Wabtec 2021 Third-Quarter 10-Q Summary
Business context and reporting period
Westinghouse Air Brake Technologies Corporation (Wabtec) supplies equipment, technology and services to global freight rail and passenger transit markets. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2021; comparisons are with the same 2020 periods. Approximately 58% of nine-month revenue came from outside the United States.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $1,906.9 million | $1,865.1 million | $5,749.4 million | $5,532.4 million |
| Gross profit | $602.3 million | $566.2 million | $1,716.6 million | $1,631.6 million |
| Income from operations | $217.0 million | $206.7 million | $611.9 million | $583.4 million |
| Net income attributable to Wabtec shareholders | $130.6 million | $128.1 million | $367.8 million | $326.5 million |
| Diluted EPS | $0.69 | $0.67 | $1.95 | $1.71 |
- Q3 sales increased 2.2%; shareholder-attributable net income rose 2.0%. Nine-month sales increased 3.9% and attributable net income increased 12.6%.
- Gross margin was approximately 31.6% in Q3 versus 30.4% a year earlier, and 29.9% for the first nine months versus 29.5%. Operating margin was approximately 11.4% and 11.1% for Q3, and 10.6% and 10.5% for the respective nine-month periods.
- Q3 Freight sales rose 4.7%, while Transit sales fell 2.5%. Freight operating margin improved to 15.1% from 12.9%; Transit operating margin declined to 7.2% from 10.2%. For nine months, Freight operating margin increased to 13.4% from 12.4%, while Transit decreased to 8.2% from 9.7%.
- Operating cash flow was $759.3 million for the first nine months, up from $458.1 million. Investing used $475.3 million, including $405.1 million for Nordco; financing used $433.3 million. Cash, cash equivalents and restricted cash were $456.4 million at September 30, down from $598.7 million at year-end.
- Total debt was approximately $4.071 billion, versus $4.239 billion at December 31, 2020; cash was $456.4 million. Current debt was $3.8 million, and the company reported $1.197 billion of availability under its $1.2 billion revolving credit facility. The company reported compliance with credit covenants.
- Current assets were $3.760 billion and current liabilities $2.812 billion at quarter-end. Inventory was $1.690 billion. The company repurchased $200.3 million of stock and paid $68.9 million in dividends during the first nine months.
Material changes and drivers
- Nine-month sales growth reflected $151.8 million of favorable foreign exchange and $76.7 million from Nordco, partly offset by an $11.5 million organic decline. Q3 included $38.3 million from Nordco and $22.6 million of favorable foreign exchange; organic sales declined $19.1 million.
- Freight Services sales grew, supported by locomotive modernizations and fewer parked locomotives. Lower locomotive equipment deliveries and supply constraints weighed on Freight Equipment and Digital Electronics. Transit faced supply-chain and COVID-related disruptions in Q3.
- Management attributed improved gross margins to product mix, synergies, operational improvements and prior restructuring, partly offset by higher metals, transportation, logistics and labor costs. Q3 cost of sales included $23 million of restructuring charges; nine-month cost of sales included $48 million. Management also reported restructuring and transaction costs in operating expenses.
- Nordco was acquired on March 31, 2021 for approximately $410 million. Purchase accounting remains preliminary; the filing says final adjustments could be material, though adjustments to date were not significant.
- In June, Wabtec issued €500 million of 1.25% senior notes due 2027 and repaid outstanding U.S.-dollar term loans and the 364-day facility. Long-term debt maturities and interest obligations are disclosed in the filing.
Outlook, commentary and risks
- The filing provides no specific revenue or earnings guidance. Management expected elevated supply-chain, component and chip shortages, inflation, and metals, logistics and labor costs to continue over the next few quarters; actions included pricing, surcharges, cost controls and sourcing changes.
- COVID-19 continued to affect sales channels, supply chains, manufacturing, workforce and end markets. Management said uncertainty about the pandemic’s duration and effects prevented it from specifically predicting the impact on the business.
- Remaining performance obligations were $21.1 billion; the company expected to recognize approximately 25% as revenue over the next 12 months. These orders remain subject to standard cancellation provisions and scope changes.
- A vendor disclosed operating-system vulnerabilities affecting a range of rail-sector products, including certain Wabtec products. Wabtec reported no known exploitation of its products to date and said it was working with the vendor and communicating with potentially affected customers.
- The filing reports ongoing asbestos-related and ordinary-course claims, with no material changes to previously disclosed matters, and says the company was not involved in litigation it believed would materially adversely affect its financial condition, results or liquidity. Xorail’s previously disclosed Denver project dispute had no formal claim against Xorail reported in this filing.
Important facts for investors to verify
- Whether supply-chain constraints and inflation persist, and whether pricing and cost actions protect margins, particularly in Transit.
- How Nordco integration and final purchase-price accounting affect results and goodwill.
- The quality, timing and conversion of the $21.1 billion remaining performance obligations into revenue and cash.
- Debt maturities, covenant headroom, cash availability across jurisdictions, and the sustainability of buybacks and dividends.
- Updates on vendor cybersecurity vulnerabilities and any developments in disclosed litigation, warranty or other contingencies.
- The Q3 repurchase disclosure: the table reports an August average price of $87.89 per share but shows “—” for the quarter’s average price; confirm the intended quarterly figure.