Wabash National Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unless stated otherwise, financial amounts are in U.S. dollars; financial-statement amounts below are rounded to millions. The filing is unaudited.
Business context and results
Wabash manufactures commercial trailers and transportation-related products. It reports two segments: Commercial Trailer Products and Diversified Products. New trailers accounted for 84.5% of Q3 sales. The company realigned segment reporting in Q2 2016 and restated prior-period segment comparisons.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $464.3m | $531.4m | $1,383.4m | $1,483.8m |
| Gross profit | $83.5m | $86.0m | $254.0m | $215.6m |
| Gross margin | 18.0% | 16.2% | 18.4% | 14.5% |
| Operating income | $54.9m | $56.4m | $161.9m | $125.7m |
| Net income | $33.4m | $31.9m | $96.4m | $71.0m |
| Diluted EPS | $0.51 | $0.47 | $1.45 | $1.01 |
Financial position, cash flow and capital
- Q3 sales declined 12.6%; nine-month sales declined 6.8%. Lower shipments and weaker Diversified Products sales were key factors. Q3 new trailer shipments fell 6.4% year over year; used trailer shipments fell 50%.
- Margins improved despite lower sales. Management attributed the improvement chiefly to pricing, favorable material costs and manufacturing efficiencies. Q3 Commercial Trailer Products gross margin was 17.0%, versus 13.6%; Diversified Products gross margin was 21.7%, versus 24.2%.
- Operating cash flow for the first nine months was $106.0m, compared with $104.7m in 2015. Capital expenditures were $15.0m; investing activities used $12.8m. Financing activities used $82.4m, including $42.1m to repurchase convertible notes and $40.7m for share repurchases. Cash increased $10.8m to $189.6m.
- Working capital absorbed cash, particularly inventory, which rose $29.6m from year-end to $195.1m. Management cited finished-goods build and production exceeding shipments. Days sales outstanding increased to 31 from 24 a year earlier; inventory turns were approximately 8 in both periods.
- At September 30, total debt and capital lease obligations were $282.5m. Debt included approximately $95.8m principal of 3.375% convertible notes due 2018 and $190.0m under the term loan due 2022. The $175m revolving facility had no outstanding borrowings; liquidity, defined by the company as cash plus available borrowing capacity, was $359.0m. The company reported compliance with credit-facility covenants.
- Stockholders’ equity was $496.9m. The company repurchased $40.7m of common stock in the first nine months; Q3 program repurchases totaled about 1.63m shares at an average $13.68 per share.
Outlook, risks and unusual items
- Management expected 2016 total unit shipments at the low end of its previously communicated 60,000–62,000 range. It anticipated healthy trailer demand above replacement levels into 2017, while expecting some volume decline from current levels. Industry forecasters cited in the filing projected lower overall trailer demand in 2016 and 2017 than in 2015.
- Management expected approximately $25m of 2016 capital spending and believed liquidity was sufficient for operations, working capital and capital expenditures through the remainder of 2016 and 2017. It also described continued focus on productivity, pricing, cost optimization, diversification and shareholder returns.
- Backlog was approximately $643m at September 30, down from $1.209bn at December 31, 2015 and $1.097bn a year earlier. The company expected to complete most existing backlog orders within 12 months. Orders may change in quantity, timing, specifications or terms.
- Principal operating risks include economic weakness, especially in housing, energy and construction; raw-material price and supply volatility; dependence on a limited number of suppliers for certain components; and the ability to manage production. A 100-basis-point interest-rate change was estimated to affect annual interest expense by about $1.0m.
- A $1.7m goodwill impairment was recorded in Q2 following segment realignment and testing of retail branch goodwill. Brazil litigation developments were favorable: on October 5, 2016, an appeals court dismissed all claims and vacated a prior damages award; further appeal remained possible. Other disclosed legal and environmental matters included disputed Walker acquisition benefits of approximately $2.9m and environmental settlements described as immaterial or resolved.
- The company disclosed $35.5m of raw-material purchase commitments through December 2017, $5.7m of standby letters of credit and $6.7m of operating lease commitments. It cautioned that actual results may differ materially from forward-looking statements.
Important facts for investors to verify
- Whether shipment volumes and backlog stabilize or continue declining, particularly in tank trailers and other Diversified Products markets.
- Whether improved Commercial Trailer Products margins persist as pricing, materials costs and manufacturing volumes change.
- Whether the inventory build converts to shipments and cash, and whether receivable collection metrics improve.
- The company’s ability to address the 2018 convertible notes at maturity and maintain the liquidity thresholds tied to accelerated-maturity provisions in its credit agreements.
- Execution of the stated shipment and capital-spending outlook, and any material developments in supplier, economic or legal risks.