Westinghouse Air Brake Technologies Corp Hits the Brakes on Costs

By Markets Fool.com

While momentum within the global economy is continuing to slow, it is still pushing forward. That was evident in Westinghouse Air Brake Technologies' , or Wabtec's, fourth-quarter earnings report, which was released before the market opened on Thursday. That report showed slow growing sales due to both global economic softness and a stronger dollar, however, the company was able to more than overcome its slowing sales by applying the brakes to its costs. Those trends are expected to continue in 2016, with the company's accelerated cost reduction and efficiency programs expected to drive earnings growth.

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A look at the numbers
Wabtec's sales edged up 1% year-over-year to $833 million, though sales would have been even higher if it wasn't for the impact of foreign exchange rates, which negatively affected sales by $27 million. That said, currencies weren't the only headwind Wabtec faced during the quarter, with the company continuing to be the tale of two businesses:

Q4 2015 Actuals

Q4 2014 Actuals

Growth (YOY)

Freight Group

$501.0 million

$481.1 million

4%

Transit Group

$331.9 million

$339.7 million

-2%

Total

$832.8 million

$820.9 million

1%

Data Source: Westinghouse Air Brake Technologies Corp

As that chart shows, Freight Group sales continue to chug along while the slowdown in sales within the Transit Group continues.

Despite rather minuscule sales growth overall, Wabtec's profitability grew by double digits with income from operations increasing 10% year-over-year to $151 million while earnings grew 11% to $1.05 per share. Driving this growth was the company's cost containment efforts, evidenced by cost of sales and selling, general, and administrative expenses, or SG&A, both falling year-over-year. In reducing its costs even as its sales were growing, Wabtec was able to expand its margins with income from operations as a percentage of sales increased from 16.7% to 18.2%. Meanwhile, earnings on a per share basis grew slightly more than income from operations because the company's share count declined thanks to its big buyback during the quarter after it repurchased $365 million worth of stock, reducing the share count by 1% year over year.

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A look at the outlook
Wabtec expects that 2016 will follow many of the same trends as 2015. The company expects revenue to be basically flat to slightly up when compared to 2015 because of the challenges it's facing not only with foreign currency headwinds, but within some of its key markets. That said, despite these headwinds Wabtec expects its earnings to rise to $4.30 to $4.50 per share, which at the mid-point represents 7% year-over-year earnings growth. Further, the company noted that it "expects 2016 quarterly results to improve sequentially during the year as it realizes the benefits of ongoing cost reduction initiatives and as projects already in backlog begin to ramp up."

That being said, one thing that is important to note about Wabtec's guidance is that it does not include its pending acquisition of Faiveley Transport, which it expects to close by mid-year. That acquisition is expected to not only boost sales, but be accretive to earnings per share in 2016. Because of this pending transaction, as well as the company's cost reduction and efficiency programs, its second half should be much stronger than the first half, assuming no changes to the global economic picture.

Investor takeaway
Wabtec ended the year on a strong note, overcoming slowing sales and foreign currency headwinds to deliver double-digit earnings growth thanks to a focus on costs. Those cost reduction efforts are expected to be key to its ability to deliver another record year of earnings growth in 2016, with growth accelerating in the second half due not only to those efforts but also to the expected closing of the Faiveley Transport transaction.

The article Westinghouse Air Brake Technologies Corp Hits the Brakes on Costs originally appeared on Fool.com.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Westinghouse Air Brake Technologies. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.