Wabash National Corporation — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Dollar amounts below are in millions, except per-share data. Wabash manufactures commercial trailers, diversified transportation and industrial products, and final-mile truck bodies. The Final Mile Products segment includes Supreme, acquired in September 2017; its inclusion makes year-over-year comparisons less directly comparable.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $553.1 | $425.1 | $1,657.1 | $1,223.7 |
| Gross profit | $65.2 | $61.0 | $214.6 | $188.0 |
| Gross margin | 11.8% | 14.3% | 13.0% | 15.4% |
| Income from operations | $16.5 | $26.6 | $88.2 | $95.5 |
| Net income | $4.7 | $18.9 | $57.8 | $62.1 |
| Diluted EPS | $0.08 | $0.30 | $0.98 | $0.99 |
| Operating cash flow | Not separately stated | Not separately stated | $56.7 | $61.1 |
Liquidity, debt, and capital allocation
- At September 30, cash and cash equivalents were $104.1; the company also reported $5.6 of restricted cash in current assets. Total assets were $1,350.2 and stockholders’ equity was $479.9.
- Disclosed liquidity was $271.4, defined as cash on hand plus available revolving-credit borrowing capacity. No borrowings were outstanding under the $175 million revolving facility; the company reported compliance with its covenants.
- Debt and capital lease obligations totaled approximately $512.3. Debt included $325.0 of 5.50% senior notes due 2025 and $186.2 under the term loan due 2022; the term loan bears floating-rate interest. The disclosed debt-to-equity ratio was approximately 1.1:1.0.
- Nine-month financing uses included $80.2 to settle $44.6 principal of the 2018 convertible notes, $44.4 in stock repurchases, and $13.6 in dividends. Cash declined by $81.8 from the start of the year to $109.7, including restricted cash.
- Operating cash flow was below prior year, with working-capital uses including increased receivables and inventory partly offset by higher accounts payable and accrued liabilities. Capital expenditures were $20.3 for the nine months.
Material changes versus the prior period
- Q3 sales increased 30.1%; nine-month sales increased 35.4%. Growth reflected higher trailer shipments, contributions from Supreme/Final Mile, and demand in diversified products. Q3 new trailer shipments rose 9.0% to 15,150 units; nine-month shipments increased 14.8% to 44,650.
- Despite higher sales, gross margin declined 2.5 percentage points in Q3 and 2.4 points year to date. Management cited higher commodity, component and labor costs, labor tightness and overtime, production interruptions, and unfavorable product mix.
- Q3 operating income and net income fell year over year. Results included a $12.0 impairment charge in Diversified Products, higher interest expense following the 2017 senior-note issuance, and lower other income from branch-asset sales than in the prior-year quarter.
- Q3 Final Mile sales were $87.0, with $9.0 gross profit; there was no comparable segment in Q3 2017. Diversified Products reported a Q3 operating loss of $6.3, including the impairment.
Outlook, commentary, and risks
- Management described demand as strong and reported backlog of $1.332 billion at September 30, versus $1.213 billion at December 31, 2017 and $741 million a year earlier. It expected to complete most of the September backlog within 12 months.
- Management cited industry forecasts above replacement demand and reported third-party 2018 trailer-production estimates of approximately 310,500 to 320,850 units. These are industry forecasts, not company revenue or earnings guidance. The company expected 2018 capital expenditures of approximately $35 million and said liquidity was adequate for planned operations, working capital, and capital spending for the remainder of 2018.
- Key risks include steel, aluminum and other input-cost inflation and tariffs; limited suppliers and potential component shortages; labor availability and manufacturing execution; chassis availability and customer pickup delays; and economic weakness in housing, energy, or construction markets. Management said it would seek to pass through cost increases and continue cost-control and hedging efforts, but noted it may not be able to offset all increases.
- Commodity purchase commitments were $107.0 through December 2019. A hypothetical 100-basis-point change in floating rates was estimated to change annual interest expense by $1.9. The company does not hedge all commodity exposure.
- The filing reports legal proceedings and governmental examinations; management did not expect the described matters to materially affect financial condition or liquidity, while noting outcomes remain uncertain. A Supreme securities class action remained pending. Disclosure controls and procedures were assessed as effective at September 30, 2018.
Most important facts to verify
- Whether cost inflation, labor constraints, supplier interruptions, and chassis availability continue to pressure margins or limit shipments, despite the strong backlog.
- Backlog conversion, cancellations or changes, and the pace of customer pickups; most backlog was expected to ship within 12 months.
- Cash generation and working-capital needs, particularly receivables and inventory, alongside planned capital spending and shareholder returns.
- Debt-service exposure, including the floating-rate term loan, covenant headroom, and remaining liquidity after cash uses.
- The impairment disclosure is not fully consistent: the financial-statement note describes $4.9 of goodwill and $7.0 of long-lived-asset impairment, while MD&A states $7.1 for long-lived assets. Verify the exact long-lived-asset charge and its implications for the Diversified Products reporting unit.
- Progress on the Supreme integration and whether the Final Mile segment’s operating performance improves; comparisons are affected by the acquisition and new segment presentation.