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, 2014. Wabtec supplies technology-based products and services for freight rail and passenger transit through its Freight and Transit segments. Aftermarket parts and services accounted for approximately 61% of sales; customers outside the U.S. accounted for approximately 50%.
Financial performance and liquidity
| Metric | 2014 | 2013 |
|---|---|---|
| Net sales | $3,044.5 million | $2,566.4 million |
| Gross profit / margin | $936.0 million / 30.7% | $764.0 million / 29.8% |
| Operating income / margin | $527.1 million / 17.3% | $437.3 million / 17.0% |
| Net income attributable to Wabtec shareholders | $351.7 million | $292.2 million |
| Diluted earnings per share | $3.62 | $3.01 |
| Cash provided by operating activities | $472.4 million | $235.7 million |
| Cash and cash equivalents at year-end | $425.8 million | $285.8 million |
| Total debt at year-end | $521.2 million | $450.7 million |
Capital expenditures were $47.7 million and acquisition cash outflows were $300.4 million. Year-end current assets were $1,637.9 million and current liabilities were $738.8 million. Cash exceeded reported debt by approximately $95 million. The company reported about $500.9 million of unused capacity under its $800 million revolving facility, net of letters of credit and subject to covenants.
Fourth-quarter 2014 sales were $820.9 million, operating income $137.0 million, net income $92.7 million and diluted EPS $0.95, versus $681.5 million, $111.2 million, $74.0 million and $0.76, respectively, in fourth-quarter 2013.
Material changes versus the prior comparable period
- Annual sales grew 18.6%; operating income rose 20.5% and net income rose 20.3% from 2013.
- Sales growth included $229.4 million from acquisitions, $184.7 million from Specialty Products and Electronics, and $84.2 million from Brake Products. Lower original-equipment locomotive sales partly offset growth.
- Freight Segment sales increased 23.8% to $1,731.5 million; Transit Segment sales increased 12.4% to $1,313.0 million.
- Gross margin improved by 0.9 percentage point, while operating margin increased by 0.3 percentage point. Operating expenses grew faster than sales, partly reflecting acquisitions, compensation and increased engineering investment.
- Operating cash flow more than doubled, with management citing higher operating results and favorable working-capital movements, including faster receivables collection. Inventory increased $90.1 million in the year-over-year cash-flow discussion, as the company built stock to support expected orders.
- Backlog rose to $2,322.0 million from $1,693.9 million. Transit backlog was $1,344.2 million and Freight backlog was $977.8 million; the filing cautions that orders may be delayed, changed or cancelled.
- Acquisitions included Fandstan Electric ($199.4 million), Dia-Frag ($70.6 million) and C2CE ($25.1 million). After year-end, Wabtec acquired Railroad Controls for approximately $63.7 million.
Outlook, management commentary, risks and unusual items
- For 2015, management expected demand for new locomotives to be slightly below 2014 levels and demand for new freight cars to be higher. Management also cited expected transit spending of about $11 billion in the U.S. in 2015. These are expectations, not company earnings guidance; the filing provides no specific EPS or revenue forecast.
- Management’s strategy emphasizes global expansion, aftermarket sales, new product development and selective acquisitions. Research and development expense was $61.9 million in 2014, up from $46.3 million.
- Positive Train Control (PTC) generated about $290 million of 2014 revenue. The statutory implementation deadline remained December 31, 2015, although railroads had indicated they could not meet it; an extension or changes to requirements could affect future demand.
- Key risks include cyclical rail markets and customer spending, dependence on major customers, strong price competition, acquisition integration and financing, foreign currency and interest-rate exposure, supply disruptions, labor negotiations, product warranty and liability claims, and environmental requirements.
- Asbestos claims remain outstanding; management said ultimate exposure could not be estimated, while believing resolution would not materially affect the company overall. Wabtec also disclosed $12.6 million of uncertain tax-position liabilities and $640.8 million of foreign subsidiary earnings considered indefinitely reinvested.
- Other notable items: 2014 foreign-currency translation contributed to a $124.6 million other comprehensive loss, compared with $18.7 million of other comprehensive income in 2013. Warranty expense increased to $34.1 million from $23.1 million; the year-end warranty reserve rose to $87.8 million from $60.6 million.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor excluded certain recently acquired businesses from the internal-control assessment.
Important facts for investors to verify
- Whether the elevated backlog converts to revenue on schedule, particularly given cancellation rights and long delivery timelines.
- Whether PTC deadlines or requirements change, and how that affects the approximately $290 million of related 2014 revenue.
- Acquisition integration, performance against expected synergies, and the effect of acquisition spending on debt and returns.
- Cash conversion and working-capital trends, including rising inventory, customer deposits and receivables.
- Exposure from asbestos litigation, uncertain tax positions, pension obligations and warranty claims, together with relevant updates in subsequent filings.