Wabash National Corporation — FY 2016 Form 10-K
Reporting period: Year ended December 31, 2016; the filing also reports unaudited fourth-quarter results. Wabash manufactures trailers, liquid transportation systems, truck bodies, and related diversified industrial products. Reporting segments were realigned in 2016 to Commercial Trailer Products and Diversified Products; prior-period segment results were restated.
Financial results and liquidity
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Net sales | $1,845.4 million | $2,027.5 million | Down 9.0% |
| Gross profit / margin | $325.5 million / 18.0% | $303.4 million / 15.0% | Profit up 7.3%; margin up 300 bps |
| Operating income / margin | $202.5 million / 11.0% | $180.4 million / 8.9% | Income up 12.3%; margin up about 210 bps |
| Net income | $119.4 million | $104.3 million | Up 14.5% |
| Diluted EPS | $1.82 | $1.50 | Up 21.3% |
| Operating cash flow | $178.8 million | $131.8 million | Up $47.0 million |
- Interest expense was $15.7 million, down from $19.5 million. Income tax expense was $66.0 million; the effective tax rate was 35.6%.
- Cash and cash equivalents were $163.5 million at year-end. Working capital was $314.8 million. Management reported total liquidity of $333.0 million, defined as cash plus available borrowing capacity; the $175 million revolving facility had no outstanding borrowings.
- Total debt and capital lease obligations were $237.8 million on the balance sheet. The filing separately reports $241.1 million of indebtedness, including principal amounts and other obligations. The $189.5 million term loan was floating-rate; a 100-basis-point rate change was estimated to affect annual interest expense by $1.5 million.
- Operating cash flow less capital expenditures was approximately $158.4 million. Investing activities used $17.3 million and financing activities used $176.8 million, including share and convertible-note repurchases.
- Year-end backlog was approximately $802 million, down from $1.210 billion a year earlier. The majority was expected to ship within 12 months, but orders may change or be cancelled.
Fourth-quarter results
Q4 2016 net sales were $462.1 million, gross profit was $71.5 million, net income was $23.0 million, and diluted EPS was $0.36. Compared with Q4 2015, sales fell from $543.7 million, gross profit from $87.8 million, net income from $33.3 million, and diluted EPS from $0.50.
Material changes and notable items
- Sales declined in both segments: Commercial Trailer Products fell 4.8% to $1.506 billion; Diversified Products fell 22.9% to $352.4 million. New trailer shipments declined 5.8% overall to 60,950 units.
- Commercial Trailer Products gross profit increased to $253.3 million, with segment margin rising to 16.8% from 12.5%, attributed to pricing, material costs, sourcing, and operating efficiencies. Diversified Products gross profit fell to $75.6 million from $107.0 million, and margin declined to 21.5% from 23.4%, mainly due to lower volume and fixed-cost under-absorption.
- Wabash recorded a $1.7 million goodwill impairment following its segment realignment. It also recorded a $1.9 million loss on extinguishment of debt related to note repurchases.
- The company repurchased $82.0 million principal amount of convertible notes for $98.9 million, excluding accrued interest, and spent $77.0 million on share repurchases. At year-end, $23 million remained authorized under the $100 million repurchase program.
- The board reinstated quarterly dividends in December 2016; the initial $0.06-per-share payment was made in January 2017. Future dividends remain discretionary and subject to financial and credit-agreement constraints.
- On February 24, 2017, Wabash refinanced its term loan balance of approximately $189.5 million. The new loan reduced the stated LIBOR margin from 3.25% to 2.75% and the base-rate margin from 2.25% to 1.75%.
Outlook, risks, and contingencies
- Management forecast 2017 new-trailer sales of 51,000–55,000 units, approximately 10%–16% below 2016, while expecting “solid results” through margin discipline, productivity, cost optimization, and operational improvements. Planned 2017 capital expenditures were $30–$40 million.
- Management cited ACT estimates of approximately 261,000 industry trailer shipments in 2017 and average annual demand of approximately 257,000 through 2021. It believed demand could remain above estimated replacement levels, but warned that forecasts were uncertain.
- Key risks include the highly cyclical trailer market; economic and customer-financing weakness; customer concentration (the five largest customers represented 24% of sales); reliance on a limited number of suppliers; commodity price increases or shortages; competitive pricing; and execution and customer adoption risks in diversification efforts.
- Debt risks include variable interest rates, restrictive covenants, and the notes’ 2018 maturity. Credit agreements contain liquidity-related accelerated-maturity provisions and limits on dividends and other actions. The company reported compliance with its covenants at year-end.
- Wabash disclosed ongoing litigation and environmental matters, including a disputed approximately $2.9 million Walker acquisition claim and environmental proceedings. Management did not expect the described matters to materially affect financial condition or liquidity, but noted that outcomes and loss ranges can be uncertain. The Brazil court of appeals dismissed the claims against Wabash in October 2016, subject to possible further appeal.
- Raw-material purchase commitments were $57.8 million through December 2017; standby letters of credit were $5.4 million. The filing states that the range of possible legal losses beyond accrued amounts could not be estimated clearly.
Most important facts for investors to verify
- Whether the 2017 trailer-volume forecast and above-replacement industry demand translated into orders, backlog conversion, and sustained margins.
- How much of the 2016 earnings and cash-flow improvement was durable operating performance versus working-capital movements, pricing, and lower input costs.
- Debt principal, maturity and conversion terms for the remaining 2018 notes; the impact and final terms of the February 2017 term-loan refinancing; and covenant headroom.
- Whether the reinstated dividend and remaining share-repurchase authorization are supported by cash generation and do not constrain investment or liquidity.
- Whether Diversified Products can recover profitability as sales decline, and whether its goodwill and acquired intangibles remain recoverable.
- Developments in supplier availability and commodity costs, customer concentration and credit quality, and the disclosed legal and environmental contingencies.