Summary of WABASH NATIONAL CORP /DE

ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) describes the matters that we consider to be important to understanding the results of our operations for each of the three years in the period ended December 31, 2008, and our capital resources and liquidity as of December 31, 2008. Our discussion begins with our assessment of the condition of the North American trailer industry along with a summary of the actions we have taken to strengthen Wabash. We then analyze the results of our operations for the last three years, including the trends in the overall business and our operations segments, followed by a discussion of our cash flows and liquidity, capital markets events and transactions, our credit facility and contractual commitments. We also provide a review of the critical accounting judgments and estimates that we have made that we believe are most important to an understanding of our MD&A and our consolidated financial statements. These are the critical accounting policies that affect the recognition and measurement of our transactions and the balances in our consolidated financial statements. We conclude our MD&A with information on recent accounting pronouncements that we adopted during the year, as well as those not yet adopted that are expected to have an impact on our financial accounting practices.
We have two reportable segments: manufacturing and retail and distribution. The manufacturing segment produces trailers that are sold to customers who purchase trailers directly or through independent dealers and to the retail and distribution segment. The retail and distribution segment includes the sale of new and used trailers, as well as the sale of aftermarket parts and service through our retail branch network.
Executive Summary
Our 2008 results reflect the challenges that the trailer industry faced during the year. Throughout the year, the factors negatively impacting demand for new trailers became more intense and pervasive across the United States. As a result, the already difficult conditions within the industry became progressively more challenging. High commodity prices and elevated fuel costs prevailed for most of the year, combined with a weak housing market and overall weak consumer confidence. The effects of these factors were further magnified by credit tightening and severe shortages of liquidity in the financial markets. The liquidity shortage has caused concern about the viability of many financial institutions and has negatively impacted the economy. These factors combined together caused our revenue and gross profits to be significantly reduced. Despite these adverse conditions, we were able to achieve strong safety performance, improved process yield and productivity, increased market share and diversification through the acquisition of certain Benson manufacturing assets and the successful product launch of portable storage containers. Due to the declining market conditions discussed above, we evaluated the recoverability of our goodwill and net deferred tax assets. Our goodwill and net deferred tax asset evaluations reflected our expectation of continued and increasing challenges in the trailer industry, and our belief that these challenging conditions will persist for some time. Based on our evaluations, and as a result of our fourth quarter results and market values, we recorded a significant non-cash impairment charge for goodwill and a full valuation allowance against our net deferred tax assets, which materially affected our operating results during 2008.
We expect the overall trailer market for 2009 to decline further from 2008. As a result, we will focus on rightsizing our manufacturing and retail operations to match the current demand environment, implementing cost savings initiatives, strengthening our capital structure and improving liquidity, improving earnings and selective production introductions that meet the needs of our customers. Going Concern
Due to the events of default under our Second Amended and Restated Loan and Security Agreement (Revolving Facility), which are discussed in Liquidity and Capital Resources below, we have classified all amounts outstanding under our Revolving Facility as a current liability in our consolidated financial statements for the year ended December 31, 2008. As a result of this, the adverse conditions in the economy in general and the trailer industry in particular, and the other factors discussed in Note 1 to our consolidated financial statements, our independent registered public accounting firm has included an explanatory paragraph with respect to substantial doubt about our ability to continue as a going concern in its report on our consolidated financial statements. The presence of the going concern explanatory paragraph may have an adverse impact on our relationship with third parties with whom we do business,

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including our customers, vendors and employees and could make it challenging and difficult for us to raise additional debt or equity financing to the extent needed, all of which could have a material adverse impact on our business, results of operations and financial condition. Strategic Alternatives
The Board of Directors has authorized management to pursue and evaluate a wide range of strategic alternatives, including, but not limited to, select business divestitures, changes to our capital structure, or a possible sale, merger or other business combination. There can be no assurance that this evaluation will result in any specific transaction.
Operating Performance
We measure our operating performance in four key areas - Safety/Environmental, Quality, Productivity and Cost Reduction. Our objective of being better today than yesterday and better tomorrow than we are today is simple, straightforward and easily understood by all our associates.
• Safety/Environmental. We have made improvements to our total recordable incident rate resulting in a 5% reduction in our workers compensation costs in 2008 compared to 2007. We maintain ISO 14001 registration of our Environmental Management System. We believe that our improved environmental, health and safety management translates into higher labor productivity and lower costs as a result of less time away from work and improved system management.

• Quality. We monitor product quality on a continual basis through a number of means for both internal and external performance as follows:

- Internal performance. Our primary internal quality measurement is Process Yield (PY). PY is a performance metric that measures the impact of all aspects of the business on our ability to ship trailers at the end of the production process. In 2008, quality expectations were increased while maintaining PY performance and reducing rework.

- External performance. We actively measure and track our warranty claims and costs. Early life cycle warranty claims are trended for performance monitoring and have shown a steady improvement from an average of approximately 6 claims per 100 trailers in 2005 to 3 claims per 100 trailers in 2008. This information is utilized, along with other data, to drive continuous improvement initiatives relative to product quality and reliability. Through these efforts, we continue to realize improved quality, which has resulted in a sustained decrease for warranty payments over the past four years.

• Productivity. We measure productivity on many fronts. Some key indicators include production line speed, man-hours per trailer and inventory levels. Improvements over the last several years in these areas have translated into significant improvements in our ability to better manage inventory flow and control costs.

• Cost Reduction. We believe Continuous Improvement (CI) is a fundamental component of our operational excellence focus. In 2008, we focused on productivity enhancements within manufacturing assembly and sub-assembly areas through developing the capability for mixed model production. We also established a central warehousing and distribution center to improve material flow, inventory levels and inventory accuracy within our supply chain. The final components of the warehousing consolidation project were completed in the end of the first quarter 2009, thus realizing significant savings in the supply chain operation. We deployed value engineering and analysis teams to improve product and process costs thus keeping us competitive in the marketplace. In 2008, we also took actions to reduce costs by temporarily slowing down production at some of our facilities, extending normal shutdown periods and reducing salaried headcount levels. We deployed an operational excellence strategy to enhance a culture of daily continuous improvement. We believe the improvements generated to date provide the flexibility needed to support our customers as well as provide the foundation for enhanced performance going forward.

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Industry Trends
Truck transportation in the U.S., according to the ATA, was estimated to be a $650 billion industry in 2008, representing about 5% of U.S. Gross Domestic Product. ATA estimates that approximately 70% of all freight tonnage is carried by trucks at some point during its shipment. Trailer demand is a direct function of the amount of freight to be transported. To monitor the state of the industry, we evaluate a number of indicators related to trailer manufacturing and the transportation industry. Recent trends we have observed include the following:
• Transportation / Trailer Cycle. Transportation, including trucking, is a cyclical industry that has experienced three cycles over the last 20 years. Truck freight tonnage, according to ATA statistics, has been negative year-over-year from mid 2006 through most of 2007. Even though tonnage volumes increased 0.7% year-over-year in 2008, recent data shows further weakening of freight tonnage. The trailer industry generally precedes transportation industry cycles. The current cycle began in early 2001 when industry shipments totaled approximately 140,000, reached a peak in 2006 with shipments of approximately 280,000 and, based on current ACT estimates, is expected to reach the bottom in 2009. According to ACT, shipments in 2008 amounted to approximately 144,000 units and will be approximately 76,000 and 136,000 in 2009 and 2010, respectively. Our view is generally consistent with that of ACT.

• Age of Trailer Fleets. During the three-year period ending December 31, 2007 (the latest such information available), the average age of the top 11 publicly traded truckload motor carrier trailer fleets increased from 4.5 years to 5 years. However, the average age of the total population during this same period remained relatively unchanged at approximately 7 years, increasing to 7.5 years for 2008. The stability of overall fleet age suggests a replacement demand estimated at 185,000 per year.

• New Trailer Orders. According to ACT, quarterly industry order placement rates have experienced year-over-year declines in each of the last nine quarters through the quarter ended December 31, 2008. Total trailer orders in 2008 were 112,000 units, a 34% decrease from the 170,000 units ordered in 2007.

• Other Developments. Other developments and our view of their potential impact on the industry include:

- U.S. federal truck emission regulations took effect on January 1, 2007, resulting in cleaner, yet less fuel-efficient and more costly tractor engines. Trucking companies accelerated purchases of tractors prior to the effective date of the regulation, significantly reducing the historical trailer-to-tractor ratio. In 2010, additional emission regulations are scheduled to take effect which may result in reoccurrence of accelerated truck purchases, again reducing the trailer-to-tractor ratio. We believe that on average the trailer-to-tractor ratio is unlikely to return to prior historic norms.

- Continuing improvements in trailer quality and durability resulting from technological advances like DuraPlateâ composite, as well as increased trailer utilization due to growing adoption of trailer tracking could result in reduced trailer demand.

- Trucking company profitability, which can be influenced by factors such as fuel prices, freight tonnage volumes, and government regulations, is highly correlated with the overall economy of the U.S. Decreases in trucker profitability reduce the demand for, and financial ability to purchase, new trailers.

- Truck driver shortages experienced over the past several years have constrained and are expected to continue to constrain freight market capacity growth. As a result, trucking companies are under increased pressure to look for alternative ways to move freight, leading to more intermodal freight movement. We believe that railroads are at or near capacity, which will limit their ability to grow. We therefore expect that the majority of freight will still be moved by truck.

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Results of Operations
The following table sets forth certain operating data as a percentage of net sales for the periods indicated:

                                                    Years Ended December 31,
                                                 2008          2007        2006
                                                   (Percentage of Net Sales)

         Net sales                                 100.0 %      100.0 %     100.0 %
         Cost of sales                              97.5         91.7        92.0

         Gross profit                                2.5          8.3         8.0
         General and administrative expenses         5.3          4.5         4.0
         Selling expenses                            1.7          1.4         1.1
         Impairment of goodwill                      7.9            -         1.2

         (Loss) Income from operations             (12.4 )        2.4         1.7
         Interest expense                           (0.6 )       (0.5 )      (0.5 )
         Foreign exchange, net                         -          0.3           -

         (Loss) Income before income taxes         (13.0 )        2.2         1.2
         Income tax expense                          2.0          0.7         0.5

         Net (loss) income                         (15.0 )%       1.5 %       0.7 %

2008 Compared to 2007
Net Sales
Net sales in 2008 were $836.2 million, a decrease of $266.3 million, or 24.2%,
compared to 2007. By business segment, net external sales and related units sold
were as follows (dollars in millions):

                                              Year Ended December 31,
                                         2008         2007         % Change

             Sales by Segment
             Manufacturing             $  694.2     $   952.8          (27.1 )
             Retail and Distribution      142.0         149.7           (5.1 )

             Total                     $  836.2     $ 1,102.5          (24.2 )


             New Trailers                      (units)
             Manufacturing               30,800        43,400          (29.0 )
             Retail and Distribution      2,500         3,000          (16.7 )

             Total                       33,300        46,400          (28.2 )

             Used Trailers                6,600         4,400           50.0

Manufacturing segment sales for 2008 were $694.2 million, a decrease of $258.6 million, or 27.1%, compared to 2007. Due to a continued weak market demand and declines in the housing and construction markets, new trailer sales decreased 12,600 units, or approximately $269.7 million. Higher average selling prices impacted sales by $16.1 million in efforts to offset material price increases.
Retail and distribution segment sales were $142.0 million in 2008, a decrease of $7.7 million, or 5.1%, compared to 2007. New trailer sales decreased $3.9 million, or 5.4%, compared to 2007 due to lower volumes primarily as a result of the overall decline in the U.S. market. Used trailer sales were flat compared to the prior year

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as higher volumes were offset by lower average selling prices as depressed market conditions have driven used trailer values down throughout 2008. Parts and service sales were $37.1 million in 2008, a decrease of $3.5 million, or 8.6%, compared to 2007 due to continued weak customer demand. Gross Profit
Gross profit in 2008 was $20.9 million, down $70.8 million, or 77.2%, compared to 2007. Gross profit as a percent of sales was 2.5% in 2008 compared to 8.3% in 2007. Gross profit by segment was as follows (in millions):

                                                   Year Ended December 31,
                                               2008         2007       % Change

          Gross Profit by Segment:
          Manufacturing                      $   13.8      $ 82.8          (83.3 )
          Retail and Distribution                 6.1         9.4          (35.1 )
          Intercompany Profit Eliminations        1.0        (0.5 )

          Total                              $   20.9      $ 91.7          (77.2 )

Manufacturing segment gross profit was $13.8 million in 2008, a decrease of $69.0 million, or 83.3%, compared to 2007. Gross profit as a percentage of sales was 2.0% in 2008 compared to 8.7% in 2007. The decrease in gross profit and gross profit margin percentage was primarily driven by the 29.0% decline in volumes and continued increases in raw material costs that outpaced increases in selling prices.
Retail and distribution segment gross profit was $6.1 million in 2008, a decrease of $3.3 million, or 35.1%, compared to 2007. Gross profit as a percentage of sales was 4.3% compared to 6.3% in 2007 due to pricing pressures on used trailers and reduced parts and service volumes. General and Administrative Expenses
General and administrative expenses decreased $5.4 million to $44.1 million in 2008 compared to the prior year primarily due to lower professional services, salaries and employee related costs, which were partially offset by severance costs incurred from headcount reduction actions. These cost reductions are partially a result of our cost cutting initiatives and efforts to adjust our cost structure to match the current market demand. Selling Expenses
Selling expenses decreased $1.5 million to $14.3 million in 2008 compared to the prior year primarily due to decreases in salaries, employee related costs, advertising and promotional activities, which were partially offset by severance costs incurred from headcount reduction actions. These cost reductions are partially a result of our cost cutting initiatives and efforts to adjust our cost structure to match the current market demand. Impairment of Goodwill
We reviewed our goodwill during the fourth quarter of 2008 and, based on a combination of factors, including the significant decline in our market capitalization as well as the current decline in the U.S. economy, we concluded that indicators of potential impairment were present. Under Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, the measurement of impairment of goodwill consists of a two step process. The first step requires us to compare the fair value of the reporting unit to its carrying value. During the fourth quarter, we completed a valuation of the fair value of our reporting units that incorporated existing market based considerations as well as discounted cash flows based on current and projected results. Based on this evaluation, it was determined that the carrying value of both our platform trailer and wood product manufacturing operations exceeded fair value. The second step involves determining an implied fair value of each reporting unit's goodwill as compared to its carrying value. After calculating the implied fair value of the goodwill by deducting the fair value of all tangible and intangible net assets of the reporting unit from the fair value of the reporting unit, it was determined that the recorded goodwill of $66.3 million was fully impaired. Based on these facts and circumstances, we recorded a non-cash goodwill impairment of $66.3 million.

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Other Income (Expense)
Gain on debt extinguishment in 2008 of $0.2 million represents the gain recognized on the extinguishment of $104.5 million of our Senior Convertible Notes, which were purchased at a discount to par value, net of related deferred debt issuance costs.
Income Taxes
In 2008, we recognized income tax expense of $17.1 million compared to $8.4 million in 2007. The effective rate for 2008 was (15.7%). This rate differs from the U.S. federal statutory rate of 35% primarily due to the recognition of a full valuation allowance against our net deferred tax asset and the write-off of non-deductible goodwill. As of December 31, 2008, we had $93.1 million of remaining U.S. federal income tax net operating loss carryforwards, which will expire in 2022 if unused, and which may be subject to other limitations on use under I.R.S. rules.
2007 Compared to 2006
Net Sales
Net sales in 2007 were $1.1 billion, a decrease of $209.6 million, or 16.0%, compared to 2006. By business segment, net external sales and related units sold were as follows (in millions, except unit data):

                                              Year Ended December 31,
                                         2007          2006         % Change

             Sales by Segment:
             Manufacturing             $   952.8     $ 1,120.7          (15.0 )
             Retail and Distribution       149.7         191.5          (21.8 )

             Total                     $ 1,102.5     $ 1,312.2          (16.0 )



             New Trailers:                      (units)
             Manufacturing                43,400        55,500          (21.8 )
             Retail and Distribution       3,000         3,900          (23.1 )

             Total                        46,400        59,400          (21.9 )

             Used Trailers                 4,400         6,600          (33.3 )

Manufacturing segment sales for 2007 were $952.8 million, a decrease of $167.9 million, or 15.0%, compared to 2006. This decrease was primarily due to a decline in van sales of 11,800 units, or approximately $229.6 million, due to weak market demand. This decrease was partially offset by higher average selling prices for vans, which had a positive impact of $67.7 million. Sales price improvements resulted from the effort to offset material price increases and a favorable product mix as we shipped a larger number of the higher-priced refrigerated units and fewer lower-priced FreightPro®, pup trailers and converter dollies in 2007 compared to 2006. Sales of platform units decreased $4.0 million compared to 2006 as the impact of owning Transcraft for an additional two months was more than offset by the decline in volume. Retail and distribution segment sales were $149.7 million in 2007, a decrease of $41.7 million, or 21.8%, compared to 2006. New and used trailer sales decreased $19.7 million and $19.1 million, respectively, compared to 2006 primarily as a result of the overall decline in the market. Parts and service sales were $40.6 million in 2007, a decrease of $1.6 million, or 3.8%, compared to 2006 due to weak customer demand.
Gross Profit
Gross profit in 2007 was $91.7 million compared to $104.5 million in 2006, a decrease of $12.8 million, or 12.2%. Gross profit as a percent of sales was 8.3% in 2007 compared to 8.0% in 2006. Gross profit by segment was as follows (in millions):

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                                                   Year Ended December 31,
                                               2007        2006        % Change

          Gross Profit by Segment:
          Manufacturing                      $   82.8     $  89.5           (7.5 )
          Retail and Distribution                 9.4        15.4          (39.0 )
          Intercompany Profit Eliminations       (0.5 )      (0.4 )

          Total                              $   91.7     $ 104.5          (12.2 )

Manufacturing segment gross profit as a percentage of sales was 8.7% compared to 8.0% in 2006. Gross profit was $82.8 million in 2007, a decrease of $6.7 million, or 7.5%, compared to 2006. The gross profit margin percentage was favorably impacted by increases in the overall average selling prices for new trailers that outpaced increased raw material costs and effective management of operating costs. Offsetting these improvements was the 21.8% decline in new trailer units sold in 2007 compared to 2006. Additionally, we were able to regain operating efficiencies that were adversely impacted in 2006 as a result of implementing a new ERP system. Transcraft's contributions to gross profit increased in 2007 from the prior year period due to Transcraft having an additional two months in the current year.
Retail and distribution segment gross profit in 2007 was $9.4 million, a decrease of $6.0 million, or 39.0%, compared to 2006. As a percentage of sales, gross profit margin was 6.3% compared to 8.0% in 2006, primarily due to declines in new and used trailer unit sales and margins and reduced demand for parts and service.
General and Administrative Expenses
General and administrative expenses decreased $1.6 million to $49.5 million in 2007. The decrease was largely due to reduction in salaries and other employee-related costs which were slightly offset by increases in bad debt expense and legal and technology costs.
Selling Expenses
Selling expenses increased $0.7 million to $15.7 million in 2007 primarily due to an increase in employee-related costs and the impact of reporting Transcraft an additional two months in 2007 as compared to 2006. Other Income (Expense)
Foreign exchange, net for 2007 includes $3.3 million of accumulated foreign currency translation gains recognized as a result of the sale of our Canadian branches. Upon finalization of this sale, the operational activities pertaining to this entity were considered substantially liquidated as of December 31, 2007, and, in accordance with FASB Statement No. 52, Foreign Currency Translation, all accumulated foreign currency translation gains were recognized. Gain on debt extinguishment in 2007 of $0.5 million represents the gain recognized on the extinguishment of $20.5 million of our Senior Convertible Notes, which were purchased at a discount to par value, net of related deferred debt issuance costs.
Income Taxes
In 2007, we recognized income tax expense of $8.4 million compared to tax expense of $6.9 million in 2006. The effective rate for 2007 was 34.0%. This rate is lower than the U.S. Federal statutory rate as it includes recognition of a portion of the benefit of certain tax deductions related to the liquidation of our Canadian subsidiary of $0.8 million. As of December 31, 2007, we had $62.6 million of remaining U.S. federal income tax net operating loss carryforwards, which will expire in 2022 if unused, and which may be subject to other limitations on use under I.R.S. rules.
In 2006, we recognized the reversal of valuation allowance and reserves primarily resulting from the settlement of certain state income tax positions totaling $4.8 million. We also recognized $5.6 million of valuation allowance . . .