Wabash National Corporation — Q2 2017 Form 10-Q
Business context and reporting period
Wabash manufactures trailers, truck bodies and related products. Its reportable segments are Commercial Trailer Products and Diversified Products. This unaudited filing covers the three and six months ended June 30, 2017, compared with the same 2016 periods. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $435.9 | $471.4 | $798.6 | $919.1 |
| Gross profit | $67.7 | $91.1 | $127.0 | $170.6 |
| Gross margin | 15.5% | 19.3% | 15.9% | 18.6% |
| Operating income | $38.7 | $58.9 | $68.9 | $107.1 |
| Net income | $22.9 | $35.5 | $43.1 | $63.1 |
| Diluted EPS | $0.36 | $0.53 | $0.68 | $0.95 |
| Operating cash flow | Not separately reported quarterly | $75.2 | $76.3 |
- Q2 sales declined 7.5%; first-half sales declined 13.1%. New-trailer shipments fell 11.0% in Q2 and 17.6% in the first half, primarily reflecting lower demand in Commercial Trailer Products.
- Q2 Commercial Trailer Products sales were $348.1 million, down 8.9%; Diversified Products sales were $90.8 million, down 2.2%. First-half segment sales were $622.9 million, down 16.5%, and $180.7 million, up 0.9%, respectively.
- Management attributed lower gross margins to reduced volume and higher commodity costs; Diversified Products also faced adverse product mix. Q2 operating margin was 8.9% versus 12.5%; first-half operating margin was 8.6% versus 11.7%.
- First-half cash from operations was nearly flat year over year. Inventory used $60.7 million of cash, partly offset by $30.7 million from receivables and $35.3 million from accounts payable and accrued liabilities. Capital expenditures were $10.9 million; investing cash outflow was $5.9 million and financing cash outflow was $54.2 million.
Balance sheet, debt and liquidity
- At June 30, cash and equivalents were $178.6 million, up from $163.5 million at December 31, 2016. Total assets were $932.4 million and stockholders’ equity was $473.5 million.
- Total debt and capital lease obligations were $233.5 million. Term-loan borrowings were $188.5 million. The $44.9 million principal balance of convertible notes due May 2018 was classified as current; the notes were eligible for conversion in Q3, and the company said it intended to settle conversions in cash. The company repurchased $4.0 million principal for $7.3 million during Q2.
- No revolving-credit borrowings were outstanding, and the company reported compliance with credit covenants. Reported liquidity, defined as cash plus available borrowing capacity, was $348.2 million. The $175 million revolving facility matures in 2020, subject to provisions linked to the convertible notes.
- Financing cash uses included $38.5 million of common-share repurchases, $7.8 million of dividends and $7.3 million for convertible-note repurchases. The company declared dividends of $0.06 per share in Q2.
Outlook, commentary and risks
- Management forecast 2017 shipments of 53,000–56,000 new trailers, 8%–13% below 2016, and described demand as historically strong and above replacement levels. Industry estimates cited in the filing anticipated 2017 market shipments down approximately 2.8%–3.4% from 2016. Backlog was $762 million at June 30, versus $802 million at year-end 2016 and $860 million a year earlier; most orders were expected to ship within 12 months.
- Management expected 2017 capital expenditures of $30–$35 million and believed available liquidity sufficient for planned operations, working capital and capital investment. Its stated priorities included cost and productivity initiatives, managing manufacturing capacity, deleveraging, product innovation and business diversification.
- Key risks include weaker domestic or global economic conditions; higher or unavailable raw materials and components, including reliance on a limited number of suppliers; the ability to pass cost increases to customers; and execution of manufacturing and diversification plans. A 100-basis-point change in floating rates was estimated to change annual interest expense by $1.9 million.
- Legal matters include a Brazil joint-venture case in which an appeals court dismissed all claims against Wabash, subject to possible further appeal; a disputed approximately $2.9 million Walker acquisition benefits claim; and environmental matters. Management said it could not estimate a range of possible losses for certain proceedings beyond recorded accruals.
- Other notable items: first-half “Other, net” included a gain on sale of branch assets, partly offset by a term-loan refinancing extinguishment loss. On July 17, 2017, after quarter-end, Wabash agreed to sell its Dallas and San Antonio retail branches for $14.2 million, subject to adjustments and closing.
Important facts for investors to verify
- Whether shipment volumes, backlog conversion and the 53,000–56,000 full-year shipment outlook were achieved, and how order cancellations or changes affected backlog.
- Whether lower volumes and commodity costs continued to pressure margins, and whether pricing, productivity measures or diversification offset that pressure.
- How the May 2018 convertible notes were settled or refinanced, and whether related liquidity and facility-maturity conditions were met.
- Actual capital spending, share repurchases and dividends relative to operating cash generation and management’s deleveraging objectives.
- Closing and final proceeds from the branch sale, as well as material developments in disclosed legal and environmental matters.