Wabash National Corporation — Q1 2013 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2013, compared with Q1 2012. Wabash manufactures commercial trailers and related products and operates Commercial Trailer Products, Diversified Products, and Retail segments. Results include Walker, acquired in May 2012, and Beall assets acquired on February 4, 2013.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $324.2 million | $277.7 million |
| Gross profit / margin | $42.2 million / 13.0% | $19.7 million / 7.1% |
| Operating income / margin | $14.9 million / 4.6% | $5.4 million / 2.0% |
| Net income | $5.7 million | $5.1 million |
| Diluted EPS | $0.08 | $0.07 |
| Operating cash flow | $(7.7) million | $(24.1) million |
| Investing cash flow | $(14.0) million | $(1.0) million |
Revenue rose 16.7%, while gross margin improved 5.9 percentage points. Management attributed margin gains to better new-trailer pricing and the higher-margin Walker business. Operating expenses increased, including amortization of acquired intangibles; interest expense rose to $7.5 million from $0.7 million, largely reflecting acquisition-related financing and non-cash discount accretion. The 2013 effective tax rate was 40.0%, versus a tax benefit in Q1 2012; the prior-year comparison was affected by tax valuation allowances.
Liquidity, debt, and cash flow
- Cash was $58.6 million at March 31, down from $81.4 million at year-end 2012. Reported liquidity, defined as cash plus available revolver capacity, was $200.1 million.
- Total debt and capital lease obligations were $429.5 million. Debt-to-equity was approximately 1.6:1.0. The company had no revolver borrowings and reported compliance with credit covenants.
- Term-loan borrowings were $297.0 million; $23.0 million was classified as current, including a planned $20 million prepayment associated with the subsequent amendment. The $150 million convertible notes bear 3.375% interest and mature in 2018.
- Operating cash use improved year over year but remained negative. Working capital absorbed cash, primarily through a $46.6 million increase in inventory; cash used for the Beall acquisition was $13.9 million. Capital expenditures were $2.6 million.
- On April 25, 2013, the company agreed to refinance the term loan with $277 million of Tranche B-1 loans after a $20 million prepayment. The amendment lowers stated borrowing margins, reduces quarterly amortization to 0.25%, and removes the minimum interest-coverage covenant; effectiveness was conditional on completion of specified requirements.
Material changes and operating trends
- Commercial Trailer Products sales declined 21.2% to $184.0 million; new-trailer shipments fell 26.0% to 7,400 units, partly offset by a 5.1% increase in average selling prices.
- Diversified Products sales increased to $99.7 million, principally due to Walker, which contributed $87.8 million to that segment’s sales. Excluding Walker, segment sales declined 37.7%, with weaker demand, particularly in energy-related offerings.
- Retail sales rose 61.4% to $40.5 million, reflecting Walker-related locations and higher new-trailer sales.
- Backlog was approximately $674 million, versus $666 million at December 31, 2012 and $583 million a year earlier; $168 million related to Walker. Backlog orders may change or be cancelled.
Outlook, risks, and unusual items
- Management expected 2013 new-trailer sales of 45,000–48,000 units and anticipated continued margin improvement, facility optimization, acquisition synergies, and growth in diversified products. Industry forecasts cited by management estimated 2013 demand of 230,000–252,000 trailers; these are third-party forecasts, not company guidance.
- Management expected approximately $20 million of capital expenditures for 2013 and believed liquidity was adequate for operations, working capital, and capital spending for the rest of the year. It estimated an approximately 40% effective tax rate for the remainder of 2013, while expecting cash taxes not to differ materially from 2012’s approximately $0.6 million.
- Raw-material and component price volatility is a key risk. Purchase commitments for raw materials were $34.7 million through December 2013. The company seeks to pass cost increases to customers and uses supplier fixed-price contracts and hedging; inability to recover costs could hurt results.
- A Brazilian court had awarded approximately R$26.7 million in damages in a disputed joint-venture case, with potential interest, fees, and inflation adjustments estimated by the company at up to approximately $54 million. Wabash appealed; the judgment was not enforceable pending appeal. No loss was accrued, and the company said it could not estimate a reasonable possible loss range.
- Other disclosed matters included environmental proceedings, a patent dispute, and a Walker acquisition working-capital dispute. Management did not expect these matters to materially affect financial condition or results, while noting uncertainty in legal outcomes.
Most important facts for investors to verify
- Whether improved trailer pricing and gross margins persist despite lower Commercial Trailer Products shipments and volatile input costs.
- Whether Walker and Beall deliver expected integration benefits and diversified-product growth, and how acquired intangible amortization affects earnings.
- Working-capital needs, especially inventory growth, cash conversion, and the sustainability of reported liquidity.
- Final effectiveness and terms of the April 2013 term-loan amendment, including the $20 million prepayment and covenant changes.
- Progress and potential exposure in the Brazilian litigation and environmental matters; the filing does not provide a clear estimate of possible losses for the Brazilian case.
- Actual 2013 trailer volumes, backlog conversion, and capital expenditures compared with management’s outlook.