Wabash National Corporation — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Financial statements are unaudited; amounts below are in U.S. dollars, generally millions unless stated otherwise.
Business context
Wabash manufactures commercial trailers and transportation-related products and operates Commercial Trailer Products, Diversified Products and Retail segments. Results include Walker, acquired in May 2012, and certain Beall assets, acquired in February 2013.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $440.0 | $405.9 | $1,177.3 | $1,046.0 |
| Gross profit / margin | $61.5 / 14.0% | $50.1 / 12.3% | $162.5 / 13.8% | $109.5 / 10.5% |
| Operating income / margin | $33.8 / 7.7% | $27.2 / 6.7% | $79.1 / 6.7% | $41.3 / 3.9% |
| Income before taxes | $27.0 | $19.7 | $60.1 | $27.5 |
| Income tax expense | $10.7 | $1.2 | $24.0 | $2.0 |
| Net income | $16.2 | $18.4 | $36.1 | $25.4 |
| Diluted earnings per share | $0.23 | $0.27 | $0.52 | $0.37 |
- Cash flow: Nine-month operating cash flow was $53.8, versus $27.5 in 2012. Investing used $25.1, including $13.9 for Beall and $11.6 in capital expenditures; financing used $44.3, principally term-loan repayments. Cash declined $15.6 to $65.9.
- Liquidity and debt: Reported liquidity was $208.2, comprising cash and available revolver capacity; no revolver borrowings were outstanding. Gross debt principal was $407.9, including $150.0 of convertible notes, $255.6 of term loans and $2.2 of industrial revenue bonds. Total debt and capital lease obligations were reported as $390.0. Senior secured leverage was 1.3:1.0; the company reported covenant compliance.
- Balance sheet: Current assets were $476.5 and current liabilities $231.7. Accounts receivable rose to $130.1 from $96.6 and inventory to $239.6 from $189.5, compared with December 31, 2012.
Changes versus prior periods
- Q3 sales increased 8.4%, while nine-month sales rose 12.6%. The nine-month increase chiefly reflected Walker and Beall; total new-trailer shipments were down 5.5% for the nine-month period, despite a 4.1% Q3 increase.
- Margins improved as pricing on new trailers strengthened and higher-margin diversified products and favorable product mix contributed. Q3 gross margin expanded 1.7 percentage points; nine-month gross margin expanded 3.3 points.
- Q3 net income fell 12.0% despite higher sales and operating income, primarily alongside much higher income-tax expense. Nine-month net income increased 41.9%.
- Nine-month G&A, selling and intangible amortization expenses rose, reflecting acquired businesses, employee costs and acquisition-related intangible amortization. Acquisition expense fell to $0.9 from $14.1.
Outlook, risks and unusual items
- Management estimated 2013 new-trailer sales of 46,000–47,000 units and expected continued pricing and gross-margin improvement. It cited healthy demand and industry forecasts above replacement levels; these are expectations, not guarantees.
- Management anticipated approximately $20 million of 2013 capital spending and believed liquidity sufficient for operations, working capital and capital expenditures through the remainder of 2013 and 2014.
- Backlog was approximately $563 million at September 30, 2013, versus $666 million at December 31, 2012 and $555 million a year earlier. Most backlog orders were expected to be completed within 12 months; orders may change.
- Management cited global economic, unemployment, housing and construction risks, as well as volatile raw-material and component costs. A hypothetical 100-basis-point change in floating rates was estimated to change annual interest expense by $0.5 million.
- The 2013 nine-month effective tax rate was 39.9%, versus a low prior-year rate affected by a $59.9 million valuation-allowance release in Q4 2012. Management estimated a roughly 40% rate for the remainder of 2013, but did not expect cash taxes to differ materially from 2012’s approximately $0.6 million.
- Q3 included a $0.6 million debt-extinguishment loss; the nine-month period included $1.3 million, related to term-loan repayment and refinancing costs. A Brazilian joint-venture litigation judgment was approximately R$26.7 million (about $11.8 million at stated exchange rates), potentially subject to substantial interest and adjustments; Wabash appealed, recorded no loss for this matter and said it could not estimate a reasonable possible loss range.
- The filing’s income statement reports Q3 interest expense of $6.3 million versus $7.8 million in 2012, while the MD&A narrative describes a $1.5 million increase. The reported figures therefore appear inconsistent and warrant verification.
Important facts for investors to verify
- Reconcile Q3 interest expense in the financial statements with the MD&A narrative, and assess the drivers of the sharp year-over-year tax-expense change.
- Track working-capital conversion: receivables and inventory increased, and management attributed much of the operating cash-flow impact to working-capital requirements.
- Review debt maturities, floating-rate exposure, covenant headroom and the convertible notes’ 2018 maturity-linked provisions.
- Monitor backlog conversion, trailer shipment and pricing trends, and whether Walker/Beall integration and diversification deliver expected margins and synergies.
- Follow the Brazil litigation appeal and environmental matters; the filing says some potential losses cannot be estimated, while the Brazilian judgment is unaccrued.