Westinghouse Air Brake Technologies Corporation (Wabtec) — Q3 2016 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2016. Wabtec supplies technology, products and services to the global freight rail and passenger transit industries; approximately 52% of nine-month revenue came from outside the United States. Results are unaudited.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $675.6 million | $809.5 million | $2,171.2 million | $2,475.1 million |
| Gross profit / margin | $212.5 million / 31.5% | $257.1 million / 31.8% | $705.1 million / 32.5% | $780.2 million / 31.5% |
| Operating income / margin | $120.1 million / 17.8% | $152.1 million / 18.8% | $395.6 million / 18.2% | $456.4 million / 18.4% |
| Net income attributable to Wabtec shareholders | $82.4 million | $99.2 million | $267.1 million | $296.8 million |
| Diluted EPS | $0.91 | $1.02 | $2.92 | $3.05 |
- Cash flow: Nine-month operating cash flow was $246.9 million, versus $255.3 million. Investing used $115.9 million, including $84.4 million for acquisitions and $31.7 million for capital expenditures. Financing used $112.3 million. Cash increased $24.2 million to $250.4 million. Operating cash flow less capital expenditures was approximately $215.2 million.
- Liquidity and debt: Current assets were $1.695 billion and current liabilities $624.9 million (current ratio approximately 2.7). Debt totaled $819.9 million, including $571.3 million drawn on the revolving facility; cash less debt was approximately negative $569.5 million. The $1.2 billion five-year revolver had approximately $602.5 million of available borrowing capacity, net of letters of credit, subject to covenants.
- Shareholder returns: Wabtec repurchased 3.05 million shares for $212.2 million during the first nine months and paid $23.5 million in dividends. The nine-month dividend was $0.26 per share.
Material changes versus prior comparable periods
- Q3 sales fell 16.5%, operating income fell 21.0%, and net income fell 16.9% year over year. Nine-month sales declined 12.3%, operating income 13.3%, and net income 10.0%.
- Freight segment sales declined 28.6% in Q3 and 22.7% for the nine months, chiefly from weaker freight original-equipment demand and lower train-control and signaling sales. Transit sales rose 3.7% in Q3 and 5.2% for the nine months, supported by aftermarket locomotive builds and other products.
- Lower sales volumes reduced operating income. Nine-month gross margin improved to 32.5% from 31.5%, reflecting cost reductions and acquisition margin improvement, partly offset by a less favorable product mix. Q3 gross margin slipped to 31.5% from 31.8%, partly due to a greater transit sales mix.
- Q3 and nine-month diluted EPS declined less than net income partly because of lower average shares outstanding. Nine-month interest expense increased $3.2 million, primarily due to higher average debt used for acquisitions and share repurchases.
Outlook, management commentary, and risks
- Management described North American rail activity as weak: rail traffic was down about 7% through the first nine months of 2016. Wabtec expected 2016 deliveries of approximately 60,000 new freight cars and 900 locomotives, down from approximately 82,000 and 1,200, respectively, in 2015. The company expected subway-car deliveries to increase and bus deliveries to be about unchanged versus 2015. These are market expectations, not company earnings guidance.
- The proposed Faiveley Transport acquisition, valued at approximately $1.7 billion including assumed debt and net of cash acquired, had not closed and remained subject to conditions, including regulatory requirements. Wabtec issued $750 million of 3.45% senior notes on November 3, 2016, after quarter-end; proceeds were intended primarily to fund the cash portion of the acquisition and refinance Faiveley debt.
- Other notable items included $12.6 million of Faiveley-related costs during the first nine months and $2.2 million of restructuring costs. Management cited cost-saving initiatives and strict cost control as priorities; it did not provide numerical full-year earnings guidance in the filing.
- Risks include continued weakness in rail demand, government transit funding, customer order delays, raw-material and supply disruptions, currency and interest-rate movements, acquisition completion and integration, and legal and product-liability matters. Siemens alleged infringement of seven patents relating to Positive Train Control; Wabtec disputed the claims and planned to defend itself. The company also reported asbestos-related claims, with no material change from its prior annual report.
Important facts for investors to verify
- Whether the Faiveley transaction closed, its final cash-and-stock mix, financing, and integration impact.
- Whether freight demand and train-control spending stabilized, and whether the disclosed 2016 industry delivery expectations were realized.
- Revolver availability, covenant compliance, and the effect of the subsequent $750 million note issuance and acquisition financing on leverage and interest expense.
- Progress and potential exposure in the Siemens patent litigation, asbestos claims, and warranty reserves.
- Whether margin improvement and cost savings can persist if sales remain weak; the filing reported no formal company earnings forecast.