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The global economic and currency headwinds that had been plaguing Westinghouse Air Brake Technologies (WAB +0.37%), or Wabtec, over the past few quarters strengthened in the second quarter. As a result, sales slumped by double digits, and earnings came in a bit below expectations. This weaker-than-anticipated result forced the company to trim its full-year guidance.
Checking in on the numbers
Wabtec's revenue dropped 15%, to $724 million, due to a 26% plunge in freight group sales. Also, the continued impact of foreign exchange rates sliced $9 million off the company's top line -- a significant amount even though it was half of last quarter's figure. Partially offsetting these issues were stronger sales in the transit group:
| Category |
Q2 2016 Actuals |
Q2 2015 Actuals |
Growth (YOY) |
|---|---|---|---|
|
Freight Group |
$397.1 million |
$534.7 million |
(26%) |
|
Transit Group |
$326.5 million |
$312.4 million |
5% |
|
Total |
$723.6 million |
$847.0 million |
(15%) |
Data source: Westinghouse Air Brake Technologies Corp.
Driving the weakness in the freight group were lower sales of train-control-related equipment and services, a decrease in rail-traffic volumes, and lower industry deliveries of new freight cars and locomotives. This result does not come as a surprise given what others in the sector have already reported. Industrial giant GE (GE 0.36%), for example, reported a 13% slump in transportation sales due in part to weaker rail sales, while diversified industrial manufacturer Trinity Industries' (TRN 2.37%) rail group sales were down 38% from last year's second quarter due to lower railcar deliveries.
On a more positive note, Wabtec's earnings, on an adjusted basis, were flat year over year at $1.05 per share. That said, net income slumped 11% due to flat margins and $0.05 per share in acquisition-related costs stemming from the company's pending deal for Faiveley Transport. On the other hand, aggressive cost-reduction initiatives and a 7% year-over-year reduction in the share count as a result of stock buybacks boosted Wabtec's profitability.
A look at outlook
Economic conditions do not appear to be improving as hoped. GE, for example, reported a 2% decrease in orders due to a "volatile and slow growth economy." This weakness is having a notable impact on the rail industry's outlook, especially for future railcar deliveries. For example, Trinity Industries' rail group's backlog fell from $4.72 billion to $4.29 billion after the company shipped 6,065 railcars but received orders for only 2,910 railcars during the quarter. Meanwhile, rival railcar maker Greenbrier's (GBX 1.77%) new railcar deliveries fell 4.4% quarter over quarter, while its backlog declined from $4 billion to $3.6 billion. That led Greenbrier to cut its full-year outlook for both railcar deliveries and earnings.
Wabtec, likewise, is cutting its full-year guidance due to these sluggish conditions. Revenue is now expected to drop 10%, which is a much steeper decline than management's prior guidance calling for revenue to be "slightly down for the full year." Earnings, meanwhile, are now expected to be in the range of $4.00 to $4.20 per share, which is well below previous guidance calling for full-year earnings of between $4.30 to $4.50 per share. Furthermore, the company does not anticipate that its Faiveley Transport transaction will close until the fourth quarter after initially expecting it to close by midyear.
Investor takeaway
Strengthening headwinds derailed Wabtec's expectations for a record-setting year. That said, the company is fighting back by cutting costs aggressively as well as going on the offensive through the acquisition of Faiveley. It needs to continue to battle given the outlook of its industry peers, which suggests that the headwinds will not abate any time soon.
