Business context and reporting period
Westinghouse Air Brake Technologies Corporation (Wabtec) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. The company supplies equipment, systems and services to global freight rail and passenger transit markets; approximately 59% of first-half revenue came from outside the United States.
The results include GE Transportation (GET) from its February 25, 2019 acquisition. Accordingly, reported growth versus 2018 is substantially acquisition-driven and the periods are not directly comparable.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $2.236 billion | $1.112 billion | $3.830 billion | $2.168 billion |
| Gross profit | $614.7 million | $324.0 million | $1.004 billion | $634.8 million |
| Income from operations | $200.6 million | $123.5 million | $267.9 million | $254.8 million |
| Net income attributable to Wabtec shareholders | $104.2 million | $84.4 million | $99.8 million | $172.8 million |
| Diluted EPS | $0.54 | $0.87 | $0.61 | $1.79 |
| Cash from operating activities | Not separately presented for the quarter | $443.9 million | $67.9 million |
- Q2 sales rose 101% and operating income rose 62%; shareholder net income increased 23%. GET contributed approximately $1.12 billion of Q2 sales and $88.2 million of operating income in the first half.
- Q2 gross margin was 27.5%, versus 29.1% a year earlier. It included $89 million of nonrecurring GET inventory step-up costs; excluding that charge, management reported a 31.5% gross margin.
- For the first half, sales grew 76.7%, while shareholder net income fell 42% and diluted EPS fell to $0.61. The company reported $169 million of GET inventory step-up costs; excluding this item, cost of sales was 69.4% of sales, a 1.3 percentage-point improvement from 2018.
- First-half operating cash flow was $443.9 million. Capital spending was $61.9 million, implying approximately $382 million of operating cash flow less capital spending. Investing cash outflow was $3.04 billion, primarily reflecting $2.98 billion of acquisition spending.
Balance sheet, liquidity and capital
- At June 30, 2019, cash and cash equivalents were $461.4 million; current assets were $4.229 billion and current liabilities were $3.211 billion.
- Total debt was $4.633 billion, including $104.4 million current and $4.529 billion long-term. The company reported $780.3 million of available bank borrowing capacity, net of letters of credit and subject to covenants.
- Cash declined by $1.881 billion in the first half, largely reflecting the acquisition. The year-end comparison included $1.761 billion of restricted cash, which was nil at June 30, 2019.
- The company paid $34.3 million in first-half dividends. No shares were repurchased during the second quarter; $137.8 million remained under the repurchase authorization.
Material changes, outlook and risks
- The GET transaction materially expanded Freight operations and the balance sheet: goodwill increased to $8.151 billion from $2.397 billion at year-end, and net intangible assets increased to $4.364 billion from $1.130 billion. Purchase accounting remains preliminary and adjustments could be material.
- Acquisition-related transaction and restructuring costs were $90 million in the first half; amortization and interest expense also rose substantially. Moody’s lowered its rating to Ba1 in February, triggering a 0.25 percentage-point increase in specified senior-note interest rates. Wabtec said it was compliant with debt covenants.
- Management gave no company-wide numerical revenue or earnings guidance in the supplied filing text. It cited its estimates of 2019 deliveries of about 2,900 locomotives and 174,000 freight cars, and passenger transit vehicle orders of roughly 30,000. These are market estimates, not formal Wabtec guidance.
- Remaining performance obligations were $21.3 billion; the company expects to recognize approximately 26% as revenue over the next 12 months. Long-term contract estimates depend on assumptions about costs, labor, suppliers and project execution; loss-contract provisions were $103.6 million at June 30, up from $71.2 million at year-end.
- Key exposures include rail-market demand and customer spending, integration of GET, foreign exchange and floating interest rates, supply and execution risks, and legal proceedings. Siemens obtained a $6.7 million jury award in a patent case, subject to post-trial motions and possible appeals; Siemens also brought antitrust and trade-practices claims that Wabtec says it will defend. A separate Denver project dispute includes an historical $36.8 million damages allegation against a subsidiary, but no formal claim had been filed against it as of the filing.
- Management said disclosure controls were effective. The GET combination materially changed internal controls over financial reporting, and integration of the combined company’s controls was ongoing.
Important facts for investors to verify
- How much reported growth and margin performance reflects GET, and whether integration synergies offset acquired costs and amortization.
- The final purchase-price allocation, including goodwill, acquired intangibles and contingent consideration; Wabtec disclosed a further $470 million fixed payment to GE tied to timing of expected tax benefits.
- Debt reduction, interest-rate exposure, covenant headroom and the sustainability of operating cash flow after acquisition-related working-capital effects.
- Progress on long-term contracts, warranty exposure, the growth in loss-contract provisions, and resolution or potential financial impact of the Siemens and Denver-related disputes.
- Whether the remaining performance obligations convert to revenue on the expected schedule and how demand, currency movements and customer capital spending affect results.