Wabtec — Q1 2016 Form 10-Q
Business context and period. Westinghouse Air Brake Technologies Corporation (Wabtec) designs, manufactures and services products for freight rail and passenger transit markets. This unaudited filing covers the three months ended March 31, 2016, compared with Q1 2015. About 48% of revenue came from outside the U.S.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $772.0 million | $818.6 million | Down 5.7% |
| Gross profit / margin | $255.2 million / 33.1% | $255.4 million / 31.2% | Margin up 190 bps |
| Operating income / margin | $142.2 million / 18.4% | $148.4 million / 18.1% | Income down 4.2% |
| Net income attributable to Wabtec shareholders | $94.2 million | $96.2 million | Down 2.1% |
| Diluted EPS | $1.02 | $0.99 | Up 3.0% |
| Operating cash flow | $75.6 million | $43.7 million | Up $31.9 million |
Freight segment sales fell 13.5% to $442.7 million; Transit sales rose 7.4% to $329.4 million. Revenue weakness was concentrated in freight Specialty Products & Electronics, down $74.2 million, partly offset by higher remanufacturing, overhaul and build sales. Acquisitions added $20.2 million to sales; unfavorable foreign exchange reduced sales by $17.7 million.
Gross margin improved despite lower sales, which management attributed to cost reductions, favorable project performance and improved margins from prior-year acquisitions. Operating expenses rose 5.7% to $113.0 million, including $3.6 million of Faiveley transaction costs. Warranty expense increased to $10.9 million from $6.4 million.
Cash, debt and liquidity. Cash and cash equivalents were $262.8 million at March 31, 2016, versus $226.2 million at year-end. Long-term debt was $801.9 million, including $553.6 million drawn under the revolving facility and $248.1 million of 4.375% senior notes due 2023. The company reported about $206.9 million of available bank borrowing capacity, net of letters of credit, under its $800 million revolving facility, subject to covenants. Capital expenditures were $8.5 million. Financing cash use included $133.7 million for repurchases of 1.95 million shares and $7.4 million in dividends.
Material changes and management outlook
- Operating cash flow increased year over year, which management linked to favorable working capital, including inventory control and improved collections.
- North American rail traffic was down about 6% in Q1 2016; the industry freight-car order backlog was about 95,000. Wabtec expected 2016 deliveries of new locomotives and freight cars to be below 2015 levels.
- Management expected new subway-car deliveries to increase in 2016 and bus deliveries to be about flat with 2015. These are operating expectations, not quantified company earnings guidance.
- The U.S. PTC implementation deadline was extended to December 31, 2018, slowing industry spending. Wabtec reported about $110 million of Train Control and Signaling revenue, including PTC, in Q1.
- The proposed Faiveley Transport acquisition, valued at about $1.8 billion including assumed debt, remained subject to conditions including regulatory requirements; completion timing was unknown. Wabtec had set aside €186.9 million in escrow for the purchase.
Risks, contingencies and unusual items
- On April 21, 2016, Siemens sued Wabtec alleging infringement of seven patents related to Positive Train Control. Wabtec said it considered the claims without merit and intended to defend itself. The filing does not provide a clear estimate of potential exposure.
- Asbestos-related claims and ordinary-course litigation remained outstanding; the company reported no material change to the matters previously described in its 2015 Form 10-K.
- Market risks include weaker rail demand, customer order delays, government transit funding, foreign exchange and interest-rate movements, supply disruptions, raw-material costs, and acquisition execution and integration.
- Wabtec reported compliance with debt covenants. The revolving facility includes a minimum interest coverage ratio and maximum debt-to-cash-flow ratio, as well as restrictions on debt, dividends, acquisitions and other activities.
- Unrecognized tax benefits were $10.6 million; the company said about $2.1 million could change within 12 months. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether freight demand and original-equipment sales stabilize, and whether Transit growth and aftermarket activity offset further freight weakness.
- Progress, financing, regulatory approvals and final terms of the Faiveley transaction, including the resulting debt and share dilution.
- Developments and potential financial consequences of the Siemens PTC patent lawsuit and other contingencies.
- Whether improved cash generation is sustainable and how continued buybacks, dividends and acquisition funding affect liquidity and leverage.
- Execution of the stated 2016 delivery outlook and the timing and scale of PTC-related spending.