Wabash National Corporation — Q2 2014 Form 10-Q
Business context and period: The company manufactures and sells commercial trailers, diversified transportation and industrial products, and trailers and related services through its Retail segment. This unaudited filing covers the quarter and six months ended June 30, 2014; comparisons are with the corresponding 2013 periods. Dollar figures below are in millions unless stated otherwise.
Key financial results
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net sales | $486.0 | $413.1 | $844.1 | $737.4 |
| Gross profit / margin | $61.6 / 12.7% | $58.9 / 14.2% | $108.3 / 12.8% | $101.0 / 13.7% |
| Income from operations / margin | $33.9 / 7.0% | $30.5 / 7.4% | $53.3 / 6.3% | $45.3 / 6.1% |
| Net income | $16.2 | $14.1 | $23.5 | $19.9 |
| Diluted earnings per share | $0.23 | $0.20 | $0.33 | $0.29 |
| Operating cash flow | Not separately provided | Not separately provided | $(8.5) | $6.6 |
Q2 sales increased 17.6% year over year, primarily as new trailer shipments rose 31.1% to 14,950 units. First-half sales increased 14.5%, with new trailer shipments up 24.5% to 24,900 units. Despite higher gross profit dollars, gross margin contracted in both periods.
Liquidity, debt and cash flow
- At June 30, cash and cash equivalents were $82.3, down from $113.3 at year-end 2013. Current assets were $492.3 and current liabilities $225.5.
- Management reported liquidity of $222.3, defined as cash plus available revolver capacity. The $150 million revolving facility had no borrowings outstanding; the company reported compliance with its covenants.
- Long-term debt carrying value was $340.1, with $3.3 current; capital lease obligations totaled $8.0. Total debt and capital lease obligations were reported as $351.3. Term-loan principal outstanding was $213.5, and convertible senior notes had $150.0 principal due 2018. The term-loan senior secured leverage ratio was 0.9:1.0, and the company was in compliance with its covenants.
- First-half operating cash flow was negative $8.5, versus positive $6.6 a year earlier. Management attributed the outflow primarily to a $74.6 working-capital increase, including a $75.8 inventory build, as production and purchasing rose to support demand.
- Investing activities provided $0.1, including $4.1 in proceeds from retail-location asset sales, against $4.2 of capital expenditures. Financing activities used $22.5, mainly for $21.4 of term-loan principal payments. Cash decreased $30.9 over the half-year.
Changes, outlook and risks
- Margins and segments: Q2 Commercial Trailer Products sales rose 30.7%, while Diversified Products sales fell 4.7% and its gross profit declined from $31.7 to $25.2. Management cited wood-flooring material and operating costs, lower tank-trailer selling prices from mix, and lower equipment shipments. Commercial trailer growth benefited from higher volumes and improved pricing, partly offset by unfavorable mix.
- Management outlook: Management described trailer demand and backlog as healthy, and expected industry production and shipments to remain above replacement demand for the rest of 2014. It forecast 53,000–55,000 new trailers sold for full-year 2014, approximately 13%–18% above 2013. The company expected continued pricing and margin improvement, while pursuing production optimization and diversification.
- Orders and investment: Backlog was approximately $842 million at June 30, versus $711 million at December 31, 2013 and $680 million a year earlier; management expected to complete most existing orders within 12 months. Full-year 2014 capital spending was expected to be approximately $20 million.
- Key operating and financial risks: Higher wood and other commodity costs, customer/product mix, and costs of new-product and diversification efforts pressured margins. Raw-material purchase commitments were $42.4 million through December 2014. Management warned that higher cash taxes after using federal net operating loss carryforwards could constrain working-capital and capital-spending liquidity. A 100-basis-point change in floating rates was estimated to change annual interest expense by $0.3 million.
- Unusual items and contingencies: Q2 “Other, net” included a $0.5 million debt-extinguishment loss and a $0.6 million loss related to transitioning three retail branches to independent dealers. A Brazilian joint-venture dispute had a lower-court award of about R$26.7 million (approximately $12.1 million), before potential interest, fees or inflation adjustments; the company estimated those additional amounts could be as much as approximately $64 million, had not accrued a loss, and was appealing. Other legal and environmental matters were disclosed; management did not expect the described matters to materially affect financial condition or liquidity, while noting outcomes remain uncertain.
- Controls: Management concluded disclosure controls were effective at June 30, 2014. Integration and evaluation of Beall’s historical financial-reporting controls was ongoing, with completion expected by year-end.
Investor facts to verify
- Whether the backlog converts to shipments and revenue as expected, and whether the 53,000–55,000 full-year trailer-sales outlook is achieved.
- Whether gross margins recover despite wood costs, mix, and Diversified Products’ weaker profitability.
- How inventory and working-capital requirements affect operating cash flow, cash balances, and reported liquidity as production expands.
- Debt repayment, floating-rate exposure, covenant headroom, and the timing and terms of the 2018 convertible notes relative to the term loan’s accelerated-maturity provision.
- Developments in the Brazil appeal and environmental matters, particularly the potential exposure beyond amounts accrued.