Monday, July 25, 2016

Wabtec reports 2Q16 results, updates full-year guidance

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Wabtec President and CEO Ray Betler Wabtec President and CEO Ray Betler

Wabtec Corp. on July 25, 2016 reported second-quarter results affected by lower freight sector-related revenues.

Sales for the quarter were $724 million, with higher sales in the Transit Group more than offset by lower sales in the Freight Group, which were affected mainly by “lower revenues from train control-related equipment and services, a decrease in rail traffic volumes, and lower industry deliveries of new freight cars and locomotives,” the company said. “Changes in foreign exchange rates reduced total net sales by $9 million compared to the year-ago quarter.”

Income from operations was $133 million, or 18.4% of sales, identical to 18.4 % in the year-ago quarter. Despite lower sales, the company’s operating margin remained the same “mainly due to the benefits of cost-reduction initiatives and improved performance in the Transit Group. Wabtec’s earnings per diluted share were $1.00. Excluding expenses of about 5 cents per diluted share related to the pending acquisition of Faiveley Transport, adjusted earnings per diluted share were $1.05. “The company generated strong cash flow from operations of $134 million in the second quarter and $209 million in the first half of the year,” Wabtec noted . “On June 30, 2016, the company had cash of $303 million, an additional $206 million of cash held in escrow for the Faiveley Transport acquisition and debt of $744 million.

Wabtec updated its full-year 2016 guidance “based on first-half results and outlook for the rest of the year.” Revenues are now expected to be down about 10% compared to 2015, and earnings per diluted share are now expected to be between $4.00 and $4.20. This guidance does not include any further costs for restructuring activities or expenses related to the Faiveley Transport acquisition. Wabtec expects the acquisition to be completed in the fourth quarter.

Wabtec President and CEO Raymond T. Betler said, “Our Transit business is performing well, with revenue growth, improved profitability and a strong backlog. Our Freight business, however, continues to be affected by overall rail industry conditions and the sluggish global economy. In this environment, we are focused on controlling what we can by aggressively reducing costs, generating cash and investing in our growth opportunities, including acquisitions. As demonstrated by our first-half operating margin of 18.4% and cash from operations at 14% of revenues, we are managing the business well in these market conditions.”

“Wabtec reported adjusted 2Q16 results of $1.05 vs. consensus of $1.08 and our estimate of $1.09,” noted Steve Barger and Kenneth Newman of KeyBanc Capital Markets. “We note results exclude expenses related to the pending Faiveley acquisition, which was a $0.05 impact. Consolidated revenue came in at $724 million vs. consensus of $804 million and our estimate of $823 million. On a year-over-year basis, revenue was down 15%; by segment, Freight sales were down 26% and Transit sales increased 5%.

“Gross margins in the quarter came in at 32.8%, which was 40 basis points ahead of our model of 32.4%, while the SGA (Selling, General and Administrative Expenses) margin in the quarter came in at 10.3%, or 100 bps below our model. Together with Engineering and Amortization expense of $23 million, this led to an operating margin of 19.3%, which outperformed our model by 90 bps. Decremental margin in the quarter was an impressive 13.2% (vs. our estimate of 19.8%), which we think could have been driven by Wabtec’s ability to limit decrementals in the Freight segment, drive incrementals in the Transit segment, or a combination of both.

“Wabtec lowered its FY16 EPS guidance to $4.00-$4.20 vs. prior guidance of $4.30-$4.50 (vs. our estimate of $4.36 and consensus of $4.35), which implies an EPS range of $2.00-$2.20 for the remaining two quarters in FY16 (vs. our model at $2.29). Additionally, sales are expected to be down approximately 10% vs. prior guidance of ‘down slightly.’Assuming a 32% tax rate in the second half, we think WAB’s new guidance implies a 17.9% decremental margin in 2H16, vs. a 13.3% decremental in 1H16. We note the lower guidance does not factor in further restructuring costs related to the Faiveley Transport acquisition.”







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