Wabash National Corporation — Q1 2017 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2017, compared with Q1 2016. Wabash manufactures trailers and related transportation equipment, reporting Commercial Trailer Products and Diversified Products segments. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $362.7 | $447.7 | Down 19.0% |
| Gross profit / margin | $59.4 / 16.4% | $79.5 / 17.8% | Margin down 1.4 percentage points |
| Operating income / margin | $30.3 / 8.4% | $48.2 / 10.8% | Lower |
| Net income | $20.2 | $27.5 | Down 26.7% |
| Diluted EPS | $0.32 | $0.42 | Down |
| Operating cash flow | $62.2 | $42.9 | Up $19.3 |
- Sales decline reflected 3,600 fewer new trailer shipments, down 24.8% to 10,900 units. Commercial Trailer Products sales fell 24.5%; Diversified Products sales rose 4.2%.
- Management attributed weaker gross margin primarily to lower volume and higher commodity costs. Diversified Products margin was also affected by unfavorable mix and lower equipment volumes.
- Operating cash flow benefited from collections and increased accounts payable and accrued liabilities, partly offset by a $51.7 million inventory build. Cash and cash equivalents were $211.2 million at quarter-end, up from $163.5 million at year-end.
- Liquidity, defined by the company as cash plus available revolving-credit capacity, was $378.9 million. There were no revolver borrowings outstanding, and the company reported compliance with its covenants.
- Total debt and capital lease obligations were $237.7 million. The $49.0 million principal amount of 3.375% convertible notes due 2018 was classified as current because the notes were convertible in Q2 2017. Management said it intended to settle conversions in cash; the if-converted value exceeded principal by approximately $38 million at March 31.
- Working capital included inventory of $190.2 million, up from $140.0 million at year-end; accounts receivable declined to $117.3 million from $153.6 million.
Material changes, outlook and commentary
- Q1 2017 net sales fell $85.0 million year over year, primarily from reduced Commercial Trailer Products shipments and lower industry demand and delivery timing. Diversified Products growth in composites and parts partly offset the decline.
- Interest expense declined to $3.0 million from $4.1 million, primarily following 2016 repurchases of convertible notes. Other, net was income of $1.3 million, including a gain on former branch asset sales, partly offset by a $0.6 million debt-extinguishment loss related to the February 2017 term-loan refinancing.
- The company refinanced its term loan in February 2017. The new loan bears interest at LIBOR plus 2.75% or the base rate plus 1.75%, with quarterly amortization and a 2022 stated maturity, subject to acceleration provisions tied to the 2018 notes and minimum liquidity.
- Wabash reinstated a quarterly dividend and declared $0.06 per share; it paid $3.9 million in dividends during the quarter. It repurchased $16.6 million of common stock and expanded its repurchase authorization by $100 million. Capital expenditures were $3.2 million in Q1; management expected $30–$35 million for 2017.
- Backlog was approximately $863 million at March 31, 2017, versus $802 million at December 31, 2016 and $1.13 billion a year earlier. Management expected to complete most backlog orders within 12 months.
- Management raised 2017 total unit shipment guidance to 52,000–56,000, implying volumes 8%–15% below 2016. It expected industry demand to remain above replacement levels, while acknowledging economic downside risks. Industry forecasts cited in the filing were approximately 275,000–269,000 trailers for 2017, depending on the forecaster.
- Key risks include trailer-market weakness, higher or unavailable raw materials and components, production and supply-chain execution, and exposure to floating interest rates. A 100-basis-point rate change was estimated to affect annual interest expense by $1.9 million. Raw-material purchase commitments were $47.9 million through December 2017.
Contingencies and unusual items
- The company disclosed multiple legal and governmental matters; it stated that, based on current knowledge, the matters described were not expected to materially affect financial condition or liquidity, though an individual outcome could affect a particular period.
- In the Brazil joint-venture dispute, an October 2016 appellate ruling favored Wabash and vacated the prior damages judgment; further appeal remained possible. Other disclosed matters included intellectual-property litigation, a disputed approximately $2.9 million Walker-related benefits claim, and environmental matters described as not expected to be material.
- Q1 also included a $2.456 million gain on asset sales, a $0.640 million debt-extinguishment loss, and recognition of excess tax benefits on stock-based compensation contributing to a 29.5% effective tax rate, compared with 37.0% in Q1 2016.
Investor facts to verify
- Whether shipment guidance, backlog conversion, and demand forecasts are realized as trailer volumes continue below 2016 levels.
- Inventory levels and margins, particularly whether production continues to exceed shipments and commodity costs remain elevated.
- Plans and cash requirements for settling or refinancing the convertible notes due 2018, including the related liquidity and accelerated-maturity provisions.
- Capital allocation trade-offs among dividends, share repurchases, capital expenditures, and debt reduction.
- Developments in legal matters and supply constraints, and the final financial impact of adopting new accounting standards.