Wabash National Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Comparisons are with the corresponding 2018 periods unless stated otherwise. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.
Business context and results
Wabash manufactures commercial trailers, diversified transportation and industrial products, and final-mile truck bodies. Its three reporting segments are Commercial Trailer Products, Diversified Products, and Final Mile Products.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $580.9 | $553.1 | $1,740.1 | $1,657.1 |
| Gross profit | $77.7 | $65.2 | $234.1 | $214.6 |
| Gross margin | 13.4% | 11.8% | 13.5% | 13.0% |
| Operating income | $38.3 | $16.5 | $111.0 | $88.2 |
| Net income | $25.5 | $4.7 | $71.2 | $57.8 |
| Diluted EPS | $0.46 | $0.08 | $1.28 | $0.98 |
Q3 net margin was 4.3% versus 0.8% a year earlier; nine-month net margin was 4.1% versus 3.5%. Q3 interest expense was $6.7 million and income tax expense was $7.4 million; the nine-month amounts were $20.8 million and $21.2 million, respectively. The nine-month effective tax rate was 23.0%, compared with 26.8%.
Cash flow, balance sheet, and capital
- Nine-month operating cash flow was $76.2 million, up from $56.7 million. Capital expenditures were $22.2 million, giving approximate operating cash flow less capex of $54.0 million. Investing activities used $21.5 million; financing activities used $66.6 million.
- Cash was $120.9 million at September 30, 2019, versus $132.7 million at year-end 2018. Liquidity, defined by the company as cash plus available revolver capacity, was $288.1 million. The $175 million revolving facility had no borrowings outstanding.
- Long-term debt, net of discount and fees, was $475.1 million, down from $503.0 million at year-end; finance lease obligations were $0.8 million. Total debt and finance lease obligations were approximately $481.0 million. The company prepaid approximately $30.5 million of term-loan principal in the first nine months. It reported compliance with debt covenants.
- Current assets were $621.4 million and current liabilities $325.7 million. Inventory rose to $274.3 million from $184.4 million at year-end, including increases in finished goods and raw materials. Inventory growth used $89.9 million of cash in the nine-month period.
- Nine-month cash dividends paid were $13.4 million and stock repurchases and withholdings were $22.7 million. The declared dividend was $0.08 per share for Q3. The company reported $80.0 million remaining under its repurchase authorization.
Material changes and management commentary
- Q3 sales rose 5.0%; nine-month sales also rose 5.0%. Final Mile Products was the main growth driver: segment sales increased 30.4% in Q3 and 23.1% year to date, supported by higher truck-body shipments, improved chassis availability, and pricing. Commercial Trailer Products sales increased 3.3% in Q3 and 2.2% year to date, despite lower new-trailer shipments. Diversified Products sales fell 9.0% in Q3 and 0.6% year to date, in part reflecting the January 2019 sale of the Aviation and Truck Equipment business (AVTE) and weaker parts demand.
- Gross margin improved in Q3 and year to date. Management attributed improvement to pricing actions, product mix, operational efficiencies, and the sale of AVTE. In Q3 2018, Wabash recorded a $12.0 million impairment charge related to goodwill and long-lived assets in Diversified Products; no comparable impairment was recorded in 2019. This also materially affects the year-over-year comparison of operating and net income.
- Backlog was $0.8 billion at September 30, 2019, compared with $1.3 billion a year earlier and $1.8 billion at December 31, 2018. Management said the order season was developing more in line with historical periods, excluding 2018, and expected to complete most of the September backlog within 12 months.
- Management described trailer demand as strong and expected industry production to remain above replacement demand for the remainder of 2019. Company capital spending was expected to total $30–$35 million for 2019. These are outlook statements, not a company revenue or earnings forecast. Industry analysts cited in the filing forecast lower trailer production in 2020 than in 2019.
Risks, contingencies, and unusual items
- Management identified slowing domestic and global economic growth, industrial production, raw-material and component costs and availability, and manufacturing execution as risks. Wabash relies on a limited number of suppliers for certain key inputs, including chassis, tires, axles, suspensions, aluminum extrusions, and specialty steel. It uses pricing, supplier contracts, and hedges to manage some commodity exposure but may not fully offset cost increases.
- Commodity swaps had a net liability fair value of $2.2 million at quarter-end. The company expected to reclassify approximately $2.7 million of pretax deferred losses to cost of sales over the next 12 months as related inventory purchases settle.
- Legal proceedings and governmental examinations were ongoing. Management did not expect existing matters to materially affect consolidated condition or liquidity if resolved adversely, but cautioned that outcomes are uncertain. A proposed environmental settlement payment was described as immaterial. The Supreme securities class action was dismissed with prejudice and the appeal was dismissed on September 24, 2019.
- The filing reported no goodwill or long-lived-asset impairment in 2019. It recorded approximately $0.1 million of debt-extinguishment losses related to 2019 term-loan prepayments. Management said disclosure controls were effective and there were no material quarterly changes in internal control over financial reporting.
Important facts for investors to verify
- Whether the lower backlog reflects normalization after the unusually high 2018 order period and how it converts into shipments, revenue, and margins.
- Whether Final Mile growth and improved chassis availability continue, and whether commercial-trailer shipment declines or Diversified Products weakness persist.
- Inventory levels, cash conversion, and the ability to manage working-capital needs without eroding liquidity.
- Commodity and supplier exposure, including the expected hedge-loss reclassification, and the effect of cost changes on margins.
- Debt repayment progress, covenant headroom, and the balance between deleveraging, capital spending, dividends, and repurchases.
- Actual 2019 capital spending and industry demand relative to the outlook; the filing provides no explicit company revenue or EPS guidance.