Wabash National Corporation — Q2 2019 Form 10-Q
Business context and period: Wabash National manufactures commercial trailers, specialized equipment and truck bodies through its Commercial Trailer Products, Diversified Products and Final Mile Products segments. This unaudited report covers the three and six months ended June 30, 2019; comparisons are with the same 2018 periods unless noted.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $626.1 million | $612.7 million | $1,159.2 million | $1,104.0 million |
| Gross profit / margin | $87.7 million / 14.0% | $85.3 million / 13.9% | $156.3 million / 13.5% | $149.4 million / 13.5% |
| Operating income / margin | $47.5 million / 7.6% | $46.0 million / 7.5% | $72.7 million / 6.3% | $71.7 million / 6.4% |
| Net income | $31.0 million | $31.9 million | $45.7 million | $53.2 million |
| Diluted EPS | $0.56 | $0.54 | $0.82 | $0.89 |
Cash flow and liquidity: Six-month operating cash flow was $61.0 million, versus $40.5 million; capital expenditures were $15.0 million. Cash increased to $140.2 million from $132.7 million at December 31, 2018. Management reported liquidity of $307.4 million, defined as cash plus available revolving-credit capacity. Inventory increased $80.2 million during the half-year, contributing to working-capital use.
Debt and capital: At June 30, total debt was $495.2 million before unamortized discounts and fees; finance lease obligations were $0.9 million. The debt table reports total debt and finance leases of $496.1 million. Debt included $325.0 million of 5.50% senior notes due 2025 and $170.2 million outstanding on the term loan due 2022. The $175 million revolving facility had no borrowings. The company prepaid $15.0 million of term-loan principal in Q2 and repurchased $13.9 million of stock and paid $9.1 million in dividends during the first half. Debt-to-equity was approximately 1.0:1.0.
Material changes versus prior periods
- Q2 sales grew 2.2%; six-month sales grew 5.0%. Final Mile sales increased 11.2% in Q2 and 19.8% for the half, largely reflecting higher truck-body shipments. Commercial Trailer Products sales declined 0.4% in Q2 while new trailer shipments fell 8.9%.
- Q2 gross margin edged up to 14.0%; six-month gross margin was unchanged at 13.5%. Diversified Products margins improved, while Final Mile margins declined amid higher commodity, component and labor costs and unfavorable mix.
- Net income declined 3% in Q2 and 14% for the half. Six-month results included $0.9 million of other income, compared with $12.0 million in the prior-year period, which included larger gains from asset sales. The 2018 comparison also included convertible-note-related effects; those notes matured in May 2018.
- Cash from operations improved year over year, while inventory rose substantially. Cash used in financing was lower than in 2018, when the company repurchased $80.2 million of convertible notes.
Outlook, commentary, risks and unusual items
- Management described trailer demand as strong and expected industry shipments and production to remain above replacement demand for the remainder of 2019. It cited external industry forecasts of 2019 trailer production of approximately 320,000–330,600 units; these are third-party estimates, not company guidance. No specific company revenue or earnings forecast is provided.
- Backlog was $1.2 billion at June 30, 2019, versus $1.8 billion at December 31, 2018 and $1.2 billion a year earlier. Most June backlog was expected to be completed within 12 months; orders may change or be cancelled.
- Management expected approximately $40 million of 2019 capital spending and said liquidity was adequate for planned operations, working capital and capital expenditures. It planned to continue deleveraging and returning capital to shareholders.
- Risks include economic weakness, raw-material and component inflation or shortages, reliance on a limited supplier base, manufacturing execution, and the ability to pass cost increases through to customers. A 100-basis-point change in floating rates was estimated to affect annual interest expense by $1.7 million.
- Commodity swaps had approximately $31.4 million notional value. The company expected to reclassify about $2.0 million of pretax deferred losses to cost of sales over the next 12 months. It also reported $107.8 million of raw-material purchase commitments through March 2020.
- The Supreme-related securities class action was dismissed with prejudice in March 2019; the plaintiff appealed. Management said existing legal proceedings were not expected to materially affect financial condition or liquidity, while noting outcomes are uncertain. A separate environmental settlement payment was described as immaterial.
- The company adopted lease accounting guidance in January 2019, recording $9.9 million of right-of-use assets and lease liabilities at adoption. Management reported compliance with debt covenants and effective disclosure controls as of June 30.
Important facts for investors to verify
- Whether the lower backlog from year-end translates into weaker subsequent shipments, and how order changes or cancellations affect conversion.
- Whether higher input costs, labor costs and product mix pressure margins, particularly in Commercial Trailer and Final Mile Products.
- Whether the elevated inventory balance converts into sales and cash, and whether working-capital requirements remain manageable.
- Term-loan repayment, refinancing and covenant headroom, including the effect of floating interest rates and the secured debt structure.
- Execution against the approximately $40 million capital-spending plan, stock repurchases and dividends while maintaining liquidity.
- Developments in the Supreme appeal, environmental matter, commodity hedges and supplier availability.