Westinghouse Air Brake Technologies Corporation (Wabtec) — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Amounts are in millions of dollars unless stated otherwise. Wabtec supplies equipment, technology, systems, and services to global freight rail and passenger transit markets. Approximately 58% of nine-month revenue came from outside the United States.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $1,865.1 | $2,001.7 | $5,532.4 | $5,831.6 |
| Gross profit | $566.2 | $599.4 | $1,631.6 | $1,603.1 |
| Gross margin | 30.4% | 29.9% | 29.5% | 27.5% |
| Operating income | $206.7 | $169.1 | $583.4 | $437.0 |
| Operating margin | 11.1% | 8.4% | 10.5% | 7.5% |
| Net income attributable to Wabtec shareholders | $128.1 | $91.1 | $326.5 | $191.0 |
| Diluted EPS | $0.67 | $0.48 | $1.71 | $1.11 |
- Revenue and segments: Q3 sales declined 6.8% year over year; nine-month sales declined 5.1%. Q3 Freight sales fell 7.1% and Transit sales fell 6.2%. For nine months, Freight sales were down 0.8% and Transit sales down 13.0%. The nine-month comparison includes $536.7 million of acquisition-related sales, mainly GE Transportation, while organic sales declined $759.3 million.
- Profitability: Q3 gross profit declined despite higher gross margin; nine-month gross profit increased. Management attributed margin pressure to unfavorable mix and lower factory overhead absorption from reduced volumes, partly offset by GE Transportation synergies and cost actions. Operating expenses decreased year over year in both periods.
- Cash flow: Nine-month operating cash flow was $458.1 million, versus $567.7 million in 2019. Investing used $119.9 million, compared with $3,109.8 million, largely because the prior-year period included the GE Transportation acquisition. Financing used $360.8 million, including $3,117.1 million of debt repayments, $105.3 million of share repurchases, and $69.2 million of dividends. Cash and cash equivalents were $559.3 million at September 30, 2020.
- Debt and liquidity: Total debt carrying value was $4,254.7 million, versus $4,429.3 million at year-end 2019; cash less debt was approximately $3,695.4 million. Current debt was $454.8 million, up from $95.7 million. Revolving credit availability was $1,324.5 million, before other conditions and letters of credit; the company reported covenant compliance. Current assets were $3,936.2 million and current liabilities $3,228.6 million.
- Other metrics: Remaining performance obligations were $20.5 billion; approximately 25% was expected to be recognized as revenue in the next 12 months. Warranty reserves were $264.8 million. Goodwill was $8,366.1 million, with no interim impairment test deemed necessary through September; management identified pandemic uncertainty as a factor that could prompt future testing.
Changes versus prior comparable periods
- Lower freight volumes, increased locomotive parking, fewer freight-car builds, COVID-related production delays, and reduced passenger traffic weighed on sales. Q3 organic sales were down $143.4 million; nine-month organic sales were down $759.3 million.
- Q3 operating income rose 22.2%, and nine-month operating income rose 33.5%, despite lower sales. Comparisons benefited from lower restructuring and transaction costs and the absence of the prior-year GE Transportation inventory step-up charge ($185 million for nine months in 2019). Amortization expense rose $38.7 million for the nine-month period, primarily reflecting the acquisition.
- Interest expense declined in both comparisons, which management attributed to lower variable rates and lower average debt balances. Nine-month effective tax rate fell to 25.8% from 30.4%; Q3 rate increased to 26.7% from 20.0%, including tax expense from an internal restructuring.
- Foreign currency translation contributed a $99.7 million net-of-tax comprehensive loss for the first nine months, while Q3 recorded a $55.5 million net-of-tax other comprehensive gain.
Outlook, risks, contingencies, and unusual items
- Management said COVID-19 materially adversely affected results for the quarter and nine months and expected a material adverse effect to continue through the remainder of 2020. The filing provides no quantified earnings or revenue guidance and states that the duration and extent of the impact cannot be specifically predicted.
- Risks include weaker customer demand and rail activity, plant or supply-chain disruption, delayed or canceled orders, customer payment delays, currency and interest-rate movements, and possible impairment of goodwill or indefinite-lived intangibles. Management also cited uncertainty around global economic conditions and potential changes in customer capital spending.
- Liquidity actions included a new $600 million 364-day facility, issuance of $500 million of 3.20% notes due 2025 to redeem floating-rate notes due 2021, and a receivables program with a stated transfer capacity of up to $150 million. The company reported $97.5 million of net cash proceeds from the program for the nine months, with collections and reinvestment affecting cash flows.
- The board authorized up to $500 million in share repurchases; $105.3 million had been spent in the first quarter, leaving approximately $394.7 million authorized. No shares were repurchased in Q3.
- Contingencies include asbestos-related claims and other ordinary-course litigation. In a Denver transit project dispute, a trial involving the project owner and contractor was ongoing; the filing says the contractor had not filed a formal claim against Wabtec subsidiary Xorail. Wabtec agreed to settle a consolidated employee no-poach class action; preliminary court approval was issued in March 2020, with the settlement amount not stated in the provided text.
Important facts for investors to verify
- Whether freight activity, locomotive utilization, passenger ridership, and COVID-related operating disruptions improved or worsened after September 30, 2020.
- Whether operating cash flow can recover from lower customer advances and payment timing effects, and how receivables-program activity affects reported cash generation.
- Debt maturities, refinancing needs, facility availability, covenant headroom, and the impact of higher current debt and interest-rate changes.
- Progress on GE Transportation integration savings versus restructuring costs, acquisition-related amortization, and weaker organic demand.
- Results of the planned fourth-quarter goodwill and intangible impairment review, and developments in legal claims and other contingencies.
- Whether management provided subsequent quantified guidance; none is stated in the filing text summarized here.