Wabtec Corporation — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017. Wabtec supplies equipment, systems and services to global freight rail and passenger transit markets through its Freight and Transit segments. Figures below are in U.S. dollars; financial amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net sales | $3,881.8 | $2,931.2 | +32.4% |
| Gross profit / margin | $1,065.3 / 27.4% | $924.2 / 31.5% | Margin down 4.1 percentage points |
| Operating income / margin | $421.7 / 10.9% | $458.4 / 15.6% | Income down 8.0% |
| Net income attributable to Wabtec shareholders | $262.3 | $304.9 | Down 14.0% |
| Diluted EPS | $2.72 | $3.34 | Down 18.6% |
| Cash from operations | $188.8 | $450.5 | Down $261.7 |
| Cash and cash equivalents (year-end) | $233.4 | $398.5 | Down $165.1 |
| Total debt (year-end) | $1,870.5 | $1,892.8 | Down $22.2 |
| Current assets / current liabilities | $2,265.1 / $1,573.3 | $2,867.6 / $1,446.6 | 2017 current ratio: approximately 1.44 |
Revenue growth largely reflected Faiveley Transport and other acquisitions: acquisitions contributed $1,183.2 million to the year-over-year sales increase. Transit sales rose 79.0% to $2,485.2 million, while Freight sales fell 9.5% to $1,396.6 million. Approximately 66% of sales were to customers outside the U.S.; aftermarket products and services represented about 56% of sales.
Material changes and notable items
- Wabtec completed its acquisition of Faiveley Transport in 2017, bringing ownership to 100%; the stated purchase price was approximately $1.507 billion. The acquisition substantially expanded Transit operations and international reach.
- Despite higher sales, gross margin fell as the acquired Transit business had lower overall margins, Freight product mix was unfavorable, and the company recorded $44.5 million of project adjustments and $11.8 million of acquisition-related restructuring and integration costs in cost of sales. Warranty expense increased to $50.4 million from $28.9 million.
- Operating expenses rose to 16.6% of sales from 15.9%. Net interest expense increased to $68.7 million from $42.6 million, mainly reflecting acquisition-related debt and higher interest rates.
- Operating cash flow weakened due to working-capital movements and lower net income. Management cited increases in receivables, supplier-payment timing and inventory built in anticipation of stronger 2018 demand.
- The 2017 effective tax rate was 25.5%. Enacted U.S. and French tax-law changes produced a net tax expense of $4.3 million; accounting for certain Tax Cuts and Jobs Act provisions remained incomplete. The company recorded a provisional $51.8 million transition-tax expense and a $24.6 million benefit from deferred-tax remeasurement.
- Backlog was $4.60 billion at year-end, up from $3.98 billion. Backlog is not a firm forecast: contracts may be delayed or canceled, and much aftermarket work is not included.
Outlook, risks and contingencies
- Management described long-term priorities of generating operating cash flow above net income, improving margins through cost control and the Wabtec Excellence Program, and growing through technology, international expansion, aftermarket activity and acquisitions. The filing provides no specific company-wide revenue or earnings guidance.
- Management cited market estimates of approximately 2,700 worldwide locomotive deliveries, 148,000 freight-car deliveries and 44,000 passenger-transit-vehicle deliveries in 2018; these are industry estimates, not company guidance. U.S. Positive Train Control implementation was subject to a December 31, 2018 deadline, with possible extensions under specified conditions. Train-control and signaling revenue, including PTC, was about $322 million in 2017.
- Key risks include rail-market cyclicality, government transit funding, customer order delays or cancellations, competition and pricing pressure, acquisition integration and synergies, international and currency exposure, variable-rate debt, and supply, labor, warranty and product-liability risks.
- Contingencies include asbestos-related claims, for which ultimate liability could not be estimated, and a dispute concerning wireless crossings on the Denver Eagle P3 project. Denver Transit alleged $36.8 million of damages through July 31, 2017; Wabtec disputed liability. The modified system had FRA approval, but PUC approval remained outstanding at the filing date. Wabtec also disclosed a patent-infringement lawsuit by Siemens concerning PTC and stated it was defending the claims.
- Debt covenants include a minimum interest-coverage ratio of 3.0 and maximum debt-to-EBITDA ratio of 3.25. Wabtec reported compliance and approximately $679 million of available borrowing capacity, net of letters of credit, subject to covenant restrictions.
Investor verification priorities
- Review segment-level margins and subsequent results to assess whether lower 2017 profitability reflected acquisition mix, project adjustments or continuing operating pressures.
- Track operating cash flow, receivables, inventory and customer deposits to determine whether working-capital use reversed as management anticipated.
- Verify Faiveley integration progress, realized synergies, acquisition-related costs and the returns on the substantial goodwill and intangible assets recorded.
- Assess debt, interest-rate exposure, covenant headroom and the effect of tax-law changes, including items not yet reasonably estimable at year-end.
- Monitor PTC timing and revenue, backlog conversion or cancellations, and the outcomes of the Siemens and Denver Eagle P3 matters.
The filing reports unqualified audit opinions on the financial statements and internal control over financial reporting. The controls assessment excluded five recently acquired, individually small subsidiaries.