Business context and reporting period
Wabash National Corporation filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2012. Its businesses include Commercial Trailer Products, Diversified Products and Retail. On May 8, 2012, Wabash acquired Walker Group Holdings LLC, a maker of liquid-transportation systems and engineered products, for approximately $375 million in cash. Walker is included in Diversified Products from the acquisition date.
Financial results and key metrics
Amounts are in millions of dollars, except per-share amounts and percentages.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $362.4 | $287.1 | $640.1 | $509.1 |
| Gross profit | $39.7 | $16.2 | $59.4 | $32.7 |
| Gross margin | 10.9% | 5.7% | 9.3% | 6.4% |
| Income from operations | $8.6 | $5.1 | $14.0 | $9.1 |
| Net income | $1.9 | $3.3 | $7.0 | $6.5 |
| Basic and diluted EPS | $0.03 | $0.05 | $0.10 | $0.09 |
- Q2 sales rose 26.2%; first-half sales rose 25.7%. Management attributed the increases to higher trailer shipments, improved pricing and Walker’s $44.3 million of post-acquisition sales.
- Q2 operating income improved, but net income fell year over year as interest expense increased to $5.4 million from $1.1 million and acquisition expense was $12.2 million. First-half acquisition expense was $13.9 million; first-half interest expense was $6.2 million versus $2.1 million.
- At June 30, cash was $31.6 million; current assets were $392.7 million and current liabilities were $239.1 million. Total assets were $861.5 million, versus $388.1 million at December 31, 2011, primarily reflecting the Walker acquisition.
- Long-term debt was $439.0 million, with $3.0 million current debt and $4.1 million of capital lease obligations. Total debt and lease obligations were reported as $446.2 million; debt-to-equity was approximately 2.5:1.0. The company reported liquidity of $151.2 million, defined as cash plus available borrowing capacity.
- Operating cash flow was negative $11.5 million in the first half, compared with negative $15.8 million in 2011. Investing cash flow was negative $367.6 million, principally reflecting the acquisition; financing cash flow was positive $390.7 million. Working capital increased by $32.9 million and was a significant use of cash.
Material changes versus the prior comparable period
- Commercial Trailer Products Q2 sales increased 11.1%, supported by 4.8% more new-trailer shipments and a 5.8% increase in average selling prices. First-half segment sales increased 17.6%, with new-trailer shipments up 10.6%.
- Diversified Products Q2 sales increased to $65.7 million from $13.7 million, largely due to Walker; excluding Walker, the segment reported 56.2% Q2 sales growth. Retail sales declined 8.5% in Q2 and 7.3% for the first half.
- Company gross margin improved substantially, which management attributed to trailer pricing, product mix, higher-margin diversified offerings and Walker. Selling, general and administrative expense also rose, reflecting Walker, acquired-intangible amortization and restored compensation levels.
- Backlog was approximately $713 million at June 30, compared with $587 million at December 31, 2011 and $736 million a year earlier. The June backlog included $190 million for Walker; orders may change or be cancelled.
Outlook, commentary, risks and contingencies
- Management expected trailer demand and order conditions to remain near then-current levels through the rest of 2012, and expected improvement in pricing and gross margins. Its full-year 2012 estimate was 48,000–52,000 new trailers sold, including Walker, approximately flat to 10% above 2011. Industry forecasts cited in the filing differed, particularly for 2013.
- Management planned 2012 capital expenditures of $10–$15 million, including approximately $2.5 million to expand paint capabilities at the Cadiz, Kentucky facility. It said liquidity was adequate for operations, working capital and capital spending for the remainder of 2012.
- Key risks include substantially increased leverage and debt-service demands, variable interest rates, refinancing and covenant risks, commodity-cost volatility, and uncertainty in trailer demand. Walker integration, realization of synergies, retention of key staff and customers, and international operations add risks. Management identified global economic, unemployment, housing and construction-related concerns.
- Term-loan borrowings were $299.3 million and revolver borrowings were $25 million at June 30. The company reported compliance with debt covenants; term-loan interest coverage and senior secured leverage ratios were 16.1:1.0 and 2.4:1.0, respectively. The term loan has a 2019 scheduled maturity but may mature earlier if the 2018 convertible notes are not addressed by the specified pre-maturity deadline.
- The notes have $150 million principal, a 3.375% coupon and an initial conversion price of approximately $11.70 per share. The company intended to settle conversions using cash for principal and shares for any excess conversion value. Their discount accretion increases reported interest expense.
- Wabash disclosed a Brazilian joint-venture judgment against it of approximately $13.2 million, excluding potential interest, fees and inflation adjustments estimated in the filing at up to approximately $54 million. The judgment was not enforceable pending clarification and appeal; Wabash had recorded no charge and said it could not estimate a probable loss range. Other disclosed environmental and intellectual-property matters were described as not expected to have a material adverse effect, though outcomes remain uncertain.
- The company maintained a full valuation allowance against net deferred tax assets due to its cumulative three-year pre-tax loss position, while noting it might release some or all of the U.S. allowance in 2012 or 2013 depending on results and evidence about future taxable income. Disclosure controls were deemed effective; Walker was excluded from the internal-control evaluation while integration work continued, expected to be completed in fiscal 2013.
Most important facts for investors to verify
- Whether Walker integration delivers expected synergies and growth, and how much reported performance reflects the acquisition versus organic improvement.
- Cash generation and working-capital needs, particularly inventory growth and the ability to convert backlog into shipments and cash.
- Debt service, borrowing availability, covenant headroom and the term loan’s accelerated-maturity condition tied to the convertible notes.
- Whether pricing can continue to offset raw-material and component costs, including under fixed-price customer contracts.
- Developments in the Brazilian litigation, environmental matters and the deferred-tax valuation allowance.