Wabtec Corporation (NYSE: WAB) — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report; the provided filing does not present a standalone fourth-quarter income statement. Dollar amounts below are U.S. dollars unless noted.
Business context
Wabtec supplies locomotives, components, digital systems and services to global freight rail and passenger transit markets. Its Freight and Transit segments generated 67% and 33% of 2021 sales, respectively. Approximately 60% of sales were outside the U.S.; aftermarket sales accounted for about 60% of total sales. The company acquired North American maintenance-of-way equipment supplier Nordco on March 31, 2021, for approximately $410 million.
Key financial results
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net sales | $7.822 billion | $7.556 billion | Up 3.5% |
| Gross profit | $2.369 billion | $2.137 billion | Up 10.9% |
| Income from operations | $876 million | $745 million | Up 17.6% |
| Net income attributable to Wabtec shareholders | $558 million | $414 million | Up 34.8% |
| Diluted EPS | $2.96 | $2.17 | Up 36.4% |
| Cash from operating activities | $1.073 billion | $784 million | Up $289 million |
| Cash and cash equivalents at year-end | $473 million | $599 million | Down $126 million |
| Total debt, approximate | $4.1 billion | $4.2 billion | Down modestly |
Gross margin was 30.3%, versus 28.3% in 2020; operating margin was 11.2%, versus 9.9%. Net margin was approximately 7.2%, versus 5.5%. The effective tax rate declined to 23.2% from 26.0%, principally reflecting amended tax returns and a net operating loss carryback.
Investing activities used $540 million, including $435 million of net cash paid for acquisitions, primarily Nordco, and $130 million of capital expenditures. Financing activities used $653 million, including $161 million of net debt payments, $99 million of GE Transportation contingent-consideration payments, $92 million of dividends and $300 million of share repurchases. The company had no variable-rate debt outstanding at year-end and reported $1.197 billion available under its revolving credit facility.
Segments and changes versus 2020
- Freight: Sales rose 3.1% to $5.239 billion, including $138 million from acquisitions and $23 million from foreign exchange; organic sales declined $4 million. Services sales increased $227 million, while Equipment declined $229 million and Digital Electronics declined $33 million. Operating income increased to $717 million from $584 million; operating margin improved to 13.7% from 11.5%.
- Transit: Sales rose 4.4% to $2.583 billion, primarily due to $111 million of favorable foreign exchange; organic sales declined $2 million. Operating income increased to $238 million from $230 million, while operating margin was 9.2% versus 9.3%.
- Consolidated sales growth was largely attributable to services, Nordco and favorable currency translation. Goods sales declined slightly while services sales increased to $1.617 billion from $1.323 billion.
Outlook, risks and unusual items
- Management provided no specific numerical 2022 revenue or earnings guidance in the supplied filing text. It said COVID-19-related supply-chain disruption, component and chip shortages, labor constraints, and inflation in metals, transportation, logistics and labor costs were expected to continue affecting operations into 2022. The company was using price escalations and surcharges, cost controls, sourcing actions and integration synergies to mitigate cost pressures.
- Backlog was $22.169 billion at year-end, compared with $21.591 billion a year earlier. Approximately $6.268 billion was expected to be delivered in 2022. Backlog may be delayed, adjusted or canceled; aftermarket orders, which have short lead times, are not represented for a significant period.
- COVID-19 materially adversely affected results in both 2021 and 2020. Management cited revenue timing effects from supply constraints and customer order deferrals and expected ongoing adverse effects in 2022.
- 2021 included $53 million of consolidated restructuring costs, compared with $45 million in 2020. SG&A restructuring and transaction costs were $25 million versus $71 million. Other income included $38 million, primarily reflecting foreign-exchange gains and higher equity income.
- Principal risks include rail-market cyclicality and customer concentration, supply-chain and raw-material availability and costs, execution of acquisitions and synergies, international and currency exposure, regulation and environmental requirements, cybersecurity, product warranty and liability claims, and substantial indebtedness. The filing disclosed a vendor operating-system vulnerability affecting certain Wabtec products; the company reported no known exploitation to date and was working with the vendor and customers on mitigation.
- Contractual obligations included $4.081 billion of long-term debt, $765 million of scheduled interest payments and $256 million of remaining GE contingent consideration. Letters of credit and bank guarantees totaled $791 million. The company reported compliance with credit-facility covenants.
Important facts for investors to verify
- Whether supply constraints and inflation continue to delay sales or erode margins, and how effectively price actions offset higher costs.
- How much of the reported sales increase and earnings improvement reflects sustainable organic performance versus currency, acquisition and tax effects.
- Backlog conversion, delivery timing and customer deferrals, including the expected 2022 delivery schedule.
- Debt maturities, cash generation, contingent GE payments and the use of the expanded share-repurchase authorization.
- Potential outcomes and financial exposure from legal, warranty, environmental and cybersecurity matters; the filing does not provide a clear quantified estimate for all such exposures.
The financial statements received an unqualified audit opinion. Management and the auditor reported effective internal control over financial reporting; Nordco was excluded from the 2021 internal-control assessment.