Wabash National Corporation — Q2 2016 Form 10-Q
Business context and reporting period. Unaudited results for the three and six months ended June 30, 2016, compared with the same 2015 periods. Wabash manufactures trailers and transportation-related products. During Q2, it realigned its reporting segments into Commercial Trailer Products and Diversified Products; prior segment results were restated.
Financial performance and liquidity
- Q2 revenue: $471.4 million, down 8.4% year over year. New trailer shipments fell 5.9% to 15,900; used trailer shipments declined 46.2% to 350.
- Q2 profitability: Gross profit was $91.1 million, up 25.8%, and gross margin increased to 19.3% from 14.1%. Operating income rose to $58.9 million from $42.1 million. Net income was $35.5 million versus $28.6 million; diluted EPS was $0.53 versus $0.41.
- First-half revenue and earnings: Revenue was $919.1 million, down 3.5%. Gross profit increased to $170.6 million from $129.6 million, with margin expanding to 18.6% from 13.6%. Net income was $63.1 million versus $39.1 million; diluted EPS was $0.95 versus $0.55.
- Drivers and segments: Management attributed stronger margins chiefly to improved pricing, favorable material costs, manufacturing efficiencies, and product mix. First-half Commercial Trailer Products sales increased 0.6% to $746.3 million; Diversified Products sales fell 17.2% to $179.2 million, mainly reflecting weaker tank-trailer demand in chemical and energy markets.
- Cash flow: First-half operating cash flow was $76.3 million, compared with $42.5 million in 2015. Capital expenditures were $8.1 million. Cash increased $8.7 million to $187.6 million. Inventory rose $46.0 million during the half, primarily as finished-goods production exceeded shipments.
- Debt and liquidity: Debt and capital lease obligations totaled $282.5 million at June 30. The company had no outstanding revolving-credit borrowings and reported liquidity of $356.9 million, including cash and available credit. It was in compliance with credit-agreement covenants.
- Capital returns: First-half financing cash use included $42.1 million to repurchase convertible notes and $17.7 million for stock repurchases. During Q2, 749,302 shares were repurchased under the program.
Material changes and unusual items
- Q2 revenue declined despite substantially higher gross margin and earnings. For the six months, Diversified Products weakness was partially offset by Commercial Trailer Products growth.
- The 2015 comparison included an $8.3 million gain on real-estate sales in “Other, net”; Q2 2016 instead recorded a $0.2 million expense there. First-half 2016 also included a $0.5 million loss on early extinguishment of debt.
- A $1.7 million goodwill impairment was recorded in Q2 following the segment realignment, relating to retail branch operations.
- The company repurchased $35.2 million principal amount of convertible notes in February for $42.1 million. At June 30, $95.8 million principal remained outstanding, due 2018; the notes were not then convertible under their stated conditions.
Outlook, commentary, and risks
- Management expected industry demand to remain healthy and above replacement levels, while citing weaker demand for platform and liquid tank trailers and a road-construction project affecting dry-van production.
- For full-year 2016, management estimated new trailer sales of 60,000–62,000 units, 4%–7% below 2015 demand levels, and capital spending of $25–$30 million. It expected continued margin improvement from pricing, productivity, and cost-optimization efforts. No specific EPS or revenue guidance was provided.
- Backlog was approximately $860 million at June 30, down from $1.209 billion at year-end 2015 and $1.155 billion a year earlier. Management expected to complete most backlog orders within 12 months.
- Risks cited include domestic and global economic weakness, housing and construction markets, raw-material and component costs or shortages, supplier concentration, manufacturing execution, customer and product acceptance, and the cyclical trailer market. A 100-basis-point floating-rate change was estimated to affect annual interest expense by $0.9 million.
- Legal contingency: In a long-running Brazilian joint-venture case, a lower court awarded damages of approximately R$26.7 million; the company estimated possible interest, fees, and inflation adjustments at about $58 million using current exchange rates. The judgment was on appeal and not enforceable pending that process. Wabash recorded no charge and stated it could not reasonably estimate a possible loss or range.
Important facts for investors to verify
- Whether improved pricing, material costs, and efficiencies can sustain higher margins as trailer shipments and backlog decline.
- Developments in the Brazilian litigation, including the appeal outcome and the potentially substantial unrecorded exposure.
- The timing and funding implications of the $95.8 million convertible notes due 2018, including liquidity requirements and provisions that can accelerate debt maturities.
- Inventory levels and conversion of backlog into shipments and operating cash flow.
- Actual 2016 trailer volumes, capital expenditures, and the extent of weakness in tank, platform, and other end markets.