Wabtec — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. All financial amounts are in U.S. dollars; amounts are in millions unless otherwise stated. Wabtec supplies equipment, systems and services to freight rail and passenger transit markets, operating in more than 50 countries.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $1,737.4 | $2,236.3 | $3,667.3 | $3,829.9 |
| Gross profit | $486.7 | $614.7 | $1,065.4 | $1,003.7 |
| Income from operations | $159.4 | $200.6 | $376.7 | $267.9 |
| Net income attributable to Wabtec shareholders | $86.8 | $104.1 | $198.4 | $99.7 |
| Diluted EPS | $0.46 | $0.54 | $1.04 | $0.61 |
| Operating cash flow | Not stated quarterly | Not stated quarterly | $228.6 | $443.8 |
Margins: Q2 gross margin was approximately 28.0% versus 27.5%; operating margin was 9.2% versus 9.0%. For the first half, gross margin was 29.1% versus 26.2%, and operating margin was 10.3% versus 7.0%. The first-half improvement includes the comparison with 2019 GE Transportation inventory step-up charges.
Balance sheet and liquidity: Cash and cash equivalents were $587.9 at June 30, down from $604.2 at year-end 2019. Current assets were $3,969.7 and current liabilities $3,483.2 (working capital of about $486.5; current ratio about 1.14). Debt totaled $4,465.8, including $697.1 classified as current; long-term debt was $3,768.7. The company reported $1,167.7 available on its $1.2 billion revolving facility and $144.0 available on its 364-day revolver. It was in compliance with credit-facility covenants at quarter-end.
First-half operating cash flow fell to $228.6 from $443.8. Investing activities used $98.2, including $67.6 of capital expenditures and $40.3 for acquisitions; financing activities used $123.5. Cash declined $16.3 during the half. A new receivables program provided $100.0 net cash proceeds in Q2; the facility permits transfers of up to $150.0, with additional receivables pledged as collateral.
Changes versus comparable periods
- Q2 sales declined 22.3% year over year, with goods sales down 25.7% and services down 3.6%. Wabtec attributed the decline largely to COVID-19 disruption, lower freight volumes, locomotive parking, reduced freight car builds, production delays and lower passenger traffic; unfavorable foreign exchange reduced sales by $43.1.
- Q2 operating income declined 20.5%, and shareholder net income declined 16.6%. Reduced sales and lower overhead absorption pressured margins, partly offset by cost controls and acquisition synergies.
- First-half sales declined 4.2%, while shareholder net income increased 99.0%. The comparison reflects $527.8 of acquisition-related sales in 2020, primarily from GE Transportation, and a $169 inventory step-up charge in the first half of 2019. Excluding the disclosed inventory step-up and 2020 restructuring costs, cost of sales as a percentage of sales was 70.4% versus 69.4%.
- Freight segment Q2 sales fell 21.1% and operating income fell 15.5%; Transit sales fell 25.0% and operating income fell 35.8%. For the first half, Freight sales rose 2.6% with acquisitions, while Transit sales fell 16.3%.
- First-half operating cash flow was lower mainly due to timing of payments, customer advances and supplier payments, partly offset by improved receivable collections and the receivables program.
Outlook, risks and unusual items
- Management said COVID-19 materially adversely affected Q2 results and expects a material adverse impact to continue for the remainder of 2020. It did not provide a specific quantified forecast, citing uncertainty about duration, severity, customer demand, supply chains and operations. Management also expects COVID-19 to negatively affect cash from operations and reduced planned investing activity as a prudent liquidity measure.
- Restructuring costs were $17 in Q2 and $19 for the first half, primarily for product-line exits, footprint rationalization and headcount actions. Q2 2019 included an $89 GE Transportation inventory step-up charge; the first-half 2019 charge was $169.
- After quarter-end, Wabtec issued $500 of 3.20% senior notes due 2025 and used the proceeds to repay its floating-rate notes due 2021. Those 2021 notes, classified as current at June 30, were repaid July 2, 2020.
- Wabtec temporarily suspended share repurchases after Q1 to preserve liquidity. It had repurchased $105.3 in the first half and had approximately $394.7 remaining under its authorization at quarter-end.
- Remaining performance obligations were $20.5 billion; management expected to recognize approximately 25% as revenue over the next 12 months. These orders are subject to standard industry cancellation provisions and scope adjustments.
- COVID-related macroeconomic uncertainty could lead to future goodwill or indefinite-lived intangible impairment tests and non-cash impairment charges; the company reported no interim test was required in the first half.
- Contingencies include asbestos-related claims, ordinary-course litigation, the Denver Eagle P3 project dispute involving subsidiary Xorail, and a class-action settlement related to alleged employee no-hire agreements. The filing reports preliminary court approval of the settlement in March 2020 but does not provide a clear settlement amount here.
Important facts for investors to verify
- Whether freight and transit demand, production and customer activity recover, and how that affects revenue, margins and cash generation during the remainder of 2020.
- Liquidity, covenant headroom, receivables-program terms and collateral, and the impact of the July refinancing on debt maturities and interest costs.
- Execution and realized benefits of GE Transportation integration and restructuring, including whether lower volumes continue to weaken overhead absorption.
- Progress on long-term contract estimates, warranty exposure, litigation and the employee class-action settlement; the filing does not state a clear settlement amount.
- Potential impairment indicators for goodwill and intangible assets, given the company’s stated sensitivity to economic assumptions.