Wabash National Corporation — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; comparative periods ended September 30, 2010. Amounts are in millions of dollars unless otherwise noted. Wabash manufactures and sells new trailers and also sells used trailers, parts and services through its retail and distribution network.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $336.4 | $170.8 | $845.5 | $398.8 |
| Gross profit / margin | $13.3 / 4.0% | $6.5 / 3.8% | $46.1 / 5.4% | $10.8 / 2.7% |
| Operating income (loss) | $2.3 | $(4.2) | $11.4 | $(21.2) |
| Net income (loss) | $1.1 | $(1.9) | $7.6 | $(146.6) |
| EPS, basic and diluted | $0.02 | $(0.03) | $0.11 | $(3.93) |
- Sales increased 97% in Q3 and 112% year to date, primarily on higher new-trailer shipments. New-trailer shipments rose 100% in Q3 to 13,600 and 129.1% year to date to 33,900.
- For the first nine months, operating cash flow was negative $22.4 million, compared with negative $34.9 million in 2010. Investing used $3.4 million; financing provided $52.6 million. Cash increased to $48.0 million from $21.2 million at year-end 2010.
- Working capital absorbed cash, especially inventory, which rose $89.1 million during the nine-month period. Management attributed this to higher production, orders and raw-material needs.
- At September 30, cash was $48.0 million, long-term debt was $110.0 million and capital lease obligations totaled $4.9 million. Total debt and leases were $114.9 million. Reported liquidity, including available borrowing capacity, was $107.3 million.
- Capital expenditures were $3.4 million year to date; management expected full-year 2011 spending of $7–8 million, including investment in manufacturing frac tanks.
Changes, drivers and unusual items
- Improved demand and higher volumes lifted sales and operating results. Q3 gross margin improved modestly; nine-month margin improved more substantially as higher volumes spread fixed manufacturing overhead across more units.
- Material costs remained a headwind: steel, aluminum, plastic, tires and other component costs rose, and the company said it could not fully pass these increases through, particularly on existing fixed-price orders. Q3 average selling prices rose 2.3% year over year, while nine-month average selling prices declined 1.1% due to customer and product mix.
- Employee compensation reductions implemented in 2009–2010 had been fully restored, increasing costs. Higher compensation and selling expenses partly offset operational improvements.
- The sharply worse 2010 nine-month net loss comparison was substantially affected by a $121.6 million warrant fair-value expense and $25.5 million of preferred-stock dividends and early-extinguishment amounts applicable to common stockholders. The 2011 period included a $0.7 million loss from writing off debt issuance costs after refinancing.
- Management continued a full valuation allowance against deferred tax assets after cumulative operating losses over the prior three years; nine-month 2011 income tax expense was $0.1 million.
Outlook, financing and risks
- Management expected trailer demand to improve through the remainder of 2011 and remain strong into 2012. It forecast 47,000–48,000 new trailers sold in 2011, up approximately 89%–93% from 2010. Backlog was approximately $513 million at September 30, versus $480 million at December 31, 2010 and $334 million a year earlier; most was expected to be completed within 12 months.
- Management cautioned that gross margins would remain challenged for the rest of 2011 because of volatile input costs and limited ability to reprice existing orders. It cited global economic uncertainty, unemployment, and weak U.S. housing and construction markets as downside concerns.
- A new asset-secured revolving credit agreement was entered into in June, maturing June 28, 2016; an August amendment raised commitments from $150 million to $175 million. The company could seek one further $25 million increase subject to conditions. It reported compliance with covenants at quarter-end. The facility has borrowing-base limits, restrictive covenants and a fixed-charge-coverage test that applies when availability falls below specified thresholds.
- Commodity-price exposure is material; raw-material purchase commitments were $29.1 million through December 2012. The company estimated that a 100-basis-point interest-rate change would alter annual interest expense by approximately $1.1 million on its $110 million of floating-rate debt.
- Legal matters include a Brazilian joint-venture claim seeking approximately $11.4 million, intellectual-property litigation, and environmental matters. The company said the ultimate loss range for certain proceedings cannot currently be estimated; the proposed Arizona environmental settlement had been accrued, but required regulatory approval.
Most important facts for investors to verify
- Whether higher trailer demand and the $513 million backlog convert to shipments and cash on the expected timetable.
- Whether pricing can keep pace with commodity and component costs, and whether margins improve after fixed-price orders roll off.
- Inventory growth, operating cash conversion, and the extent of available borrowing capacity under the borrowing-base facility.
- Debt covenant headroom, floating-rate exposure and refinancing terms, including any further revolver increase.
- Developments and potential financial exposure in environmental, Brazilian and intellectual-property proceedings.
- The assumptions supporting the deferred-tax-asset valuation allowance and the sustainability of reported profitability.