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WNC > SEC Filings for WNC > Form 10-K on 27-Feb-2014All Recent SEC Filings

Show all filings for WABASH NATIONAL CORP /DE

Form 10-K for WABASH NATIONAL CORP /DE


27-Feb-2014

Annual Report


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, 2013, and our capital resources and liquidity as of December 31, 2013. 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 the Company. We then analyze the results of our operations for the last three years, including the trends in the overall business and our operating 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, if any, as well as those not yet adopted that may have an impact on our financial accounting practices.

We have three reportable operating segments: Commercial Trailer Products, Diversified Products and Retail. The Commercial Trailer Products segment produces trailers that are sold to customers who purchase trailers directly or through independent dealers and to the Retail segment. The Diversified Products segment focuses on our commitment to expand our customer base, diversify our product offerings and revenues and extend our market leadership by leveraging our proprietary DuraPlate® panel technology, drawing on our core manufacturing expertise and making available products that are complementary to the truck and tank trailers and transportation equipment we offer. The Retail 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

We were successful in delivering results for 2013 that we consider transformational and are record-setting in several aspects. With a stable and healthy demand environment for trailers throughout 2013, as evidenced by our 46,800 new trailer shipments during the current year period, our healthy backlog of $711 million as of December 31, 2013, as well as a demand forecast by industry forecasters that remains healthy, we were successfully able to deliver margin improvement through improved product pricing and to recapture lost margins experienced during the previous downturn as well as improve productivity. More specifically, according to most recent ACT estimates, total new trailer shipments in 2013 totaled approximately 240,000 trailers representing an increase of 1% as compared to the prior year, and representing the third consecutive year that total trailer demand exceeded normal replacement demand levels estimated to be between 175,000 trailers and 200,000 trailers.

In addition to our commitment to profitably grow our Commercial Trailer Products segment, our strategic initiatives included a focus on diversification efforts, both organic and strategic, through our Diversified Products segment to enhance our business model, strengthen our revenues and become a stronger company delivering greater value to our shareholders. Organically, our focus is on profitably growing and diversifying by leveraging our existing assets, capabilities and technology, with our key focus being to successfully apply our industry leading and revolutionary DuraPlate® composite panel technology into higher margin products and markets and thereby provide customer solutions. Strategically, our focus continues to be to evolve as a diversified industrial manufacturer, profitably growing and diversifying the products we offer, the customers and end markets we serve and strengthening our geographic presence. The Walker acquisition and the acquisition of certain assets of Beall provided us the opportunity to move forward on this strategic initiative and our long-term plan to become a diversified industrial manufacturer. Calendar year 2013 includes the first full year impact of the Walker acquisition which provided top-line growth, improved profitability and margin expansion while the purchase of certain assets of Beall provided us the opportunity to have one of the broadest product portfolios in the tank trailer industry with access to additional markets while also expanding our manufacturing footprint. Our Diversified Products segment has now grown to represent 28% of our consolidated revenues and 54% of our gross profits for the current year period, significantly increasing this segment's impact to our bottom line.

The outlook for the overall trailer market for 2014 continues to indicate a strong and stable demand environment. In fact, the most recent estimates from industry forecasters, ACT and FTR Associates ("FTR"), indicate demand levels to be in excess of the estimated replacement demand levels in each of the years through 2018. More specifically, ACT is currently estimating 2014 demand will increase to approximately 242,000, or 1% compared to the previous year period, with 2015 through 2018 industry demand levels ranging between 242,000 and 259,000 trailers, while FTR anticipates a 2% increase in trailer demand for 2014 to approximately 240,000 trailers. This continued strong demand environment reinforces our belief that we are still in the early stages of a recovery in the trailer industry, and we believe we are well positioned to capitalize on the expected strong overall demand levels while also achieving continued margin growth through improvements in product pricing as well as operational excellence initiatives.

However, we are not relying solely on volume and product pricing within the trailer industry to improve operations and enhance profitability. As noted above, through our Diversified Products segment, we remain committed to enhancing and diversifying our business model through the organic and strategic initiatives discussed previously. Through this operating segment we offer a wide array of products and customer-specific solutions beyond those offered in our Commercial Trailer Products segment that we believe provide a good foundation for achieving these goals. Continuing to identify attractive opportunities to leverage our core competencies, proprietary technology and core manufacturing expertise into new applications and end markets enables us to deliver greater value to our customers and shareholders.

Operating Performance

We measure our operating performance in six key areas - Safety, Quality, Delivery, Cost Reduction, Morale and Environment. We maintain a continuous improvement mindset in each of these key performance areas. 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/Morale. The safety of our associates is a core company value. We continually focus on reducing the severity and frequency of workplace injuries to create a safe environment for our associates and minimize workers compensation costs. 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. In 2012 and 2013, our manufacturing facilities at Brenner and Walker Stainless, respectively, won the Truck Trailer Manufacturer Association's Plant Safety Award which recognizes the best safety record amongst the largest tank trailer companies in North America. Our focus on safety also extends beyond our facilities. We are a founding member of the Cargo Tank Risk Management Committee, a group dedicated to reducing the hazards faced by workers on and around cargo tanks.

· 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. Process Yield is a performance metric that measures the impact of all aspects of the business on our ability to ship our products at the end of the production process. As with previous years, the expectations of the highest quality product continue to increase while maintaining Process Yield performance and reducing rework. In addition, we currently maintain an ISO 9001 registration of our Quality Management System at our Lafayette operations.

- External performance. We actively track our warranty claims and costs to identify and drive improvement opportunities in quality and reliability. Early life cycle warranty claims for our van trailers are trended for performance monitoring. During the 2012 calendar year we modified our warranty reporting process to report warranty "units" per 100 trailers as opposed to warranty "claims." The new unit based reporting process is a more rigorous approach to documenting failures. Early life cycle warranty units per 100 trailers shipped averaged approximately 3.6, 7.4 and 3.8 units per 100 trailers in 2013, 2012 and 2011, respectively. The substantial improvement in 2013 was driven by continuous improvement programs centered on process variation reduction, and responding to the input from our customers. These activities will continue to drive down our total warranty cost profile.

· Delivery/Productivity. We measure productivity on many fronts. Some key indicators include production line cycle-time, 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. During the past several years, 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 successful implementation of these productivity enhancements supported our ability to effectively manage the recent increases in trailer volumes as well as efficiently produce a wide range of products on fewer assembly lines.

· Cost Reduction. We believe continuous improvement is a fundamental component of our operational excellence focus. Our continued focus on our balanced scorecard process has allowed us to improve all areas of manufacturing including safety, quality, on-time delivery, cost reduction, employee morale and environment. Utilizing continuous improvement and our balance scorecard process we have realized total cost per unit reductions by increased capacity utilization of all facilities while maintaining a lower level of fixed overhead. We also have a tank trailer manufacturing facility in Queretaro, Mexico that provides a low cost advantage for our tank trailer product line, and we recently expanded the paint capacity at our platform manufacturing facility in Cadiz, Kentucky, to allow for increased capacity and decreased per unit operating costs.

· Environment. We strive to manufacture products that are both socially responsible and environmentally sustainable. We demonstrate our commitment to sustainability by maintaining ISO 14001 registration of our Environmental Management System at our Lafayette, Indiana facilities. As one of the first trailer manufacturing operations in the world to be ISO 14001 registered, these facilities have also been awarded membership into the Indiana Department of Environmental Management's Environmental Stewardship Program ("ESP"). Both ISO 14001 and ESP require us to demonstrate quantifiable and third-party verified environmental improvements. Through our facilities we have initiated employee-based recycling programs that reduce waste being sent to the landfill, have installed a fifty-five foot wind turbine to produce electricity and reduce our carbon emissions, and have restored a natural wildlife habitat to enhance the environment and protect native animals. Our commitment to sustainable operations has also been demonstrated internationally by our Bulk Tank International facility being awarded the Clean Industry Certificate in 2013.

Industry Trends

Truck transportation in the U.S., according to the ATA, was estimated to be a $642 billion industry in 2012. ATA estimates that approximately 69% 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 in the U.S., including trucking, is a cyclical industry that has experienced three cycles over the last 20 years. The most recently completed cycle began in early 2001 when industry shipments totaled approximately 140,000, reached a peak in 2006 with shipments of approximately 280,000 and reached the bottom in 2009 with shipments of approximately 79,000 trailers. In each of these three U.S. economic downturns, the decline in freight tonnage preceded the general economic decline by approximately two and one-half years and its recovery has generally preceded that of the economy as a whole. The trailer industry generally follows the transportation industry cycles. After three consecutive years with total trailer demand well below normal replacement demand levels estimated to be between 175,000 trailers and 200,000 trailers, the three year period ending December 2013 represented years of significant improvement in which the total trailer market increased year-over-year approximately 67%, 13% and 1% for 2011, 2012 and 2013, respectively, with total shipments of approximately 210,000 and 237,000, and 239,000, respectively. As we enter the fifth year of an economic recovery, ACT is estimating demand within the trailer industry to increase in 2014 and 2015 to approximately 242,000 trailers and with forecasted demand to remain above 250,000 trailers in 2016 through 2018. Our view is generally consistent with that of ACT.

· Age of Trailer Fleets. The average age of fleets has remained at historical highs over the past several years as fleets deferred on their capital investments during the most recent industry downturn. According to ACT, the average age of dry and refrigerated vans in 2013 was approximately 8 years and 6 years, respectively, as compared to 7 years and 5.5 years, respectively, in 2007. The increase in age of trailers suggests an increase in replacement demand over the next several years.

· New Trailer Orders. According to ACT, total orders in 2013 were approximately 232,000 trailers, a slight decrease from approximately 239,000 trailers ordered in 2012. Total orders for the dry van segment, the largest within the trailer industry, were approximately 133,000, which were in line with dry vans ordered in 2012.

· Transportation Regulations and Legislation. There are several different areas within both federal and state government regulations and legislation that are expected to have an impact on trailer demand, including:

- The Federal Motor Carrier Safety Administration (the "FMCSA") has recently taken steps to improve the overall truck safety standards, particularly by implementing the Compliance, Safety, and Accountability ("CSA") program. CSA is considered a comprehensive driver and fleet rating system that measures both the freight carriers and drivers on several safety related criteria, including driver safety, equipment maintenance and overall condition of trailers. This system drives increased awareness and action by carriers since enforcement actions were targeted and implemented beginning in June 2011. CSA is generally believed to have contributed to the tightening of the supply of drivers and capacity in 2011 and 2012 as carriers took measures to improve their rating.

- The FMCSA issued a final rule in December 2011 on its revised proposal for rule changes in regard to truck driver hours-of-service rules. The new rule changes include reductions in total driver hours from 82 hours per week to 70 hours and retains the per day limit of 11 hours. The rule, which went into effect in July 2013, also requires alterations to the required rest period that drivers must follow. Though this proposal has been met with strong opposition, particularly by the ATA, current estimates indicate these actions could lead to productivity losses ranging from approximately 3% to 5%. We believe this ruling will increase the general need for equipment and increases the potential that a carrier's drop-and-hook activities will increase and, therefore, will require a higher ratio of trailer to trucks across the industry.

- The FMCSA also issued in January 2011 a proposed rule change requiring the installation and use of Electronic On-Board Recorders for over-the-road trucks and buses that would be used to monitor and enforce the driver hours-of-service rules. The proposed rule was rejected by the U.S. Circuit Court of Appeals in September 2011 and the FMCSA is working on a revised rule to meet the October 2013 deadline. The agency indicated in October 2012 it will release a new proposal for the mandate by March 2013.

- The California Air Resource Board (CARB) regulations mandate that refrigeration units older than 7 years may no longer operate in California. As refrigeration units become obsolete, capacity in the refrigerated segment will tighten and the increase in demand for new refrigerated trailers is likely. CARB regulations also mandate fuel efficiency improvements on all fleets operating in California for which our DuraPlate® AeroSkirt® provides a durable, aerodynamic side panel solution that yields the improved fuel efficiencies required by these regulations.

· Other Developments. Other developments and potential impacts on the industry include:

- While we believe the need for trailer equipment will be positively impacted by the legislative and regulatory changes addressed above, these demand drivers could be offset by factors that contribute to the increased concentration and density of loads, including the miniaturization of electronic products and packaging optimization of bulk goods. Increases in load concentration or density could contribute to decreased need or demand for dry van trailers.

- 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. Carrier profitability significantly impacts demand for, and the financial ability to purchase, new trailers.

- Although truck driver shortages have not been a significant problem in the past year, constraints are expected to exacerbate as fleet equipment utilization increases due to new government regulations. 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 respond to freight demand pressures. Therefore, we expect that the majority of freight will continue to be moved by truck and, according to ATA, overall truck activity as a percentage of the total freight industry is expected to increase throughout the next decade.

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,
                                       2013          2012       2011
Net sales                               100.0 %       100.0 %   100.0 %
Cost of sales                            86.8          88.8      94.4
Gross profit                             13.2          11.2       5.6

General and administrative expenses       3.6           3.1       2.6
Selling expenses                          1.9           1.6       1.1
Amortization of intangibles               1.3           0.7       0.2
Acquisition expenses                      0.1           1.0         -
Income from operations                    6.3           4.8       1.7

Interest expense                        (1.6)         (1.5)     (0.3)
Loss on debt extinguishment             (0.1)             -     (0.1)
Other, net                                0.1             -         -
Income before income taxes                4.7           3.3       1.3

Income tax expense (benefit)              1.9         (3.9)         -
Net income                                2.8 %         7.2 %     1.3 %

2013 Compared to 2012

Net Sales

Net sales in 2013 increased $173.8 million, or 11.9%, compared to the 2012
period.  By business segment, net external sales and related units sold were as
follows (dollars in millions):

                                      Year Ended December 31,
                                                           Change
                                2013        2012         $        %
Sales by Segment
Commercial Trailer Products   $ 1,009.5   $   993.9   $  15.6      1.6
Diversified Products              446.0       311.0     135.0     43.4
Retail                            180.2       157.0      23.2     14.8
Total                         $ 1,635.7   $ 1,461.9   $ 173.8     11.9

New Trailers                         (units)
Commercial Trailer Products      40,800      40,800         -        -
Diversified Products              3,000       2,000     1,000     50.0
Retail                            3,000       2,800       200      7.1
Total                            46,800      45,600     1,200      2.6

Used Trailers                        (units)
Commercial Trailer Products       4,300       3,100     1,200     38.7
Diversified Products                100         100         -        -
Retail                            1,300       1,600     (300)   (18.8)
Total                             5,700       4,800       900     18.8

Commercial Trailer Products segment sales were $1.0 billion in 2013, up $15.6 million, or 1.6%, compared to 2012. New trailer shipments in 2013 of $959.1 million and 40,800 trailers were consistent with the previous year period as the increase in segment sales was primarily the result of a $9.9 million, or 42.1%, increase in used trailer sales as compared to the prior year period as approximately 4,300 trailers shipped in 2013 compared to 3,100 trailers shipped in the prior year period. Parts sales increased by approximately $5.1 million, or 218.0%, as compared to the prior year. New trailer sales in 2013 were in line with 2012.

Diversified Products segment sales were $446.0 million in 2013, up $135.0 million, or 43.4%, compared to 2012. The increase in sales is primarily due to the acquisitions of Walker and certain assets of Beall, which contributed $128.1 million more in sales during the current year compared to the prior year. We continue to gain positive momentum in our efforts to diversify our business and increase our market penetration and overall acceptance of our product offerings.

Retail segment sales were $180.2 million in 2013, up $23.2 million, or 14.8%, 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, generating $11.8 million more in sales during the current year as compared to the prior year. Excluding the parts and service locations acquired from Walker, Retail segment sales were $149.0 million, an increase of 8.2%, as compared to the prior year. New trailer sales increased $9.5 million, or 12.9%, as approximately 200 additional units were shipped during the current year as compared to the prior year period. Parts and service sales were up $7.0 million, or 15.2%. Used trailer sales decreased $1.9 million, or 13.2%, primarily due to an 18.8% decrease in shipments compared to the prior year period.

Cost of Sales

Cost of sales for 2013 was $1.4 billion, an increase of $122.5 million, or 9.4%, compared to 2012. As a percentage of net sales, cost of sales was 86.8% for 2013 compared to 88.8% for 2012.

Commercial Trailer Products segment cost of sales, as detailed in the following table, was $932.2 million for 2013, an increase of $8.0 million, or 0.9%, compared to 2012. As a percentage of net sales, cost of sales was 92.3% for 2013 compared to 93.0% in the prior year period.

                                               Year Ended December 31,
Commercial Trailer Products Segment          2013                   2012
                                                (dollars in millions)
                                                % of Net               % of Net
                                                 Sales                  Sales
Material Costs                        $ 741.8       73.5 %   $ 740.2       74.5 %
Other Manufacturing Costs               190.4       18.8 %     184.0       18.5 %
                                      $ 932.2       92.3 %   $ 924.2       93.0 %

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 73.5% of net sales in 2013 compared to 74.5% for the prior year. The 1.0% decrease was primarily driven by increases in average selling prices for new trailers as raw material, commodity and component costs remained relatively consistent, and the increase was also partially driven by favorable customer and product mix. Other manufacturing costs increased $6.4 million in the current year as compared to the prior year resulting from higher variable costs related to the increase in new trailer production volumes. As a percentage of sales, other manufacturing costs increased slightly from 18.5% in the prior year to 18.8% in 2013.

Diversified Products segment cost of sales was $330.9 million in 2013, an increase of $97.9 million, or 42.0%, compared to 2012 primarily resulting from the acquisitions of Walker and certain assets of Beall. As a percentage of net sales prior to the elimination of intersegment sales, cost of sales was 77.1% in 2013 compared to 78.1% in 2012. The 1.0% decrease as a percentage of net sales was primarily the result of an increased percentage of net sales from our higher-margined product lines as compared to the previous year.

Retail segment cost of sales was $160.0 million in 2013, an increase of $19.8 million, or 14.1%, compared to 2012. The increase in cost of sales was primarily due to the addition of six tank trailer parts and service locations from the Walker acquisition, which added $9.0 million more in cost of sales during the current year as compared to the prior year, as well as an increase in new trailer shipments. As a percentage of net sales, cost of sales was 88.8% in 2013 compared to 89.3% in 2012. This improvement as a percentage of net sales was primarily the result of product mix as an increased percentage of net sales were from the higher margin parts and service product line for the 2013 period as compared to the prior year.

Gross Profit

Gross profit was $215.1 million in 2013, an improvement of $51.3 million, or
31.3%, from the prior year period.  Gross profit as a percent of sales was 13.2%
for 2013 compared to 11.2% for 2012.  Gross profit by segment was as follows (in
millions):

                                   Year Ended December 31,
                                                     Change
                               2013      2012       $       %
Gross Profit by Segment:
Commercial Trailer Products   $  77.3   $  69.6   $  7.7   11.1
Diversified Products            115.1      78.0     37.1   47.6
Retail                           20.1      16.8      3.3   19.6
Corporate and Eliminations        2.6     (0.6)      3.2
Total                         $ 215.1   $ 163.8   $ 51.3   31.3

. . .

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