Wabash National Corporation — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Financial amounts are in millions of dollars unless noted; the unaudited statements are condensed.
Business context and results
Wabash manufactures trailers and also sells new and used trailers, parts, and services through its retail and distribution segment. Results improved as trailer demand and production recovered from the prior-year downturn.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $287.1 | $149.7 | $509.1 | $228.0 |
| Gross profit | $16.2 | $5.3 | $32.7 | $4.3 |
| Gross margin | 5.7% | 3.5% | 6.4% | 1.9% |
| Operating income (loss) | $5.1 | $(5.7) | $9.1 | $(16.9) |
| Net income (loss) | $3.3 | $(5.6) | $6.5 | $(144.7) |
| Net income (loss) per share | $0.05 | $(0.72) | $0.09 | $(4.78) |
Q2 operating margin was 1.8%, compared with negative 3.8% a year earlier; first-half operating margin was 1.8%, compared with negative 7.4%. The filing reports no separate cash-flow margin measure.
Cash flow, liquidity, and debt
- First-half operating cash use was $15.8, versus $17.8 in 2010. Working-capital growth, particularly an $84.6 increase in inventory and a $32.2 increase in receivables, consumed cash; higher payables and accrued liabilities provided $84.5.
- Investing cash use was $1.5, mainly capital expenditures. Financing activities provided $9.6, primarily reflecting net revolving-credit borrowings. Cash declined $7.7 to $13.5 from $21.2 at year-end 2010.
- At June 30, total debt and capital lease obligations were $70.8, including $66.2 of floating-rate revolver borrowings. Stockholders’ equity was $136.4; management reported a debt-to-equity ratio of approximately 0.5:1.0.
- Management reported liquidity of $91.7, defined as cash plus available borrowing capacity, and considered it adequate for 2011 operating, working-capital, and capital-expenditure needs.
- A new $150 revolving facility, secured by substantially all company assets, matures June 28, 2016; commitments may be increased to $200 subject to conditions. The company was in compliance with its covenants at quarter-end. A 100-basis-point rate change would change annual interest expense by approximately $0.7, based on the filing’s sensitivity estimate.
Material changes and management commentary
- Q2 sales rose 91.8% and first-half sales rose 123.3% year over year. New-trailer shipments increased 111.1% in Q2 and 153.8% in the first half. New trailers represented 87.7% of Q2 sales, versus 81.4% in the prior-year quarter.
- Higher volumes improved manufacturing overhead absorption and margins. However, average selling prices were down 3.8% in both the quarter and first half due to customer and product mix, while material costs as a share of manufacturing sales increased amid higher commodity and component costs.
- Management said trailer demand and pricing conditions had improved, but expected gross margins to remain challenged for the rest of 2011 because of volatile input costs and limited ability to reprice existing orders. Compensation reductions implemented in 2009–2010 had been restored by July 2011; the full restoration was expected to add less than $1.0 per quarter to costs.
- Backlog was approximately $736 at June 30, compared with $480 at December 31, 2010 and $377 at June 30, 2010. The company expected to complete most current backlog within 12 months.
- For full-year 2011, management estimated new-trailer sales of 46,000–48,000 units, approximately 85%–93% above 2010. The cited industry forecast estimated total trailer shipments of about 209,000 in 2011 and 259,000 in 2012; these are third-party estimates, not company guidance.
- Planned 2011 capital expenditures were $6–$8, compared with $1.5 spent in the first half. Plans included approximately $2.5 over two years to enable production of frac tanks.
Unusual items, risks, and contingencies
- The first-half 2010 loss included a $124.9 increase in the fair value of a warrant liability; the filing reported no corresponding warrant adjustment in 2011. This materially affects the year-over-year comparison. The 2011 quarter also included a $0.7 loss from writing off costs on the replaced credit facility.
- The company maintained a full valuation allowance against net deferred tax assets because of cumulative operating losses over the prior three years; first-half 2011 income-tax expense was less than $0.1.
- Commodity-price exposure includes aluminum, steel, wood, and polyethylene. Raw-material purchase commitments totaled $48.0 through December 2012; the company warned that unpassed cost increases could materially harm results.
- Legal matters include a Brazilian joint-venture claim seeking approximately $13.3 in damages, a stayed patent dispute, and an environmental settlement proposal awaiting agency approval. The proposed environmental settlement terms had been accrued. Management did not expect the discussed matters to materially affect financial condition or liquidity, but noted that outcomes remain uncertain and could affect results for a particular period.
- Management identified macroeconomic weakness, tight credit, unemployment, and depressed housing and construction markets as downside risks. The filing refers investors to the company’s 2010 Form 10-K risk factors. Disclosure controls were reported effective as of June 30, 2011.
Important facts for investors to verify
- Whether shipment growth and the $736 backlog convert into timely deliveries, cash collections, and sustained profitability.
- Whether pricing can offset commodity and component inflation, particularly under fixed-price customer contracts.
- Available revolver capacity under borrowing-base limits, covenant headroom, and the effect of floating rates on interest expense.
- Inventory quality and working-capital requirements as production expands.
- Developments and potential exposure in the Brazil, patent, and environmental matters, including approval of the proposed environmental settlement.
- The assumptions behind management’s 46,000–48,000 full-year unit estimate and the cited industry shipment forecasts.