Westinghouse Air Brake Technologies (NYSE:WAB), or Wabtec, continued its excellent start to 2018 during the second quarter by delivering strong revenue and earnings growth. Because of that, and what the company sees ahead, it increased its full-year outlook. Add to that the upside potential from its upcoming combination with GE's (NYSE:GE) transportation unit, and Wabtec has growing optimism about what's ahead.

Wabtec's results: The raw numbers

Metric

Q2 2018

Q2 2017

Year-Over-Year Change

Revenue

$1.11 billion

$932.3 million

19%

Adjusted net income

$93.3 million

$72.0 million

30%

Earnings per share

$0.96

$0.75

28%

Data source: Westinghouse Air Brake Technologies Corp.

A freight train at dusk.

Image source: Getty Images.

What happened with Wabtec this quarter? 

Freight helped lead the way in the second quarter:

  • Sales from Wabtec's transit group jumped 19% versus the year-ago quarter to $699.4 million. Overall, the company pulled in $112 million of incremental revenue during the quarter, driven by a $51 million increase in organic sales, a $31 million benefit from changes in foreign exchange rates, and $28 million in revenue from acquisitions. However, while sales surged, operating income in the segment slipped 2% due to additional expenses relating to restructuring its operations and a tax law change in India, as well as lower-margin contracts in the U.K.
  • Revenue from the freight group leaped 20% year over year to $412.3 million. Driving the $67 million revenue increase was a combination of organic sales growth, acquisitions, and a benefit from changes in foreign exchange rates. Operating income, meanwhile, surged 34% versus last year's second quarter due to the higher sales and an improved product mix.
  • The company generated $44 million in cash flow from operations, up sharply from the $12 million it produced in the year-ago quarter. As a result, Wabtec ended the quarter with $246 million in cash and $1.9 billion in debt, with total debt declining 2% from the end of the first quarter.
  • Wabtec's multiyear backlog was $4.7 billion at the end of the quarter, which was slightly higher than the end of last quarter after adjusting for changes in foreign exchange rates.
  • Wabtec continued its acquisitive ways, agreeing to merge with GE's transportation unit during the quarter. The transformational deal will make Wabtec a global leader in rail equipment, software, and services. Under the terms of the transaction, GE will receive $2.9 billion in cash at closing for a 50.1% interest in the combined company. Wabtec already has financing in place for the deal, which it expects to close early next year.

What management had to say 

CEO Raymond Belter commented on the quarter:

Our second-quarter results were on target, and with a strong backlog and the positive indicators we see in our markets, we're comfortable increasing our guidance for the year. Our freight business demonstrated strong growth in revenues and income from operations, and we expect demand to continue to improve. In transit, as expected, we are managing through some lower-margin contracts in the short term while making long-term improvements in the core business. Overall, we're pleased with our year-to-date performance; excited about the opportunities we see from our combination with GE Transportation; and confident we can deliver improved earnings, margins, and cash flow in the future.

As Belter noted, Wabtec's freight group delivered strong growth in revenue and earnings during the quarter, which helped offset some weakness in its transit unit as it works through some lower-margin contracts in the short term.

However, the big story was the combination with GE Transportation. The deal will nearly double the company's revenue while also immediately improving margins, so that Wabtec anticipates a more than 15% increase in EPS in the first year. On top of that, the companies believe they can capture $250 million in annual synergies within four years by integrating the two companies, as well as $150 million per year in cash tax savings over the next 15 years. Meanwhile, Wabtec sees ample growth ahead for the combined company as the rail industry rebounds from its recent downturn.

Looking forward 

While the GE merger will be a key driver of future growth, strengthening market conditions are the story of 2018. That's evident in Wabtec's guidance. The company now expects to pull in $4.2 billion in revenue this year -- up from its initial view of $4.1 billion in sales -- and sees adjusted EPS of $3.85, which is up from its prior guidance of $3.80.

Matthew DiLallo owns shares of General Electric. The Motley Fool owns shares of and recommends Westinghouse Air Brake Technologies. The Motley Fool has a disclosure policy.