Wabash National Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited consolidated results; financial amounts below are in U.S. dollars. The company manufactures commercial trailers and related products and operates Commercial Trailer Products, Diversified Products, and Retail segments.
Financial performance and position
- Third-quarter revenue: $491.7 million, up 11.8% year over year, driven mainly by higher new-trailer shipments. Net income was $18.3 million versus $16.2 million; diluted EPS was $0.25 versus $0.23.
- First-nine-month revenue: $1.336 billion, up 13.5%. Net income was $41.8 million versus $36.1 million; diluted EPS was $0.58 versus $0.52.
- Margins: Q3 gross margin declined to 12.5% from 14.0%; operating margin was 7.1% versus 7.7%. For nine months, gross margin was 12.7% versus 13.8%, while operating margin was 6.6% versus 6.7%.
- Cash flow: Operating cash flow for nine months was $14.7 million, down from $53.8 million. Increased working capital used $81.0 million, particularly from a $79.5 million inventory increase. Investing activities used $4.8 million; financing activities used $43.6 million, primarily for term-loan repayments.
- Liquidity: Cash was $79.6 million at September 30, versus $113.3 million at December 31, 2013. Management reported liquidity of $219.7 million, including available revolver capacity; there were no revolver borrowings.
- Debt: Long-term debt was reported at $323.7 million, with $0.5 million current; capital lease obligations totaled $7.6 million. The term loan balance was $192.8 million and convertible notes had $150 million principal. Senior secured leverage was 0.8:1.0, and the company reported covenant compliance.
- Working capital and equity: Inventory rose to $259.8 million from $184.2 million at year-end. Stockholders’ equity was $370.3 million, up from $322.4 million.
Material changes and operating drivers
- Q3 Commercial Trailer Products sales increased 20.7%, reflecting a 27.4% rise in new-trailer shipments to 13,950 units. The segment’s gross profit improved, but lower-margin commercial trailer sales comprised a larger share of consolidated sales.
- Q3 Diversified Products sales fell 4.3%; segment gross profit declined to $23.9 million from $31.3 million. Management cited wood-flooring input and operating costs, product mix, lower tank-trailer selling prices, and competitive pressures.
- For the first nine months, Commercial Trailer Products sales rose 22.0%, while Diversified Products sales fell 1.4%. The decline in Diversified Products gross profit offset part of the improvement in Commercial Trailer Products.
- Term-loan principal declined by about $42.1 million during the nine-month period. Lower debt and the prior-year repricing reduced interest expense to $16.9 million from $20.4 million.
- The company recorded $1.0 million of nine-month expense related to early debt extinguishment and a $0.6 million loss associated with transitioning three retail branches to independent dealers.
Outlook, risks, and contingencies
- Management expected healthy trailer demand to continue, citing a growing backlog and industry forecasts. It forecast 2014 new-trailer sales of 54,500–56,000 units, approximately 16%–20% above 2013, and expected pricing and gross-margin improvement through the balance of 2014. These are management expectations, not guaranteed results.
- Backlog was approximately $794 million at September 30, 2014, compared with $711 million at December 31, 2013 and $563 million a year earlier. Most was expected to be completed within 12 months; orders may change.
- Planned 2014 capital expenditures were approximately $20 million. Management said available liquidity should fund operations, working capital, and capital spending through the remainder of 2014 and 2015, while warning that higher cash taxes could constrain liquidity.
- Key business risks include trailer-market cyclicality, economic and construction weakness, commodity and component price volatility, competitive pricing, customer and product concentration, and the ability to integrate acquisitions and grow diversified products. Raw-material purchase commitments were $33.0 million through December 2015; management said costs not offset through pricing could materially hurt results.
- A Brazilian joint-venture dispute remained under appeal. A lower-court award was approximately R$26.7 million (about $11 million at then-current exchange rates), excluding potentially substantial interest, fees, or inflation adjustments; the company had not accrued a loss and could not reasonably estimate its exposure. The filing cited a potential maximum for such additions of approximately $58 million, subject to change and court discretion.
- Other environmental and legal matters were disclosed. The company said it did not expect the described matters to materially affect its financial condition or liquidity, but outcomes remain uncertain.
Important facts for investors to verify
- Whether higher shipments translate into recovered gross margins, particularly in Diversified Products, given cost inflation and competitive pressures.
- Whether inventory growth and the $14.7 million operating cash flow are temporary working-capital effects, and whether backlog converts to shipments on expected terms.
- The components and availability conditions underlying reported liquidity of $219.7 million, and the impact of rising cash taxes and planned capital spending.
- The status and potential exposure of the Brazilian litigation, including appeal developments and any interest or other additions to the lower-court award.
- Progress against the 54,500–56,000-unit 2014 sales forecast, expected margin improvements, and the company’s ability to meet debt obligations, including the notes due 2018.