Wabtec (Westinghouse Air Brake Technologies Corporation) — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; unaudited. Comparisons are to the corresponding 2017 periods. Amounts are in U.S. dollars unless stated otherwise.
Business context
Wabtec supplies equipment, systems and services to global freight rail and passenger transit markets, operating in 31 countries. About 66% of first-half revenue came from outside the United States. The company reports Freight and Transit segments.
Financial performance
| Metric | Q2 2018 | Q2 2017 | H1 2018 | H1 2017 |
|---|---|---|---|---|
| Net sales | $1,111.7m | $932.3m | $2,167.9m | $1,848.3m |
| Gross profit / margin | $324.0m / 29.1% | $274.0m / 29.4% | $634.8m / 29.3% | $543.7m / 29.4% |
| Operating income / margin | $123.5m / 11.1% | $113.4m / 12.2% | $254.8m / 11.8% | $227.9m / 12.3% |
| Net income attributable to Wabtec shareholders | $84.4m | $72.0m | $172.8m | $145.9m |
| Diluted EPS | $0.87 | $0.75 | $1.79 | $1.52 |
| Operating cash flow | Not presented quarterly | $67.9m | $(13.7)m |
Q2 sales grew 19.2%; Freight and Transit sales rose 19.6% and 19.1%, respectively. H1 sales increased 17.3%. Growth reflected organic demand, acquisitions and favorable foreign exchange; for H1, these contributed approximately $152.6m, $74.2m and $103.8m, respectively. Operating income grew more slowly than revenue, and operating margin declined.
Q2 cost of sales was 70.9% of revenue versus 70.6% a year earlier. Management attributed pressure primarily to higher labor costs on UK Transit overhaul contracts, partly offset by favorable Freight product mix. SG&A increased, including costs for the proposed GE Transportation transaction, restructuring, acquisitions, foreign exchange and an India tax-law change. Q2 net income benefited from a lower effective tax rate: 11.2% versus 25.4%, including a $13.0m Tax Act estimate benefit. H1 effective tax rates were 17.7% and 26.5%.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $245.6m; total debt was $1,884.9m, including $27.1m current debt. Approximate net debt was $1,639.3m.
- Current assets were $2,446.9m and current liabilities $1,606.5m. Inventory increased to $863.8m from $742.6m at year-end 2017.
- H1 operating cash flow improved to $67.9m from a $13.7m outflow. Management cited working-capital improvements and higher earnings, partially offset by inventory investment and timing of customer receipts.
- H1 investing cash outflow was $69.1m, including $38.3m for acquisitions and $39.7m for capital expenditures. Financing provided $22.8m; the company paid $23.1m in dividends.
- A June refinancing established a $1.2bn revolving facility, a $350m term loan, a $400m delayed-draw term loan and an available bridge facility of up to $2.5bn. Available bank capacity, net of letters of credit, was about $647.9m. The company reported covenant compliance; variable-rate debt carried a 3.03% weighted-average rate.
Material developments, outlook and risks
- Proposed GE Transportation transaction: Under a modified Reverse Morris Trust structure, Wabtec agreed to combine with GE Transportation. The arrangement includes a $2.9bn cash purchase of certain assets and issuance of Wabtec shares for the remaining business. At the cited July 18 share price, the transaction’s total consideration was estimated at about $13.5bn. Closing was expected by early 2019, subject to shareholder, regulatory and other customary approvals. Post-transaction ownership was expected to be 50.1% for GE and former GE shareholders and 49.9% for existing Wabtec shareholders; these estimates depend on transaction terms and market price.
- Management identified rail activity, customer capital spending, government transit funding, economic conditions, raw-material and component availability, labor, foreign exchange and interest rates as factors affecting results. It cited global market growth opportunities but gave no specific company revenue or EPS guidance in the filing.
- Management’s cited industry expectations included approximately 2,700 worldwide locomotive deliveries in 2018 (about 2,600 in 2017), 148,000 freight-car deliveries (155,000 in 2017), and 44,000 passenger-transit vehicle orders (34,000 in 2017). These are company estimates, not guaranteed outcomes.
- Contingencies include Siemens patent litigation involving Positive Train Control, with Siemens seeking to add antitrust and trade-practices claims; a Denver rail-crossing contract dispute with alleged damages of $36.8m through July 2017, no formal claim against Wabtec’s subsidiary, and arbitration expected to conclude by year-end; and employee no-poach class actions seeking unspecified damages after a proposed DOJ consent decree. The filing provides no clear estimate of potential loss for these matters.
- Wabtec adopted ASC 606 in 2018; management said adoption had no material impact on the financial statements. Tax Act accounting remained provisional. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Progress, financing, final consideration, dilution and approval conditions for the GE Transportation transaction.
- Whether Transit contract labor costs, SG&A and transaction-related expenses continue to pressure margins.
- Cash conversion and working-capital trends, particularly the inventory build and customer-payment timing.
- Debt levels, interest costs, available borrowing capacity and compliance with leverage and interest-coverage covenants.
- Developments and potential financial exposure in the Siemens, Denver rail-crossing and employee litigation matters.