Business context and reporting period
Westinghouse Air Brake Technologies Corporation (Wabtec; NYSE: WAB) filed this Form 10-K for the fiscal year ended December 31, 2015. It supplies technology-based equipment and services to freight rail and passenger transit markets through Freight and Transit segments. Aftermarket parts and services represented about 62% of sales; customers outside the U.S. represented about 47%.
Financial performance and position
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Net sales | $3.308 billion | $3.044 billion | +8.7% |
| Gross profit / margin | $1.048 billion / 31.7% | $936.0 million / 30.7% | Margin +1.0 percentage point |
| Operating income / margin | $607.6 million / 18.4% | $527.1 million / 17.3% | Income +15.3% |
| Net income attributable to Wabtec shareholders | $398.6 million | $351.7 million | +13.3% |
| Diluted EPS | $4.10 | $3.62 | +13.3% |
| Operating cash flow | $448.3 million | $472.4 million | −5.1% |
| Cash and cash equivalents at year-end | $226.2 million | $425.8 million | −$199.7 million |
| Total debt at year-end | $695.7 million | $521.2 million | +$174.5 million |
| Total assets / shareholders’ equity | $3.300 billion / $1.701 billion | $3.304 billion / $1.808 billion | Assets broadly flat; equity lower |
Freight sales rose 18.7% to $2.055 billion, while Transit sales declined 4.5% to $1.253 billion. Reported segment operating income was $482.6 million for Freight and $151.0 million for Transit. Gross-margin improvement reflected higher volume, favorable sales mix and lower material costs. The effective tax rate increased to 31.9% from 30.8%.
Cash used in investing was $380.1 million, including $129.6 million net cash paid for acquisitions and a $202.9 million escrow deposit for the proposed Faiveley transaction. Capital expenditures were $49.4 million. Financing activities used $248.9 million; Wabtec repurchased $387.8 million of stock and paid $27.0 million in dividends. The $800 million revolving facility had $333.1 million of available borrowing capacity, net of letters of credit and subject to covenants. Working-capital needs reduced operating cash flow versus 2014, partially offset by higher earnings.
Material changes versus the prior year
- Sales growth included $262.8 million from acquisitions and was reduced by $151.8 million from unfavorable foreign exchange. Freight growth was driven by specialty/electronics, PTC and aftermarket demand, as well as locomotive builds.
- Transit sales were pressured by foreign exchange, lower demand after completion of a multi-year locomotive project, and weaker brake-product demand; acquisitions partially offset the declines.
- North American rail carloads fell 2.2% in 2015; locomotive deliveries fell about 20%, while freight-car deliveries rose about 22%. U.S. transit ridership declined about 1%.
- Backlog was $2.147 billion at year-end, down from $2.322 billion. Management cautions that orders may be delayed, changed or cancelled and that much aftermarket business is not included in backlog.
- Stock repurchases increased materially: the company repurchased 4.89 million shares in 2015 for $387.8 million. The board renewed a $350 million authorization in February 2016.
Outlook, risks and unusual items
Management expected locomotive and freight-car deliveries in 2016 to be lower than in 2015; it did not provide company-specific revenue or earnings guidance. Management cited global rail-supply growth estimates, but emphasized that actual demand depends on economic conditions, rail traffic, government funding and customer investment.
Wabtec recorded about $400 million of PTC-related revenue in 2015. The industry deadline was extended to the end of 2018, which may alter the timing of PTC revenue and resource needs. The company’s proposed acquisition of Faiveley Transport, valued at about $1.8 billion including assumed debt, remained subject to conditions including regulatory approvals; closing timing was unknown. Wabtec had deposited €186.9 million in escrow.
Principal risks include cyclical rail markets and government transit funding, customer concentration (the top five customers were 22% of sales), acquisition integration and financing, foreign-exchange exposure, variable-rate debt, labor negotiations, product warranties, and environmental and asbestos claims. Management said asbestos-related losses could not be reasonably estimated, although it did not expect the ultimate resolution to be material to the company overall. The company reported no litigation it believed would materially adversely affect its financial condition, results or liquidity. It was in compliance with debt covenants and stated it did not expect them to constrain operations.
Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. The 2015 internal-control assessment excluded four recently acquired businesses; their combined significance was limited but not zero.
Key facts for investors to verify
- Whether Freight demand and margins hold up as management anticipated lower 2016 locomotive and freight-car deliveries.
- Final terms, financing, regulatory approvals and integration outcomes for the proposed Faiveley acquisition.
- How much cash flow and liquidity remain after acquisitions, the escrow deposit, debt changes and share repurchases.
- Whether the backlog converts to revenue on schedule, given cancellation and deferral provisions.
- Potential financial exposure from asbestos, environmental matters, warranties, pensions and long-term contracts.
- Progress on PTC projects after the deadline extension and the related effect on revenue timing.