Westinghouse Air Brake Technologies Corp.'s Latest Acquisition Keeps Driving Revenue Higher

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Westinghouse Air Brake Technologies' (NYSE: WAB) top line once again benefited from its recent acquisition of Faiveley Transport. However, integration expenses from that transaction, as well as continued challenging rail market conditions, drove down earnings. Wabtec expects those challenges to persist, leading it to pull back further on its full-year guidance.

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Wabtec's results: The raw numbers

Metric

Q3 2017

Q3 2016

Year-Over-Year Change

Revenue

$957.9 million

$675.6 million

42%

Net income

$67.4 million

$82.4 million

(18%)

EPS

$0.70

$0.92

(24%)

What happened with Wabtec this quarter? 

The Faiveley Transport transaction continues to drive results:

  • Sales for Wabtec's transit group rocketed 97% from the year-ago quarter to $617.7 million thanks primarily to the acquisition of Faiveley Transport, which helped add $290 million in revenue during the quarter. However, income from operations in the segment slipped 7% due to a steep drop in margins, which went from 16.3% to 7.7%. One of the factors that negatively affected earnings was an $18 million impact from contract adjustments and restructuring and integration expenses. Without those additional costs, adjusted income from operations would have increased 29% and the operating margin would have been 10.7%.
  • The Faiveley deal helped more than offset a 6% decline in sales in the freight group, which slumped to $340 million due to lower sales from original equipment rail products. This fall came despite $41 million in incremental revenue from recent acquisitions as well as a $2 million boost from changes in foreign exchange rates. That drop in revenue, as well as expenses relating to contract adjustments and restructuring and integration, caused income from operations to dip 21%.
  • Several factors drove down earnings during the quarter, including weaker organic sales, higher interest expenses, contract adjustments, and integration expenses. The transaction-related costs alone cut $0.18 per share from the bottom line during the quarter, which if adjusted, would have resulted in the company earning $0.88 per share.
  • Wabtec generated $40 million in cash flow from operations during the quarter and ended with $228 million of cash. Meanwhile, debt fell 6% to $1.9 billion.
  • Using its balance sheet strength to make another deal after the quarter ended, it bought AM General Contractor, which makes fire protection and extinguishing systems for transit cars and has about $25 million of annual sales.
  • The company continues to book new orders, boosting its backlog 2% to a record $4.5 billion. Some of the highlights were contracts worth more than $100 million in components and systems for the new-generation double-deck trains for Paris.

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What management had to say 

CEO Raymond Belter said this about the company's third-quarter results:

Excluding the contract adjustments and restructuring and integration expenses, our third quarter results were in line with our expectations. Although we have faced challenging market conditions this year, we have also seen many positive developments, too. During the third quarter our transit business once again grew its record backlog, winning orders throughout our major geographic markets and product categories. Our freight revenues and backlog have remained mostly flat for the past four quarters, indicating a level of stability, and we are seeing a slight pick-up in the aftermarket. We expect a strong finish to the year based on our existing backlog and increasing synergies.

Despite the positives Belter pointed out, rail market conditions remain challenging. Industrial giant GE (NYSE: GE), for example, noted on its third-quarter conference call that revenue in its transportation segment tumbled 14% due to lower locomotive shipments. Overall, GE expects that North American shipments will crater 73% this year while international will plunge 43%. Though GE noted that it won some big international orders recently, it expects that "the market for new locomotives will continue to remain challenging."

Looking forward 

Those weaker market conditions caused Wabtec to revise its full-year guidance once again. Last quarter, the company anticipated revenue of about $3.85 billion and earnings per share of $3.55 to $3.70, which was down from previous guidance of $4.1 billion in revenue and earnings between $3.95 to $4.15 per share. However, it now expects full-year revenue of $3.8 billion and adjusted earnings of $3.45 to $3.50 per share.

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Matthew DiLallo has the following options: short January 2018 $24 puts on General Electric. The Motley Fool recommends Westinghouse Air Brake Technologies. The Motley Fool has a disclosure policy.