For Wabtec, a challenging 2016

Wabtec Corp. on Feb. 21 reported results for 2016’s fourth quarter and full year, and issued financial guidance for 2017, that reflects “significant headwinds” in the freight and industrial markets, as well as ongoing effects from its acquisition of Faiveley Transport.

During the quarter, Wabtec acquired majority ownership of Faiveley Transport and initiated a tender offer for Faiveley’s remaining public shares; began the integration of two other recent acquisitions, Workhorse Rail and Gerken Group; and completed a $750 million notes offering. Sales for the fourth quarter were $760 million, with higher sales in the Transit Group more than offset by lower sales in the Freight Group.

Wabtec said Freight Group sales were affected mainly by lower revenues from train control-related equipment and services, and lower industry deliveries of new freight cars and locomotives. Changes in foreign exchange rates reduced sales by $22 million compared to the year-ago quarter.

Income from operations in the fourth quarter was $63 million, including transaction expenses of about $26 million related to the Faiveley acquisition and expenses of about $15 million primarily for contract adjustments and restructuring. Interest and other expense was $30 million in the fourth quarter, including $22 million of debt refinancing expenses and additional interest costs the company incurred prior to closing the Faiveley acquisition. Wabtec had a net tax benefit in the quarter due to two items related to the Faiveley acquisition: expense of $9 million for the non-deductibility of certain transaction costs, and income of $27 million to reduce a deferred tax liability due to a change in the statutory tax rate in France.

Net income in the fourth quarter was $46 million. Wabtec said the effect of all of the items above reduced net income by $27 million. Earnings per diluted share in the fourth quarter were 42 cents. The effect of all of the items above and $9 million of non-controlling interest expense related to the acquisition of Faiveley Transport reduced earnings per diluted share by 39 cents. The company generated cash flow from operations of $202 million in the fourth quarter.

Sales for the full year were $2.9 billion, with higher sales in the Transit Group more than offset by lower sales in the Freight Group. As in the fourth quarter, Freight Group sales 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. Changes in foreign exchange rates reduced sales by $71 million compared to 2015.

Income from operations for the full year was $458 million, including transaction expenses of about $39 million related to the Faiveley acquisition and expenses of about $16 million primarily for contract adjustments and restructuring. Interest and other expense was $46 million for the full year, including $24 million of debt refinancing expenses and additional interest costs the company incurred prior to closing the Faiveley acquisition. Income tax expense was $99 million for the full year. The amount was reduced by the net effect of the two fourth-quarter tax items related to the Faiveley acquisition. Wabtec expects its 2017 effective tax rate to be about 29.5%.

Net income for the full year was $313 million. The effect of all of the items above reduced net income by $38 million. Earnings per diluted share for the full year were $3.34. The effect of all of the items above and $9 million of non-controlling interest expense related to the Faiveley acquisition reduced earnings per diluted share by 51 cents.

Wabtec generated cash flow from operations of $449 million for the full year, exceeding net income by about 45%. At year-end, the company had cash of $398 million and debt of $1.9 billion. In 2016, Wabtec repurchased 3.1 million shares of its common stock for about $212 million, or about $69.63 per share. The company has about $138 million remaining under its current share repurchase authorization.

Wabtec’s 2017 financial guidance says revenues are expected to be about $4.1 billion and adjusted earnings per diluted share are expected to be between $3.95 and $4.15, excluding expected restructuring and transaction charges, and non-controlling interest expense related to the Faiveley acquisition. Due to the ramp-up of projects already in backlog and the timing of synergies from the Faiveley acquisition, the company expects its adjusted earnings per diluted share in the first quarter of 2017 to be similar to its adjusted earnings per diluted share in the fourth quarter of 2016, and it expects the second half of the year to be stronger than the first half of the year. Wabtec estimates synergies from the acquisition to be about $15 million to $20 million in 2017, with long-term synergies expected to exceed $50 million.

“During 2016 we faced many challenges, including significant headwinds in our freight and industrial markets,” said Wabtec President and CEO Raymond T. Betler. “Yet, our financial results were among the best in our history, we generated more cash from operations than net income, and we completed the most important strategic acquisition we’ve made to date. I’m pleased with how our team responded to difficult market conditions, some of which will persist in 2017. We will continue to control what we can by managing our costs aggressively, while working diligently on the integration of Faiveley. We will also continue to invest in our balanced growth strategies and expect to benefit from our diversified business model and rigorous application of the Wabtec Excellence Program.”