WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORPORATION (Wabtec) — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. Wabtec supplies equipment, systems and services to freight rail, passenger transit, mining, marine and industrial markets. Approximately 55% of first-half sales were to customers outside the United States.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $2,407 | $2,048 | $4,601 | $3,975 |
| Gross profit | $723 | $645 | $1,388 | $1,240 |
| Income from operations | $312 | $264 | $588 | $503 |
| Net income attributable to Wabtec shareholders | $191 | $166 | $360 | $315 |
| Diluted EPS | $1.06 | $0.91 | $2.00 | $1.71 |
| Operating cash flow | Not separately stated | Not separately stated | $90 | $424 |
- Q2 sales increased 17.5%; first-half sales increased 15.7%. First-half organic sales grew $657 million, partially offset by $63 million of unfavorable foreign exchange; acquisitions added $32 million.
- Q2 gross margin was 30.1%, versus 31.5% a year earlier; operating margin was 13.0%, versus 12.9%. First-half gross margin was 30.2%, versus 31.2%; operating margin was 12.8%, versus 12.7%.
- Management attributed margin pressure to product mix, labor-related manufacturing inefficiencies, higher development costs in Digital Intelligence and restructuring costs. Cost actions partly offset these pressures.
- First-half operating cash flow fell $334 million year over year, mainly due to working-capital movements, including receivables, accounts payable and customer deposits.
Financial position and liquidity
- At June 30, cash, cash equivalents and restricted cash were $371 million, down from $541 million at year-end 2022. Current assets were $4,663 million and current liabilities $4,173 million.
- Total debt was $4,390 million ($989 million current and $3,401 million long-term), compared with $4,002 million at December 31, 2022. Cash less total debt implies net debt of approximately $4.0 billion.
- The $1.5 billion revolving credit facility had $372 million outstanding and $1,377 million of reported current availability, including the available delayed-draw term loan. Wabtec reported compliance with its credit agreement financial covenants.
- First-half investing cash outflow was $293 million, including $223 million net cash paid for the L&M Radiator acquisition and $70 million of capital expenditures. Financing cash inflow was $30 million; the company repurchased $252 million of stock and paid $62 million in dividends.
- Wabtec has a $350 million revolving receivables facility; net cash proceeds under it were $155 million in the first half. Suppliers used the supply-chain financing program for $341 million of outstanding payables at June 30.
Material changes and business developments
- Freight segment Q2 sales rose 14.6% to $1,708 million; operating income increased 16.3% to $271 million. Transit sales rose 25.3% to $699 million; operating income increased 32.0% to $66 million. Both segments experienced higher cost-of-sales percentages.
- Wabtec acquired L&M Radiator for approximately $239 million in Q2. The preliminary purchase-price allocation includes $102 million of goodwill and $88 million of intangible assets; valuation remains subject to adjustment.
- Management reported strategic orders for locomotives, mining drive systems and transit equipment, and delivery of the 500th locomotive under its Indian Railways contract. Moody’s upgraded Wabtec’s senior unsecured debt rating.
- Shares repurchased in the first half totaled $252 million. Approximately $588 million remained under the refreshed $750 million authorization at June 30.
Outlook, risks and unusual items
- The filing provides no specific full-year revenue or earnings guidance. Remaining performance obligations were approximately $22.3 billion; the company expected to recognize about 30% as revenue over the next 12 months.
- Integration 2.0 is expected to generate $75 million–$90 million of incremental annual run-rate synergies in 2025. Estimated one-time restructuring charges are $135 million–$165 million; approximately $86 million had been incurred through June 30. Approved programs are expected to close about 15 facilities and affect approximately 1,100 employees.
- Macroeconomic, supply-chain, labor, inflation, commodity-cost and foreign-exchange volatility continue to affect operations. A collective bargaining agreement covering approximately 1,400 Erie locomotive workers expired June 9, 2023; workers rejected the company’s proposed agreement and authorized a strike. Negotiations continued with a federal mediator.
- Wabtec recorded an approximately $3 million charge in Q2 after determining that non-cash assets related to Russian operations were not recoverable. It held approximately $8 million of Russia-related cash to settle remaining obligations.
- The company said the June 2022 cyber incident had no significant financial impact and was not expected to materially affect operations or results. Asbestos-related claims and other ordinary-course litigation remain; management said it could not estimate ultimate liability for asbestos claims. DTC appealed a court decision denying its damages claim against RTD; the filing reports no formal claim against Wabtec by DTC.
- Management cited no material change in risk factors from the 2022 Form 10-K and said market-risk exposure had not materially changed. The filing notes uncertainty around economic conditions, customer demand, labor availability, long-term contract performance, cybersecurity, geopolitical developments and regulatory or funding changes.
Important facts for investors to verify
- Whether working-capital cash use normalizes and operating cash flow improves from the first-half $90 million level.
- Progress on Erie labor negotiations and any resulting effects on production, costs or deliveries.
- Refinancing or repayment of the $250 million notes due August 2023, and the cost and terms of any replacement financing.
- Whether margins recover as sales grow, given higher costs, unfavorable mix and labor-related inefficiencies.
- Final purchase accounting for L&M Radiator, realization of Integration 2.0 savings, and any further Russia-related costs or legal developments.