WABCO Holdings Inc. (NYSE: WBC) is primarily a manufacturer of braking systems for commercial vehicles. In the three months ended September 30, 2017, the company generated US$827.8 million in sales globally, up 22.5% over the same period last year. In the first three quarters of 2017, the company generated US$250.2 million in net income, up 47.6% over the same period last year. Although sales and net income have increased, the company’s cash flows have suffered.
Globally, the company generated US$226.6 million in cash flow from operations in the nine months ended September 30, 2017. This is a decrease of 21.4% or US$62 million. The primary contributor to the decease in cash flow from operations was a US$68.2 million increase in accounts receivables.
Sales in China, which grew 43.4%, were financed at an increasing cost to the company. In the first nine months of 2016, WABCO had discounted with banking institutions or transferred to suppliers in China US$83.6 million worth of notes receivables. In the first nine months of 2017, that amount had more than doubled to US$182.7 million. Not only is the company waiting longer to be paid, the company’s expenses related to discounting these notes have increased at an even higher rate, from US$0.2 million to US$1.6 million.
Although discounting expense is increasing, it is probably safer to transfer the risk of account receivable repayment from a state-owned or public enterprise to a bank. This will allow more cash to be available at a sooner, more certain date. Many other companies are simply recording the sale today and then hoping to collect accounts receivable at an unknown future date.
