Acquisitions Drive Westinghouse Air Brake Technologies Corp's Revenue Higher

By Matthew DiLallo Markets Fool.com

After more than a year of waiting, Westinghouse Air Brake Technologies (NYSE: WAB), or Wabtec, finally closed its acquisition of Faiveley Transport during the first quarter, which provided a noticeable boost to revenue. However, earnings didn't track that increase since the deal added some restructuring and transaction expenses, which when combined with weaker sales to freight customers, caused earnings to slide. That said, despite continued freight weakness, the company remains on track to hit its full-year guidance.

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Wabtec's results: The raw numbers

Metric

Q1 2017

Q1 2016

Year-Over-Year Change

Revenue

$916.0 million

$772.0 million

19%

Net income

$73.9 million

$94.2 million

(22%)

Adjusted EPS

$0.77

$1.02

(25%)

Data source: Westinghouse Air Brake Technologies Corp.

Image source: Getty Images.

What happened with Wabtec this quarter?

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The Faiveley Transport transaction was the story this quarter:

  • Thanks to the Faiveley deal, revenue within the company's transit group jumped 72% to $568.1 million, which more than offset a 21% drop in freight group sales as a result of lower train control related equipment and service revenue and lower industry deliveries for new freight cars and locomotives. In addition, foreign exchange headwinds continued to impact results, cutting $25 million off the top versus last year's first quarter.
  • This year has been a busy one for Wabtec on the strategic front. Not only did the company finally close the Faiveley Transport acquisition this quarter but it also acquired Aero Transportation, which has $40 million in annual sales. Meanwhile, the company signed a $97 million contract to provide signaling and communications services to a new commuter rail line in Fort Worth. Finally, the company completed two additional acquisitions after the quarter closed, buying Thermal Transfer and Semvac, which had annual sales of $25 million and $15 million, respectively
  • Several factors impacted earnings during the quarter, including weaker freight group sales. In addition, the company had $8.9 million in restructuring and transaction costs related to the Faiveley deal, which sliced $0.07 per share off the bottom line. Meanwhile, interest expenses rose sharply as a result of the incremental debt needed to complete that transaction while the share count, likewise, increased due to that deal.

What management had to say

CEO Raymond Belter commented on the company's results by saying that,

Our first quarter adjusted earnings were in line with expectations, and we expect improvement during the year. As we work to integrate Faiveley and our other recent acquisitions, we are managing our costs aggressively based on market conditions. We 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.

While Belter notes that rail market conditions have been challenging, there have been some green shoots of optimism in 2017. Railcar maker The Greenbrier Companies (NYSE: GBX), for example, recently reported expectation-beating fiscal second-quarter results. Furthermore, Greenbrier CEO William Furman noted in the earnings release that "We are encouraged by the upward trend in rail traffic, order activity in our current quarter, and earnings contribution from our activities in international markets." Meanwhile, industrial giant GE (NYSE: GE) noted some positives in the rail market on its quarterly conference call. GE's CFO Jeffrey Bornstein stated on the call that "Domestic market dynamics were slightly more positive, building on the modest improvement we saw in the fourth quarter." However, he did caution that "Although these signs of improvement are important, they're off a weak base and, as of yet, have not signaled a consistent trend." The said, GE did report robust orders in its transportation unit, with equipment orders rocketing 500% thanks to 37 new locomotive orders, including 24 in North America, which was the first order of this type it has taken since 2014.

Looking forward

Given those positives in the market, Wabtec remains confident in its full-year outlook. The company continues to expect revenue of around $4.1 billion and earnings between $3.95 to $4.15 per share, excluding restructuring and transaction expenses. Driving this outlook is the company's backlog, which has several projects ramping up later this year, as well as the expectation that it will capture between $15 million to $20 million of synergies from the Faiveley deal by year-end.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of General Electric. The Motley Fool recommends The Greenbrier Companies and Westinghouse Air Brake Technologies. The Motley Fool has a disclosure policy.