The expectation of "meaningful downwards pressure on revenue and earnings likely into 2021, amid deteriorating end market fundamentals and weak macro conditions, heightened by the coronavirus outbreak," was the justification for lowering trailer manufacturer Wabash National Corporation (NYSE:WNC) credit ratings.
In the Wednesday report, Moody's Investors Service announced it had lowered the Lafayette, Indiana-based company's debt, probability of default and speculative grade liquidity ratings another notch. The company's senior unsecured debt rating fell two notches. The firm's outlook on the company "remains stable," but it expects Wabash's financial leverage to remain "at an elevated level over the next year, with weakening credit metrics amid an uncertain environment."
Moody's notes that fundamental changes in Wabash's business led the company to record a significant impairment charge. Wabash recorded $106.7 million in goodwill impairment charges in its final-mile products and tank trailer segments during the first quarter as declines in share price lowered the fair value of the units. The company's share price declined 50% during the first quarter.
The report said "the company faces weakening demand for its core heavy duty trailers (mainly Class 8), which comprise the substantial portion of revenue, amid the sharp cyclical drop in truck production accelerated by the coronavirus crisis." Moody's expects those conditions to pressure revenue and earnings, and "negatively impact" its credit metrics into next year.
Moody's is calling for operating margins to "trend towards the low-to mid-single digit range (including Moody's standard adjustments) from about mid-to-high single digit levels over the past year," and the company's debt leverage (debt-to-earnings before interest, taxes, depreciation and amortization) to exceed 4x within the next year.
Weakness in the final-mile products segment was highlighted as a concern as well. For the first half of 2020, the unit has seen net sales fall more than 50%, leading to a $19 million operating loss excluding the impairment. Moody's pointed to weak demand for medium-duty equipment, exposure to small and midsize businesses "more vulnerable in a recession," and issues with chassis availability due to COVID supply chain disruptions as the culprits.
Cost initiatives led to second-quarter beat
Wabash's cost-cutting efforts during the second quarter drove a better-than-expected break-even result, which was well ahead of analysts' estimates calling for a 20-cent-per-share loss. The company closed the quarter with a $750 million production backlog, down from $1 billion at the close of the first quarter, as the third quarter includes the seasonally weakest part of the annual production cycle.
Moody's said the cost and productivity initiatives "could provide savings of at least $20 million over the next year."
During the quarter, the company repaid a preemptive draw on its credit facility taken as added protection against the potential impacts from COVID-19. Wabash's liquidity position improved $27 million sequentially in the period, inclusive of $136 million in cash and $168 million available on its untapped credit line. The company's nearest debt maturity of $135 million doesn't occur until March 2022.
The report stated, "Wabash's liquidity profile is good." The firm expects Wabash to maintain "healthy cash balances (above $150 million in 2020 and over $120 million in 2021)" and believes its undrawn revolver will balance out "weak cash flow on low earnings over the next year." Moody's expects free cash flow to moderate this year and likely turn negative in 2021 as "working capital needs and capex ramp up with a gradual pick-up in demand and economic recovery."
In its second-quarter financial press release, President and CEO Brent Yeagy said he expects the company to remain free cash flow positive in 2020. "We aim to demonstrate how our free cash flow profile has improved from previous cycles by maintaining our dividend through this challenging time and continuing to deploy capital in the best interest of our long-term shareowners."
The company stopped paying a dividend in 2008 during the financial crisis, not resuming quarterly cash payments until 2017.
Trailer orders continue to rebound since April
ACT Research reported that U.S. trailer orders continue to improve off of the COVID-induced bottom in April. Net orders increased 40% sequentially from June at 18,851 units.
"Several non-COVID driven factors will continue to impact trailer volumes over the next few years. The surge of trailer acquisitions in 2017-19 has increased trailers in operation, decreased average life of trailers in use, and more than caught up with delayed replacement of older units, stated Frank Maly, director of commercial vehicle transportation analysis and research at ACT Research in a recent publication. "In addition to the market impact of an economy crawling from the worst quarterly performance in history, replacement volumes will also be lower than in recent years."
The Moody's report concluded, "The stable outlook reflects Moody's expectation of the good liquidity profile to anchor operations amid weak fundamentals in the company's trailer and truck body markets with uncertainty as to a sustainable meaningful recovery in demand."