Wabash National Corporation — FY 2017 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2017; it is not a standalone fourth-quarter filing. Wabash manufactures trailers, truck bodies, tank and liquid-transportation equipment, and other industrial products. Following its September 27 acquisition of Supreme Industries, it reported three segments: Commercial Trailer Products, Diversified Products, and Final Mile Products.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net sales | $1.767 billion | $1.845 billion |
| Gross profit / margin | $260.9 million / 14.8% | $325.5 million / 18.0% |
| Operating income / margin | $130.8 million / 7.4% | $202.5 million / 11.3% |
| Net income | $111.4 million | $119.4 million |
| Diluted earnings per share | $1.78 | $1.82 |
| Cash from operating activities | $144.4 million | $178.8 million |
| Capital expenditures | $26.1 million | $20.3 million |
| Cash and cash equivalents | $191.5 million | $163.5 million |
| Working capital | $292.7 million | $314.8 million |
| Total debt and capital leases | $551.4 million | $237.8 million |
FY 2017 fourth-quarter results were sales of $543.4 million, gross profit of $72.9 million, net income of $49.4 million, and diluted EPS of $0.80. Fourth-quarter net income included the effects of the year’s tax and other unusual items; the filing does not provide a quarterly breakdown of those effects.
Liquidity, defined by the company as cash plus available revolver borrowing capacity, was approximately $361 million at year-end. The $175 million revolving facility had no borrowings outstanding, with approximately $169.6 million available. Backlog rose to approximately $1.213 billion from $802 million; the company expected to complete most of year-end backlog within 12 months.
Changes versus the prior year
- Sales declined 4.2%; commercial trailer shipments fell 10.3% to 52,800 units. Commercial Trailer Products sales decreased 10.5%, while Diversified Products sales increased 2.5%.
- Gross profit fell 19.9% and gross margin contracted 320 basis points. Management attributed the decline mainly to lower commercial trailer shipments, higher commodity costs, labor constraints and overtime; Diversified Products also experienced mix and material-cost pressure.
- Operating income declined to $130.8 million from $202.5 million. Net income decreased despite a substantially lower reported tax expense.
- Supreme contributed $67.1 million of sales and a $1.6 million net loss from acquisition through year-end. The new Final Mile segment reported $70.5 million of sales and $8.2 million of gross profit; segment reporting includes truck-body activities beyond Supreme.
- Operating cash flow decreased by $34.4 million. Investing cash outflow rose to $332.2 million, primarily reflecting $323.5 million paid for Supreme net of acquired cash.
Outlook, commentary, risks and unusual items
- Management cited a strong trailer-market outlook. Industry forecasters ACT and FTR estimated 2018 demand at about 299,000 and 290,000 trailers, respectively; management expected demand to remain above estimated annual replacement levels of roughly 220,000 units for several years. These are industry forecasts, not company revenue or earnings guidance.
- Management expected 2018 capital expenditures of $40 million to $50 million, including $10 million to $12 million for Supreme. It aimed to support growth and productivity, manage materials costs, maintain or improve margins, reduce debt and return capital to shareholders.
- Key risks include the cyclical trailer market, commodity price increases and supply constraints, customer concentration (the five largest customers represented 24% of sales), competition and pricing pressure, and execution and integration risks related to Supreme. Raw materials and components represented about 61% of sales.
- Debt increased substantially to fund the Supreme acquisition. Wabash issued $325 million of 5.50% senior notes due 2025; it also had $187.6 million outstanding under a floating-rate term loan and $44.6 million principal outstanding on convertible notes due May 2018. The company intended to settle convertible-note conversions in cash. A 100-basis-point rate change was estimated to affect annual interest expense by $1.9 million.
- The 2017 effective tax rate was 9.1%, compared with 35.6% in 2016. The 2017 result included a provisional $19.7 million benefit from remeasuring deferred taxes following U.S. tax-law changes and a benefit from releasing tax reserves after closure of an audit. The company said its tax accounting remained incomplete and estimates could change.
- Other notable items included $9.6 million of Supreme acquisition expenses and $8.1 million of other income, primarily a gain on sale of retail-branch assets. The company repurchased $70.1 million of shares and paid $15.3 million in dividends; the quarterly dividend was raised to $0.075 per share beginning in January 2018.
- Contingencies include a Supreme-related lawsuit alleging approximately $40 million in damages; management considered the claims without merit and did not expect a material adverse effect. Other disclosed matters included a long-running Brazilian dispute under appeal and environmental matters; Wabash said it could not estimate a loss range for certain proceedings beyond recorded accruals.
- The CEO was scheduled to step down June 1, 2018, with President and COO Brent Yeagy designated as successor. Auditors issued unqualified opinions on the financial statements and on internal control over financial reporting, but the control audit excluded Supreme, which represented $404.2 million of year-end assets.
Most important facts for investors to verify
- Whether Supreme integration delivers expected synergies and growth, and how the acquired business performs on a full-year basis.
- Whether backlog converts to sales as expected and whether the trailer-demand forecasts materialize; backlog orders may change or be cancelled.
- Whether gross margins recover despite commodity costs, labor constraints and competitive pricing.
- Liquidity and refinancing needs around the May 2018 convertible-note maturity, as well as debt reduction, interest-rate exposure and covenant headroom.
- The final tax effects of the Tax Cuts and Jobs Act, and developments or potential exposure in the disclosed litigation and environmental matters.