Wabtec Q3 2019 Form 10-Q Summary
Business context and reporting period
Westinghouse Air Brake Technologies Corporation (Wabtec; NYSE: WAB) filed this unaudited quarterly report for the three and nine months ended September 30, 2019. Wabtec supplies equipment, systems and services to global freight rail and passenger transit markets. The February 25, 2019 combination with GE Transportation (GET) substantially changed the company’s scale and makes year-over-year comparisons less like-for-like; 2019 includes GET results after closing.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $2.002 billion | $1.078 billion | $5.832 billion | $3.246 billion |
| Gross profit | $599.4 million | $302.0 million | $1.603 billion | $936.9 million |
| Income from operations | $169.1 million | $125.2 million | $437.0 million | $380.0 million |
| Net income attributable to Wabtec shareholders | $91.1 million | $87.7 million | $191.0 million | $260.6 million |
| Diluted EPS | $0.48 | $0.91 | $1.11 | $2.70 |
| Operating cash flow | Not stated separately for the quarter | Not stated separately for the quarter | $567.7 million | $38.0 million |
- Reported gross margin was approximately 30.0% in Q3 and 27.5% for the first nine months; operating margin was approximately 8.4% and 7.5%, respectively. Nine-month net income attributable to Wabtec shareholders was approximately 3.3% of sales.
- At September 30, cash and cash equivalents were $587.4 million; total debt was $4.745 billion, including $111.8 million current. Net debt was approximately $4.16 billion. The company reported $656 million of available bank borrowing capacity, net of letters of credit and subject to covenants.
- Current assets were $4.410 billion and current liabilities $3.199 billion. Cash flow from operations exceeded reported net income for the first nine months.
Material changes versus prior periods
- Q3 sales grew 85.7%, primarily reflecting $955.9 million of acquisition-related sales, mainly GET. GET contributed approximately $1.0 billion of Q3 sales and $2.57 billion for the nine-month period.
- For the first nine months, sales rose 79.7%, while income attributable to Wabtec shareholders fell 26.7% and diluted EPS fell to $1.11 from $2.70. Increased amortization, transaction and restructuring costs, interest expense, and a higher effective tax rate weighed on results; weighted average diluted shares also increased substantially following the merger.
- Q3 shareholder income increased 3.9% despite higher sales. Reported cost of sales included restructuring charges and GET inventory purchase-accounting step-up costs. Excluding those identified costs, management reported lower cost of sales as a percentage of sales than in the prior-year quarter.
- Operating cash flow rose to $567.7 million from $38.0 million, while investing cash outflow increased to $3.110 billion, including $3.001 billion of net acquisition spending. Financing cash flow was $817.1 million; cash and restricted cash declined by $1.755 billion during the period.
- Goodwill increased to $8.103 billion and net other intangible assets to $4.207 billion, largely reflecting the GET acquisition. The preliminary purchase-price allocation remains subject to adjustment.
Outlook, commentary, risks and unusual items
- Management described long-term priorities of cash generation, maintaining credit strength, margin improvement through cost control and the Wabtec Excellence Program, and growth through innovation, market expansion, aftermarket sales and acquisitions. The filing does not provide specific company-wide earnings or revenue guidance.
- Management cited industry drivers including urbanization, technology investment, aging fleets and demand for efficient transportation. It estimated worldwide 2019 deliveries of about 2,900 locomotives and 174,000 freight cars, and passenger-vehicle orders around the prior year’s 30,000. These are market estimates, not formal company financial guidance.
- Remaining performance obligations were $20.6 billion; approximately 26% was expected to be recognized as revenue over the next 12 months. Orders are subject to standard cancellation provisions and potential scope changes.
- Identified risks include rail and transit demand, customer capital spending and government funding, economic conditions, foreign exchange and interest rates, supply disruptions and raw-material costs, long-term contract execution, competition, regulation, litigation, and successful integration of acquisitions. About 58% of nine-month revenue came from outside the United States; currency movements reduced sales by $136.2 million.
- Debt was elevated following the acquisition. Moody’s lowered its rating to Ba1 in February 2019, triggering a 0.25 percentage-point increase in interest rates on specified 2018 notes. Wabtec said it was in compliance with debt covenants at September 30.
- Unusual costs included $185 million of GET inventory purchase-accounting step-up costs and $28 million of restructuring charges in nine-month cost of sales, plus $130 million of GET transaction, restructuring and litigation costs in selling, general and administrative expense. Nine-month interest expense was $160.8 million versus $75.9 million.
- The Siemens patent and related litigation was globally settled on September 27, 2019 after a court judgment of $14.1 million; settlement terms are not stated here. A separate employee antitrust class action remained pending, with damages unspecified. Xorail had received notices asserting contract-related damages, but no formal claim against it had been filed as described in the report.
- Management reported disclosure controls were effective, while noting that integration of GET’s internal controls was ongoing following the merger.
Most important facts for investors to verify
- How much of reported sales and operating performance reflects GET versus organic growth, and whether acquisition synergies and integration plans are being achieved.
- Whether cash generation is sustainable after acquisition-related working-capital effects, and how debt, interest costs and covenant headroom evolve.
- The final GET purchase-price allocation, future amortization burden, and progress in reducing restructuring and transaction costs.
- Updates on the pending employee antitrust case and any remaining exposure from other litigation, contract claims or warranty provisions.
- Conversion of the $20.6 billion remaining performance obligations into revenue, including timing, cancellations and contract-loss estimates.