Wabtec Generates $124MM in 3Q19

Written by Andrew Corselli, Managing Editor
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Rafael Santana

Wabtec Corp. recently reported its 3Q19 results, which include earnings per diluted share of $0.48 and adjusted earnings per diluted share of $1.03. In addition, Wabtec noted that it generated GAAP cash from operations of $124 million for the quarter and affirmed its 2019 GAAP cash from operations guidance of about $900 million.

Wabtec also updated its full-year guidance for adjusted sales of about $8.2 billion and adjusted earnings per diluted share to between $4.15 to $4.20.

“We delivered a solid operational performance in the third quarter and we remain on track to achieve our full-year adjusted earnings and cash flow guidance, despite challenging conditions in the North American freight market,” said Rafael Santana, Wabtec President and CEO. “Growth in our aftermarket and services revenues demonstrate the importance of our significant installed base across both freight and transit and the resilience of our business model.

“In addition, as we focus on controlling what we can, we have made significant progress in our integration initiatives and execution of our synergy activities.  We have accelerated our cost and synergy actions, giving us strong confidence that we will exceed our synergy target of $250 million before 2022.”

3Q19 Consolidated Results

  • GAAP sales were $2 billion; adjusted sales were $2.1 billion including accounting policy harmonization. The increase compared to the year-ago quarter resulted mainly from sales from GE Transportation and higher transit sales partially offset by lower sales in freight components, electronics and unfavorable foreign exchange rates.
  • Income from operations was $169 million (8.4% of GAAP sales) and adjusted income from operations was $317 million (15.4% of adjusted sales) which was favorably impacted by original equipment (OE) mix, timing of policy harmonization and seasonality in the locomotive services.  Adjusted income from operations included $63 million for non-cash, accounting policy harmonization and excluded pre-tax expenses of $85 million as follows: $69 million for transaction, restructuring and litigation costs, as well as $16 million for one-time, non-cash purchase price accounting charges (see reconciliation table). 
  • The company also had pre-tax expense of $71 million for non-cash, recurring purchase price accounting charges related to the GE Transportation merger which is not added back to adjusted income from operations.
  • Net interest expense was $58 million, with adjusted net interest expense of $54 million.
  • Income tax expense was $23 million for an effective tax rate of 20%.  Excluding the net tax benefit from restructuring, transaction costs related to the GE Transportation merger and litigation costs adjusted income tax expense was $67 million for an adjusted effective tax rate of about 25%.
  • Earnings per diluted share were $0.48 and adjusted earnings per diluted share were $1.03 (see reconciliation table).  Adjusted earnings per diluted share included $0.25 for after-tax non-cash policy harmonization and excluded after-tax expenses of $0.30 as follows:
  • $0.06 for one-time, non-cash purchase price accounting charges; $0.28 for transaction, restructuring and litigation costs, offset by $0.04 from increased tax expense for non-deductible transaction costs (see reconciliation table).
  • In addition to the expenses noted above, the company also had after-tax expense of $0.28 per diluted share for non-cash, recurring purchase price accounting charges which is not added back to adjusted earnings per diluted share.
  • EBITDA, which Wabtec defines as income from operations plus depreciation and amortization, was $292 million and adjusted EBITDA was $440 million. Adjusted EBITDA included $63 million for policy harmonization and excluded pre-tax expenses of $85 million as follows: $16 million for one-time, non-cash purchase price accounting charges and $69 million for transaction, restructuring and litigation costs (see reconciliation table). 

3Q19 Segment Results

  • Freight segment sales of $1.3 billion increased by 231% from the year-ago quarter or $904 million; the increase resulted from acquisitions of $954 million (GE Transportation, chiefly), which was partially offset by an organic decrease of $45 million and unfavorable changes in foreign currency exchange rates of $5 million.  Freight segment organic sales were negatively impacted by lower sales in freight car components and electronics.
  • Freight segment income from operations of $148 million (or 11.4% of segment sales) increased from the year-ago quarter by $69 million mainly as a result of acquisitions.  Freight segment income from operations was reduced by $108 million due to the policy harmonization, merger-related and restructuring expenses noted.  Excluding those items, Freight segment income from operations as a percent of adjusted sales was 19.0%.  Adjusted Freight segment income from operations benefited from seasonality of services and lower mix of OE locomotives due to timing of deliveries. 
  • Transit segment sales of $706 million increased by 3% from the year-ago quarter or $20 million.  The increase resulted from organic sales growth of $44 million and acquisitions of $2 million, which was partially offset by unfavorable changes in foreign currency exchange rates of $26 million.  Transit segment sales were positively impacted by growth in both OE and aftermarket components.
  • Transit segment income from operations of $56 million (or 7.9% of segment sales) decreased from the year-ago quarter by $5 million as a result of higher restructuring expenses, offset somewhat by higher volume.  Excluding restructuring charges of $11 million, Transit segment income from operations as a percent of sales was 9.4%.  Adjusted segment income from operations benefited from leverage of higher volume. 

Cash Flow Summary

  • The company generated cash from operations of $124 million for the third quarter compared to cash used for operations of $30 million in the year-ago quarter, with the increase resulting from higher financial results (net income plus net add-back for non-cash transactions in earnings) and improved working capital performance.  In the 2019 third quarter, cash from operations was reduced by about $40 million as a result of costs related to the GE Transportation merger. 
  • At September 30, the company had cash and cash equivalents of $587 million and debt of $4.7 billion.  

Backlog

  • At September 30, Wabtec’s total, multi-year backlog was $21.9 billion, and its 12-month backlog was $5.7 billion, slightly lower than at June 30 as increased aftermarket orders were more than offset by the timing of OEM orders and changes in foreign currency exchange rates.

2019 Financial Guidance

  • Wabtec updated 2019 GAAP sales guidance of about $8.1 billion, GAAP income from operations guidance of about $725 million and GAAP earnings per diluted share guidance to between $2.05 to $2.10 due to refined estimates for purchase price accounting charges and transaction and restructuring costs.  Wabtec updated guidance for EBITDA, which Wabtec defines as income from operations plus depreciation and amortization, of about $1.2 billion. 
  • Wabtec updated 2019 adjusted sales guidance of about $8.2 billion and affirmed guidance for adjusted EBITDA of about $1.6 billion, and adjusted income from operations of about $1.2 billion.  Wabtec also updated its guidance for adjusted earnings per diluted share to between $4.15 to $4.20.  The adjusted guidance excludes estimated expenses for the GE Transportation merger for transaction and restructuring costs, one-time purchase price accounting charges, and non-cash accounting policy harmonization.  Excluding these expenses, the company’s adjusted operating margin target for the full year is about 14% and its adjusted effective tax rate for the full year is expected to be about 24%. This guidance also includes a net synergy benefit of about $20 million for 2019. 
  • In addition to the expenses noted above, the company also expects after-tax expense of about $0.88 per diluted share for non-cash, recurring purchase price accounting charges which are not added back to adjusted earnings per share. 
  • For the year, Wabtec expects GAAP cash flow from operations to be about $900 million including expenses of about $100 million related to the GE Transportation merger.

Cowen Insight

“WAB guided for 2019 EPS of $4.15-$4.20, versus its prior guidance of $4.10-4.20,” according to Cowen and Company analysts Jason H. Seidl (Managing Director and Railway Age Wall Street Contributing Editor), Matt Elkott and Adam Kramer. “This is the second consecutive quarter that the company has modestly raised the low end of its guidance range, essentially raising the midpoint. WAB maintained its operating income guidance of $1.20Bn versus consensus of $1.16 billion. It maintained its EBITDA guidance of $1.60 billion versus consensus of $1.54 billion. The company continues to expect $900 million of cash from operations, unchanged from the 2Q guidance, which was an increase from the initial guidance.”

“These results and guidance are encouraging amid freight market conditions that have continued to progressively worsen throughout the year and as PSR implementation remains ongoing,” the analysts added.

“WAB’s backlog at the end of 3Q19 was $21.9 million, and its 12-month backlog was $5.7 million,” the analysts said. “This is slightly lower than the June 30 total backlog of $22.6 million and 12 month backlog of $5.9 million as increased aftermarket orders were more than offset by the timing of OEM orders and changes in foreign currency exchange rates.”

“The company again demonstrated solid execution in a soft North American market. It beat consensus expectations top to bottom, raised the low end of its EPS guidance modestly for the second consecutive quarter, and maintained its cash flow guidance after having raised it materially last quarter. This occurred as the company is putting new focus on cost cutting and capitalizing on specific pockets of opportunities in an otherwise weak North American freight market. Additionally, international markets for both freight and transit equipment and services remain solid.

“About two-thirds of the company’s pipeline of opportunities is coming from international markets, with India and the broader Southeast Asia region a particularly bright spot. WAB is delivering more than 100 locomotives this year in India as part of the company’s 1,000-unit contract. It is also testing the 6,000-horsepower locomotive that is expected to enter revenue service soon. In North American, rail market weakness and PSR challenges have been well documented and are likley to continue to be head winds for WAB’s freight OE and aftermarket businesses, but the company is still able to pursue specific pockets of opportunities, especially on the locomotive modernization front, as the railroads look to upgrade their power fleets.

“WAB refrained from providing 2020 guidance during the third quarter call. The company is likely to issue such guidance early next year, in addition to providing insights on the longer term outlook at its anticipated early-2020 investor day. We see limited additional rail traffic and PSR pressure in North America next year as we project modest low single digit rail volume increases off of this year’s low base. This, the relative strength in international markets, a full year of GE Transportation results (the merger closed on Feb. 25, 2019), and the company’s thus-far-successful cost management initiatives should result in solid earnings growth next year.”

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