Business context and reporting period
Westinghouse Air Brake Technologies Corporation (Wabtec) filed this unaudited Form 10-Q for the quarter ended March 31, 2019. Wabtec supplies equipment, systems and services to global freight rail and passenger transit markets; 61% of quarterly revenue came from customers outside the United States.
The quarter includes GE Transportation (GET) results from its February 25, 2019 acquisition, so comparisons with Q1 2018 are not on a like-for-like basis. GET contributed $495 million of revenue during the 34 days included.
Financial highlights
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $1.594 billion | $1.056 billion |
| Gross profit / margin | $389 million / 24.4% | $311 million / 29.4% |
| Operating income / margin | $67 million / 4.2% | $131 million / 12.4% |
| Net income (loss) attributable to Wabtec shareholders | ($4.5) million; diluted EPS ($0.04) | $88.4 million; diluted EPS $0.92 |
| Cash from operations | $31 million | $24 million |
| Capital expenditures | $30 million | $17 million |
Reported gross margin declined to 24.4%, but included an $80 million nonrecurring inventory step-up charge from acquisition accounting. Excluding that charge, cost of sales was 70.6% of sales, approximately comparable to the prior year. SG&A included $59 million of GET-related transaction and restructuring costs. Interest expense rose to $45 million from $20 million, principally due to higher debt.
Freight segment sales were $876 million, including GET, and operating margin was 8.6% versus 18.3%. Transit sales were $717 million and operating margin was 8.2% versus 10.1%; the company cited lower-margin product mix, project adjustments including warranty costs, and foreign exchange.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $513 million at March 31, compared with $581 million at December 31, 2018. The quarter’s cash-flow statement reports a $1.829 billion decrease in cash, cash equivalents and restricted cash, largely reflecting acquisition cash outlays.
- Cash used in investing was $2.740 billion, including $2.711 billion for acquisitions, net of cash acquired. Financing provided $883 million, including $1.737 billion of debt proceeds and $838 million of debt repayments.
- Total debt was $4.963 billion, including $321 million current and $4.641 billion long-term, versus $3.857 billion at year-end. Cash less total debt implies net debt of approximately $4.450 billion.
- Current assets were $4.381 billion and current liabilities $3.254 billion (current ratio approximately 1.35). Available bank borrowing capacity was approximately $675 million, net of letters of credit and subject to covenants.
- Wabtec reported compliance with debt covenants. Moody’s lowered its rating to Ba1 in February; the applicable interest rate on certain senior notes increased by 0.25 percentage points. Variable-rate debt was 40% of total debt at quarter-end, versus 22% at year-end.
Material changes, outlook and risks
- The GET transaction was completed February 25. Preliminary estimated consideration was approximately $10.3 billion; acquisition-date fair values and contingent consideration remained subject to adjustment. The quarter included $58.9 million in acquisition-related costs and the $80 million inventory step-up charge.
- Remaining performance obligations were $22.0 billion; the company expected to recognize approximately 27% over the next 12 months. No specific company-wide earnings or revenue guidance was provided in the supplied filing text.
- Management described long-term market drivers including urbanization, technology investment, aging rail fleets and global trade. Company estimates cited 2019 worldwide deliveries of about 2,900 locomotives and 174,000 freight cars, and passenger vehicle orders around the prior year’s 30,000; these are market estimates, not formal Wabtec guidance.
- Management identified exposure to economic and rail-industry conditions, customer capital spending, order delays or cancellations, raw-material and supply constraints, foreign exchange and interest rates, execution of long-term contracts, and successful integration of acquisitions. Approximately 39% of sales were U.S.-based; the company uses foreign-exchange forwards to manage some currency exposure.
- Legal matters include a Siemens patent verdict awarding $6.7 million, subject to post-trial motions and possible appeals, and a new Siemens antitrust action that Wabtec said it would vigorously defend. A contractor’s notices concerning a Denver rail project alleged $36.8 million of damages through July 2017; Wabtec’s subsidiary disputed responsibility, and no formal claim against it had been filed. Asbestos and other ordinary-course litigation also remain outstanding.
- The GET combination materially changed internal controls over financial reporting; integration and testing of combined-company controls were ongoing. Management stated disclosure controls were effective and reported no material change in risk factors from the 2018 Form 10-K.
Important facts for investors to verify
- How GET integration, synergy realization and operating performance progress beyond the short post-acquisition period included here.
- The final purchase-price allocation and the effects of amortization, inventory step-up and contingent consideration on future results and cash flows.
- Debt reduction, covenant headroom, interest costs and liquidity after funding the acquisition; also monitor the Ba1 rating and variable-rate exposure.
- Whether Transit margins recover and whether Freight profitability improves after excluding the one-time inventory charge.
- Developments in the Siemens cases, Denver project dispute, warranty reserves and estimated losses on long-term contracts.
- Conversion of the $22.0 billion performance-obligation balance into revenue, and the assumptions underlying market estimates and customer demand.