Wabash National Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Financial statements are unaudited. Unless otherwise noted, dollar amounts are in millions.
Business context and results
Wabash manufactures commercial trailers and related products and operates Commercial Trailer Products, Diversified Products and Retail segments. The company reported stronger shipments and sales across all three segments compared with Q1 2013.
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $358.1 | $324.2 |
| Gross profit / margin | $46.7 / 13.0% | $42.2 / 13.0% |
| Operating income / margin | $19.5 / 5.4% | $14.9 / 4.6% |
| Interest expense | $5.7 | $7.5 |
| Income before taxes | $13.8 | $9.6 |
| Income tax expense / effective rate | $6.5 / 47.1% | $3.8 / 40.0% |
| Net income / diluted EPS | $7.3 / $0.10 | $5.7 / $0.08 |
| Cash used in operating activities | $44.1 | $7.7 |
| Capital expenditures | $2.1 | $2.6 |
Liquidity, debt and working capital
- Cash was $65.7 at March 31, down from $113.3 at December 31, 2013. Reported liquidity, defined as cash plus available revolver capacity, was $205.9; no revolver borrowings were outstanding.
- Total debt and capital lease obligations were $370.6. Debt principal included $150.0 of 3.375% convertible notes due 2018, $234.2 outstanding under the term loan and $2.0 in industrial revenue bonds. Capital lease obligations were $8.1. The company reported a 1.2:1.0 senior secured leverage ratio and compliance with debt covenants.
- Inventory rose $78.7 during the quarter to $262.9, principally because production exceeded shipments and finished-goods inventory increased. This contributed to the $44.1 operating cash outflow; management attributed the working-capital use mainly to higher production and purchasing requirements.
- Current assets were $475.6 and current liabilities $225.1 at quarter-end. The filing reports liquidity as above; it does not provide a separate current ratio discussion.
Changes versus Q1 2013
- Sales increased $33.9, or 10.5%, driven mainly by 15.1% more new-trailer shipments and 110.0% more used-trailer shipments. New trailers accounted for 74.9% of sales.
- Commercial Trailer Products sales rose 12.5%, Diversified Products 6.0% and Retail 12.1%. Commercial Trailer Products operating income increased to $8.9 from $5.3; Diversified Products operating income declined to $12.9 from $13.5; Retail operating income increased to $1.1 from $0.9.
- Gross margin was unchanged at 13.0%. Higher new-trailer volume, pricing and product diversification were offset by higher raw-material and operating costs, notably wood-flooring costs in Diversified Products.
- Operating income improved as selling, general and administrative expenses fell to 6.0% of sales from 6.6%, and acquisition expenses were nil versus $0.6. Interest expense declined following debt repayment and the 2013 term-loan repricing. Q1 2013 also included $2.2 of other income, compared with $0.03 in Q1 2014.
- Cash used in operations worsened substantially, primarily due to the larger inventory build. The company ended the quarter with $65.7 cash versus $58.6 at March 31, 2013, but cash was down $47.5 from year-end 2013.
Outlook, risks and unusual items
- Management expected 2014 new-trailer sales of 47,000–50,000 units, with volumes slightly above 2013. It anticipated continued pricing and gross-margin improvement and expected healthy industry demand, while noting industry forecasts and economic conditions are uncertain.
- Backlog was approximately $791 at March 31, 2014, compared with $711 at December 31, 2013 and $674 a year earlier. Most existing backlog was expected to be completed within 12 months.
- Expected 2014 capital expenditures were approximately $20. Management believed liquidity would be adequate for the remainder of 2014, using operating cash flow and available revolver capacity. It also expected higher cash tax payments in 2014 as federal tax-loss and credit carryforwards were expected to be fully utilized.
- Raw-material prices remain volatile. Purchase commitments for raw materials were $42.1 through December 2014, up from $32.8 at year-end. Management seeks to pass cost increases through to customers and uses fixed-price purchasing and hedging, but stated that inability to offset higher costs could materially harm results. A 100-basis-point change in floating rates was estimated to change annual interest expense by $0.4.
- A Brazilian court had awarded approximately R$26.7 million (about $11.8 at current exchange rates) against Wabash in a long-running joint-venture case. The company appealed, had not accrued a loss and could not estimate a reasonably possible loss range; potential interest, fees and inflation adjustments were estimated at up to approximately $63, subject to change.
- Other disclosed matters include environmental proceedings and an acquisition-related benefits claim. The company said it did not expect the described matters to materially affect its financial condition or liquidity; certain proposed environmental settlement terms had been accrued, but amounts are not clearly stated in this filing text.
- Wabash repurchased 113,203 shares during the quarter solely to cover employee tax withholding on vested restricted stock; no public repurchase program purchases were reported.
Most important facts for investors to verify
- Whether the substantial inventory build converts to shipments and operating cash flow, and whether working-capital needs pressure liquidity.
- Whether management delivers the 47,000–50,000 trailer sales target, margin recovery and approximately $20 of planned capital spending.
- How higher 2014 cash taxes and commodity-cost changes affect cash generation and profitability.
- Developments in the Brazilian appeal and environmental matters, including any changes to estimated exposure or accruals.
- Debt covenant compliance, refinancing or repayment plans for the 2018 convertible notes, and continued access to the asset-based revolver.