Westinghouse Air Brake Technologies Corporation (Wabtec) — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Wabtec supplies equipment, technology and services to global freight rail and passenger transit markets; 59% of first-half revenue came from outside the United States.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $2,012.3 million | $1,737.4 million | $3,842.5 million | $3,667.3 million |
| Gross profit | $580.1 million | $486.7 million | $1,114.3 million | $1,065.4 million |
| Income from operations | $203.3 million | $159.4 million | $394.9 million | $376.7 million |
| Net income attributable to Wabtec shareholders | $124.8 million | $86.8 million | $237.2 million | $198.4 million |
| Diluted EPS | $0.66 | $0.46 | $1.25 | $1.04 |
| Cash from operating activities | Six-month period: $515.4 million | Prior-year period: $228.6 million |
- Q2 sales increased 15.8%; first-half sales increased 4.8%. Q2 organic growth was $153.4 million, with an additional $83.6 million from foreign exchange and $37.9 million from acquisitions. For the first half, organic growth was $7.6 million, foreign exchange contributed $129.2 million and acquisitions $38.4 million.
- Q2 gross margin was approximately 28.8%, compared with 28.0%; operating margin was approximately 10.1%, compared with 9.2%. First-half gross margin was approximately 29.0%, versus 29.1%, and operating margin was approximately 10.3% in both periods.
- Q2 growth reflected higher Transit demand and Freight Services and Components sales; Freight Equipment sales declined. In the first half, Transit organic sales rose $50.2 million while Freight organic sales fell $42.6 million, mainly due to lower locomotive Equipment sales, partly offset by stronger Services.
- At June 30, cash was $453.5 million, down from $598.7 million at year-end 2020. Current assets were $3.81 billion and current liabilities $2.84 billion. Total debt was approximately $4.08 billion; net debt was approximately $3.63 billion. The filing reports $1.196 billion available under the revolving credit facility and compliance with debt covenants.
- First-half investing cash outflow was $452.4 million, including $405.1 million net cash paid for Nordco. Financing cash outflow was $212.5 million. Capital expenditures were $55.5 million and dividends paid were $45.9 million.
Material changes and notable items
- Q2 2021 included $21 million of restructuring costs in cost of sales; Q2 2020 included $17 million. First-half amounts were $25 million and $19 million, respectively. Excluding these charges, management reported improved Q2 cost of sales as a percentage of revenue, but only a slight first-half improvement.
- Nordco was acquired on March 31, 2021, for approximately $410 million and is included in the Freight segment. Purchase accounting remains preliminary; the filing says pro forma impact was not significant.
- Wabtec issued €500 million of 1.25% senior notes due 2027 in June and repaid outstanding U.S. dollar term loans and the 364-day facility. The company reported $4.08 billion in debt at quarter-end, with $0.6 million classified as current.
- Remaining performance obligations were $20.8 billion at June 30; approximately 25% is expected to convert to revenue in the next 12 months.
Outlook, risks and contingencies
- The filing provides no specific company revenue, earnings or cash-flow guidance. Management describes long-term priorities as cash-flow conversion, cost and margin improvement, operational efficiency, innovation, aftermarket growth and acquisitions.
- Management warns that COVID-19 continues to affect sales channels, supply chains, manufacturing, employees and end markets. Duration, variants, vaccination effectiveness and potential restrictions leave the impact uncertain; management says it cannot predict the extent or duration of the effects.
- Other disclosed risks include demand and customer spending, supply disruptions and raw-material costs, contract performance, foreign-exchange movements, integration of acquisitions, and governmental funding and regulation. The company says market-risk exposure had not changed materially since year-end 2020.
- Warranty reserve was $281.8 million at June 30, up from $278.5 million at year-end; provisions for estimated loss contracts were $122.5 million, versus $108.9 million. The filing also describes asbestos and ordinary-course claims without material changes, and a disputed Denver rail-crossing matter; Wabtec states it knows of no litigation expected to materially adversely affect its financial condition, results or liquidity.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales and margin gains persist, particularly in Freight Services and Transit, and whether lower Freight Equipment demand continues.
- Whether supply-chain, inflation, labor and COVID-related pressures affect costs, delivery schedules or customer demand.
- Nordco integration, final purchase-price accounting and expected contribution to Freight results.
- Debt maturities, covenant headroom, revolving-credit availability and the effect of foreign-held cash on liquidity.
- Changes in warranty and loss-contract reserves, and developments in the Denver matter and other legal contingencies.