Business context and reporting period
Westinghouse Air Brake Technologies Corporation (Wabtec) filed this unaudited Form 10-Q for the quarter ended September 30, 2014. It supplies technology-based products and services to the global freight rail and passenger transit industries, operating in 19 countries; about 48% of nine-month 2014 revenue came from outside the United States. Comparisons below are with the three or nine months ended September 30, 2013, as applicable.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $797.3 million | $631.4 million | $2,223.6 million | $1,884.9 million |
| Gross profit / margin | $247.5 million / 31.0% | $188.1 million / 29.8% | $681.7 million / 30.7% | $563.9 million / 29.9% |
| Operating income / margin | $136.0 million / 17.1% | $109.9 million / 17.4% | $390.1 million / 17.5% | $326.1 million / 17.3% |
| Net income attributable to Wabtec shareholders | $90.2 million | $73.9 million | $259.0 million | $218.2 million |
| Diluted EPS | $0.93 | $0.76 | $2.67 | $2.25 |
| Operating cash flow | Not separately presented | Not separately presented | $230.2 million | $85.0 million |
Q3 sales rose 26.3%, operating income 23.8%, and net income 21.9%. Nine-month sales increased 18.0%, operating income 19.6%, and net income 18.7%. Growth reflected acquisitions, stronger demand for freight original-equipment and aftermarket products, and brake products; lower transit locomotive remanufacturing and overhaul sales partially offset growth. Acquisitions contributed $86.6 million of Q3 sales growth and $147.0 million for the nine-month period. Q3 gross margin improved 1.2 percentage points, while operating margin declined 0.3 points as operating expenses grew faster than sales.
Freight segment Q3 external sales were $453.3 million, up 33.1%; Transit segment sales were $343.9 million, up 18.2%. For nine months, Freight sales were $1,250.3 million, up 23.9%, and Transit sales were $973.3 million, up 11.1%.
Cash, debt and liquidity at September 30, 2014
- Cash and cash equivalents were $212.5 million, down from $285.8 million at December 31, 2013. Total assets were $3.23 billion and current assets were $1.53 billion versus current liabilities of $674.7 million.
- Debt totaled $522.0 million: $250.0 million of 4.375% senior notes due 2023, $270.0 million drawn on the revolving facility, and $2.0 million of capital leases. The filing reports approximately $513.0 million of available borrowing capacity, net of letters of credit and subject to covenants. Net debt, calculated as total debt less cash, was approximately $309.5 million.
- Nine-month investing cash outflow was $330.3 million, including $299.7 million for acquisitions and $31.0 million for capital expenditures. Financing provided $31.6 million; the net decrease in cash was $73.2 million.
- Wabtec repurchased 346,800 shares for $26.8 million during the nine months and paid $13.5 million in dividends. The company reported $173.2 million remaining under its $200 million repurchase authorization.
Material changes and unusual items
- 2014 acquisitions included Fandstan ($199.4 million), Dia-Frag ($70.6 million), and C2CE ($25.1 million). These contributed to increases in goodwill, intangibles, debt, and operating expenses; purchase allocations for these acquisitions were preliminary.
- Foreign currency translation losses were $52.9 million before tax for the first nine months, contributing to a $49.4 million net-of-tax other comprehensive loss. Accumulated other comprehensive loss increased to $84.3 million from $34.9 million at year-end 2013.
- The effective tax rate was 31.2% for the first nine months, compared with 30.4% in 2013, reflecting prior-year benefits from the R&D tax credit and a foreign tax-rate change.
- Warranty reserve stood at $70.7 million, compared with $60.6 million at year-end 2013. Warranty expense increased year over year, while remaining about 1.0% of sales.
Outlook, management commentary and risks
Management described long-term priorities of growing through global expansion, new products, aftermarket services and acquisitions; controlling costs and improving margins; and generating operating cash flow above net income. The filing does not provide a specific earnings or revenue forecast. Management expected 2014 North American new locomotive and freight-car deliveries to exceed 2013 levels, while subway-car and bus deliveries were expected to remain about level. It cited North American rail carloadings up 4.3% through October 11, 2014, and an industry freight-car backlog of about 100,000 in Q2.
Positive Train Control (PTC) implementation was a significant opportunity and execution risk: Wabtec reported $221 million of PTC revenue for the first nine months, while railroads and commuter authorities said they could not meet the statutory December 31, 2015 implementation deadline. Congress had discussed an extension but had not enacted one by the filing date. Other risks include economic and rail-market fluctuations, government transit funding, customer concentration and order delays, raw-material and supply constraints, foreign-exchange and interest-rate movements, acquisition integration, and legal matters. Asbestos and other litigation disclosures had no material changes from the 2013 Form 10-K. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile operating cash flow: the cash-flow statement reports $230.2 million for the first nine months, while the MD&A narrative states $233.5 million for 2014; the filing text does not explain the difference.
- Assess how much reported growth reflects acquired businesses versus underlying demand, and whether acquisition-related expenses and amortization will continue to weigh on margins.
- Monitor cash conversion and working capital, particularly receivables, unbilled receivables and inventory, alongside the large acquisition outlays.
- Review revolver availability, covenant headroom, variable-rate exposure and the effect of additional borrowing; variable-rate debt was 23% of total debt, and a 1% rate change was estimated to alter annual interest expense by about $1.2 million.
- Track PTC implementation and any legislative deadline extension, as well as freight and transit demand, government funding and currency effects.