Wabtec 2016 Second-Quarter Form 10-Q Summary
Business context and reporting period
Westinghouse Air Brake Technologies Corporation (Wabtec) supplies technology-based products and services to the global freight rail and passenger transit industries. This unaudited 10-Q covers the quarter and six months ended June 30, 2016, compared with the corresponding 2015 periods. About 50% of first-half revenue came from outside the United States.
Financial results
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $723.6 million | $847.0 million | $1,495.6 million | $1,665.6 million |
| Gross profit | $237.4 million | $267.8 million | $492.6 million | $523.1 million |
| Gross margin | 32.8% | 31.6% | 32.9% | 31.4% |
| Operating income | $133.3 million | $155.9 million | $275.5 million | $304.3 million |
| Operating margin | 18.4% | 18.4% | 18.4% | 18.3% |
| Net income attributable to Wabtec shareholders | $90.5 million | $101.5 million | $184.6 million | $197.7 million |
| Diluted EPS | $1.00 | $1.04 | $2.02 | $2.03 |
For the first half, operating cash flow was $214.0 million, versus $110.9 million in 2015; management attributed the improvement mainly to favorable working capital, including collections and payment timing. Investing cash outflow was $40.2 million, including $21.3 million for acquisitions and $19.1 million for capital spending. Financing cash outflow was $102.2 million. Cash increased by $76.7 million to $302.9 million.
At June 30, 2016, total debt was approximately $744.3 million, including $248.2 million of 4.375% senior notes due 2023 and $495.8 million drawn on the revolving facility. The company reported $675.7 million of available borrowing capacity, net of letters of credit, subject to covenants. Current assets were $1,700.4 million and current liabilities $664.6 million. Current assets included a $206.2 million escrow deposit for the proposed Faiveley acquisition.
Changes versus the prior comparable period
- Q2 sales fell 14.6% and first-half sales fell 10.2%. Freight segment sales declined 25.7% in Q2 and 19.8% in the first half; transit sales rose 4.5% and 6.0%, respectively.
- Lower freight original-equipment demand and reduced train-control and signaling sales drove much of the decline. First-half Specialty Products and Electronics sales decreased $172.2 million; Brake Products sales decreased $28.9 million. Higher remanufacturing, overhaul and build sales partially offset declines.
- Gross margins improved year over year, which management attributed to cost reductions, sourcing and commodity savings, product mix, and improved margins at prior acquisitions. Lower sales volume nevertheless reduced gross profit and operating income.
- First-half net income declined 6.6%; diluted EPS declined slightly. Management cited lower operating income, partly offset by a lower effective tax rate and fewer shares outstanding.
- Freight rail activity remained weak: North American rail traffic was down about 7% through the first half. The reported industry freight-car order backlog was about 89,000 at quarter-end.
Outlook, commentary, risks, and unusual items
- Management expected 2016 North American deliveries of approximately 60,000 new freight cars and 900 locomotives, down from about 82,000 and 1,200, respectively, in 2015. It expected subway-car deliveries to increase and bus deliveries to be roughly unchanged. These are management expectations, not reported results.
- The PTC implementation deadline was extended to December 31, 2018; management said this had slowed industry spending. Train Control and Signaling revenue, including PTC, was about $196 million in the first half.
- The proposed Faiveley Transport transaction, with an indicated total purchase price of about $1.8 billion including assumed debt, remained subject to conditions including regulatory requirements; completion timing was unknown. Wabtec reported $9.4 million of first-half Faiveley-related costs in SG&A. Funding was expected from cash, existing credit facilities and potentially other debt financing.
- Wabtec repurchased 1.95 million shares for $133.7 million during the first half; no repurchases occurred in Q2. $216.0 million remained under the authorization.
- The company entered a new five-year $1.2 billion revolving facility and a $400 million delayed-draw term loan agreement in June 2016. It reported compliance with debt covenants, including a minimum interest-coverage ratio of 3.0 and maximum debt-to-cash-flow ratio of 3.25.
- Key exposures include weaker rail and transit demand, government funding and customer spending, foreign exchange and interest rates, supply or raw-material constraints, acquisition completion and integration, and execution of long-term contracts. Approximately 47% of long-term debt was variable-rate at June 30.
- Siemens sued Wabtec in April 2016, alleging infringement of seven patents relating to Positive Train Control. Wabtec answered the complaint, described the case as preliminary, and said it believed the claims were without merit. The filing reported no material first-half change in previously disclosed asbestos-related claims.
- Warranty expense was $17.9 million in the first half, versus $14.0 million a year earlier; the warranty reserve was $96.3 million at June 30. The filing also reported $10.6 million of liabilities for uncertain tax positions and said about $2.1 million of unrecognized tax benefits might change within 12 months.
Important facts for investors to verify
- Whether freight-market weakness and lower PTC-related spending persist, and how they affect Freight segment orders and revenue.
- Progress, regulatory status, financing needs and final terms of the Faiveley transaction, including the use of the escrow deposit and potential additional debt.
- Whether cash generation remains strong as working-capital conditions change, and how share repurchases and acquisition funding affect liquidity and leverage.
- Performance of gross margins and cost-saving initiatives against ongoing revenue declines, including developments in warranty claims and reserves.
- Developments in the Siemens patent case, asbestos claims and uncertain tax positions.