Wabtec — Q2 2014 Form 10-Q
Business and period: Westinghouse Air Brake Technologies Corporation (Wabtec) supplies technology, equipment and services to the global freight rail and passenger transit industries. This unaudited filing covers the quarter and six months ended June 30, 2014, compared with the same 2013 periods. Approximately 46% of first-half revenue came from outside the United States.
Key financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $731.1 million | $638.0 million | $1,426.3 million | $1,253.5 million |
| Gross profit / margin | $224.7 million / 30.7% | $192.9 million / 30.2% | $434.2 million / 30.4% | $375.8 million / 30.0% |
| Operating income / margin | $132.3 million / 18.1% | $112.6 million / 17.6% | $254.2 million / 17.8% | $216.2 million / 17.2% |
| Net income attributable to Wabtec shareholders | $88.7 million | $74.6 million | $168.8 million | $144.3 million |
| Diluted EPS | $0.91 | $0.77 | $1.74 | $1.49 |
| Operating cash flow | Not separately reported for the quarter | $137.7 million | $45.1 million |
- Q2 sales rose 14.6%, operating income 17.6% and net income 18.8% year over year. First-half sales rose 13.8%, operating income 17.6% and net income 17.0%.
- Q2 sales growth reflected acquisitions ($39.6 million), favorable foreign exchange ($11.3 million) and higher product sales. First-half growth included $60.3 million from acquisitions and $10.9 million from favorable foreign exchange. Specialty Products & Electronics and Brake Products were important contributors; lower remanufacturing, overhaul and build sales partly offset growth.
- Freight segment Q2 external sales were $411.5 million, up 16.0%; Transit sales were $319.6 million, up 12.9%. For the first half, Freight sales increased 19.2% to $797.0 million and Transit sales increased 7.6% to $629.3 million.
- Q2 cost of sales was 69.3% of sales versus 69.8%; first-half cost of sales was 69.6% versus 70.0%. Management cited higher volume and mix; raw-material costs as a share of sales rose in some segment comparisons. Operating expenses were 12.6% of sales in both Q2 periods and 12.6% versus 12.7% for the first half.
Balance sheet, debt and liquidity
- At June 30, 2014, cash was $225.9 million, current assets $1,526.9 million and current liabilities $668.4 million. The resulting working capital was approximately $858.4 million and current ratio approximately 2.3.
- Total debt was $500.9 million, including $250.0 million of 4.375% senior notes due 2023 and $250.0 million drawn on the revolving facility. Cash less debt was approximately negative $275.0 million. The $800 million revolving facility had approximately $531.9 million of available borrowing capacity, net of letters of credit, subject to covenants.
- First-half operating cash flow was $137.7 million. Investing used $217.6 million, including $199.4 million for acquisitions and $18.4 million for capital expenditures. Financing provided $24.6 million; cash decreased $59.9 million to $225.9 million.
- Working-capital balances increased: accounts receivable and unbilled receivables were $717.1 million combined, and inventory was $481.5 million, versus $554.5 million and $403.2 million, respectively, at year-end 2013.
Material changes, outlook and risks
- Wabtec acquired Fandstan Electric Group on June 6, 2014 for approximately $199.4 million net of cash acquired. The acquisition added $32.9 million of preliminary goodwill and primarily operates in the Transit segment. Purchase-price allocation remained preliminary.
- Management described freight rail activity as improving: North American carloadings through July 19 were up 4.3% year over year, and the industry freight-car backlog was about 100,000. Wabtec expected 2014 deliveries of new locomotives and freight cars to exceed 2013 levels. It expected transit spending and deliveries of new subway cars and buses to remain about level with 2013. These are market expectations, not quantified company earnings guidance.
- Wabtec reported approximately $145 million of Positive Train Control (PTC) revenue in the first half. The statutory implementation deadline was December 31, 2015; railroads and commuter authorities said full implementation by then was not feasible. A possible deadline extension had not been enacted and could affect spending timing.
- Key risks include economic and rail-market weakness, government transit funding and budgets, customer order delays or cancellations, raw-material and supply availability, foreign-exchange and interest-rate movements, acquisition integration, and execution of new technology and long-term contracts. Asbestos-related and other ordinary-course litigation had no material changes reported from the prior 10-K.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. The filing reported no material changes to risk factors from the 2013 10-K.
Most important facts for investors to verify
- How much revenue and earnings growth is organic versus attributable to acquisitions and foreign exchange, including Fandstan’s subsequent contribution.
- Whether receivables, unbilled receivables and inventory convert to cash as expected; first-half operating cash flow was substantially affected by working-capital timing.
- Whether debt, interest expense and covenant headroom remain manageable as acquisition spending and investment continue; variable-rate debt was 20% of long-term debt at June 30.
- Whether PTC implementation timing, freight-car and locomotive demand, and government transit budgets support the market outlook described by management.
- Changes in preliminary acquisition valuations, warranty reserves, uncertain tax positions and the status or potential exposure of litigation and other contingencies.