Wabtec — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2017. Wabtec supplies technology-based products and services to global freight and passenger rail markets; approximately 65% of first-half revenue came from outside the U.S. Figures below are in U.S. dollars, with financial statement amounts converted from thousands to millions where applicable.
Key financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $932.3M | $723.6M | $1,848.3M | $1,495.6M |
| Gross profit / margin | $274.0M / 29.4% | $237.4M / 32.8% | $543.7M / 29.4% | $492.6M / 32.9% |
| Operating income / margin | $113.7M / 12.2% | $133.3M / 18.4% | $228.6M / 12.4% | $275.5M / 18.4% |
| Net income attributable to Wabtec shareholders | $72.0M | $90.5M | $145.9M | $184.6M |
| Diluted EPS | $0.75 | $1.00 | $1.52 | $2.02 |
- Reported Q2 sales rose 28.8% and first-half sales rose 23.6%, primarily because of acquisitions, especially Faiveley Transport. Wabtec reported first-half Faiveley revenue of $557.4M.
- On a pro forma basis assuming acquisitions occurred at the start of 2016, sales were lower year over year: Q2 $932.5M versus $1,055.2M; first half $1,859.6M versus $2,210.4M. Pro forma diluted EPS was $0.75 versus $1.10 for Q2 and $1.53 versus $2.43 for the first half.
- Lower freight demand and the absence of a large locomotive rebuild contract that ended in 2016 weighed on organic sales. Management cited unfavorable product mix, including the larger share of lower-margin transit revenue, as a driver of lower margins.
- Interest expense rose to $15.4M in Q2 from $5.0M and to $33.1M for the first half from $9.8M, mainly due to higher debt associated with the Faiveley acquisition. The effective tax rate declined to 25.4% for Q2 and 26.3% for the first half, largely reflecting a lower earnings mix in higher-tax jurisdictions.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was negative $13.7M, versus positive $214.0M a year earlier. Management attributed the decline to weaker working capital and lower net income, including timing-related increases in receivables and inventory and payments of accrued liabilities and acquisition costs.
- Investing cash outflow was $128.6M, including $90.6M net cash paid for acquisitions and $38.4M of capital spending. Financing cash inflow was $41.6M. Cash declined $70.0M to $328.5M.
- At June 30, cash was $328.5M; total debt was $1,985.3M, including $50.7M current and $1,934.6M long-term. Approximate net debt was $1,656.8M. The revolving facility provided about $583.2M of available borrowing capacity, net of letters of credit.
- Current assets were $2,344.8M and current liabilities $1,482.1M. Debt increased from $1,892.8M at year-end 2016. The company reported compliance with debt covenants, including a maximum debt-to-EBITDA ratio of 3.25 and minimum interest coverage ratio of 3.0.
Material developments, outlook and risks
- Wabtec completed its acquisition of Faiveley Transport, reaching 100% ownership in March 2017. Total consideration was approximately $1.736B, including cash, stock and assumed debt. Purchase accounting remained preliminary; adjustments during the period increased goodwill by $68.6M, and management stated valuations could still change materially.
- Wabtec also acquired Thermal Transfer Corporation and Aero Transportation Products in 2017. Acquisition-related expenses, integration costs, additional amortization and higher debt affected results.
- Management described long-term objectives of generating operating cash flow above net income, improving margins and pursuing growth through innovation, global expansion, aftermarket business and acquisitions. It did not provide specific company revenue, earnings or cash-flow guidance in this filing.
- Management cited rail-market demand, customer capital spending and government transit funding as important drivers. Risks include weaker economic or industry conditions, order delays or cancellations, customer concentration, raw-material or supply disruption, foreign exchange and interest rates, acquisition integration, contract performance, technology and legal proceedings.
- Xorail received allegations from Denver Transit Constructors concerning crossing installations and late delivery of a train-management system. Denver Transit alleged $29.9M of damages as of March 31, 2017, continuing to accumulate, for the crossings; no claim had been filed. Wabtec disputed liability regarding the crossings and was working with the parties on the issues.
- Other notable exposures include asbestos-related claims and ordinary-course litigation; the company reported no material change to previously disclosed matters except as described above. The company said disclosure controls were effective and that there had been no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- How much of reported growth is acquisition-related versus underlying demand, particularly given the lower pro forma sales and earnings comparisons.
- Whether margins and freight-market demand stabilize as integration progresses, and whether the company realizes expected acquisition synergies.
- Working-capital trends and the sustainability of operating cash flow, alongside capital spending and further acquisition needs.
- Debt levels, borrowing capacity, variable-rate exposure and covenant headroom; 42% of debt was variable-rate at June 30, 2017.
- Final Faiveley purchase-price allocations and any material changes to goodwill or acquired asset and liability values.
- Developments in the Denver project dispute, including any formal claims, and changes in other litigation or warranty exposures.