Westinghouse Air Brake Technologies Corporation (Wabtec) — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. Unless otherwise noted, amounts are U.S. dollars. The filing reports Freight and Transit segments. Wabtec supplies equipment, components, digital solutions and services to global freight rail and passenger transit markets. Ernst & Young issued an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting.
Financial results and liquidity
| Metric | 2020 | 2019 | Change / context |
|---|---|---|---|
| Net sales | $7,556.1 million | $8,200.0 million | Down 7.9%; organic sales fell $1,140.3 million, partly offset by $546.4 million from acquisitions. |
| Gross profit / margin | $2,137.1 million / 28.3% | $2,278.0 million / 27.8% | Margin increased despite lower sales; excluding specified restructuring and acquisition inventory step-up charges, cost of sales as a share of sales increased 1.6 percentage points. |
| Operating income / margin | $744.5 million / 9.9% | $663.1 million / 8.1% | Higher operating income despite lower revenue; lower SG&A and engineering costs more than offset higher amortization. |
| Net income attributable to Wabtec shareholders | $414.4 million | $326.7 million | Up 26.8%. |
| Diluted EPS | $2.17 | $1.84 | Increased; weighted-average diluted shares were 190.4 million versus 177.3 million. |
| Cash from operating activities | $783.7 million | $1,015.5 million | Down $231.8 million, mainly reflecting working-capital timing and other asset/liability changes. |
| Cash and cash equivalents | $598.7 million | $604.2 million | About $108 million was held in the U.S.; about $491 million outside the U.S. |
| Total debt | $4,239.4 million | $4,429.3 million | Down $189.9 million; $447.2 million was classified as current. |
| Backlog | $21,591.3 million | $22,431.7 million | Down about 3.7%; $5,520.7 million was expected to deliver in 2021. |
Capital expenditures were $136.4 million; operating cash flow less capital expenditures was approximately $647 million. Cash used in investing activities was $155.4 million, compared with $3,177.8 million in 2019, when the GE Transportation acquisition drove most of the outflow. Financing activities used $619.0 million in 2020, including $199 million of net debt repayments, $115.4 million of contingent consideration payments, $92.5 million of dividends and $207.2 million of share repurchases.
At year-end, current assets were $3,879.8 million and current liabilities were $3,226.3 million. The current ratio was approximately 1.20. Wabtec reported $1,180.9 million of availability under its $1.2 billion revolving credit facility and $144 million under its 364-day revolver. The 364-day facility was scheduled to mature July 9, 2021. The company reported compliance with its credit covenants at year-end.
Segments and material changes
- Freight: Sales were $5,082.3 million, down 6.6%; operating income was $583.9 million, down from $642.9 million, and operating margin was 11.5% versus 11.8%. Lower locomotive equipment sales, fewer freight-car builds, weaker freight volumes and locomotive parking reduced sales. Acquisitions, mainly GE Transportation, added $543.4 million.
- Transit: Sales were $2,473.8 million, down 10.3%; operating income rose to $229.7 million from $214.4 million, and margin improved to 9.3% from 7.8%. COVID-related production interruptions and reduced ridership affected both original equipment and aftermarket sales; cost savings and improved operational performance supported margins.
- COVID-19: Pandemic-related closures, supply-chain disruption, lower freight activity and passenger traffic materially adversely affected 2020 operations and results. Management also attributed some working-capital and cash-flow impacts to the pandemic.
- GE Transportation integration: The 2019 acquisition continued to affect comparisons, including higher amortization and ongoing restructuring and integration costs. Wabtec reported $44 million of restructuring costs in 2020 cost of sales and $71 million of restructuring and transaction costs in SG&A.
Outlook, risks and contingencies
- Wabtec did not provide specific numerical 2021 revenue or earnings guidance in the supplied filing text. Management expected COVID-19 to continue to materially adversely affect operations and business results into 2021, with uncertain duration and scale.
- The company expected approximately $250 million in annual run-rate operating synergies from the GE Transportation combination before 2022. This is a target, not a reported result.
- Management highlighted long-term priorities of strong cash conversion, margin improvement, cost control, product innovation, international expansion, aftermarket growth and disciplined acquisitions. It identified freight volumes, transit ridership and government funding as important market drivers.
- Risks include cyclical rail demand and customer order deferrals, COVID-related disruption, supply-chain constraints, raw-material costs, intense competition, foreign-exchange and interest-rate exposure, acquisition integration, cybersecurity, regulation and environmental compliance, and substantial indebtedness. Variable-rate debt was 15% of total debt; a 1 percentage-point rate change was estimated to affect annual interest expense by about $6.5 million.
- Backlog is subject to cancellation, rescheduling and delays; management reported no significant cancellations in 2020 but said some deliveries had shifted to later years. Aftermarket orders, about 60% of 2020 sales, typically have short lead times and are not represented in backlog for long.
- Wabtec disclosed asbestos-related claims, most of which it said were submitted to insurers or indemnitors; ultimate liability could not be estimated. The company said it knew of no litigation expected to have a material adverse effect. A separate employee no-poach class action settlement was approved and payments were distributed in December 2020; the excerpt does not state the settlement amount.
- Long-term contract revenue estimates are judgment-intensive; this was identified as the auditor’s critical audit matter. Management reported no goodwill impairment in 2020, while noting that actual results differing from forecasts could lead to future impairment.
Important facts for investors to verify
- How 2021 demand, passenger ridership, freight volumes and supply availability developed relative to management’s COVID-19 assumptions.
- Whether Wabtec achieved the targeted GE Transportation synergies and improved Freight margins as integration and restructuring continued.
- The refinancing or repayment plan for current debt and the 364-day facility maturing in July 2021, together with covenant headroom and liquidity needs.
- Whether the $21.6 billion backlog converted to revenue on schedule, and the scale of later delivery deferrals, cancellations or contract cost revisions.
- Developments in legal and environmental matters, warranty claims, and the estimates supporting long-term contract profitability and goodwill valuations.