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WNC > SEC Filings for WNC > Form 10-Q on 30-Apr-2013All Recent SEC Filings

Show all filings for WABASH NATIONAL CORP /DE

Form 10-Q for WABASH NATIONAL CORP /DE


30-Apr-2013

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;

the benefits of, and our plans relating to the acquisition of Walker Group Holdings ("Walker") and our recently completed acquisition of certain assets of Beall Corporation ("Beall"), the amount of transaction costs associated with the acquisitions, our ability to manage the cost of the financing of the acquisition of Walker and related indebtedness and our ability to effectively integrate Walker and the Beall assets and realize the expected synergies and benefits;

our expected revenues, income or loss and capital expenditures;

our strategic plan and 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;

our ability to diversify the product offerings of non-trailer businesses and opportunities to leverage the acquired Walker and Beall businesses to grow sales in our existing products;

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 ending December 31, 2012 and elsewhere herein. 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,
                                                  2013               2012
        Net sales                                    100.0 %            100.0 %
        Cost of sales                                 87.0               92.9
        Gross profit                                  13.0                7.1

        General and administrative expenses            4.2                3.0
        Selling expenses                               2.4                1.3
        Amortization of intangibles                    1.7                0.3
        Acquisition expenses                           0.1                0.5
        Income from operations                         4.6                2.0

        Interest expense                              (2.3 )             (0.3 )
        Other, net                                     0.6                  -
        Income before income taxes                     2.9                1.7

        Income tax expense                             1.1                0.1
        Net income                                     1.8 %              1.8 %

For the three month period ended March 31, 2013, we recorded net sales of $324.2 million, compared to $277.7 million in the prior year period. Net sales increased $46.5 million as compared to the prior year period as the acquisition of Walker, completed on May 8, 2012, which generated net sales of $95.2 million in the current year period, was partially offset by a reduction in new trailer volumes of approximately 1,700 units, or 16.5%, as compared to the prior year. Gross profit margin was 13.0% in the first quarter of 2013 compared to 7.1% in the prior year period. The increase in gross profit margin is primarily due to improved pricing on new trailers and the diversification into higher margin opportunities through the acquisition of Walker. We continue to be encouraged by the overall trailer market throughout the first three months of 2013, and our expectation is that overall industry shipment and production levels will remain above replacement demand for the remainder of 2013 as key structural and market drivers continue to support healthy demand for new trailers. In addition, we expect to continue to deliver improvements in our financial and operational results as we further optimize our production facilities, implement synergies related to the acquisitions of Walker and certain assets of Beall, and continue to expand our Diversified Products customer base and product offerings.

Selling, general and administrative expenses increased in the first quarter of 2013 as compared to the same period in 2012 due primarily to the acquisition of Walker, as well as higher salaries and employee related costs. As a percentage of net sales, selling, general and administrative expenses increased to 6.6% as compared to 4.3% in the prior year period.

Our management team continues to be focused on positioning the Company to optimize profits as the industry continues to improve, maintaining our cost savings initiatives, strengthening our capital structure, developing innovative products that meet the needs of our customers and diversifying our product offering through growth in non-trailer products. As a recognized industry leader, we continue to focus on product innovation, lean manufacturing, strategic sourcing and workforce optimization in order to strengthen our industry position and improve operating results.

Three Months Ended March 31, 2013



Net Sales



Net sales in the first quarter of 2013 increased $46.5 million, or 16.7%,
compared to the first quarter of 2012. By business segment, net external sales
and related units sold were as follows (dollars in millions):



                                               Three Months Ended March 31,
                                                                       Change
                                        2013         2012          $            %
         Sales by Segment
         Commercial Trailer Products   $ 184.0     $  233.6     $  (49.6 )     (21.2 )
         Diversified Products             99.7         19.0         80.7       424.7
         Retail                           40.5         25.1         15.4        61.4
         Total                         $ 324.2     $  277.7     $   46.5        16.7

         New Trailers                         (units)
         Commercial Trailer Products     7,400       10,000       (2,600 )     (26.0 )
         Diversified Products              600            -          600           -
         Retail                            600          300          300       100.0
         Total                           8,600       10,300       (1,700 )     (16.5 )

         Used Trailers                        (units)
         Commercial Trailer Products       700          600          100        16.7
         Retail                            300          400         (100 )     (25.0 )
         Total                           1,000        1,000            -           -

Commercial Trailer Products segment sales were $184.0 million for the first quarter of 2013, a decrease of $49.6 million, or 21.2%, compared to the first quarter of 2012. The decrease in sales is due primarily to a 26.0% reduction in new trailer shipments as approximately 7,400 trailers shipped in the first quarter of 2013 compared to 10,000 trailers shipped in the prior year period. Average selling prices increased by 5.1% in the first quarter of 2013, compared to the prior year period, due to increased pricing necessary to offset higher raw material costs as well as favorable customer and product mix. Used trailer sales increased $0.9 million, or 21.7%, compared to the previous year period as a result of a 16.7% increase in shipments as demand for used trailers has remained healthy.

Diversified Products segment sales, net of intersegment sales, were $99.7 million for the first quarter of 2013, up $80.7 million, or 424.7%, compared to the same period in 2012. The increase in sales is due to the acquisition of Walker, which contributed $87.8 million in the current year period. Excluding Walker, Diversified Products segment sales for the current quarter was $11.8 million, a decrease of $7.2 million, or 37.7%, as compared to the previous year period as demand for our other product offerings, primarily related to the energy industry, have decreased.

Retail segment sales were $40.5 million in the first quarter of 2013, up $15.4 million, or 61.4%, compared to the prior year period. This increase in sales was partly due to the addition of six tank trailer parts and service locations as a result of the Walker acquisition, which added $7.8 million in sales for the current period. Excluding the parts and service locations acquired from Walker, Retail segment sales were $32.7 million, an increase of 30.4%, as compared to the prior year. New trailer sales increased $7.1 million, or 71.3%, as approximately 300 additional units were shipped during the current year as compared to the prior year period. Used trailer sales decreased $0.8 million, or 23.0%, primarily due to a 25.0% decline in unit volumes as compared to prior year period. Parts and service sales were up $1.3 million, or 11.1%.

Cost of Sales

Cost of sales for the first quarter of 2013 was $282.0 million, an increase of $24.1 million, or 9.3%, compared to the first quarter of 2012. As a percentage of net sales, cost of sales was 87.0% in the first quarter of 2013 compared to 92.9% in the first quarter of 2012.

Commercial Trailer Products segment cost of sales, as detailed in the following table, was $172.4 million for the first quarter of 2013, a decrease of $49.5 million, or 22.3%, compared to the first quarter of 2012. As a percentage of net sales, cost of sales was 93.7% for the current quarter compared to 95.0% in the prior year period.

                                                Three Months Ended March 31,
Commercial Trailer Products Segment            2013                       2012
                                                    (dollars in millions)
                                                   % of Net                   % of Net
                                                    Sales                      Sales
Material Costs                        $ 135.4           73.6 %   $ 176.2           75.4 %
Other Manufacturing Costs                37.0           20.1 %      45.7           19.6 %
                                      $ 172.4           93.7 %   $ 221.9           95.0 %

Cost of sales is comprised 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 73.6% of net sales in the first quarter of 2013 compared to 75.4% for the same period in 2012. The 1.8% decrease resulted from increases in the overall average selling prices for new trailers necessary to offset increased raw material, commodity and component costs. Other manufacturing costs decreased $8.7 million in the current year period, as compared to the prior year period, resulting from decreases in new trailer production volumes. As a percentage of sales, other manufacturing costs increased from 19.6% in the first quarter of 2012 to 20.1% in the 2013 period.

Diversified Products segment cost of sales was $73.8 million in the first quarter of 2013, an increase of $61.2 million, or 488.0%, compared to the same 2012 period due primarily to the acquisition of Walker. As a percentage of net sales prior to the elimination of intersegment sales, cost of sales was 76.8% in the first quarter of 2013 compared to 79.6% in the first quarter of 2012. The 2.8% decrease as a percentage of net sales was primarily the result of the inclusion of Walker during the current year period and an increased percentage of net sales from our higher-margined product lines as compared to the previous year period.

Retail segment cost of sales was $35.7 million in the first quarter of 2013, an increase of $13.0 million, or 57.6%, compared to the same 2012 period. As a percentage of net sales, cost of sales was 88.0% for the first quarter of 2013 compared to 90.1% for the same period in 2012. The increase in cost of sales was due to the addition of six tank trailer parts and service locations from the Walker acquisition, which added $6.1 million in cost of sales for the quarter, as well as an increase in new trailer shipments for the quarter. The improvement in cost of sales as a percentage of net sales was primarily the result of product mix driven by an increased percentage of sales from our higher margin parts and service product line in the first quarter of 2013 as compared to the previous year period.

Gross Profit

Gross profit was $42.2 million in the first quarter of 2013, an improvement of $22.5 million from the prior year period. Gross profit as a percent of sales was 13.0% for the current quarter, compared to 7.1% for the same period in 2012. Gross profit by segment was as follows (in millions):

                                               Three Months Ended March 31,
                                                                      Change
                                          2013        2012        $           %
           Gross Profit by Segment:
           Commercial Trailer Products   $  11.6     $ 11.6     $    -         0.0
           Diversified Products             25.9        6.5       19.4       298.5
           Retail                            4.9        2.5        2.4        96.0
           Corporate and Eliminations       (0.2 )     (0.9 )      0.7       (77.8 )
           Total                         $  42.2     $ 19.7     $ 22.5       114.2

Commercial Trailer Products segment gross profit was $11.6 million for the first quarter of 2013 compared to $11.6 million for the first quarter of 2012. Gross profit, prior to the elimination of intersegment sales, as a percentage of sales was 5.9% in the first quarter of 2013 as compared to 4.8% in the 2012 period. The increase in gross profit margin was primarily driven by improved pricing necessary to offset increased material costs and recapture lost margin.

Diversified Products segment gross profit was $25.9 million for the first quarter of 2013 compared to $6.5 million in the first quarter of 2012. This increase of $19.4 million, or 298.5%, was primarily due to the acquisition of Walker. Gross profit, prior to the elimination of intersegment sales, as a percentage of sales was 23.2% in the first quarter of 2013 compared to 20.4% in the first quarter of 2012. The 2.8% increase as a percentage of net sales was largely the result of the inclusion of Walker during the current year period, as well as improved margins from our wood floor operations due to productivity improvements during the current year period as compared to the previous year period.

Retail segment gross profit was $4.9 million for the first quarter of 2013, an increase of $2.4 million compared to the same period in 2012. Gross profit, prior to the elimination of intersegment sales, as a percentage of sales for the first quarter of 2013 was 11.9% compared to 9.9% for the prior year period. The increase in gross profit and gross profit margin is primarily due to the addition of six tank trailer parts and service locations from the Walker acquisition.

General and Administrative Expenses

General and administrative expenses increased $5.3 million, or 63.4%, from the prior year period. The increase was largely due to the inclusion of Walker, which added $3.2 million during the current year period. In addition, employee related costs, excluding Walker, increased $0.9 million in the current year period due to higher salaries and employee related costs, as well as the mark-to-market of certain stock based compensation awards. The remainder of the increase is primarily attributable to higher outside professional fees and technology costs. As a percentage of sales, general and administrative expenses increased to 4.2% for the current quarter as compared to 3.0% for the first quarter of 2012.

Selling Expenses

Selling expenses were $7.7 million in the first quarter of 2013, an increase of $4.2 million, or 119.3%, compared to the prior year period primarily due to the inclusion of Walker, which added $3.9 million during the current year period. In addition, employee related costs, excluding Walker, increased $0.3 million in the current year period due to employee incentive programs as well as the mark-to-market of certain stock based compensation awards. As a percentage of net sales, selling expenses were 2.4% for the first quarter of 2013 compared to 1.3% for the prior year period.

Amortization of Intangibles

Amortization of intangibles was $5.4 million for the first quarter of 2013, an increase of $4.6 million, or 627.6%, compared to the prior year period due to amortization expense recognized for intangible assets recorded from the acquisitions of Walker and certain assets of Beall.

Other Income (Expense)

Interest expense for the first quarter of 2013 totaled $7.5 million, an increase of $6.8 million primarily due to interest and non-cash accretion charges of $1.1 million related to our Convertible Senior Notes and Term Loan Credit Agreement entered into in connection with the Walker Acquisition. In addition, Other, net for the first quarter of 2013 includes interest income of $2.0 million due to the recovery of interest on past due accounts receivable.

Income Taxes

We recognized income tax expense of $3.8 million in the first quarter of 2013 compared to a tax benefit of $0.4 million in the first quarter of 2012. The effective tax rate for the first quarter of 2013 was 40.0%, which differs from the U.S. Federal statutory rate of 35% primarily due to the impact of state and local taxes. During the fourth quarter of 2012, we released $59.9 million of valuation allowance against our net deferred tax assets. Therefore, income tax benefit for the first quarter of 2012 reflected the utilization of valuation allowance for federal, state and local income taxes resulting in an effective tax rate less than the U.S. Federal statutory rate of 35%. As of March 31, 2013, we had an estimated $103 million of remaining U.S. Federal income tax net operating loss carryforwards, which will begin to expire in 2028 if unused, and which may be subject to other limitations under IRS rules. We also have various multi-state income tax net operating loss carryforwards, which have been recorded as a deferred income tax asset, of approximately $11 million, before valuation allowances. We also have various U.S. Federal income tax credit carryforwards which will expire beginning in 2023, if unused. As a result, for the remainder of 2013 we estimate our effective tax rate to be approximately forty percent. However, due to our remaining income tax net operating loss carryforwards, we do not anticipate our cash taxes to be materially different from those paid in 2012 of approximately $0.6 million.

Liquidity and Capital Resources

Capital Structure

Our capital structure is comprised of a mix of debt and equity. As of March 31, 2013, our debt to equity ratio was approximately 1.6:1.0. 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, including the ability to improve our capital structure through debt repayments. For the remainder of 2013, we expect to fund operations, working capital requirements and capital expenditures through cash flows from operations as well as from available borrowings under our Amended and Restated Revolving Credit Agreement (as described below in "Debt Agreements and Related Amendments" section).

Debt Agreements and Related Amendments

Convertible Senior Notes

On April 23, 2012, we issued Convertible Senior Notes due 2018 (the "Notes") with an aggregate principal amount of $150 million in a public offering. The Notes bear interest at the rate of 3.375% per annum from the date of issuance, payable semi-annually on May 1 and November 1, commencing on November 1, 2012. The Notes are senior unsecured obligations and rank equally with our existing and future senior unsecured debt.

The Notes are convertible by their holders into cash, shares of our common stock or any combination thereof at our election, at an initial conversion rate of 85.4372 shares of our common stock per $1,000 in principal amount of Notes, which is equal to an initial conversion price of approximately $11.70 per share, only under the following circumstances: (A) before November 1, 2017 (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2012 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the "measurement period") in which the trading price (as defined in the indenture for the Notes) per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; (3) if we call the Notes for redemption, at any time prior to the close of business on the business day immediately preceding the redemption date; and (4) upon the occurrence of specified corporate events as described in the indenture for the Notes; and (B) at any time on or after November 1, 2017 until the close of business on the second business day immediately preceding the maturity date.

It is our intent to settle conversions through a net share settlement, which involves repayment of cash for the principal portion and delivery of shares of common stock for the excess of the conversion value over the principal portion. We used the net proceeds of approximately $145.1 million from the sale of the Notes to fund a portion of the purchase price of the Walker Acquisition.

We account separately for the liability and equity components of the Notes in accordance with authoritative guidance for convertible debt instruments that may be settled in cash upon conversion. The guidance requires the carrying amount of the liability component to be estimated by measuring the fair value of a similar liability that does not have an associated conversion feature. We determined that senior, unsecured corporate bonds traded on the market represent a similar liability to the convertible senior notes without the conversion option. Based on market data available for publicly traded, senior, unsecured corporate bonds issued by companies in the same industry and with similar maturity, we estimated the implied interest rate of the Notes to be 7.0%, assuming no conversion option. Assumptions used in the estimate represent what market participants would use in pricing the liability component, including market interest rates, credit standing, and yield curves, all of which are defined as Level 2 observable inputs. The estimated implied interest rate was applied to the Notes, which resulted in a fair value of the liability component of $123.8 million upon issuance, calculated as the present value of implied future payments based on the $150.0 million aggregate principal amount. The $21.7 million difference between the cash proceeds before offering expenses of $145.5 million and the estimated fair value of the liability component was recorded in additional paid-in capital. The discount on the liability portion of the Notes is being amortized.

Revolving Credit Agreement

On April 17, 2012, we entered into an amendment (the "Second Amendment") to our then-existing credit agreement, dated June 28, 2011, by and among us, certain of our subsidiaries and the lender parties thereto (the "Existing Credit Agreement"). The Second Amendment was executed to permit the issuance of our Notes discussed above, and the conversion, possible redemption and other arrangements in connection with the Notes.

Furthermore, on May 8, 2012 and in connection with the completion of the Walker Acquisition and entering into the Term Loan Credit Agreement (as defined below), we repaid approximately $51 million of borrowings under our senior secured revolving credit facility, dated June 28, 2011, and entered into an amendment and restatement of that credit agreement among us, certain of our subsidiaries (together with us, the "Borrowers"), Wells Fargo Capital Finance, LLC, as joint lead arranger, joint bookrunner and administrative agent (the "Revolver Agent"), RBS Citizens Business Capital, a division of RBS Citizens, N.A., as joint lead arranger, joint bookrunner and syndication agent, and the other lenders named therein, as amended (the "Amended and Restated Revolving Credit Agreement"). Also on May 8, 2012, certain of our subsidiaries (the "Revolver Guarantors") entered into a general continuing guarantee of the Borrowers' obligations under the Amended and Restated Revolving Credit Agreement in favor of the lenders (the "Revolver Guarantee").

The Amended and Restated Revolving Credit Agreement is guaranteed by the Revolver Guarantors and is secured by (i) first priority security interests (subject only to customary permitted liens and certain other permitted liens) in substantially all personal property of the Borrowers and the Revolver Guarantors, consisting of accounts receivable, inventory, cash, deposit and securities accounts and any cash or other assets in such accounts and, to the extent evidencing or otherwise related to such property, all general intangibles, licenses, intercompany debt, letter of credit rights, commercial tort claims, chattel paper, instruments, supporting obligations, documents and payment intangibles (collectively, the "Revolver Priority Collateral"), and (ii) second-priority liens on and security interests in (subject only to the liens securing the Term Loan Credit Agreement, customary permitted liens and certain other permitted liens) (A) equity interests of each direct subsidiary held by the Borrower and each Revolving Guarantor (subject to customary limitations in the case of the equity of foreign subsidiaries), and (B) substantially all other tangible and intangible assets of the Borrowers and the Revolving Guarantors . . .

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