Wabtec 3Q20: ‘All-Around Beat, Backlog Intact’

Written by Marybeth Luczak, Executive Editor
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Wabtec Corp. reported a “strong operational third quarter in the face of a challenging and dynamic environment,” and updated its 2020 guidance.

Third-quarter earnings per diluted share were $0.67 and adjusted earnings per diluted share were $0.95, versus the year-earlier period’s $0.48 and $1.10, respectively. The company also updated its full-year guidance for sales “in a range of $7.5 billion to $7.6 billion, GAAP earnings per diluted share to between $2.35 to $2.45, adjusted earnings per diluted share to between $3.75 and $3.85, and expects continued strong cash generation.”

Wabtec reported that at Sept. 30, its total, multi-year backlog was $21.4 billion, “about flat with our backlog at June 30, 2020,” and the 12-month backlog was $5.2 billion.

Wabtec President and CEO Rafael Santana

“Our team continued to deliver for our customers, while driving strong cash generation, aggressively reducing costs and executing on our $150 million net synergy targets for 2020,” President and CEO Rafael Santana said. “We are seeing signs of recovery across some of our international end-markets. While our North American OE markets are transitioning . . ., global freight volumes and equipment utilization continue to improve from the lows in the second quarter. Global transit service levels are also improving. These directional trends, along with our backlog and strong order pipeline are encouraging. The strength of our business portfolio, combined with the focused performance of our team, positions us well for a strong order recovery.”

Cowen and Company OEM Transportation Analyst Matt Elkott called the Wabtec third-quarter 2020 report “an all-around beat” (see his insight below).

Among Wabtec’s third-quarter highlights:

2020 Financial Guidance

  • Wabtec updated its 2020 sales guidance (reported above), and notes that “the adjusted guidance excludes estimated expenses for restructuring, transaction and amortization expenses.”
  • “With cost actions and synergies stemming from the Wabtec and GE Transportation merger on-track, we expect to see a net synergy benefit of over $150 million in 2020. For full year 2020, Wabtec expects strong cash flow generation which includes approximately $170 million of cash outflows related to prior restructuring, transaction and litigation costs.”

2020 Third Quarter Consolidated Results

  • Sales were $1.9 billion versus $2.0 billion in the same period a year ago. The decrease compared to the year-ago quarter was “primarily driven by lower sales in Freight Services, Components, Digital Electronics, and Transit sales, offset somewhat by higher sales in Freight Equipment.”
  • Income from operations was $207 million (11.1% of sales) and adjusted income from operations was $293 million (15.7% of sales), which was “unfavorably impacted” by lower sales in Freight and Transit “primarily due to COVID-19 pandemic disruptions.” Adjusted income from operations excluded pre-tax expenses of $87 million, of which $70 million is for non-cash amortization expense and $16 million is for restructuring and transaction cost, Wabtec reported.
  • Net interest expense was $46 million and other income (expense) was $14 million of income.
  • The reported and adjusted effective tax rate for the quarter was 26.7%. 
  • EBITDA was $337 million and adjusted EBITDA was $354 million. Adjusted EBITDA excluded pre-tax expenses of $16 million for transaction and restructuring costs. 

2020 Third Quarter Freight Segment Results

  • Freight segment sales of $1.2 billion decreased by 7%  from the year-ago quarter. Wabtec said the decrease was due to “lower organic sales of $84 million and unfavorable changes in foreign currency exchange rates of $20 million, offset somewhat by $9 million of sales from acquisitions. Freight segment sales were primarily impacted by disruption due to the COVID-19 pandemic resulting from lower Services due to higher locomotive parking levels, lower demand for new freight car components and lower Digital Electronics sales, offset somewhat by higher deliveries of locomotives.”
  • Freight segment income from operations was $160 million (or 12.9% of segment sales) and adjusted income from operations of $234 million (or 18.9% of segment sales). Freight segment adjusted income from operations decreased 17% from the year-ago quarter “primarily driven by mix of lower Services sales and higher OE deliveries, offset somewhat by lower operating costs,” Wabtec said.

2020 Third Quarter Transit Segment Results

  • Transit segment sales of $628 million decreased by 6% from the year-ago quarter. Wabtec said the decrease was “due to lower organic sales of $59 million, offset somewhat by favorable changes in foreign currency exchange rates of $18 million. Transit segment sales were negatively impacted by lower original equipment and after-market sales primarily related to the disruption caused by the COVID-19 pandemic.”
  • Transit segment income from operations was $64 million (or 10.2% of segment sales) and adjusted income from operations was $75 million (or 12% of segment sales). Transit segment adjusted income from operations increased from the year-ago quarter by 21% “as a result of continued improvement in operational performance and cost actions, offset somewhat by lower volumes as a result of the COVID-19 pandemic.”

The Wabtec website provides more details.

The Cowen Insight

Wabtec’s third-quarter 2020 report was “an all-around beat,” Cowen and Company OEM Transportation Analyst Matt Elkott said. He added that “guidance raised modestly” and backlog was “intact.”

Wabtec “was the only company in our transportation equipment coverage to issue specific EPS guidance on its 2Q call,” said Cowen and Company’s Matt Elkott. “Not only is this still the case now, but the company actually raised guidance today. 3Q was a decisive top-to-bottom beat; and the backlog remained largely unchanged.”

Among the key takeaways:

  • “The backlog of $21.4Bn was largely flat sequentially, an encouraging sign in the current environment. The freight backlog was just shy of the prior quarter, while transit was up modestly.” (See Elkott’s recent op-ed: “Election ‘Blues’ Could Benefit Rail Suppliers.”)
  • “Not only did WAB [Wabtec] remain the only company in our transportation equipment (both rail and truck) and machinery coverage to provide guidance, but the company actually raised guidance modestly. The new EPS guidance range of $3.75 to $3.85 has a $3.80 midpoint, above our and Street estimates of $3.70 and $3.77, respectively. The prior, 2Q guidance range of $3.50 to $3.80 had a $3.65 midpoint.
  • “3Q20 results represented a top-to-bottom beat to our and consensus estimates.” See chart below.
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