Wabash National Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. Results include Supreme, acquired in September 2017, so comparisons with 2017 are not fully like-for-like.
Financial performance
| Metric | Q2 2018 | Q2 2017 | H1 2018 | H1 2017 |
|---|---|---|---|---|
| Net sales | $612.7 | $435.9 | $1,104.0 | $798.6 |
| Gross profit | $85.3 | $67.7 | $149.4 | $127.0 |
| Gross margin | 13.9% | 15.5% | 13.5% | 15.9% |
| Operating income | $46.0 | $38.7 | $71.7 | $68.9 |
| Net income | $31.9 | $22.9 | $53.2 | $43.1 |
| Diluted EPS | $0.54 | $0.36 | $0.89 | $0.68 |
| Operating cash flow | Not separately presented | Not separately presented | $40.5 | $75.2 |
- Q2 sales rose 40.6%; H1 sales rose 38.2%. Q2 net income increased about 39%, while H1 net income increased about 23%.
- Gross margin fell 1.6 percentage points in Q2 and 2.4 points in H1. Management cited labor inefficiencies and workforce constraints, higher material costs, supplier shortages, and production disruption.
- Q2 operating margin was 7.5%, versus 8.9% a year earlier; H1 was 6.5%, versus 8.6%. Interest expense rose to $7.2 million in Q2 and $14.6 million in H1, primarily reflecting the 2025 senior notes issued to help finance Supreme.
- Other income was $4.0 million in Q2 and $12.0 million in H1, principally gains on sales of former retail branch locations. H1 also included a $0.2 million debt-extinguishment loss.
Segments and operating changes
- Q2 Commercial Trailer Products sales increased 15.6% to $402.5 million; new trailer shipments rose 15.1% to 15,650 units. Segment gross margin declined to 11.8% from 14.6%.
- Q2 Diversified Products sales increased 3.6% to $94.1 million; gross margin declined to 17.7% from 18.9%.
- Final Mile Products, including Supreme, contributed $121.2 million of Q2 sales and $20.9 million of gross profit. Its Q2 gross margin was 17.3%.
- Acquisition-related sales materially affect growth comparisons: Supreme contributed $119.5 million of revenue in Q2 and $191.7 million in H1 2018, according to the acquisition note.
Cash flow, liquidity and debt
- H1 operating cash flow was $40.5 million, down from $75.2 million. Working capital used approximately $29.8 million, including a $46.6 million increase in receivables and a $56.1 million increase in inventory, partly offset by a $72.8 million increase in payables and accrued liabilities.
- H1 investing activities provided $8.4 million, including proceeds from asset sales, and capital expenditures were $11.1 million. Financing activities used $111.1 million, including $80.2 million to settle $44.6 million principal of convertible notes, $21.4 million of stock repurchases, and $9.3 million of dividends.
- Cash and cash equivalents were $119.2 million at June 30, 2018; restricted cash was another $10.0 million. Reported liquidity, defined as cash on hand plus available revolver capacity, was $287.7 million. The $175 million revolving facility had no borrowings outstanding; the company reported covenant compliance.
- Total debt and capital lease obligations were approximately $512.8 million. Debt included $325 million of 5.50% senior notes due 2025 and $186.6 million under the term loan, which matures in 2022 and has variable interest rates. Debt-to-equity was approximately 1.0:1.0.
- Current assets were $604.1 million and current liabilities $308.7 million at quarter-end. Inventory increased to $234.1 million from $180.7 million at year-end 2017.
Outlook, risks and contingencies
- Management described demand across segments as strong and expected industry production to remain above replacement demand for the rest of 2018. It cited external forecasts of approximately 310,000–320,000 U.S. trailer builds in 2018 and continued healthy demand thereafter; these are industry forecasts, not company sales guidance.
- Backlog was $1.154 billion at June 30, 2018, versus $1.213 billion at December 31, 2017 and $762 million a year earlier. Management expected to complete most of the June backlog within 12 months. Orders may be changed or cancelled.
- Management expected 2018 capital expenditures of approximately $40 million and said liquidity was adequate for planned operations, working capital and capital expenditures for the remainder of the year. It also intended to continue returning capital and reducing debt.
- Key risks include tariffs and trade-policy uncertainty affecting steel, aluminum and other inputs; raw-material inflation and volatility; shortages from a limited supplier base; labor availability and manufacturing execution; and weaker domestic or global economic conditions. A hypothetical 100-basis-point change in floating rates would change annual interest expense by approximately $1.9 million.
- Legal matters include a Supreme securities class action with an amended complaint filed in July 2018 after dismissal of earlier claims; management said it would defend the case and did not expect a material adverse effect. The Brazil joint-venture matter remained subject to further appeal, though the company said it did not expect a material adverse effect. Other discussed matters were settled, dismissed or assessed by management as not expected to be material.
- The company adopted revenue-recognition Topic 606 effective January 1, 2018 with no financial-statement impact. It expected adoption of lease standard Topic 842 in 2019 to add a comparable amount to the balance sheet for approximately $5.2 million of future rental obligations.
Important facts for investors to verify
- Whether the company can recover gross margins as labor, supplier constraints and materials costs evolve, including the effects of tariffs and its ability to pass cost increases through to customers.
- How much reported sales growth and future profitability depend on Supreme, and the progress of integration and expected diversification benefits.
- Whether working-capital investment—particularly receivables and inventory—converts into operating cash flow while demand remains high.
- The terms, variable-rate exposure and repayment schedule of debt, and whether liquidity remains sufficient alongside capital spending, dividends and repurchases.
- Developments in the Supreme securities litigation and other contingencies, as well as changes in backlog quality, cancellations and delivery timing.