Business context and reporting period
Westinghouse Air Brake Technologies Corporation (Wabtec) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. The company supplies technology-based products and services to the global freight rail and passenger transit industries through its Freight and Transit segments; about 48% of nine-month revenue came from outside the U.S.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $809.5m | $797.3m | $2,475.1m | $2,223.6m |
| Gross profit / margin | $257.1m / 31.8% | $247.5m / 31.0% | $780.2m / 31.5% | $681.7m / 30.7% |
| Operating income / margin | $152.1m / 18.8% | $136.0m / 17.1% | $456.4m / 18.4% | $390.1m / 17.5% |
| Net income attributable to Wabtec shareholders | $99.2m | $90.2m | $296.8m | $259.0m |
| Diluted EPS | $1.02 | $0.93 | $3.05 | $2.67 |
Nine-month operating cash flow was $255.3m, compared with $230.2m a year earlier. Investing used $342.0m and financing used $120.8m; cash declined $217.6m to $208.2m. Investing included a $209.1m escrow deposit for the proposed Faiveley Transport acquisition. Capital spending was $33.1m.
At September 30, cash was $208.2m, total debt was $451.0m (including $250.0m of 4.375% notes due 2023 and $200.0m drawn on the revolving facility), and the company reported $572.9m of available borrowing capacity, net of letters of credit and subject to covenants. Total debt was $70.2m lower than at year-end 2014. Current assets were $1,650.1m and current liabilities $654.6m. Total assets were $3,326.1m; shareholders’ equity was $1,985.4m.
Material changes versus prior comparable periods
- Q3 sales rose 1.5%; nine-month sales rose 11.3%. Nine-month growth reflected acquisitions (+$217.5m) and higher Specialty Products & Electronics sales (+$172.9m), partly offset by unfavorable foreign exchange (-$121.9m).
- Freight sales increased 11.9% in Q3 and 24.3% year to date. Transit sales declined 12.1% in Q3 and 5.3% year to date, with currency and lower transit locomotive activity contributing.
- Profitability improved: nine-month operating income increased 17.0% and net income increased 14.6%. Management cited higher sales volume, favorable mix, and lower operating expenses as contributors; higher tax rates and currency losses partly offset gains.
- Q3 cost of sales was 68.2% of revenue versus 68.9% a year earlier. Nine-month cost of sales was 68.6% versus 69.4%.
- Foreign currency translation and derivative effects contributed to a $97.7m nine-month other comprehensive loss, principally from currency translation.
Outlook, commentary, risks, and unusual items
Management gave no consolidated full-year revenue or earnings guidance in the supplied filing text. It expected 2015 new locomotive deliveries to be lower and freight car deliveries higher than in 2014; new subway car deliveries were expected to increase, while bus deliveries were expected to be broadly similar. North American rail traffic was approximately flat through Q3, with intermodal traffic up 3.5%; the freight car order backlog was about 123,000 at quarter-end.
Wabtec reported about $290m of Positive Train Control (PTC) revenue for the first nine months of 2015. The statutory implementation deadline was December 31, 2015, but railroads and commuter authorities said full implementation by then was not achievable; a possible deadline extension could affect the pace of industry spending.
On October 6, 2015, after the reporting date, Faiveley Transport’s 51% shareholders signed a definitive share purchase agreement and Faiveley entered into an acquisition agreement with Wabtec. The proposed transaction values the purchase at about $1.8bn including assumed debt; Wabtec planned to use cash, existing credit facilities and potentially additional debt for the cash component. Completion remained subject to conditions, including regulatory requirements, and timing was uncertain. The $209.1m escrow deposit had already reduced cash available for other uses.
Key risks cited include economic and rail-market weakness, reduced or delayed customer orders, government transit funding, raw-material and supply availability, foreign-exchange and interest-rate movements, acquisition completion and integration, and PTC implementation timing. The company disclosed ongoing asbestos-related and ordinary-course litigation, with no material changes from its prior annual report. It was in compliance with debt covenants; the revolving facility includes leverage and interest-coverage tests. The IRS was auditing the 2012 tax year, and approximately $4.4m of unrecognized tax benefits could change within 12 months.
Important facts for investors to verify
- Progress, financing, regulatory conditions and final consideration for the Faiveley Transport transaction, including the effect on Wabtec’s debt and share count.
- Whether PTC deadlines or implementation changes affect the timing and level of PTC sales.
- Freight and transit demand trends, particularly continued Freight growth versus weaker Transit revenue and foreign-exchange exposure.
- Cash conversion and working capital: operating cash flow improved, but accounts payable and accrued liabilities were significant cash uses.
- Warranty reserve and claims: the reserve was $95.0m at September 30, 2015, up from $87.8m at year-end 2014.
- Tax, litigation, pension and debt-covenant developments; management reported no material changes in risk factors or internal control during the quarter.