Wabash National Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Financial statements are unaudited. Unless noted otherwise, amounts below are in millions of dollars.
Business context and results
Wabash manufactures commercial trailers and related products, sells trailers and parts through its retail network, and is expanding its Diversified Products business. The company reported three segments: Commercial Trailer Products, Diversified Products, and Retail.
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $277.7 | $222.0 |
| Gross profit / margin | $19.7 / 7.1% | $16.5 / 7.4% |
| Operating income | $5.4 | $4.0 |
| Income before taxes | $4.7 | $3.2 |
| Income tax benefit (expense) | $0.4 benefit | $0.04 expense |
| Net income | $5.1 | $3.2 |
| Diluted EPS | $0.07 | $0.05 |
| Operating cash flow | $(24.1) | $(2.8) |
| Capital expenditures | $1.0 | $0.3 |
Sales grew 25.1%, led by higher new-trailer shipments and diversified-product sales. New trailer shipments rose 15.7% to 10,300 units. Commercial Trailer Products external sales increased 25.8% to $233.6 million; Diversified Products sales nearly doubled to $19.0 million; Retail sales fell 6.0% to $25.1 million. New trailers represented 84.7% of consolidated sales.
Gross margin declined 0.3 percentage point despite higher gross profit. Management attributed pressure, particularly in trailer products, to steel, tire, and other material cost increases that could not yet be fully passed through on previously fixed-price orders. General and administrative expense fell 4.3% to $9.1 million, while selling expense rose 17.4% to $3.5 million. Q1 included $1.7 million in Walker acquisition costs.
Cash, debt, and liquidity
Cash was $6.1 million at March 31, down from $20.0 million at year-end 2011. Operating cash use reflected a $34.3 million working-capital increase, including a $25.8 million inventory build and a $10.7 million increase in receivables, partly offset by payables and accrued liabilities. Financing activities provided $11.2 million, primarily from revolving-credit borrowings. Investing activities used $1.0 million.
At quarter-end, long-term debt was $77.5 million and capital lease obligations totaled $4.3 million, for total debt and lease obligations of $81.8 million. Revolver borrowings were floating-rate; management reported compliance with all credit agreement covenants. Reported liquidity, defined as cash plus available borrowing capacity, was $99.6 million. Management considered liquidity adequate for 2012 operations, working capital, and capital expenditures.
Full-year 2012 capital expenditures were expected to be $10–$15 million. The company reported a $583 million backlog at March 31, versus $587 million at December 31, 2011 and $731 million a year earlier; it expected to fulfill most existing orders within 12 months.
Acquisition, outlook, and material risks
On March 26, Wabash agreed to acquire Walker Group Holdings for $360 million in cash, subject to working-capital adjustments. Walker makes liquid-transportation systems and engineered products and is expected to join the Diversified Products segment. Management expected the deal to close in Q2 2012; early termination of the HSR waiting period was received April 23. The agreement includes a potential $20 million termination fee in specified circumstances.
After quarter-end, Wabash issued $150 million of 3.375% convertible senior notes due 2018, with approximately $144.8 million in net proceeds intended to fund part of the acquisition. The company was negotiating a $300 million senior secured term loan and expected to amend and restate its asset-based revolver with up to $150 million of capacity. Those facilities were not described as completed; final terms and closing were not assured. Management indicated total acquisition-related expenses could reach $12–$15 million.
Management cited stronger trailer demand, a strong order environment, and improving pricing, but flagged volatility in raw-material and component costs and the risk that fixed-price contracts delay cost recovery. Its 2012 outlook was 50,000–56,000 new trailers sold, approximately 5%–18% above 2011, and non-trailer product growth in excess of 30%; it expected profitability to improve through the year. Industry forecasts cited by management projected 2012 trailer shipments above 248,000 and further growth in 2013. These are expectations, not guarantees.
The contemplated acquisition financing would materially increase leverage. The filing’s illustrative, as-adjusted discussion estimated approximately $317 million of secured indebtedness and $155 million of unsecured indebtedness, including capital leases. Risks include debt service, covenant compliance, refinancing and interest-rate exposure, integration and retention of Walker personnel and customers, and the possibility the acquisition does not close.
Other contingencies include a Brazilian court judgment of approximately R$26.7 million (about $14.2 million at stated exchange rates), with potentially substantial interest, fees, or inflation adjustments. The judgment was unenforceable pending clarification and appeal; Wabash recorded no loss and said it could not estimate a reasonable possible loss range. The company also reported environmental matters, including a newly noticed Louisiana site claim, and said it did not expect that matter to have a material adverse effect. Management noted cumulative operating losses over the prior three years and maintained a full valuation allowance against net deferred tax assets.
Most important facts for investors to verify
- Whether the Walker acquisition closed, its final purchase-price adjustment, integration results, and realized benefits and costs.
- Final terms and availability of the term loan and amended revolver, resulting debt, interest expense, covenants, and liquidity after closing.
- Whether trailer pricing keeps pace with steel, tire, and other input costs, and whether gross margins recover.
- Cash conversion and working-capital trends, especially inventory growth and the backlog’s conversion into shipments.
- Developments and potential exposure in the Brazilian judgment and environmental matters.