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WNC > SEC Filings for WNC > Form 10-Q on 28-Apr-2014All Recent SEC Filings

Show all filings for WABASH NATIONAL CORP /DE

Form 10-Q for WABASH NATIONAL CORP /DE


28-Apr-2014

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 acquisitions of Walker Group Holdings ("Walker") and certain assets of Beall Corporation ("Beall"), the amount of transaction costs associated with the acquisitions 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 ability to manage our indebtedness;

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 ended December 31, 2013. 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,
                                                  2014               2013
        Net sales                                    100.0 %            100.0 %
        Cost of sales                                 87.0               87.0
        Gross profit                                  13.0               13.0

        General and administrative expenses            4.0                4.2
        Selling expenses                               2.0                2.4
        Amortization of intangibles                    1.6                1.7
        Acquisition expenses                             -                0.1
        Income from operations                         5.4                4.6

        Interest expense                              (1.6 )             (2.3 )
        Other, net                                       -                0.6
        Income before income taxes                     3.8                2.9

        Income tax expense                             1.8                1.1
        Net income                                     2.0 %              1.8 %

For the three month period ended March 31, 2014, we recorded net sales of $358.1 million compared to $324.2 million in the prior year period. Net sales increased $33.9 million, or 10.5%, compared to the prior year period due to an increase in new trailer shipments of approximately 1,300 units, or 15.1%, and an increase in used trailer shipments of approximately 1,100 units, or 110.0%. Gross profit margin was 13.0% in the first quarter of 2014 which was consistent with the prior year period. Gross profit margin was in line with the prior year period as improved pricing and volume on new trailers and continued diversification into higher margin opportunities made available organically through product development and strategically through recent acquisitions were offset by higher raw material, primarily lumber, and operating costs during the quarter. We continue to be encouraged by the overall trailer market throughout the first three months of 2014, and our expectation is that overall industry shipment and production levels will remain above replacement demand for the remainder of 2014 as many 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 and continue to expand our Diversified Products segment customer base and focus on developing innovative new products that both add value to our customers' operations and allow us to continue to differentiate our products from the competition.

Selling, general and administrative expenses increased in the first quarter of 2014 as compared to the same period in 2013 due primarily to higher salaries and employee related costs. As a percentage of net sales, selling, general and administrative expenses decreased to 6.0% as compared to 6.6% 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, 2014



Net Sales



Net sales in the first quarter of 2014 increased $33.9 million, or 10.5%,
compared to the first quarter of 2013. By business segment, net external sales
and related units sold were as follows (dollars in millions):



                                               Three Months Ended March 31,
                                                                      Change
                                         2014        2013          $           %
          Sales by Segment
          Commercial Trailer Products   $ 207.0     $ 184.0     $  23.0        12.5
          Diversified Products            105.7        99.7         6.0         6.0
          Retail                           45.4        40.5         4.9        12.1
          Total                         $ 358.1     $ 324.2     $  33.9        10.5

          New Trailers                        (units)
          Commercial Trailer Products     8,300       7,400         900        12.2
          Diversified Products              800         600         200        33.3
          Retail                            800         600         200        33.3
          Total                           9,900       8,600       1,300        15.1

          Used Trailers                       (units)
          Commercial Trailer Products     1,700         700       1,000       142.9
          Retail                            400         300         100        33.3
          Total                           2,100       1,000       1,100       110.0

Commercial Trailer Products segment sales were $207.0 million for the first quarter of 2014, an increase of $23.0 million, or 12.5%, compared to the first quarter of 2013. The increase in sales was primarily due to a 12.2% increase in new trailer shipments as approximately 8,300 trailers shipped in the first quarter of 2014 compared to 7,400 trailers shipped in the prior year period. As compared to the prior year period, average new trailer selling prices decreased by 2.7% in the first quarter of 2014 due to customer and product mix. Used trailer sales increased $6.2 million, or 122.7%, compared to the previous year period primarily due to strong demand and increased availability of product through fleet trade packages as approximately 1,000 more used trailers shipped in the first quarter of 2014 compared to the prior year period.

Diversified Products segment sales were $105.7 million for the first quarter of 2014, up $6.0 million, or 6.0%, compared to the first quarter of 2013. The increase in sales was primarily due to a 33.3% increase in new trailer shipments as approximately 800 trailers shipped in the first quarter of 2014 compared to 600 trailers shipped in the prior year period. In addition, our continued efforts to diversify our business organically and increase our market penetration and acceptance of our product offerings continued to gain momentum as demand for our composite product offerings increased $2.8 million, or 24.0%, as compared to the previous year period.

Retail segment sales were $45.4 million in the first quarter of 2014, up $4.9 million, or 12.1%, compared to the prior year period. New trailer sales increased $3.3 million, or 19.6%, as approximately 200 more trailers were shipped in the current year as compared to the prior year period. As compared to the prior year period, new trailer average selling prices decreased 6.3% primarily due to customer and product mix. Used trailer sales increased $1.0 million, or 37.4%, primarily due to an increase in volume demand as approximately 100 more used trailers were shipped in the first quarter of 2014 as compared to the prior year period. Parts and service sales were up $1.0 million, or 5.2%.

Cost of Sales

Cost of sales for the first quarter of 2014 was $311.4 million, an increase of $29.4 million, or 10.4%, compared to the first quarter of 2013. As a percentage of net sales, cost of sales was 87.0% in the first quarters of both 2014 and 2013.

Commercial Trailer Products segment cost of sales, as detailed in the following table, was $192.1 million for the first quarter of 2014, an increase of $19.7 million, or 11.4%, compared to the first quarter of 2013. As a percentage of net sales, cost of sales was 92.8% for the current quarter compared to 93.7% in the prior year period.

                                                Three Months Ended March 31,
Commercial Trailer Products Segment            2014                       2013
                                                    (dollars in millions)
                                                   % of Net                   % of Net
                                                    Sales                      Sales
Material Costs                        $ 152.1           73.5 %   $ 135.4           73.6 %
Other Manufacturing Costs                40.0           19.3 %      37.0           20.1 %
                                      $ 192.1           92.8 %   $ 172.4           93.7 %

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 the first quarter of 2014 compared to 73.6% for the same period in 2013. Material costs as a percentage of net sales was consistent with the prior year period as a result of raw material, commodity and component costs remaining relatively consistent. Other manufacturing costs increased $3.0 million in the current year period as compared to the prior year period, resulting from increased variable costs related to increases in new trailer production volumes. As a percentage of sales, other manufacturing costs decreased from 20.1% in the first quarter of 2013 to 19.3% in the 2014 period due to increased leverage of fixed costs from higher production.

Diversified Products segment cost of sales was $80.3 million in the first quarter of 2014, an increase of $6.6 million, or 8.9%, compared to the same period in 2013. As a percentage of net sales prior to the elimination of intersegment sales, cost of sales was 78.8% in the first quarter of 2014 compared to 76.8% in the first quarter of 2013. The 2.0% increase as a percentage of net sales was primarily the result of higher raw material and operating costs attributable to our wood flooring manufacturing activities.

Retail segment cost of sales was $40.0 million in the first quarter of 2014, an increase of $4.3 million, or 12.1%, compared to the same 2013 period. As a percentage of net sales, cost of sales was 88.1% for the first quarter of 2014 compared to 88.0% for the same period in 2013. Cost of sales as a percentage of net sales was consistent with the prior year period as a result of comparable product mix.

Gross Profit

Gross profit was $46.7 million in the first quarter of 2014, an improvement of $4.5 million from the prior year period. Gross profit as a percent of sales was 13.0% for the current quarter and 13.0% for the same period in 2013. Gross profit by segment was as follows (in millions):

                                               Three Months Ended March 31,
                                                                      Change
                                           2014        2013        $          %
           Gross Profit by Segment:
           Commercial Trailer Products   $   15.0     $ 11.6     $  3.4       29.3
           Diversified Products              25.4       25.9       (0.5 )     (1.9 )
           Retail                             5.4        4.9        0.5       10.2
           Corporate and Eliminations         0.9       (0.2 )      1.1
           Total                         $   46.7     $ 42.2     $  4.5       10.7

Commercial Trailer Products segment gross profit was $15.0 million for the first quarter of 2014 compared to $11.6 million for the first quarter of 2013. Gross profit, prior to the elimination of intersegment sales, as a percentage of net sales was 6.6% in the first quarter of 2014 as compared to 5.9% in the 2013 period. The increase in gross profit margin was primarily driven by the increase in new trailer volumes as compared to the previous year period.

Diversified Products segment gross profit was $25.4 million for the first quarter of 2014 compared to $25.9 million in the first quarter of 2013. Gross profit, prior to the elimination of intersegment sales, as a percentage of sales, was 21.2% in the first quarter of 2014 compared to 23.2% in the first quarter of 2013. The decreases in gross profit and gross profit as a percentage of net sales are due primarily to the higher raw material and operating related costs associated with our wood flooring operations partially offset by increased demand for our composite and Walker product offerings as compared to the prior year period.

Retail segment gross profit was $5.4 million for the first quarter of 2014 compared to $4.9 million in the first quarter of 2013. Gross profit, prior to the elimination of intersegment sales, as a percentage of sales for the first quarter of 2014 was 11.8% compared to 11.9% for the prior year period. Gross profit margin was relatively consistent with the prior year period as the increased demand for products and services were offset by higher costs to support growth initiatives.

General and Administrative Expenses

General and administrative expenses for the first quarter of 2014 increased $0.8 million, or 5.8%, from the prior year period largely as a result of a $1.2 million increase in salaries and employee related costs, including employee incentive programs, partially offset by lower depreciation expense of $0.4 million due to the timing of certain assets becoming fully depreciated. As a percentage of sales, general and administrative expenses were 4.0% for the current quarter as compared to 4.2% for the first quarter of 2013.

Selling Expenses

Selling expenses were $7.3 million in the first quarter of 2014, a decrease of $0.4 million, or 5.3%, compared to the prior year period primarily due to a $0.2 million decrease in salaries and employee related costs, including employee incentive programs. As a percentage of net sales, selling expenses were 2.0% for the first quarter of 2014 compared to 2.4% for the prior year period.

Amortization of Intangibles

Amortization of intangibles was $5.5 million for the first quarter of 2014, an increase of $0.1 million, or 1.9%, compared to the prior year period as the current year period includes a full quarter of amortization expense recognized for intangible assets recorded from the acquisition of certain assets of Beall in February 2013.

Other Income (Expense)

Interest expense for the first quarter of 2014 totaled $5.7 million compared to $7.5 million in the first quarter of 2013. Interest expense for both periods primarily related to interest and non-cash accretion charges on our Convertible Senior Notes and Term Loan Credit Agreement. The decrease from the previous year period is due to lower outstanding loan commitments through voluntary debt payments made over the previous year as well as reduced interest rates achieved as a result of repricing the Term Loan Credit Agreement in April 2013.

Income Taxes

We recognized income tax expense of $6.5 million in the first quarter of 2014 compared to expense of $3.8 million in the first quarter of 2013. The effective tax rate for the first quarter of 2014 was 47.1%, which differs from the U.S. Federal statutory rate of 35% primarily due to the impact of state and local taxes and the revaluation of our net deferred tax assets due to a reduction in state and local statutory income tax rates. The combined U.S. Federal, state and local effective tax rate on a current and prospective basis, excluding the effects of the revaluation of the net deferred tax assets, is estimated to be 39.5%. As of March 31, 2014, we had an estimated $36 million of remaining U.S. Federal income tax net operating loss carryforwards, which will begin to expire in 2029 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 $7 million, before valuation allowances. We also have various U.S. Federal income tax credit carryforwards which will expire beginning in 2023, if unused. For 2014 we expect to fully utilize all of our remaining U.S. Federal income tax net operating loss carryforwards and credit carryforwards and, therefore, we anticipate an increase in our cash tax payments in 2014 as compared to the previous years which could limit the amount of liquidity available to fund working capital requirements and capital expenditure needs throughout 2014.

Liquidity and Capital Resources

Capital Structure

Our capital structure is comprised of a mix of debt and equity. As of March 31, 2014 our debt to equity ratio was approximately 1.1:1.0. 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 2014, 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

In April 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. 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; and
(3) 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. As of March 31, 2014, the Notes were not convertible based on the above criteria.

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 required 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 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

In May 2012 we entered into an amendment and restatement of our then-existing senior secured revolving credit facility among us, certain of our subsidiaries (collectively, 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 in May 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, as amended, 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 including equipment, general intangibles, intercompany notes, insurance policies, investment property, intellectual property and material owned real property (in each case, except to the extent constituting Revolver Priority Collateral) (collectively, the "Term Priority Collateral"). The respective priorities of the security interests securing the Amended and Restated Revolving Credit Agreement and the Term Loan Credit Agreement, as amended, are governed by an Intercreditor Agreement between the Revolver Agent and the Term Agent (as defined below) (the "Intercreditor Agreement"). The Amended and Restated Revolving Credit Agreement has a scheduled maturity date of May 8, 2017.

Under the Amended and Restated Revolving Credit Agreement, the lenders agree to make available to us a $150 million revolving credit facility. We have the option to increase the total commitment under the facility to $200 million, subject to certain conditions, including (i) obtaining commitments from any one or more lenders, whether or not currently party to the Amended and Restated Revolving Credit Agreement, to provide such increased amounts and (ii) the available amount of increases to the facility being reduced by the amount of any incremental loans advanced under the Term Loan Credit Agreement, as amended, in excess of $25 million. Availability under the Amended and Restated Revolving Credit Agreement will be based upon monthly (or more frequent under certain circumstances) borrowing base certifications of the Borrowers' eligible . . .

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