Wabtec (NYSE: WAB) reported Q1 EPS of $1.03, $0.18 better than the analyst estimate of $0.85. Revenue for the quarter came in at $1.64 billion versus the consensus estimate of $1.48 billion.

2019 First Quarter Consolidated Results

• GAAP sales were $1.59 billion; adjusted sales were $1.64 billion including accounting policy harmonization. The increase compared to the year-ago quarter resulted mainly from sales from GE Transportation.
• Income from operations was $67 million and adjusted income from operations was $220 million (13.4% of adjusted sales). Adjusted income from operations excluded pre-tax expenses of $153 million related to the GE Transportation merger, as follows: $80 million for one-time, non-cash purchase price accounting charges; $59 million for transaction and restructuring costs; and $14 million for non-cash, accounting policy harmonization (see reconciliation table). In addition to the expenses noted above, the company also had pre-tax expense of $20 million for non-cash, recurring purchase price accounting charges which is not added back to adjusted income from operations.
• Net interest expense was $45 million, including expenses of $14 million related to the GE Transportation merger.
• Other expense was $8 million due to losses on the remeasurement of certain foreign currency-denominated contracts.
• Income tax expense was $19 million. Excluding the net tax benefit from transaction costs related to the GE Transportation merger, adjusted income tax expense was $41 million for an adjusted effective tax rate of about 23%.
• The loss per diluted share was $0.04 and adjusted earnings per diluted share based on adjusted shares outstanding of 132.5 million were $1.06 (see reconciliation table). Adjusted earnings per diluted share excluded after-tax expenses of $1.10 per diluted share related to the GE Transportation merger, as follows: $0.46 for one-time, non-cash purchase price accounting charges; $0.42 for transaction, restructuring and interest costs; $0.08 for non-cash, accounting policy harmonization; and $0.14 for the net tax benefit (see reconciliation table). In addition to the expenses noted above, the company also had after-tax expense of $0.12 per diluted share for non-cash, recurring purchase price accounting charges which is not added back to adjusted earnings per diluted share.
• EBITDA, which Wabtec defines as income from operations plus depreciation and amortization, was $123 million and adjusted EBITDA was $276 million. Adjusted EBITDA excluded pre-tax expenses of $153 million related to the GE Transportation merger, as follows: $80 million for one-time, non-cash purchase price accounting charges; $59 million for transaction and restructuring costs; and $14 million for non-cash, accounting policy harmonization (see reconciliation table). In addition to the expenses noted above, the company also had pre-tax expense of $20 million for non-cash, recurring purchase price accounting charges which is not added back to adjusted EBITDA.

2019 First Quarter Segment Results

• Freight segment sales increased by 131% or $496 million; the increase resulted from acquisitions of $495 million and organic growth of $9 million, which more than offset unfavorable changes in foreign currency exchange rates of $8 million. Freight segment income from operations of $75 million was reduced by $99 million of the expenses noted above. Excluding those expenses, income from operations as a percent of sales was 18.9%. GE Transportation had a strong quarter due to the timing of project deliveries.
• Transit segment sales increased by 6% or $41 million; the increase resulted from organic sales growth of $77 million and acquisitions of $15 million, which more than offset unfavorable changes in foreign currency exchange rates of $51 million. Income from operations as a percent of sales was 8.2% mainly due to an unfavorable product mix and certain discrete items.

Cash Flow Summary

• The company generated cash from operations of $31 million for the first quarter compared to cash from operations of $24 million in the year-ago quarter, with the increase resulting from improved working capital performance. In the 2019 first quarter, cash from operations was reduced by about $50 million as a result of costs related to the GE Transportation merger.
• At March 31, the company had cash of $513 million and debt of $4.96 billion. Total debt was higher than at the end of 2018 due to the GE Transportation merger.

Raymond T. Betler, Wabtec’s president and chief executive officer, said: “Our first-quarter adjusted results represent a solid start to the year, and we’re well positioned to meet our financial targets in 2019 based on our current backlog and expected market conditions.

“Since completing our merger with GE Transportation in late February, we have focused on continuing to serve our customers, integrating our companies and validating the strategic rationale for the combination. We have also confirmed our target to deliver operating synergies of $250 million by year four, demonstrating further confidence in the financial benefits of the merger. As we drive short-term performance and our synergy initiatives, we are also investing in our long-term growth strategies and are confident we can deliver improved earnings, margins and cash flow in the future.”

GUIDANCE:

Wabtec sees FY2019 EPS of $4.00-$4.20, versus the consensus of $4.15. Wabtec sees FY2019 revenue of $8.4 billion, versus the consensus of $8.39 billion.

• Wabtec affirmed 2019 GAAP sales guidance of about $8.4 billion. The company updated GAAP income from operations guidance to about $800 million and GAAP earnings per diluted share guidance to between $2.40-$2.60 due to refined estimates for purchase price accounting charges and transaction and restructuring costs. Wabtec affirmed its guidance for EBITDA, which Wabtec defines as income from operations plus depreciation and amortization, of about $1.3 billion.
• Wabtec affirmed its adjusted financial guidance for 2019: Adjusted sales of about $8.4 billion, adjusted EBITDA of about $1.6 billion, adjusted income from operations of about $1.2 billion and adjusted earnings per diluted share of between $4.00-$4.20. The adjusted guidance excludes estimated expenses for the GE Transportation merger for transaction and restructuring costs, one-time purchase price accounting charges, and non-cash accounting policy harmonization. Excluding these expenses, the company’s adjusted operating margin target for the full year is about 14% and its effective tax rate for the full year is expected to be about 24%. This guidance also includes a net synergy benefit of about $20 million. For the year, Wabtec expects GAAP cash flow from operations to be between $500 million-$600 million including expenses of about $300 million related to the GE Transportation merger.
• Compared to its first quarter results, which included about five weeks of GE Transportation’s results, Wabtec said it expects second quarter adjusted sales, adjusted net income and adjusted EBITDA to be higher, with adjusted earnings per diluted share expected to be lower mainly due to a less favorable product mix and the fully diluted share count increasing to about 193 million as a result of the GE Transportation merger. Based on the expected timing of project deliveries, Wabtec expects its product mix and adjusted earnings per diluted share to improve during the rest of the year.
• Following is pro forma adjusted financial information assuming a full year of GE Transportation’s results and excluding estimated expenses for the GE Transportation merger for transaction and restructuring costs, one-time and recurring purchase price accounting charges and non-cash accounting policy harmonization: Adjusted sales of about $9.2 billion, adjusted EBITDA of about $1.7 billion and adjusted income from operations of about $1.3 billion due to updated estimates for purchase price accounting charges.

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