Wabtec Corporation — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report, not a standalone fourth-quarter filing. Wabtec completed its GE Transportation merger on February 25, 2019; results therefore include GE Transportation for most of 2019 and are not directly comparable with 2018.
Business context and financial performance
Wabtec supplies locomotives, rail equipment, systems and services to freight rail and passenger transit markets through its Freight and Transit segments. Aftermarket parts and services were about 55% of sales; customers outside the U.S. accounted for about 60%.
| Metric | 2019 | 2018 |
|---|---|---|
| Net sales | $8.20 billion | $4.36 billion |
| Gross profit / gross margin | $2.28 billion / 27.8% | $1.23 billion / 28.3% |
| Operating income / operating margin | $663.1 million / 8.1% | $473.4 million / 10.8% |
| Net income attributable to Wabtec shareholders | $326.7 million | $294.9 million |
| Diluted EPS | $1.84 | $3.05 |
| Cash from operating activities | $1.016 billion | $314.7 million |
| Capital expenditures | $185.3 million | $93.3 million |
| Cash and cash equivalents at year-end | $604.2 million | $580.9 million |
| Total debt at year-end | $4.429 billion | $3.857 billion |
Operating cash flow less capital expenditures was approximately $830 million in 2019 (derived). The current ratio was approximately 1.29 at year-end. The company reported $938 million of remaining revolving-credit availability and compliance with its credit-facility covenants.
Material changes versus the prior period
- Sales rose 87.9%, primarily because the GE Transportation acquisition contributed about $3.8 billion. Organic sales increased about $127 million overall, with Transit growth partly offset by Freight declines; unfavorable currency movements reduced sales by $154 million.
- Net income attributable to shareholders rose 10.8%, but diluted EPS fell as weighted-average diluted shares increased to 177.3 million from 96.5 million following merger-related share issuance.
- Operating margin declined to 8.1% from 10.8%. Higher acquisition-related amortization and transaction/restructuring costs weighed on reported results. Management said cost of sales excluding specified non-recurring costs improved as a percentage of sales, helped by product mix.
- Operating cash flow increased substantially, aided by working-capital movements, including inventory reduction and acquired-inventory liquidation. Investing cash outflow was $3.18 billion, mainly reflecting $3.00 billion of net cash paid for acquisitions, primarily GE Transportation.
- Year-end cash, cash equivalents and restricted cash fell to $604.2 million from $2.34 billion; the 2018 balance included $1.76 billion of restricted cash.
Outlook, risks and unusual items
- Management expects approximately $250 million of annual run-rate operating synergies from the GE Transportation combination before 2022. It also describes growth priorities in product innovation, international markets, aftermarket services and selective acquisitions; the filing provides no specific 2020 earnings or revenue guidance.
- Backlog was approximately $22.4 billion at December 31, 2019; remaining performance obligations were $21.3 billion, with about 25% expected to be recognized over the following 12 months. Backlog may be delayed, modified or canceled under contract terms.
- Reported 2019 results included $185 million of GE Transportation purchase-accounting inventory step-up costs, restructuring charges, and substantial transaction and integration expenses. GE Transportation contributed $358 million of operating income during its period of ownership.
- Debt was $4.43 billion, including variable-rate borrowings. A 1 percentage-point rate change on variable-rate debt would change annual interest expense by about $14 million. The company also disclosed LIBOR transition exposure after 2021.
- Key risks include cyclical rail demand, customer and government spending decisions, acquisition integration and synergy execution, international operations and foreign exchange, raw-material supply and pricing, cybersecurity, product warranty/liability exposure, regulation and environmental requirements.
- Wabtec settled Siemens patent and related litigation in 2019. It also agreed in January 2020 to settle a class action concerning alleged employee non-solicitation agreements; settlement approval and amount were not specified in the provided filing text. Other disclosed matters include asbestos claims and a Denver rail project dispute; management did not believe pending litigation would materially affect financial condition, results or liquidity.
- The auditor issued an unqualified opinion on the financial statements. Management’s internal-control assessment and the auditor’s control audit excluded GE Transportation, which represented 61% of year-end assets and 47% of 2019 revenue.
Most important facts for investors to verify
- Whether the company is realizing the targeted GE Transportation synergies, and the pace and cost of integration.
- Underlying organic sales, segment margins and cash generation apart from acquisition effects and non-recurring items.
- Debt-reduction capacity, upcoming maturities, interest-rate exposure and covenant headroom.
- Backlog quality, delivery schedules, cancellation exposure and conversion of remaining performance obligations into revenue and cash.
- Progress on GE Transportation internal controls and any material outcomes or costs from litigation and other contingencies.