Wabash National Corporation — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Amounts below are in U.S. dollars; financial statement amounts are generally shown in millions.
Business context
Wabash manufactures trailers and transportation-related products and sells trailers, parts and services through retail operations. On May 8, 2012, it acquired Walker Group Holdings for $375 million in cash. Walker makes liquid-transportation systems and engineered products and is included in the Diversified Products segment from the acquisition date.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $405.9 | $336.4 | $1,046.0 | $845.5 |
| Gross profit | $50.1 | $13.3 | $109.5 | $46.1 |
| Gross margin | 12.3% | 4.0% | 10.5% | 5.4% |
| Operating income | $27.2 | $2.3 | $41.3 | $11.4 |
| Net income | $18.4 | $1.1 | $25.4 | $7.6 |
| Diluted EPS | $0.27 | $0.02 | $0.37 | $0.11 |
- Q3 sales rose 20.7%; nine-month sales rose 23.7%. Walker contributed $96.5 million of Q3 revenue and $140.8 million from acquisition through September 30.
- For the first nine months, operating cash flow was $27.5 million, compared with cash used of $22.4 million in 2011. Investing used $373.0 million, primarily for the Walker acquisition; financing provided $364.8 million.
- Cash was $39.3 million at September 30, versus $20.0 million at December 31, 2011. Management reported liquidity of $182.2 million, defined as cash plus available borrowing capacity.
- Total debt and capital lease obligations were $421.8 million. This included $298.5 million outstanding under the term loan and $150 million principal amount of convertible notes (carrying amount $126.0 million); the $150 million revolver had no balance outstanding. Debt-to-equity was approximately 2.1:1.
- Term-loan interest coverage and senior secured leverage ratios were 9.7:1 and 1.9:1, respectively; the company reported compliance with debt covenants.
Material changes and management commentary
- Higher margins reflected improved trailer pricing and product mix, Walker’s contribution, and productivity improvements. Q3 Commercial Trailer Products new-trailer shipments fell 19.2% year over year, while average selling prices rose 7.4%. Nine-month total new-trailer shipments increased 1.8%.
- Interest expense increased to $7.8 million in Q3 and $13.9 million for nine months, principally due to acquisition financing and noncash discount accretion. Nine-month acquisition expenses were $14.1 million.
- Backlog was approximately $555 million at September 30, including $170 million from Walker; it was $587 million at December 31, 2011 and $513 million a year earlier.
- Management forecast 46,000–48,000 new trailers sold in 2012, including Walker, approximately flat with the prior year, and 2012 capital expenditures of $13–$15 million. Management expected demand to remain above replacement levels, while industry forecasts for 2013 differed materially: ACT projected growth to about 259,000 trailers, while FTR projected about 208,000.
- Management cited volatile raw-material costs, global economic conditions and the need to integrate Walker and realize expected synergies. The company expects to seek customer price increases and continue hedging commodity exposure.
Risks, contingencies and unusual items
- The Walker purchase-price allocation remained preliminary. The acquisition added $149.9 million of goodwill and $162.8 million of intangible assets; integration, synergy delivery and retention of Walker customers, suppliers and employees are risks.
- The company maintained a full valuation allowance against net deferred tax assets, citing uncertainty about future U.S. taxable income. Management said a release of some or all of the allowance could be possible in 2012 or 2013.
- In a Brazilian joint-venture dispute, a lower court awarded approximately R$26.7 million (about $13.1 million), excluding interest and other potential additions. The judgment was not enforceable pending clarification and appeal; Wabash recorded no loss and said it could not estimate a reasonable possible loss range. The filing estimated potential interest, fees or inflation adjustments at up to approximately $54 million, subject to change.
- New acquisition financing substantially increased leverage. The term loan is secured and matures in 2019, subject to an acceleration provision tied to the 2018 convertible notes; the notes bear a 3.375% coupon and have an initial conversion price of approximately $11.70 per share.
- Management stated disclosure controls were effective. Walker was excluded from the internal-control effectiveness evaluation while its controls are being integrated; completion was expected in fiscal 2013.
Important facts for investors to verify
- Walker’s subsequent contribution to sales, margins and cash generation, and progress on integration, synergies and the final purchase-price allocation.
- Debt service capacity, covenant headroom, available revolver capacity and the maturity interaction between the term loan and convertible notes.
- Whether trailer demand, backlog conversion and pricing support management’s 2012 outlook amid divergent 2013 industry forecasts and volatile input costs.
- Developments in the Brazilian litigation, including any clarified judgment, appeal outcome or change in estimated exposure.
- Future evidence supporting any release of the deferred-tax-asset valuation allowance and the cash impact of working-capital needs.