Wabtec Q1 2015 Form 10-Q Summary
Business context and reporting period
Westinghouse Air Brake Technologies Corporation (Wabtec) supplies technology-based products and services to the global freight rail and passenger transit industries. This unaudited filing covers the three months ended March 31, 2015, compared with the three months ended March 31, 2014. About 49% of first-quarter revenue came from customers outside the United States.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $818.6 | $695.2 |
| Gross profit / gross margin | $255.4 / 31.2% | $209.6 / 31.0% |
| Operating income / operating margin | $148.4 / 18.1% | $121.8 / 17.5% |
| Net income attributable to Wabtec shareholders | $96.2 | $80.1 |
| Diluted EPS | $0.99 | $0.83 |
| Cash provided by operating activities | $43.7 | $26.2 |
- Sales increased 17.7%, operating income increased 21.8%, and net income increased 20.0% year over year. Gross margin expanded 0.2 percentage points and operating margin expanded 0.6 points.
- Freight segment sales rose 32.8% to $511.9 million; Transit segment sales declined 1.0% to $306.7 million.
- Cash and equivalents were $249.1 million at March 31, down from $425.8 million at year-end 2014. Net cash used in investing was $84.0 million, including $75.7 million for the RCL acquisition; net cash used in financing was $119.8 million. Cash decreased $176.7 million during the quarter, including a $16.6 million adverse currency effect.
- Total debt was $421.0 million, down from $521.2 million at December 31, 2014, including $250 million of 4.375% senior notes due 2023 and $170 million drawn on the revolving facility. The company reported approximately $602.8 million of available borrowing capacity, net of letters of credit, subject to covenants. Current assets were $1,503.9 million and current liabilities were $695.8 million.
Material changes and notable items
- Acquisitions contributed $78.0 million to year-over-year sales. Wabtec acquired Railroad Controls L.P., a railway signal construction services provider, on February 4, 2015 for approximately $75.7 million net of cash acquired. Acquisitions completed in 2014 also contributed to results.
- Higher demand for freight original-equipment products, aftermarket electronics and positive train control (PTC) products supported growth. Lower Transit remanufacturing, overhaul and build sales, including the substantial completion of a multi-year locomotive project, and unfavorable foreign exchange partly offset growth. Currency effects reduced sales by $38.7 million.
- Other expense was $2.9 million, compared with $0.02 million in Q1 2014, mainly reflecting foreign currency losses. Foreign currency translation contributed to an $86.1 million net-of-tax other comprehensive loss; comprehensive income was $10.1 million versus $80.9 million a year earlier.
- Wabtec reported $94 million of PTC revenue in Q1. The company was working toward the statutory December 31, 2015 implementation deadline, while railroads and commuter authorities said they could not complete implementation on time and Congress had discussed an extension.
Outlook, risks, and contingencies
- The filing provides market expectations rather than a specific company revenue or earnings forecast: Wabtec expected lower new-locomotive deliveries and higher freight-car deliveries in 2015; new subway-car deliveries were expected to increase, while bus deliveries were expected to be roughly unchanged from 2014.
- Management identified demand sensitivity to economic conditions, rail traffic, railroad and government investment, and public transit budgets. Other risks include order delays or cancellations, customer concentration, raw-material and supply constraints, foreign-exchange movements, acquisition integration, technology adoption, and changes in government funding or regulation.
- The company had asbestos-related bodily-injury claims and ordinary-course litigation; it reported no material changes from its 2014 Form 10-K during the quarter. It also reported $12.6 million of liabilities for uncertain tax positions and said it could not reliably estimate the timing of any cash settlement.
- Credit agreements impose financial and other covenants, including a minimum interest-coverage ratio of 3.0 and maximum debt-to-cash-flow ratio of 3.25. Management said it did not expect these requirements to constrain operations and reported covenant compliance.
- Management said disclosure controls were effective at March 31, 2015 and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- How much reported growth reflects acquired businesses versus organic demand, particularly in Freight and Transit.
- Whether market expectations for 2015 locomotive, freight-car, subway-car and bus deliveries materialize, and how any PTC deadline extension affects demand and revenue timing.
- Whether operating cash generation remains adequate amid working-capital needs, acquisition spending, and planned capital investment.
- How currency movements, acquisition integration, warranty claims, and rail and transit customer spending affect margins and earnings.
- Developments in asbestos and other litigation, uncertain tax positions, and compliance with debt covenants.