Wabash National Corporation — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; unaudited. Wabash manufactures trailers, truck bodies and related transportation products. On September 27, it acquired Supreme Industries, expanding its final-mile vehicle business. Supreme’s results after acquisition were not material and were excluded from reported operating results.
Financial results and position
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $425.1 | $464.3 | $1,223.7 | $1,383.4 |
| Gross profit / margin | $61.0 / 14.3% | $83.5 / 18.0% | $188.0 / 15.4% | $254.0 / 18.4% |
| Operating income | $26.6 | $54.9 | $95.5 | $161.9 |
| Net income | $18.9 | $33.4 | $62.1 | $96.4 |
| Diluted EPS | $0.30 | $0.51 | $0.99 | $1.45 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $61.1 | $106.0 |
- Q3 sales fell 8.4%; nine-month sales fell 11.5%. Q3 operating income declined 51.5% and net income declined 43.2% year over year. Nine-month net income declined 35.6%.
- At September 30, cash was $153.7, current assets $585.4 and current liabilities $289.1. Inventory was $245.7, up from $140.0 at year-end 2016.
- Total debt and capital lease obligations were approximately $559.6, versus $240.5 at December 31, 2016. This included $325.0 of 5.50% senior notes due 2025, $188.0 outstanding on the term loan, and $44.8 principal on convertible notes due May 2018. The convertible notes were classified as current.
- Liquidity, defined as cash plus available revolver capacity, was $323.3; no revolver borrowings were outstanding, and the company reported compliance with its covenants. The filing says approximately $169.6 of additional revolver borrowing capacity was available.
- Nine-month investing cash outflow was $320.1, principally the $323.5 net cash purchase of Supreme; financing cash inflow was $249.2. Cash declined $9.8 to $153.7. Operating cash flow fell by $44.8 year over year, with inventory growth a major use of cash.
Material changes and unusual items
- Supreme was acquired for aggregate consideration of $360.4, funded primarily with proceeds from the senior notes and available cash. Purchase accounting, including $165.4 of goodwill and $158.0 of identifiable intangibles, was preliminary. The company expected to establish a Final Mile Products reporting segment in Q4 2017.
- Reported sales and earnings do not include a material contribution from Supreme. Unaudited pro forma results assuming Supreme had been acquired at the beginning of each comparative period showed sales of $496.8 and net income of $24.3 for Q3 2017, and sales of $1,454.6 and net income of $68.1 for the first nine months of 2017. The filing cautions these are not necessarily indicative of actual or future results.
- The company recorded $8.7 of Supreme acquisition expenses. Other income included a gain on sale of retail branch assets of $5.6 in Q3 and $8.1 for the nine-month period.
- Commercial Trailer Products drove the sales decline: Q3 segment sales decreased 10.8%, with new trailer shipments down 10.4%; nine-month segment sales decreased 14.6%, with shipments down 15.7%. Diversified Products sales increased modestly, but segment margins also declined.
- Quarterly dividends declared were $0.06 per share; the company also reported $11.5 of dividends paid during the first nine months, including payments to holders of convertible notes. It repurchased $46.6 of common stock during the nine-month period.
Outlook, commentary and risks
- Management forecast full-year 2017 new trailer shipments of 53,500–55,500 units, 10%–11% below 2016. It expected strong operational performance through the rest of 2017 and into 2018, citing backlog, industry demand and productivity initiatives; this is management’s expectation, not a guarantee.
- Backlog was $741 at September 30, including $70.5 associated with Supreme, versus $802 at December 31, 2016 and $643 at September 30, 2016. Management expected to complete most existing backlog within 12 months.
- Management cited lower volumes and higher commodity costs as pressures on margins. It also warned of raw-material and component price or supply disruptions, economic weakness, manufacturing execution risks, and dependence on certain suppliers.
- Integration of Supreme may involve higher-than-expected costs, employee or customer disruption, systems and control integration challenges, unknown liabilities, and failure to realize projected synergies or growth. Supreme also faces chassis-supply and specialized-vehicle competition risks.
- The company expected 2017 capital expenditures of approximately $25.0, compared with $15.4 in the first nine months. Management said liquidity was adequate for planned operations, working capital and capital spending through the remainder of 2017 and 2018.
- The $44.8 principal amount of convertible notes matures in May 2018. The term loan has a springing maturity provision tied to the convertible notes and a minimum-liquidity condition. The company stated it intended to settle note conversions in cash; conversion value exceeded principal by approximately $43 at September 30.
- Legal matters include Supreme litigation with approximately $40.0 in claimed damages and a Brazilian joint-venture appeal. Management did not expect these matters to have a material adverse effect, but noted litigation outcomes are uncertain and some potential losses cannot be estimated.
- Management identified 2018 adoption of the new revenue standard as under evaluation; reviewed sample contracts had not indicated a financial-statement impact, but the assessment was not complete. Supreme was excluded from the company’s internal-control effectiveness evaluation while integration was underway.
Important facts for investors to verify
- Whether Supreme integration delivers the expected synergies, margins and final-mile growth, and how preliminary acquisition valuations change.
- Whether trailer shipments meet management’s 53,500–55,500-unit forecast and backlog converts to sales on expected timing and terms.
- Whether inventory normalizes and operating cash flow improves after the substantial working-capital use.
- Debt-service capacity, the May 2018 convertible-note maturity and the term loan’s springing-maturity liquidity condition.
- Exposure to commodity costs and constrained chassis or component supplies, as well as developments in material legal claims.