Westinghouse Air Brake Technologies Corporation (Wabtec) — Q2 2015 Form 10-Q
Business context and period: Wabtec supplies technology, products and services to freight rail and passenger transit markets. This unaudited filing covers the quarter and six months ended June 30, 2015; approximately 48% of first-half revenue came from customers outside the U.S.
Financial performance
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $847.0 (+15.9%) | $731.1 | $1,665.6 (+16.8%) | $1,426.3 |
| Gross profit / margin | $267.8 / 31.6% | $224.7 / 30.7% | $523.1 / 31.4% | $434.2 / 30.4% |
| Operating income / margin | $155.9 / 18.4% | $132.3 / 18.1% | $304.3 / 18.3% | $254.2 / 17.8% |
| Net income attributable to Wabtec | $101.5 (+14.4%) | $88.7 | $197.7 (+17.1%) | $168.8 |
| Diluted EPS | $1.04 | $0.91 | $2.03 | $1.74 |
- Q2 Freight segment sales rose 29.9%; Transit sales declined 2.3%. First-half sales rose 31.3% in Freight and fell 1.6% in Transit.
- Growth reflected acquisitions and stronger freight original-equipment, aftermarket electronics and positive train control (PTC) demand. Currency translation reduced sales by $45.3 million in Q2 and $83.1 million in the first half. Transit locomotive overhaul/build sales were weaker after a multiyear project substantially ended in 2014.
- Operating expenses grew faster than sales: Q2 expenses were 13.2% of sales versus 12.6% a year earlier; first-half expenses were 13.1% versus 12.6%. The effective tax rate rose to 32.3% in Q2 and 32.1% for the half, from 30.7% and 31.2%, respectively.
Cash flow, debt and liquidity
- First-half operating cash flow was $110.9 million, down from $137.7 million. Investing used $120.8 million, including $100.1 million for acquisitions and $20.9 million for property and equipment. Financing used $143.6 million, including $120.3 million net debt repayments and $11.6 million of dividends.
- Cash fell to $264.8 million from $425.8 million at December 31, 2014. Total debt was $400.8 million, down from $521.2 million; cash exceeded debt by approximately $135.9 million, versus $95.3 million at year-end.
- The $800 million revolving facility had approximately $622.6 million of available borrowing capacity after letters of credit, subject to covenants. Current assets were $1,580.0 million and current liabilities $699.5 million. The company reported compliance with debt covenants.
Outlook, material developments and risks
- No specific consolidated earnings or revenue guidance is provided. Management expected lower new-locomotive deliveries and higher new freight-car deliveries in 2015; new subway-car deliveries were expected to increase, with bus deliveries roughly level with 2014.
- North American rail traffic through Q2 was approximately level with 2014, with intermodal traffic up 3.5%; the industry freight-car order backlog was about 136,000. Management identified economic conditions, government transit budgets, customer investment and international market conditions as demand drivers.
- Wabtec reported about $194 million of PTC revenue in the first half. Railroads and commuter authorities said they could not fully meet the statutory December 31, 2015 implementation deadline; a possible extension could affect spending patterns.
- On July 27, 2015, after quarter-end, Wabtec announced a proposed acquisition of Faiveley Transport for approximately $1.8 billion including assumed debt. The offer contemplated cash and Wabtec preferred stock, and remained subject to consultations, definitive agreements and regulatory requirements. Planned cash funding included cash on hand, credit facilities and potentially additional debt.
- Key risks include economic and rail-market downturns, foreign exchange, raw-material and supply constraints, contract performance, acquisition integration, government funding and regulation, and legal proceedings. Asbestos-related and other litigation disclosures had no material changes from the prior annual report. The IRS was auditing tax year 2012; uncertain tax positions totaled $12.6 million.
- Management stated disclosure controls were effective and there was no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of sales and earnings growth is organic versus acquired, and how currency movements affect future reported results.
- Whether stronger freight demand and PTC-related revenue persist, and how any change to the PTC deadline affects orders.
- Cash conversion and working-capital trends, given lower operating cash flow and the first-half cash decline.
- Final terms, financing, approvals and integration implications of the proposed Faiveley transaction, including any additional borrowing or dilution.
- Developments in the 2012 IRS audit, uncertain tax positions, warranty reserves and asbestos-related claims.