Wabash National Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Dollar amounts below are in millions unless noted.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Net sales | $447.7 | $437.6; up 2.3% |
| Gross profit / margin | $79.5 / 17.8% | $57.2 / 13.1% |
| Operating income / margin | $48.2 / 10.8% | $27.3 / 6.2% |
| Net income / diluted EPS | $27.5 / $0.42 | $10.5 / $0.15 |
| Operating cash flow | $42.9 | $4.2 |
| Capital expenditures | $3.0 | $3.0 |
- Gross margin improved 4.7 percentage points, primarily reflecting better pricing, higher Commercial Trailer Products volumes, favorable commodity costs and manufacturing efficiencies. Cost of sales fell 3.2% despite higher sales.
- Cash and cash equivalents were $168.4 at March 31, versus $178.9 at year-end. Inventory rose $41.2 during the quarter to $208.2, partly because production exceeded shipments; accounts payable and accrued liabilities increased $46.3.
- Liquidity, defined by the company as cash plus available revolving-credit capacity, was $337.8. There were no revolving-credit borrowings outstanding at quarter-end, and the company reported compliance with its covenants.
- Debt and capital lease obligations totaled $282.6 on a carrying-value basis. Convertible notes had $95.8 principal outstanding and the term loan had approximately $190.9 outstanding. The term loan is floating-rate; management estimated that a 100-basis-point rate change would affect annual interest expense by $0.8.
Changes versus the prior-year quarter
- Revenue increased modestly, but profitability rose substantially, led by Commercial Trailer Products: segment sales before intersegment eliminations increased 12.8%, while segment operating income rose to $52.1 from $22.8.
- Diversified Products sales declined 23.6% to $79.4, principally on lower tank-trailer shipments tied to weaker chemical and energy end-market demand. Retail sales fell 21.1% to $34.0, largely due to fewer new-trailer shipments and timing.
- Interest expense decreased to $4.1 from $5.2, following convertible-note repurchases. Other expense was $0.4 versus $5.4 a year earlier; the 2015 amount included a $5.3 debt-refinancing charge.
- Operating cash flow improved from $4.2 to $42.9. The quarter included a $41.2 inventory cash use, partly offset by a $46.3 increase in accounts payable and accrued liabilities.
Outlook, risks and unusual items
- Management cited healthy trailer demand, strong pricing and backlog, while noting potential downside from domestic and global economic conditions, including housing and construction markets. Industry forecasts cited in the filing differ: ACT projected about 298,000 trailers for 2016, while FTR projected about 279,000.
- For full-year 2016, management estimated sales of 60,000–62,000 new trailers, 4%–7% below 2015 demand levels, partly due to a road-construction project expected to affect dry-van production. It expects continued improvement through margin discipline, productivity and cost initiatives; no earnings-per-share guidance is provided.
- Backlog was approximately $1.13 billion at March 31, down from $1.21 billion at December 31, 2015 and $1.22 billion a year earlier. The company expected to complete most orders within 12 months. Planned 2016 capital spending was approximately $30 million.
- Raw-material and component costs, possible supply shortages and reliance on a limited number of suppliers are risks. Purchase commitments for raw materials were $69.1 through March 2017.
- In February, the company repurchased $35.2 principal amount of convertible notes for $42.1 and recorded a $0.5 loss. The notes mature in 2018; if not resolved by specified dates, their terms may accelerate maturity of the revolving facility and term loan unless liquidity conditions are met.
- A Brazilian joint-venture lawsuit remains on appeal. A lower court ordered damages of about R$26.7 million (approximately $7.4 million at current exchange rates); the company estimated possible interest, fees and inflation adjustments at approximately $52 million, but said it could not reasonably estimate its possible loss and had recorded no charge. The judgment was not enforceable pending appeal; a decision was not expected before Q3 2016 at the earliest.
- Other disclosed matters include environmental disputes and an approximately $2.9 million disputed Walker acquisition benefits claim. Management did not expect these matters to materially affect financial condition or results, while noting litigation outcomes can affect a particular period.
- The company authorized a $100 million, two-year share repurchase program in February. It repurchased 493,110 shares under the program during the quarter; $93.7 remained authorized at March 31. Disclosure controls were reported effective, with no material changes in internal controls.
Key facts for investors to verify
- Whether improved Commercial Trailer Products pricing and margins are sustainable, and whether weaker Diversified Products and Retail trends persist.
- Execution against the 60,000–62,000 trailer sales estimate, the expected dry-van production disruption and the reported backlog.
- Working-capital conversion, particularly inventory growth, and the sustainability of operating cash flow.
- Liquidity and covenant headroom relative to the convertible notes’ 2018 maturity and the facilities’ conditional accelerated-maturity provisions.
- Developments and potential exposure in the Brazilian litigation, including the uncertain interest and adjustment estimate.
- Actual capital spending, raw-material costs and supplier availability compared with management’s plans and commitments.