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

Kristine Kubacki - Avondale Partners, LLC Arthur Hatfield - Morgan Keegan & Company, Inc. Thomas Albrecht - BB&T Capital Markets Steve Barger - KeyBanc Capital Markets Inc.

Scott Group - Wolfe Trahan & Co. Allison Poliniak-Cusic - Wells Fargo Securities, LLC

Thanks, Valerie. Good morning, everyone, and welcome to our second quarter earnings call today.

Let me introduce the other members of the Wabtec team that are here. President and CEO, Al Neupaver; Alvaro Garcia-Tunon, our CFO; Chief Operating Officer, Ray Betler; and our Corporate Controller, Pat Dugan.

We have some prepared remarks from Al and Alvaro, and then we'll be happy to take your questions. During the call, we will make forward-looking statements.

So please review today's press release for the appropriate disclaimers. I also want to point out that on today's call, we will refer to those GAAP and non-GAAP EPS and income from operations numbers.

Reconciliations for those numbers are included in our press release. We believe that the non-GAAP measures provide useful supplemental information to assess our operating performance and to evaluate period-to-period comparisons.

Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, Wabtec's reported results prepared in accordance with GAAP. Al, go ahead.

Okay. Good morning, everyone.

We had a very strong operating performance in the second quarter with record sales and a record backlog. We earned a GAAP EPS of $0.75.

If we exclude the special items we mentioned in the press release and which we'll talk about on this call, we earned a non-GAAP EPS of $0.94, which was also a record. As we'll discuss, this performance was driven mostly by growth in our Freight Group, but our Transit Group continues to perform well.

Based on this second quarter performance and our outlook for the rest of the year, we raised our annual guidance to $3.45 to $3.55 earnings per diluted share, excluding the special items. Clearly, our business is performing very well, thanks to our diversified business model, our strategic growth initiatives and the power of our Wabtec performance system.

We are positioned well to take advantage of our growth opportunities around the world. Let's talk a little bit about these special items that Tim mentioned.

As we announced last month, after a long-running legal battle, a jury awarded Favlay [ph] $18.1 million based on a claim that stems from a 1993 product license agreement. That amount could change pending on any post-trial adjustments for previous payments and interest.

We're disappointed in the outcome and plan to appeal, but we needed to record the $18.1 million charge in this quarter. Most importantly about this situation is that it has no impact on our ability to supply customers in the past or will have no impact on the business going forward.

We also recorded 2 other special items, both of which were benefits. When we acquired Ricon subsidiary in 2008, we had certain amount of money set aside.

During this quarter, we received $2.4 million from Ricon's prior owner to settle several claims for which Wabtec had been indemnified. This was the final settlement on those issues.

We also had a tax benefit of $1.7 million from the resolution of tax issues from prior years. As I mentioned, we raised our 2011 EPS guidance based on current backlog and outlook.

We are now expecting earnings per diluted share between $3.45 and $3.55, with sales growth of about 20% for the year. This guidance excludes the special items we recorded this quarter.

Our guidance assumes the following: the global economy continues to grow modestly, freight rail traffic continues to improve with the economy, the transit markets continue to be stable and there's no major changes in foreign exchange rates. We will continue to stick to our long-held philosophy, that is to be disciplined when it comes to costs, focus on generating cash to invest in growth opportunities.

Let's first take a look at the freight rail markets. Rail traffic continues to grow this year.

Although the rate of growth has slowed due in part to tougher comparison and some weather factors cited by the railroads during the second quarter. Through mid-July, ton miles have increased 3.5% this year and intermodal traffic was up 7.2%.

The increase in traffic, as well as additional service contract, primarily related to positive train control, has led to strong growth on our North American aftermarket business, with aftermarket sales in the second quarter up 46% compared to the year ago quarter. The freight OEM markets also continue to strengthen, with OEM sales up 62%.

We now expect about 40,000 new freight cars to be delivered this year, up from our original forecast of 30,000 to 35,000. Second quarter deliveries were 10,600, more than triple last year's quarter.

New orders come in at 16,900, almost 4x last year's quarter. And the backlog for rail cars rose to over 57,000, the highest in 4 years.

As for the locomotive build, it is also increasing with our expectations now that there will be at least 800 built this year compared to our original estimate of 700. In the second quarter, our freight revenues hit a record quarterly high of $280 million.

Even with OEM deliveries still below the long-term average, which bodes well for continued growth. Let's look at the transit markets.

Our transit sales increased 8% compared to a year ago quarter. Acquisitions have enabled us to overcome some short-term challenges in the U.S.

market, which have been affected by budget issues and our transit agency customers and uncertainty about the timing of the new federal transportation bill. Our strategic diversity has helped us to overcome these transit markets issues.

This diversity consists of sales were about 2/3 outside of the U.S., about 2/3 were in aftermarket. Product-wise, we cover 4 main areas: components for subway cars, components for buses, we do manufacture locomotives, and we overhaul and maintain locomotives as well as passenger cars.

Our customer base, therefore, is also very diversified. Plus, we've continued to invest strategically in future growth with acquisitions, new product development and global expansion.

Thanks to these strategies and growth initiatives, our transit backlog increased 3% this quarter. Year-to-date, orders are running slightly ahead of last year, with some not yet in the backlog as we negotiate some final contracts.

Looking at the transit markets, we see a stable yet challenging U.S. market, with agencies cutting costs and federal funding about flat.

However, ridership was up 1.6% in the quarter, the first increase since the fourth quarter of 2008. OEM transit car deliveries will be about 1,000 in 2011, with new bus deliveries of 4,800.

Both figures are slightly less than last year. We're at various stages of negotiating final contracts with several projects this quarter.

We did announce a $12 million order to provide braking components for our new subway cars in New Jersey Transit. And there are other contracts that we expect to announce in the coming months.

The politicians in DC that we all have come to love have talked about a new federal transportation bill, but none of the proposals seem to be gaining traction. And it's looking like they'll just extend the current bill again.

We continue to make progress in various international transit markets, so we are very positive about our transit opportunities based on long-term demographic and economic trends, and our relatively small market share in large global markets. Overall, we will continue to focus on growth and cash generation.

Cash remains a priority. It provides the opportunity to invest in organic growth and acquisitions and they return money directly to shareholders in various ways.

At our annual meeting in May, the Board voted to increase our dividend to $0.03 per quarter and to increase our stock buyback authorization back up to $150 million. During the quarter, we repurchased 95,000 shares of Wabtec stock for about $6 million.

We are focused on increasing free cash flow by managing cost, driving down working capital, controlling capital expenditures. This will enable us to continue to invest in our 4 strategic growth opportunities: global market expansion, aftermarket expansion, new products, and technologies and acquisitions.

In the global market expansion area, we've shown some success this quarter. Sales outside of the U.S.

were $237 million, 35% higher than in 2010. During the quarter, we announced the fifth joint venture in China.

We also announced 2 major contracts in Australia. We announced an order for 22 locomotives for CBH, an Australian grain hauler.

And a $21 million project to install electronic controlled pneumatic brakes on Rio Tinto's fleet of iron ore cars. We have also seen in non-rail internationally.

In the aftermarket area, overall aftermarket sales were $293 million, 61% of our total sales with growth of 48% compared to the prior year. This is due to our growth initiatives, acquisitions, increasing rail traffic, which benefits our global service unit among others, and increased service contracts, especially in the positive train control area.

As far as acquisitions, the integration of Brush Traction, which we acquired during the first quarter, is going well, as is the integration of the transit aftermarket product launch we bought from General Electric just last month. We integrated this business into our already established service center network.

Brush Traction is based in the U.K. and has 2 facilities, one near Birmingham and the second one in Scotland.

Brush provides locomotive overhaul and maintenance services, annual sales of about $55 million. It is a great complement to our Wabtec rail business in Doncaster, England.

We see opportunities for top line growth and margin expansion. The transit aftermarket product lines from GE is also a good fit with Wabtec.

We have exclusive rights to manufacture and distribute propulsion and control system products for an installed base of nearly 5,000 transit cars in North America. This acquisition expands our footprint in the transit aftermarket and fits well with our recent acquisitions of Swiger Coil.

As for new products, I'd like to provide just a brief update on positive train control. We're moving full speed ahead to help the industry meet the December 15 implementation deadline.

We're seeing good growth in PTC this year, with sales expected to exceed $50 million, as we continue working with the U.S. Class I railroads and transit agencies to develop the interoperable solution.

These efforts have moved into the laboratory testing phase. Sales were about $20 million last year.

We signed 2 major PTC contracts in the first quarter and we are negotiating others, $165 million contract with a railroad in Brazil MRS for a turnkey solution included -- includes project managing, signaling, communications, train dispatch equipment and onboard electronic equipment for 500 locomotives and 50 auxiliary vehicles. The project is scheduled to be completed in 2013.

MRS is the fourth largest railroad in Brazil. We had also signed a $27 million contract to provide PTC equipment and services for Metrolink, a commuter agency that serves Southern California.

They want to have the project completed by the end of next year. I'll now turn it over to Alvaro.

Great. Thanks, Al.

And good morning, everyone. I'll provide a brief financial summary of our results.

Sales for the quarter were a record $479 million, which was 28% higher than last year. This increase of about 2/3 came from organic growth and the balance from acquisition.

Freight Group sales were up about 47%, with almost all of that coming from internal growth. The aftermarket growth of the Freight Group was primarily due to increasing rail traffic and growth initiatives, which Al mentioned earlier.

OEM sales almost doubled because of increasing demand for new locomotives and freight cars and growth in non-rail market such as power gen. Transit Group sales increased about 8%, with acquisitions more than offsetting slightly lower organic sales.

Margins, as you know and we discussed extensively, we're always driving to drive our operation margins higher. For the quarter, GAAP income from operations was $56 million, including the special items Al mentioned.

Two of these special items, the $18.1 million charge from the Favlay [ph] ruling and the $2.4 million benefit from the settlement, were included in SG&A. If you exclude both of those items from SG&A, our non-GAAP income from operations of $72 million for an operating margin of 15% compared to 13.3% in the year ago quarter.

While we think this is a nice improvement, we always feel there is room for more improvement over time and that's our constant goal. A few of the other smaller P&L items, interest, interest expense was lower due mostly to lower net debt compared to the year ago.

Other expense, which is typically a pretty small item and that's mostly due to paper FX translation gain or losses. We had a small loss this quarter.

The effective tax rate, this is another one of the special items that we mentioned. The tax rate for this quarter was 30%, which was slightly lower than the year ago quarter due to the $1.7 million benefit from the resolution of prior year tax issues.

What we did is we closed calendar '07 and '08, leaving only '09 and '10 open. Our tax rate will fluctuate over time, obviously, but we expect it to be somewhere in the 34% to 35% range in the future.

A few other items, turning to the balance sheet. Working capital was up mostly due to increased sales, but working capital excluding cash was down quarter-to-quarter by about $8 million, showing that at least we're making some progress in our initiative.

Receivables were $337 million, up $31 million from March 31. Inventories were $311 million, up $26 million and offsetting that were payables which were $186 million, up $11 million.

Cash at June 30, we had $221 million in cash compared to $201 million in cash at March 31 in '11. We generated cash in the quarter from operations of about $50 million.

Debt at June 30, we had $396 million in debt compared to $400 million at March 31. So that's relatively stable.

And if you take a look at our balance sheet, I think you'll agree that we have plenty of capacity for investing in, in additional growth opportunities and we're not restrained in a financial sense at all. A few more of the typical numbers that we give you during this call.

Depreciation was $6.6 million during the quarter, same as last year. Amortization was $3.3 million versus $2.1 million, the increase being mostly due to amortization of intangibles from acquisitions.

CapEx, our totals were $5.4 million this quarter versus $3.4 million last year. Year-to-date, CapEx is about $12.8 million and we expect about $25 million to $28 million for the year.

In terms of backlog, as we mentioned, the backlog is very solid and reached a record high. The multiyear backlog, this includes the 12-year number, so this is the total backlog compared to the last quarter-to-quarter ended March 31.

The total is $1.51 billion versus $1.49 billion at March 31, so a slight increase. The transit number is $811 million versus $791 million last quarter.

That transit backlog number is the highest since second quarter of '09. And freight was relatively stable, $701 million versus $705 million at the end of the last quarter.

The rolling 12-month backlog compared to year end is, this is what we expect to execute in the next 12 months, in total, was $970 million versus $821 million last year. Transit was $410 million versus $365 million, and freight was $560 million versus $456 million.

So an increase in all the total. And with that, I'll turn it back over to Al for the summary.

Thanks, Alvaro. Once again, we had a strong performance in the quarter with record sales and earnings and a record backlog.

Longer term, we just couldn't be any more pleased with our strategic progress and the growth opportunities we see. We continue to benefit from our diverse business model in the Wabtec performance system, which gives us the tools we need to generate cash and reduce costs.

We have an experienced management team that is now taking advantage of our growth opportunities. With that, we'll be happy to answer your questions.

You touched on the transportation reauthorization proposal a little bit. But can you just give us a little more color maybe, particularly with transit and then the PTC implications, and if there's anything upholding people up in those 2 areas specifically?

Yes, the transportation reauthorization or SAFETEA-LU Bill that has been expired since September 2009, although there's been a lot of discussions related to that particular bill, nothing has really been set in concrete. There has been some proposals that were put out by a number of politicians, that one proposal was there was going to be some cutbacks, it was a lot of pushback related to that from both sides of the house.

And what we're hearing is that they're really looking at just extending it beyond. They will not be able to come to any kind of reality to formulate a bill and determine how it's going to be funded or even the amounts associated with that transportation bill.

The implications from that is that as long as that's in limbo, I think there's a reluctance on the part of the transit authorities here in North America to really get aggressive with their growth plans. Although the same amount of money will be available for these capital expenditures -- and there is a lot of projects that are already in the works here.

And as a matter of fact, I mean, we are very busy with a number of finalizations on contracts and quoting on new projects. So we think it's fine for a while, but you start to soon run out of the money that has already been approved and some of the projects.

So we're really anxious to see that bill start to be formulated and to move forward. As far as the bill is concerned related to PTC, we're not aware of any impact on that transportation bill will have on the implementation of positive train control.

We're working very diligently to do our part of supplying the technology, and we think things are moving along quite well.

Great. And then on Brazil, it seems like we're hearing a lot about that country this quarter.

You had a big contract there. Could you talk about potentially the market size for Wabtec's products there since it's going so fast?

Yes, I think Brazil, we identified the opportunity in Brazil a number of years ago and we started a aftermarket business with one of the railroads. And that business has grown nicely for us.

Not only are we going aftermarket for that railroad, but we have aftermarket business with some of the other railroads. The opportunity that this created for us is we have the opportunity to quote on a turnkey train control system for MRS.

The MRS is the fourth largest railroad in Brazil. These relationships continue to grow.

We also added a friction business in Brazil, so we have an installed base in that area. The market is growing rapidly.

In comparison, if you broke it down freight and transit, the transit market is very small compared to the transit market here in the U.S., but the thing that's happening right now, they're expanding in preparation for the Olympics in Rio de Janeiro. The freight market, what they're trying to do now is to upgrade the system and buying locomotives, as well as putting in better signaling systems and upgrading the technology on their rail cars, which were involved in all of those.

Alvaro, just a clarification. On the benefit of $2.4 million from the settlement related to the prior acquisition, was that in the SG&A line?

Yes, that was in the SG&A line. So it partially offset the negative from the settlement -- not the settlement, the court ruling on the Favlay [ph] matter.

Okay. Good.

And then I think you mentioned, Al, that PTC revenues this year will exceed $50 million. And can you talk about -- I know you talked about the 4- and 5-year picture, but do you have some sense where that may be headed as you look into 2012?

With that, it's kind of early to provide guidance for 2012. What we have said and continue to feel is going to be the case is the fact that we thought we'd start seeing more of a ramp up in the fourth quarter of this year from PTC activities.

Right now, what's happening is that there's a lot of work being done in the laboratory to test the software out. This moves to be in a field test early next year.

And as it moves into the field test stage, obviously, there should be a increase in demand for a lot more of the hardware. And that's the basis of what we're talking about.

We would expect over that timeframe, the numbers that we've explained before, I think you could probably estimate your own a ramp-up based on those numbers.

Finally, we've seen a little bit of upward reality and that's what caught my attention.

Yes. exactly, Tom.

And then lastly, Alvaro, SG&A still kind of $53 million to $55 million a quarter?

Yes. And then that's once you take out the special items that were in SG&A and that's where we were, and I think that's a reasonable run rate going forward, Tom.

Just a quick question on some of the car builders have been suggesting that production has been capped by supply chain issues. And I'm just wondering if you could just make a comment either in terms of, are you using any supply chain issues internal to you?

And kind of in general, do you see the industry, obviously, it's a very quick ramp and I understand that. So do you this smoothing out over the next couple of quarters?

Obviously, you raised your forecast for the full year in terms of the industry car production.

Yes. I think a lot of people have worked through most of the supply chain problems that have existed.

Now that doesn't mean that we could start meeting -- everyone could start meeting the demands. If you look at the rail car builders, and you're exactly right, take a look at just 1 year ago, when the deliveries were 2,900 and we had 6 rail car builders.

And all of a sudden now, you want to ramp that up to 10,600 that were delivered in the quarter. That is -- puts a lot of stress on the supply chain.

But what we're seeing and we don't particularly have any major issues, and what we're seeing from others is that I think most people have worked through the supply chain issues that were created in the first quarter and second quarter.

Okay, that's helpful. And then my final question was, unfortunately, given the accident, the terrible accident in China over the weekend and there's been a lot of shuffling again going on there.

I guess, do you see any -- I know it's really early on as well, but do you see any near term impacts from the shakeup going on in China?

Yes. As everyone knows there was shakeup inside the Ministry of the Railroad.

And one of the concerns that the Ministry had was the amount of money that's being spent and how rapid they've been growing and was there issues related to safety and other areas. And it is very unfortunate, the accident, and the best we know it appears that there may have been a problem with the signaling system.

I think that what we've already heard and seen from is a slowdown. They've lowered the speed that they're running the high-speed trains at and they're reassessing primarily their entire program.

I think this reassessment will have some impact on the amount of revenue and sales that go in there. We don't have a great sales base.

It's something that we're developing. We think long term, however, the market is going to be a good market and one that we want to participate in.

As we have it right now, and we are very diverse in our product base there, and we still see our particular revenue and sales in China increasing this year and into the future.

On the locomotive build, you raised your forecast. Could you give us some idea -- we get a good idea in terms of what the rail car build looks like over the year, but can you give us an idea how back-end loaded that locomotive build is for the locomotive manufacturers?

Back-end loaded. Yes.

I think it's an even slope. I don't think there's any rapid buildup.

Are you related the supply chain issues or just...

No, just on the production side.

No, I think it's a pretty gradual growth.

Can you talk about inquiry activity in the quarter so far? You talked about the nice order momentum that we saw in 2Q on the freight OE side.

Are you seeing a continuation of that as we progress through July?

Yes, we've not seen any slowdown in activity. Things still look pretty good.

A lot of activity, especially in the transit area.

Yes, that was encouraging. And so if supply chain constraints have reached to some degree and you're not seeing a slowdown in momentum, can you talk about pricing?

Are you able to go to your customers and get some increases?

Pricing is still difficult. It takes a little bit of time for everyone to fill up their capacity.

And then pricing, we're always looking to get paid appropriately for our products, our technology. However, it is always a bit difficult in the transit areas where you have closed bids.

But in the freight area, until we get back up to more normal rates in locomotive and rail car business, I don't think there's going to be a lot of opportunity for that.

More normal rates being above the 40,000 that you talked about?

Exactly.

And going back to the locomotive build question, can you update us on your content per freight locomotive? And have you seen any change following the CAT acquisition of EMD in terms of your ability to sell to them?

No. We have a great relationship with CAT and EMD and other locomotive builders throughout the country.

If we build the locomotive, we could have content from other divisions selling into that locomotive of $200,000 to $225,000 per locomotive.

Great. And one just kind of housekeeping, the court decision that you talked about, you said the amount could change.

Would that change be a meaningful number and should we think about that going up or down? Do you have any color there?

There's a chance that there would be some interest that could be paid and that's not a large number, definitely, under $1 million. If there's any substantial changes, it would be in the downward direction based on, one, we've had already paid close to $4 million on a previous agreement from the arbitration panel.

So if we get credit for that amount, which has not been determined yet, and any appeal would obviously get it going in the right direction as far as we're concerned.

Just a couple, and I don't -- if you said any of these numbers, I apologize. But Alvaro, in the backlog number, the $1.5 million, how much of that is PTC?

It's not really that much and I tell you why, because we don't put anything on backlog until we get the specific order. So I'm doing this also -- most of the domestic PTC stuff, like the onboard equipment, that's not in backlog yet.

You might have something in there on this MRS agreement and the Metrorail agreement, but those would not be huge quantities, just strictly PTC.

Is that the kind of -- is that onboard PTC stuff the kind of components that would rarely show up in backlog because of the short lead times?

Exactly, yes.

Okay, okay.

Where the larger contracts would be in there. The MRS and the MetroLink that we announced.

That's in the backlog. But the component and some of the service work are just, they may show up, they're 30-day, 45-day items.

Again, like the MRS contract was about $163 million. The MetroLink contract was in the 30s, I think.

So I mean, those amount are on backlog but the PTC elements of those are relatively small. You have back office work, you have communications work, you have a number of elements to it.

So strictly, though, the PTC part is small.

Got it. Regarding PTC, and I don't recall you saying this today, Al, but you've said in the past that your expectations are revenue contribution from PTC over the timeframe of implementation to be between $250 million and $500 million.

Any change to that, and any kind of thought process whether or not you think it's going to be at a lower or higher end of that range?

The one thing we've always said is, we've been very open on how we calculate that number, and that there's a lot of other business related to PTC not in that number. But that number is really based on the onboard computer, the onboard system.

And based on the number of locomotives that would have to be equipped with PTC, as well as a very conservative portion of business that we would get after the acquisition of Xorail. So that number doesn't include, for example, it does not include MRS.

It does not include transit opportunities similar to this MetroLink. It really was based on something that you could get your arms around.

So from a PTC standpoint, there's a lot of adjacent business that we would expect to have over time, and not quantify that, and probably won't.

Okay. So I'm hearing you say that when it's all said and done, when you start throwing transit in and then the ancillary work related to it, it could ultimately be a number north of that range possibly?

Possibly.

Okay. On the 12-month backlog, the 970, Alvaro, is that going to pretty evenly lapped [ph] over the next 4 quarters?

I think so, yes.

Nothing sticks out as unusual?

No, not really.

Should we see this year the normal seasonality that we typically see with regards to revenue and earnings in the back half of the year?

I think so I, Art, because that's due to train closings and other items like that which are not really, let's say, attributable to economic factors. It's just a normal recurring pattern that occurred year-over-year.

So I think, yes.

Okay. And then finally, just kind of a longer term thing.

You guys are obviously performing at levels that we've never seen, at least in my experience with this company and the performance is just unbelievable. To get to that kind of next level and I don't want -- I know you don't focus exclusively on operating margins, but just in that context as we think about the growth going forward, what has to happen, does there a need to guide of a structural change in the company or does the mix of the business need to change for us to think about you potentially getting to something in the higher teens or maybe even the 20% operating margins?

So you're saying you're not really happy with where we are right now, right? Can't even celebrate for one day, right?

You're trying to put words into my mouth like I tried to put words into Al's mouth, and all I'm going to say is...

I think, Art, to answer your question, our focus has really been on increasing our operating margin, our EBIT over this time frame. And you go back to 2006 and just follow the progression, even through the downturn, we lost less than 1% during the downturn with a reduction of $150 million of revenue.

And this continuous improvement approach is exactly how we view it. We work every day to focus on the Wabtec performance system.

We do focus on the pricing. We focus on sourcing.

We focus on moving to lower-cost platforms. We also -- part of the formula going forward is the fact that we have, ahead of us, a great opportunity.

And that is that not only we're going to get growth from acquisitions, but we have the ability to have some great internal growth potential here. And that's where you really are able to expand your margins with internal growth.

Acquisitions, if you find the right ones and integrate them properly. So we're going to continue to focus on improving those margins and expand them.

And we don't set a goal of 20%, we don't set a goal of 15.5%. We set the goal that we're going to continue each and every month, each and every quarter, each and every year.

I just want to follow up on the revenue growth guidance of 20%. If we just assume flat revenue from second quarter, I kind of get to 26% revenue growth for the year.

Am I missing something, or is guidance just very conservative, or do things fall right naturally in the second half?

If I double the first half, I get to 24%. But generally, when we say 20%, there is a range around it and we tend to be conservative on our projections with the uncertainty that we have.

And you do have some seasonality but you have to play in it as well. So we're not trying to be coy or anything, it's just that when you take a look at going forward, there are quite a bit of uncertainties that lay out there.

That makes sense. So outside of just normal seasonality, you're not seeing anything to suggest that trends would slow from the really strong second quarter levels on the revenue side?

Not at this point, no.

Okay, great. And then I just want to follow up on the question about the highway bill.

Is there any way to think about what percent of your transit revenue is actually impacted by federal funding in the highway bill? Just because when we see the House proposal, it does propose some pretty material reductions in transit funding.

But I don't know how much of your actual transit revenue is impacted by federal funding.

Federal funding makes up about 40% of what's spent on the capital budget of all these municipalities in the country, between 40% and 50%. And so if that gets cut back, it's obviously going to have an impact on us.

But keep in mind that if you look at year-to-date, our OEM business, and this is OEM globally is 37% of our total transit sales, and about 58% of our transit sales year-to-date are outside of the U.S. So you start tracking this down, it will have an impact but it's just not a major number.

It's an important number. We're focused on it.

We have a good market share in that area. If there was a cut in the amount of money that is allocated to transit authorities, it will have an impact.

But this is not a major item that would impact Wabtec just because of the diversity we have. And though some of that is what I talked about in the prepared remarks, we sell in 4 different areas, that's just product areas, then you add the international as well.

That makes a lot of sense. And just last real quick, if I can, so following some acquisitions in Europe, I'm just kind of wondering where your European market share is today, and do you have any updated thoughts on where you think that could go in the next couple of years?

Yes. It depends on the product as far as the market share.

If you take a look at the transit markets, we're in the 5% range. And we hope that, that market share will -- it's a small number and a large market, so I think that growth should allow us to really have a successful growth.

I don't see why we can't double that in a short order of time. And the freight market's probably about the same amount of market share.

If you look at the aftermarket business, specifically in the U.K., we obviously have a larger market share with the recent acquisitions of Brush and WRL. So overall, we think that the European and international markets create a major growth opportunity for Wabtec because we are generally a small player in very large markets.

Relative to capital deployment plans, obviously, you've repurchased some shares, you've increased the dividend, you have made acquisitions with the caveat that the timing on acquisitions can never be projected very finitely. But just wondered if you discuss how the management team and the Board are viewing the capital deployment of the company since your cash flow is so strong, and it looks like it will continue to be?

Yes, we discuss at each Board meeting and our #1 priority that we have for cash deployment is internal development. We think that's the most profitable growth that this company could have.

Secondly, we continue to look at acquisitions that we could bold on, or adjacencies that doesn't that our management team stray away from what we're good at and our core competency. And thirdly, we look at stock buyback, as well as dividends or special paybacks to the shareholders.

So those are reviewed, priorities could change meeting to meeting. But right now, those have been pretty consistent over the past few years, with us really focusing on growth.

And again, first, internal growth, and acquisition second.

And are there any particular areas in terms of acquisitions that the company could really utilize to get to the next level, if you will?

I believe that I have been actually surprised about the opportunities when I got here 5, 6 years ago, I wasn't aware of just how many opportunities we had of being able to continue to expand our business in the rail areas, and we want to continue to do that. Those opportunities are primarily overseas where we may not have the market share that we would like to have and an installed base would definitely help.

So we stay focused on that. The other area or adjacencies, and those are ones that we would view it as kind of a market expansion taking some of our technologies and products into new market and market areas.

A very good example of that is how we've expanded our thermal management group into the power generation area and the gen set areas. Does that answer your question?

Yes. And Alvaro, one quick one for you, just wonder if you have an approximation on your equity level at June 30?

We were approaching $1 billion so -- I think we're over $1 billion dollars. So we're a little over that.

I just want to follow-up on Scott's comment about revenue in the second half of the year. It's been so long since the economy kind of had a normal year.

We fell out of bed and then we defied seasonal patterns on the initial recovery. Do you typically have a little more seasonality in the third quarter revenues?

It seems like you do with the plant shutdowns than you would in the fourth quarter, just trying to get the flow of things right.

Yes. And we do, Tom.

Typically what could happens is quite a few of our customers, basically that's their vacation period. And a lot of them will actually do plant shutdowns.

And there's also a little bit of basically how the railroads spend. Typically, they set their budget in the fourth quarter.

So fourth quarter could tend to be high as people try to justify their budgets, first quarter tends to be a little higher as well than kind of, certainly, the third. You've always seen a little bit of a slowdown in the third quarter for those 2 reasons.

So there's an element of seasonality in our numbers.

And then on the tax rate, 34%, 35%, just last quarter it was going to be 36%. Just why the change there?

We're always taking a look at tax saving initiatives. And a couple of things we've done, I think we're going to benefit going forward.

So I think the 34% to 35% is a pretty good number.

Okay. And then how come depreciation declined sequentially, $7.7 million, it was about $6.6 million.

I'm just kind of splitting hairs and I don't mean to. I'm just trying to make sure my model makes sense.

Yes. No, no, absolutely.

The depreciation, I think was the same as last year's quarter, that's the number I had, about $6.6 million. That's always going to vary a little bit.

The amortization has been going up sequentially because of acquisitions. And we keep CapEx pretty modest, we think, especially the last few years.

So I think it's just a normal fact. I'd put it to you in a different way.

I think you can use this quarter's run rate as a pretty good run rate going forward if you're trying to build a model. I don't see much change from where we are today, if that's helpful.

And I'll turn it back over to Al for any closing remarks.

All right. Thanks a lot.

I look forward to seeing you or talking to you again soon. Thank you.

Thank you, everybody.