Westinghouse Air Brake Technologies Corporation (Wabtec) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. Wabtec supplies equipment, systems and services to global freight rail and passenger transit markets, with about 59% of Q1 revenue generated outside the United States.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $1,929.9 | $1,593.6 |
| Gross profit / gross margin | $578.7 / 30.0% | $389.0 / 24.4% |
| Operating income / operating margin | $217.3 / 11.3% | $67.3 / 4.2% |
| Net income (loss) attributable to Wabtec shareholders | $111.6 | $(4.5) |
| Diluted EPS | $0.58 | $(0.04) |
| Net cash from (used in) operating activities | $(81.9) | $31.3 |
Revenue rose 21.1%, principally from the GE Transportation acquisition, which added $509.4 of sales; organic sales declined $141.7 and foreign exchange reduced sales by $31.4. As an acquisition-adjusted comparison, the filing’s unaudited pro forma Q1 2019 sales were $2,069.2, versus reported Q1 2020 sales of $1,929.9. This comparison indicates lower sales, but is not a like-for-like reported-period comparison.
Freight revenue was $1,301.0, up 42.1%, while segment operating income was $161.7 and margin 12.4%. Transit revenue was $628.9, down 7.3%; operating income was $68.6 and margin 10.9%. Freight organic weakness was concentrated in components and locomotive delivery timing. Transit sales were affected by project timing, COVID-related delays and foreign exchange.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $615.9 at March 31, 2020, versus $604.2 at December 31, 2019. Current assets were $4,241.1 and current liabilities $2,981.6.
- Total debt was $4,747.9, including $92.8 current and $4,655.1 long-term; debt was $4,429.3 at year-end 2019. Cash less total debt was approximately $4,132 net debt.
- The revolving facility had $597.5 of availability at quarter-end. Wabtec reported compliance with its credit-facility covenants; the acquisition-related leverage limit was temporarily 3.5x for Q1 and Q2 2020.
- Financing activities provided $183.5, including $981.5 of debt proceeds and $663.8 of debt repayments. Investing activities used $62.6, including $35.7 for acquisitions and $33.3 of capital expenditures. Cash increased $11.7.
- On April 10, 2020, after quarter-end, Wabtec entered a new $600 credit facility maturing in April 2021, comprising a $456 term loan and $144 revolving facility.
Material changes, outlook and risks
- Management estimated COVID-19 reduced Q1 sales by approximately $40 and operating income by approximately $15. Temporary plant closures and restrictions affected operations, sales channels, supply chains and workforce.
- Management expected COVID-19 to have a materially adverse impact on 2020 operations and results, potentially reducing demand and operating cash flow. The extent and duration were uncertain; the filing provides no numerical earnings or revenue guidance.
- Operating cash flow turned negative from $31.3 provided in Q1 2019. Management attributed the decline principally to timing-related movements in other assets and liabilities and inventory, partly offset by higher net income and depreciation and amortization. Management expected pandemic-related pressure on operating cash flow for the remainder of 2020 and said it was reducing planned investing outflows.
- Wabtec temporarily suspended share repurchases after quarter-end to preserve liquidity. During Q1 it had repurchased 1.6 million shares for $105.3; $394.7 remained under the $500 authorization.
- Gross margin improved partly because Q1 2019 included an $80 inventory step-up charge from the GE Transportation acquisition. The lower 2019 comparison also reflected acquisition-related transaction costs; Q1 2020 SG&A included $16 of GE transaction and restructuring costs versus $59 a year earlier. Amortization expense increased to $69.0 from $27.4, largely reflecting acquired intangibles.
- Remaining performance obligations were $20.6 billion; the company expected to recognize approximately 25% within 12 months. This amount is subject to standard cancellation provisions and scope adjustments.
- Risks include pandemic duration and severity, customer order delays or cancellations, customer payment and credit risk, facility closures, supply-chain disruption, foreign exchange, and uncertainty in global freight and transit demand. COVID-related uncertainty may also prompt future impairment tests; management concluded an interim goodwill and tradename impairment test was not required at March 31.
- Contingencies include asbestos-related claims and other ordinary-course litigation. Wabtec entered a settlement agreement in February 2020 resolving the employee no-poach class action; the filing does not state the settlement amount. The filing reported no material Q1 change in asbestos matters.
Important facts for investors to verify
- Subsequent-quarter sales, margins and cash generation, particularly the scale and duration of COVID-19 impacts.
- Whether acquisition-adjusted demand and segment trends stabilize; reported growth includes substantial GE Transportation contribution.
- Debt, covenant headroom, availability and terms of the April 2020 facility, and cash needs as operating cash flow weakens.
- Execution against the $20.6 billion remaining performance obligations, including conversion to billings and cash and potential contract-loss exposure.
- Potential future goodwill or intangible impairment, litigation settlement costs, and other pandemic-related contingencies.