Business context and reporting period
Westinghouse Air Brake Technologies Corporation (Wabtec) filed this unaudited Form 10-Q for the quarter ended March 31, 2017. The company supplies products and services to global freight and passenger rail markets; approximately 65% of first-quarter revenue came from outside the United States. Results include Faiveley Transport, acquired in stages and wholly owned by March 21, 2017.
Key financial results
Amounts below are in millions, except per-share data and percentages.
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $916.0 | $772.0 |
| Gross profit / margin | $269.7 / 29.4% | $255.2 / 33.0% |
| Operating income / margin | $114.9 / 12.5% | $142.2 / 18.4% |
| Net income attributable to Wabtec shareholders | $73.9 | $94.2 |
| Diluted EPS | $0.77 | $1.02 |
| Operating cash flow | $(26.1) | $75.6 |
| Capital expenditures | $19.3 | $8.5 |
Sales rose 18.7%, but operating income fell 19.2% and shareholder-attributable earnings declined 21.5%. Gross margin contracted as a larger share of lower-margin Transit business, including Faiveley, and product mix pressured margins. SG&A rose to $122.3 million from $89.8 million, including acquisition-related expense and $5.5 million of transaction and restructuring charges. Net interest expense increased to $17.7 million from $4.9 million, mainly reflecting higher debt associated with the Faiveley acquisition. The effective tax rate declined to 27.6% from 31.5%.
Financial position and liquidity
At March 31, 2017, cash and cash equivalents were $280.2 million, down from $398.5 million at year-end. Total debt was $1.870 billion, compared with $1.893 billion at December 31, 2016; current debt was $87.4 million. The company reported approximately $728 million of available capacity under its $1.2 billion revolving credit facility, net of letters of credit, subject to financial covenants. Current assets were $2.166 billion and current liabilities $1.471 billion.
Operating cash use reflected weaker working-capital performance and lower net income. Management cited receivables timing, inventory build in anticipation of stronger demand, and acquisition-cost payments, partly offset by customer receipts and deposits. Investing cash use was $63.1 million, including acquisition spending and capital investment; financing cash use was $39.5 million. The quarterly dividend was $0.10 per share. No shares were repurchased during the quarter.
Material changes and management commentary
- Acquisitions contributed $307.2 million of the $144.0 million year-over-year sales increase, while unfavorable foreign exchange reduced sales by $24.8 million. Organic pressures included lower demand for freight original-equipment, train-control and signaling products, and the completion of a large locomotive rebuild contract in 2016.
- Freight segment sales declined 21.4% to $347.9 million; Transit segment sales increased 72.5% to $568.1 million, largely due to acquisitions. Company-wide cost of sales increased to 70.6% of sales from 66.9%.
- Wabtec completed its acquisition of Faiveley Transport for aggregate consideration valued at $1.736 billion, including cash, stock and assumed debt, net of acquired cash. Faiveley contributed $274.7 million of consolidated revenue in the quarter. Purchase-price allocations remained preliminary and were subject to potentially material adjustments.
- Management’s stated priorities include cash generation, cost control, margin improvement, innovation, international and aftermarket growth, and acquisitions. It cited market dependence on economic conditions, rail traffic, customer capital spending, transit funding and ridership. The filing provides no specific company financial guidance. Wabtec estimated global 2017 deliveries of about 3,200 new locomotives and 97,000 new freight cars.
- Risks include weaker rail demand or delayed orders, acquisition integration, customer and supplier concentration, input costs, foreign exchange and interest rates, and legal, product-liability and intellectual-property matters. Siemens alleges infringement of 13 patents related to Positive Train Control; Wabtec disputes the claims and is defending itself. The filing reports no material change in other previously disclosed contingencies.
- The company said it was in compliance with debt covenants and did not expect them to limit operations. Disclosure controls were judged effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- How much of revenue and future earnings growth is organic versus attributable to Faiveley and other acquisitions, and whether acquired margins improve.
- Whether working capital converts to cash as expected, particularly receivables, inventory and customer deposits.
- Debt levels, variable-rate exposure, facility availability and covenant headroom following the acquisition.
- Final Faiveley purchase accounting, including goodwill and intangible-asset valuations, and integration performance.
- Developments in the Siemens Positive Train Control litigation and other product, warranty and contingency exposures.