower sales versus prior year. Absorption of overhead costs and other indirect costs were unfavorable by $20.5 million versus the prior year. Volume and mix decreased cost of sales by $2.8 million and contributed $16.5 million to decline in gross profit. Sales price reductions had a negative impact of $6.5 million on gross profit, or 0.5% of sales, which is at the lowest level we have historically seen. Foreign currency translational effects decreased cost of sales by $63.4 million and combined with the translational effects on sales they negatively affected gross profit in the amount of $29.7 million. Foreign currency transactional impacts decreased cost of sales by $18.4 million and positively affected gross profit in the amount of $14.9 million. The net result of all these changes was a decrease in gross profit of $24.1 million (an increase of $5.6 million excluding foreign currency translation effects).

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