Westinghouse Air Brake Technologies Corporation (Wabtec) — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Wabtec supplies products and services to the global freight rail and passenger transit industries, with operations in 19 countries; approximately 45% of quarterly revenue came from outside the United States.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $695.2 million | $615.5 million | +13.0% |
| Gross profit / margin | $209.6 million / 30.1% | $182.9 million / 29.7% | Margin +0.4 percentage points |
| Operating income / margin | $121.8 million / 17.5% | $103.7 million / 16.9% | Income +17.5% |
| Net income attributable to Wabtec shareholders | $80.1 million | $69.6 million | +15.1% |
| Diluted EPS | $0.83 | $0.72 | +15.3% |
| Operating cash flow | $26.2 million | $32.0 million | Down $5.8 million |
Gross margin improvement reflected higher sales volume and lower overhead costs as a share of sales, partly offset by higher raw-material costs and warranty expense. The effective tax rate rose to 31.7% from 30.0%, primarily because Q1 2013 included an R&D tax-credit benefit.
Segments and drivers
- Freight: Sales of $385.5 million, up 22.9%; operating income increased to $91.9 million from $69.8 million. Growth reflected demand for freight original-equipment products, positive train control (PTC) electronics, aftermarket products and acquisitions.
- Transit: Sales of $309.7 million, up 2.6%; operating income declined to $34.5 million from $38.6 million. Aftermarket brake and electronic sales gains were partly offset by lower transit locomotive sales.
- Total sales growth included $20.7 million from acquisitions and $1.4 million from favorable foreign exchange. Specialty Products & Electronics sales rose $42.7 million.
Cash, debt and liquidity
- Cash and cash equivalents were $295.1 million at March 31, 2014, up $9.3 million from year-end. Operating cash flow was lower year over year, as increased receivables and inventory absorbed cash; management cited higher sales, slower collections and inventory to support sales.
- Investing activities used $4.9 million, versus $120.8 million in Q1 2013, which included $115.1 million of acquisition spending. Q1 2014 capital expenditures were $6.3 million.
- Total debt was approximately $450.6 million, including $250 million of 4.375% senior notes due 2023 and $200 million drawn on the revolving facility. Cash exceeded debt by approximately $155 million. The company reported about $553 million of available borrowing capacity, net of letters of credit, subject to covenants.
- The $800 million revolving credit facility expires in December 2018. A $150 million interest-rate swap fixes the rate on a portion of borrowings at 1.415% plus the applicable margin through November 2016. The company reported compliance with debt covenants.
- Dividends paid were $3.8 million, or $0.04 per share. Wabtec repurchased 27,500 shares for $2.2 million; $197.8 million remained under its $200 million repurchase authorization.
Outlook, risks and other material items
- Management expected 2014 deliveries of new locomotives and freight cars to exceed 2013 levels, while deliveries of new subway cars and buses were expected to remain roughly level. These are market expectations, not company earnings guidance.
- North American freight car orders backlog reached approximately 82,000 in Q1, and carloadings through April 12 were 1.8% above the prior year. Wabtec reported approximately $70 million of PTC revenue in Q1. Railroads and commuter authorities said they could not complete implementation by the statutory December 31, 2015 deadline; Congress had discussed but not enacted an extension.
- On February 12, 2014, Wabtec agreed to acquire Fandstan Electric Group for approximately $215 million and expected closing in Q2, subject to customary conditions and competition clearance.
- Key risks include economic and rail-market weakness, government transit funding, customer order delays or cancellations, raw-material costs and supply disruptions, acquisition integration, foreign-exchange and interest-rate changes, and regulatory developments. The filing reported no material change in risk factors or litigation from the 2013 Form 10-K; asbestos-related claims and ordinary-course litigation remain outstanding.
- Disclosure controls were assessed as effective; the company reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether receivable collection times and working-capital outflows improve, and how they affect operating cash flow.
- Whether Freight growth and margins persist, and whether Transit operating income stabilizes.
- Fandstan closing, final purchase price and subsequent financing or integration effects.
- PTC implementation timing and any legislative change to the 2015 deadline.
- Debt covenant headroom, acquisition-related obligations, and developments in asbestos and other litigation.