Business context and reporting period
Westinghouse Air Brake Technologies Corporation (Wabtec) filed this unaudited Form 10-Q for the three months ended March 31, 2018. The company supplies equipment, systems and services to global freight rail and passenger transit markets, operating in 31 countries; approximately 65% of first-quarter revenue came from outside the United States. Results are compared with the three months ended March 31, 2017. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions.
Key financial results
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $1,056.2 million | $916.0 million | +15.3% |
| Gross profit / gross margin | $310.9 million / 29.4% | $269.7 million / 29.4% | +15.3% profit |
| Operating income / operating margin | $131.3 million / 12.4% | $114.5 million / 12.5% | +14.6% income |
| Net income | $87.5 million | $72.0 million | +21.5% |
| Net income attributable to Wabtec shareholders | $88.4 million; diluted EPS $0.92 | $73.9 million; diluted EPS $0.77 | +22.7% income |
| Operating cash flow | $24.2 million | $(26.1) million | Improved $50.3 million |
| Cash and cash equivalents, quarter-end | $249.9 million | $280.2 million | Prior-year comparative |
| Total debt, including current portion | $1,920.6 million | $1,870.5 million at Dec. 31, 2017 | Up $50.1 million |
Cash from operations less property and equipment purchases was approximately $6.7 million. The balance sheet reported current assets of $2,465.8 million and current liabilities of $1,648.0 million, a current ratio of about 1.50. Cash increased $16.5 million from year-end 2017. The company had approximately $622.5 million of available borrowing capacity under its revolving facility, net of letters of credit and subject to covenants.
Material changes versus the prior comparable period
- Revenue increased $140.1 million: favorable foreign exchange contributed $70.3 million, acquisitions $35.0 million, and organic product-line changes the balance. Freight sales rose 9.1%; Transit sales rose 19.1%.
- Operating income increased 14.6%, while operating margin was broadly stable, easing from about 12.5% to 12.4%. Net income attributable to shareholders rose 22.7%, supported in part by a lower effective tax rate of 23.0%, versus 27.6%.
- Gross margin was essentially flat at 29.4%. Management cited improved margins from prior-year acquisitions, partly offset in Freight by product mix, labor content and higher warranty costs on electronic products. Warranty expense rose to $11.7 million from $5.8 million.
- SG&A increased 20.0%, including currency and acquisition-related costs; engineering expense declined 6.0%. Interest expense increased modestly with higher debt balances.
- Operating cash flow turned positive, with management citing higher earnings and more favorable working-capital performance. Cash used for investing was $43.9 million, including $34.3 million for acquisitions and $17.5 million for capital spending. Financing provided $28.7 million, including revolving-credit borrowings and repayments and $11.5 million in dividends.
- Wabtec acquired Annax GmbH on March 22, 2018, for approximately $28.7 million net of cash acquired. The company adopted ASC 606 revenue guidance in January; adoption did not materially affect the income statement or balance sheet.
Outlook, commentary, risks and unusual items
- The filing provides no specific company financial guidance. Management described long-term priorities of cash generation, margin improvement, cost control, product innovation, global and aftermarket growth, and acquisitions.
- As market estimates, Wabtec expected worldwide locomotive deliveries of about 2,700 in 2018 versus 2,600 in 2017, freight-car deliveries of about 148,000 versus 155,000, and passenger-transit vehicle orders of about 44,000 versus 34,000. These are market estimates, not company revenue or earnings guidance.
- Management identified sensitivity to rail traffic, customer capital spending, government transit funding, economic conditions, raw-material and component availability, customer order delays or cancellations, foreign exchange, interest rates, and execution and integration of acquisitions.
- Tax reform reduced the U.S. federal corporate rate to 21% beginning in 2018. The company’s accounting for some Tax Act effects remained incomplete; it had recorded provisional amounts, including a $51.8 million transition-tax expense and a $24.6 million deferred-tax benefit at year-end 2017, with no adjustment in Q1.
- Contingencies include Siemens patent litigation concerning Positive Train Control, a Denver rail-project dispute with alleged damages of $36.8 million through July 2017 (not a formal claim), and employee antitrust class-action lawsuits. The DOJ proposed consent decree had no monetary fine or penalty imposed and remained subject to court approval.
- Debt covenants include a minimum interest-coverage ratio of 3.0 and maximum debt-to-EBITDA ratio of 3.25; Wabtec reported compliance. Variable-rate debt was 40% of total long-term debt at March 31, 2018, exposing the company to interest-rate changes. Foreign currency movements are also material; foreign exchange increased reported sales by $70.3 million.
Important facts for investors to verify
- How much of reported revenue and earnings growth persists after separating foreign-exchange effects, acquisitions and organic growth.
- Whether higher warranty expense on electronic products and the $157.6 million warranty reserve lead to further costs or claims.
- Working-capital conversion and cash generation, given the quarter’s receivables, inventory and customer-deposit movements.
- Debt levels, interest-rate exposure, available facility capacity and continued compliance with credit covenants.
- Final Tax Act accounting and potential changes to tax expense, alongside the effective tax-rate benefit in Q1.
- Developments in Siemens, Denver project and employee antitrust matters, including any change in potential financial exposure.