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WNC > SEC Filings for WNC > Form 10-Q on 3-May-2011All Recent SEC Filings

Show all filings for WABASH NATIONAL CORP /DE

Form 10-Q for WABASH NATIONAL CORP /DE


3-May-2011

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report of Wabash National Corporation (the "Company", "Wabash" or "we") contains "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). Forward-looking statements may include the words "may," "will," "estimate," "intend," "continue," "believe," "expect," "plan" or "anticipate" and other similar words. Our "forward-looking statements" include, but are not limited to, statements regarding:

• our business plan;

• our expected revenues, income or loss and capital expenditures;

• plans for future operations;

• financing needs, plans and liquidity, including for working capital and capital expenditures;

• our ability to achieve sustained profitability;

• reliance on certain customers and corporate relationships;

• availability and pricing of raw materials;

• availability of capital and financing;

• dependence on industry trends;

• the outcome of any pending litigation;

• export sales and new markets;

• engineering and manufacturing capabilities and capacity;

• acceptance of new technology and products;

• government regulation; and

• assumptions relating to the foregoing.

Although we believe that the expectations expressed in our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and are subject to inherent risks and uncertainties, such as those disclosed in this Quarterly Report. Important risks and factors that could cause our actual results to be materially different from our expectations include the factors that are disclosed in "Item 1A. Risk Factors" in our Form 10-K for the year ended December 31, 2010 and elsewhere herein, including, but not limited to, Item 1A of Part II hereof. Each forward-looking statement contained in this Quarterly Report reflects our management's view only as of the date on which that forward-looking statement was made. We are not obligated to update forward-looking statements or publicly release the result of any revisions to them to reflect events or circumstances after the date of this Quarterly Report or to reflect the occurrence of unanticipated events.


RESULTS OF OPERATIONS

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

                                                 Percentage of Net Sales
                                              Three Months Ended March 31,
                                                2011                2010
      Net sales                                     100.0 %             100.0 %
      Cost of sales                                  92.6               101.2
      Gross profit                                    7.4                (1.2 )

      General and administrative expenses             4.3                 9.9
      Selling expenses                                1.3                 3.2
      Income (Loss) from operations                   1.8               (14.3 )

      Increase in fair value of warrant                 -              (162.0 )
      Interest expense                               (0.4 )              (1.3 )
      Other, net                                        -                   -
      Income (Loss) before income taxes               1.4              (177.6 )

      Income tax expense                                -                 0.1
      Net income (loss)                               1.4 %            (177.7 ) %

For the three month period ended March 31, 2011, we recorded net sales of $222.0 million, compared to $78.3 million in the prior year period. Net sales increased in the current year as new trailer volumes increased by approximately 6,300 trailers, or 242.3% compared to the same period in 2010. Gross profit margin was 7.4% in the first quarter of 2011 compared to negative 1.2% in the prior year period. The 8.6 percentage point improvement in gross profit was primarily driven by increased shipment and production levels resulting in lower overhead costs per unit as compared to the prior year period. We are encouraged as the overall trailer market continued to strengthen during the first quarter of 2011 and our expectation is that overall shipment and production levels will continue to improve as the year progresses. However, though demand levels have improved significantly and the pricing environment for new trailers has become more favorable, we continue to be challenged with rising raw material commodities and component costs, primarily with aluminum, steel, plastic and lumber. Selling, general and administrative expenses increased in the first quarter of 2011 as compared to the same period in 2010 primarily as a result of higher employee compensation costs due primarily to a reinstatement of compensation levels that were reduced during 2009 and 2010 in order to adjust our cost structure to match the market demand at that time. A portion of the compensation reductions implemented in the previous years remain in effect and we continue to evaluate the full restoration of these costs. The impact, if fully restored, would increase our cost structure by less than $1.0 million per quarter.

Our management team continues to be focused on sizing our operations to match the current demand environment, maintaining our cost savings initiatives, strengthening our capital structure, developing innovative products, positioning the Company to optimize profits as the industry continues to recover and selecting product introductions that meet the needs of our customers.


As a recognized industry leader, we continue to focus on product innovation, lean manufacturing, strategic sourcing and workforce rationalization in order to strengthen our industry position and improve operating results.

Three Months Ended March 31, 2011

Net Sales

Net sales in the first quarter of 2011 increased $143.7 million, or 183.5%,
compared to the first quarter of 2010. By business segment, net external sales
and related units sold were as follows (dollars in millions):

                                Three Months Ended March 31,
                             2011            2010        % Change
Sales by segment
Manufacturing             $    193.0       $   57.4          236.2
Retail and distribution         29.0           20.9           38.8
Total                     $    222.0       $   78.3          183.5

                                   (units)
New trailer units
Manufacturing                  8,300          2,300          260.9
Retail and distribution          600            300          100.0
Total                          8,900          2,600          242.3

Used trailer units               700            700              -

Manufacturing segment sales were $193.0 million in the first quarter of 2011, an increase of $135.6 million, or 236.2%, compared to the first quarter of 2010 due primarily to increased new trailer volumes reflecting higher customer demand, higher selling prices by product line necessary to cover increases in raw material commodity and component costs as well as the continued success of the diversification of our product offering through DuraPlate® composite products. New trailer sales volumes for this segment increased 6,000 units, or 260.9%, compared to the prior year period as a result of overall strengthened market demand across all product lines within the manufacturing segment. Non-trailer related net sales have increased $6.8 million, or 136.8%, compared to the prior year period due primarily to the increased demand for our DuraPlate® composite products as we continue to diversify our product offerings.

Retail and distribution segment sales were $29.0 million in the first quarter of 2011, up $8.1 million, or 38.8%, compared to the prior year first quarter. New trailer sales increased $5.9 million, or 75.9%, due primarily to increased volumes as a result of overall improved market demand. Used trailer sales were up $0.3 million, or 5.7%, primarily due to higher average selling prices. Parts and service sales were up $1.9 million, or 22.9%, as a result of increased market demand.

Cost of Sales

Cost of sales for the first quarter of 2011 was $205.5 million, an increase of $126.2 million, or 159.3%, compared to the first quarter of 2010. As a percentage of net sales, cost of sales was 92.6% in the first quarter of 2011 compared to 101.2% in the first quarter of 2010.


Manufacturing segment cost of sales, as detailed in the following table, was $178.9 million for the first quarter of 2011, an increase of $119.3 million, or 200.2%, compared to the first quarter of 2010. As a percentage of net sales, cost of sales was 92.7% in the first quarter of 2011 compared to 103.8% in the 2010 period.

                                               Three Months Ended March 31,
         Manufacturing Segment                2011                      2010
                                                  (dollars in millions)
                                                  % of Net                  % of Net
                                                   Sales                     Sales
         Material Costs              $ 141.4           73.3 %   $ 42.5           74.0 %
         Other Manufacturing Costs      37.5           19.4 %     17.1           29.8 %
                                     $ 178.9           92.7 %   $ 59.6          103.8 %

Cost of sales is composed of material costs, a variable expense, and other manufacturing costs, comprised of both fixed and variable expenses, including direct and indirect labor, outbound freight, and overhead expenses. Material costs were 73.3% of net sales in the 2011 period compared to 74.0% in the 2010 period. The 0.7% decrease results from an improved product mix which reflects continued growth in our higher margin DuraPlate® composite products. Other manufacturing costs decreased from 29.8% of net sales in the first quarter of 2010 to 19.4% in the 2011 period. The 10.4% decrease is primarily due to strengthened market demand resulting in allocating our fixed overhead costs over approximately 6,000 more new trailers sold in the current quarter as compared to the prior year period.

Retail and distribution segment cost of sales was $26.5 million in the first quarter of 2011, an increase of $6.9 million, or 35.3%, compared to the 2010 period. As a percentage of net sales, cost of sales was 91.5% in the first quarter of 2011 compared to 93.6% in the 2010 period. This improvement as a percentage of net sales was primarily the result of increased new trailer and parts and service volumes for the 2011 period.

Gross Profit

Gross profit was $16.5 million in the first quarter of 2011, an improvement of
$17.5 million from the prior year period. Gross profit as a percent of sales was
7.4% for the quarter compared to negative 1.2% for the same period in
2010. Gross profit by segment was as follows (in millions):

                                         Three Months Ended March 31,
                                          2011                   2010
           Gross profit by segment
           Manufacturing             $         14.1         $         (2.3 )
           Retail and distribution              2.5                    1.3
           Eliminations                        (0.1 )                    -
           Total gross profit        $         16.5         $         (1.0 )

The manufacturing segment gross profit for the first quarter of 2011 was $14.1 million, an improvement of $16.4 million from the previous year period. Gross profit as a percentage of sales was 6.8% for the first quarter of 2011 as compared to negative 3.7% for the same period in 2010. The increase in gross profit and gross profit margin was primarily driven by a 242.3% increase in new trailer volumes.


Retail and distribution segment gross profit in the first quarter of 2011 was $2.5 million, an increase of $1.2 million compared to the 2010 period. Gross profit as a percentage of sales was 8.5% compared to 6.2% for the prior year period primarily due to increased new trailer and parts and service volumes.

General and Administrative Expenses

General and administrative expenses of $9.5 million for the first quarter of 2011 increased $1.8 million, or 23.3%, from the prior year period primarily as a result of a $1.5 million increase in employee compensation related costs due to a reinstatement of compensation levels that were reduced during 2009 and 2010 in order to adjust our cost structure to match market demand at that time.

Selling Expenses

Selling expenses were $3.0 million in the first quarter of 2011, an increase of $0.4 million, or 17.2%, compared to the prior year period. This increase was the result of $0.3 million increase in salaries and other employee related costs due to a reinstatement of compensation levels that were reduced during 2009 and 2010 in order to adjust our cost structure to match market demand at that time.

Income Taxes

We have experienced cumulative operating losses over the most recent three year period. After considering these operating losses and other available evidence, both positive and negative, we have recorded a full valuation allowance against our net deferred tax assets as of March 31, 2011. As a result, the income tax expense for the first quarter of 2011 was less than $0.1 million.

Liquidity and Capital Resources

Capital Structure

Our capital structure is comprised of a mix of debt and equity. As of March 31, 2011, our debt to equity ratio was approximately 0.4:1.0. Our long-term objective is to generate operating cash flows sufficient to fund normal working capital requirements, to fund capital expenditures and to be positioned to take advantage of market opportunities. For 2011, we expect to fund operations, working capital requirements and capital expenditures through cash flows from operations as well as available borrowings.

Debt Agreements and Related Amendments

In July 2009, we entered into a Third Amended and Restated Loan and Security Agreement with our lenders, effective August 3, 2009, with a maturity date of August 3, 2012. The revolving credit facility is guaranteed by certain subsidiaries of ours and secured by substantially all of our assets and has a capacity of $100 million, subject to a borrowing base and other discretionary reserves. The revolving credit facility amended and restated our previous revolving credit facility, and our lenders waived certain events of default that had occurred under the previous revolving credit facility and waived the right to receive default interest during the time the events of default had continued.


In May 2010, we entered into Consent and Amendment No. 1 to the revolving credit facility. The Consent and Amendment No. 1 was entered into to permit the early redemption of our Series E-G Preferred Stock and required us to pay down our revolving credit facility by at least $23.0 million. The repayment did not reduce our revolving loan commitments. As amended, if the availability under our revolving credit facility is less than $15.0 million at any time before the earlier of August 14, 2011 or the date that monthly financial statements are delivered for the month ending June 30, 2011, we would be required to maintain a varying minimum EBITDA and would be restricted in the amount of capital expenditures we could make during such period. If our availability is less than $20.0 million thereafter, we would be required to maintain a fixed charge coverage ratio for the 12 month period ending on the last day of the calendar month that ended most recently prior to such time of not less than 1.1 to
1.0. In addition, the Consent and Amendment No. 1 modified our borrowing base by eliminating a $12.5 million facility reserve while reducing the fixed assets sub-limit by $12.5 million.

The interest rate on borrowings under our revolving credit facility from the date of effectiveness through July 31, 2010 was LIBOR plus 4.25% or the prime rate of Bank of America, N.A. (the "Prime Rate") plus 2.75%. After July 31, 2010, the interest rate is based upon average unused availability and will range between LIBOR plus 3.75% to 4.25% or the Prime Rate plus 2.25% to 2.75%. We are required to pay a monthly unused line fee equal to 0.375% times the average daily unused availability along with other customary fees and expenses of our agent and lenders. All interest and fees are paid monthly.

Our revolving credit facility contains customary representations, warranties, affirmative and negative covenants, including, without limitation, restrictions on mergers, dissolutions, acquisitions, indebtedness, affiliate transactions, the occurrence of liens, payments of subordinated indebtedness, disposition of assets, leases and changes to organizational documents.

Our revolving credit facility contains customary events of default including, without limitation, failure to pay obligations when due under the facility, false and misleading representations, breaches of covenants (subject in some instances to cure and grace periods), defaults on certain other indebtedness, the occurrence of certain uninsured losses, business disruptions for a period of time that materially adversely affects the capacity to continue business on a profitable basis, changes of control and the incurrence of certain judgments that are not stayed, released or discharged within 30 days.

During the first quarter of 2011, we initiated a process to analyze various refinancing alternatives for our current revolving credit facility, which resulted in our solicitation and the receipt of refinancing proposals from various asset-based lenders. We are currently evaluating these proposals and expect to make a decision during the second quarter of 2011 as to which refinancing alternatives, if any, we will pursue.

As of March 31, 2011, we were in compliance with all covenants of our revolving credit facility.

Cash Flow

Cash used in operating activities for the first quarter of 2011 amounted to $3.3 million compared to $13.8 million used in the same period in 2010. The use of cash from operating activities for the current year period was the result of an $11.3 million increase in our working capital offset by $8.0 million of net income, adjusted for various non-cash activities, including depreciation, amortization and stock-based compensation. Increases in working capital for the current year period can be attributed to the increased production levels in comparison to the previous year and the related increases in purchasing activities resulting from higher raw material requirements. Changes in key working capital accounts for the first quarter of 2011 compared to the same period in 2010 are summarized below (in millions):


        Source (Use) of cash:                       2011        2010       Change
        Accounts receivable                        $ (17.3 )   $  (6.7 )   $ (10.6 )
        Inventories                                  (35.0 )     (22.2 )     (12.8 )
        Accounts payable and accrued liabilities      43.4        23.0        20.4

Accounts receivable increased by $17.3 million in the first three months of 2011 as compared to an increase of $6.7 million in the same period in 2010. Days sales outstanding, a measure of working capital efficiency that measures the amount of time a receivable is outstanding, improved to approximately 22 days in the first quarter of 2011 compared to 30 days during the same period in 2010 due to the timing of collections. The increase in accounts receivable for the first quarter of 2011 was primarily the result of the timing of shipments as trailer demands increased throughout the first quarter and a 183.6% increase in our consolidated net sales as compared to the prior year period. Inventory increased $35.0 million during the first three months of 2011 as compared to an increase of $22.2 million in the 2010 period. The increase in inventory for 2011 was due to higher new trailer inventories and raw materials resulting from increased order levels during the first quarter of 2011. Despite the increased inventory levels, our inventory turns, a commonly used measure of working capital efficiency that measures how quickly inventory turns per year, improved to approximately 7 times in 2011 compared to 5 times in 2010 due to our ability to effectively manage inventory levels as the overall demand for trailers increased. Accounts payable and accrued liabilities increased $43.4 million in the first quarter of 2011 compared to an increase of $23.0 million for the same period in 2010. The increase in the first quarter of 2011 was due primarily to higher production levels as compared to the previous year period. Days payable outstanding, a measure of working capital efficiency that measures the amount of time a payable is outstanding, was reduced to 48 days for the first quarter of 2011 compared to 59 days for the same period in 2010 due primarily to the timing of trailer shipments relative to our production levels.

Investing activities used $0.3 million during the first three months of 2011 compared to $0.2 million provided in the same period in 2010. Cash used in investing activities in the first three months of 2011 was related to capital spending in order to support growth and improvement initiatives at our facilities.

Financing activities used $7.4 million during the first three months of 2011 driven by repayments under our revolving credit facility necessary to fund working capital requirements and increased production levels.

As of March 31, 2011, our liquidity position, defined as cash on hand and available borrowing capacity, amounted to $57.1 million, an improvement of $28.1 million compared to March 31, 2010 and as compared to $60.4 million at December 31, 2010. Total debt and capital lease obligations amounted to $52.1 million as of March 31, 2011. As we continue to see improvements to the overall trailer industry as well as our operating performance metrics, we believe our liquidity is adequate to fund operations, working capital needs and capital expenditures for 2011.

Capital Expenditures

Capital spending amounted to approximately $0.3 million for the first three months of 2011 and is anticipated to be in the range of $6 million to $8 million in the aggregate for 2011. Capital spending for 2011 will be primarily utilized to support growth and improvement initiatives within our facilities, including an investment of approximately $2.5 million to be incurred over the next two years to enable us the capability to manufacture bulk liquid storage containers, or frac tanks, used by fluid management companies in the environmental services and oil and gas industries.


Off-Balance Sheet Transactions

As of March 31, 2011, we had approximately $1.7 million in operating lease commitments. We did not enter into any material off-balance sheet debt or operating lease transactions during the quarter ended March 31, 2011.

Contractual Obligations and Commercial Commitments

We have included a summary of our Contractual Obligations and Commercial Commitments in our annual report on Form 10-K for the year ended December 31, 2010 and, with the exception of the decrease in our outstanding borrowings on our revolving credit facility, the increase in our raw material purchase commitments (see "Commodity Prices" section below for further details), and an increase of $24.1 million in used trailer purchase commitments for 2011, there have been no material changes to the summary provided in that report.

Backlog

Orders that have been confirmed by customers in writing and can be produced during the next 18 months are included in our backlog. Orders that comprise our backlog may be subject to changes in quantities, delivery, specifications and terms. Our backlog of orders was approximately $731 million at March 31, 2011 compared to $480 million at December 31, 2010 and $295 million at March 31, 2010. We expect to complete the majority of our existing backlog orders within the next 12 months.

OUTLOOK

The demand environment for trailers is improving, as evidenced by the increases in our new trailer shipments and backlog as well as trailer industry forecasts for the upcoming years. According to the most recent A.C.T. Research Company, LLC ("ACT") estimates, total trailer industry shipments for 2011 are expected to be up 61% from 2010 to approximately 200,000 units. By product type, ACT is estimating that van trailer shipments will be up approximately 70% in 2011 compared to 2010. ACT is forecasting that platform trailer shipments will increase approximately 57% and dump trailer shipments will increase approximately 50% in 2011. For 2012, ACT estimates that shipments will grow approximately 25% to a total of 250,000 units. Downside concerns for 2011 relate to continued issues with the global economy, unemployment, tight credit markets, as well as depressed housing and construction-related markets in the U.S. Taking into consideration recent economic and industry forecasts, as well as discussions with customers and suppliers, management expects demand for new trailers to improve as we move through 2011 and the economy continues to improve.

We believe we are well-positioned for long-term growth in the industry because:
(1) our core customers are among the dominant participants in the trucking industry; (2) our DuraPlate® trailer continues to have increased market acceptance; (3) our focus is on developing solutions that reduce our customers' trailer maintenance costs; and (4) we expect some expansion of our presence into the mid-market carriers.

While our expectations for industry volumes are generally in line with those of ACT, pricing will be difficult for the remainder of 2011 as raw material and component costs have risen and remain volatile. As has been our policy, we will endeavor to pass along raw material and component price increases to our customers. Our standard sales terms and conditions allow for price adjustments associated with raw material increases; however, in some cases, we have provided fixed price trailer contracts to key customers for periods of up to 12 months. We have a focus on continuing to develop innovative new products that both add value to our customers' operations and allow us to continue to differentiate our products from the competition.


Based on industry forecasts, conversations with our customers regarding their current requirements and our existing backlog of orders, we estimate that for the full year 2011 total new trailers sold will be between 45,000 and 47,000, an increase from 2010 of approximately 81% to 89%.

. . .

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