|
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:
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•
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our expected revenues, income or loss;
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•
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our ability to manage our indebtedness;
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•
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our strategic plan and plans for future operations;
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•
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financing needs, plans and liquidity, including for working capital and capital expenditures;
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•
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our ability to achieve sustained profitability;
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•
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reliance on certain customers and corporate relationships;
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•
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availability and pricing of raw materials;
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•
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availability of capital and financing;
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•
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dependence on industry trends;
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•
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the outcome of any pending litigation or notice of environmental dispute;
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•
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export sales and new markets;
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•
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engineering and manufacturing capabilities and capacity;
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•
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acceptance of new technology and products;
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•
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government regulation; and
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•
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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,
2015. 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
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
82.0
|
|
|
|
83.8
|
|
|
|
81.6
|
|
|
|
85.5
|
|
Gross profit
|
|
|
18.0
|
|
|
|
16.2
|
|
|
|
18.4
|
|
|
|
14.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
3.7
|
|
|
|
3.4
|
|
|
|
4.0
|
|
|
|
3.6
|
|
Selling expenses
|
|
|
1.4
|
|
|
|
1.2
|
|
|
|
1.5
|
|
|
|
1.4
|
|
Amortization of intangibles
|
|
|
1.1
|
|
|
|
1.0
|
|
|
|
1.1
|
|
|
|
1.1
|
|
Impairment of goodwill
|
|
|
-
|
|
|
|
-
|
|
|
|
0.1
|
|
|
|
-
|
|
Income from operations
|
|
|
11.8
|
|
|
|
10.6
|
|
|
|
11.7
|
|
|
|
8.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(0.8
|
)
|
|
|
(0.9
|
)
|
|
|
(0.9
|
)
|
|
|
(1.0
|
)
|
Other, net
|
|
|
0.2
|
|
|
|
-
|
|
|
|
0.1
|
|
|
|
0.2
|
|
Income before income taxes
|
|
|
11.2
|
|
|
|
9.7
|
|
|
|
10.9
|
|
|
|
7.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
4.0
|
|
|
|
3.7
|
|
|
|
3.9
|
|
|
|
2.8
|
|
Net income
|
|
|
7.2
|
%
|
|
|
6.0
|
%
|
|
|
7.0
|
%
|
|
|
4.8
|
%
|
For the three and nine
month period ended September 30, 2016, we recorded net sales of $464.3 million and $1,383.4 million, respectively, compared to
$531.4 million and $1,483.8 million, respectively, in the prior year periods. Net sales for the three month period ended September
30, 2016 decreased $67.1 million, or 12.6%, compared to the prior year period, due primarily to a decrease in new trailer shipments
of approximately 1,050 units, or 6.4%, decreases in used trailer shipments of approximately 250 units, or 50%, as well as lower
volumes of our composite products and non-trailer related equipment. In spite of lower volumes, gross profit margin increased 180
basis points to 18.0% in the third quarter of 2016 compared to 16.2% in the prior year period driven by improved pricing, favorable
material costs and continued manufacturing efficiencies. We continue to be encouraged by the strong demand within the dry and refrigerated
trailer segment throughout the first nine months of 2016, and our expectation is that overall industry shipment and production
levels will remain above replacement demand levels for the remainder of 2016 and 2017 as many key structural and market drivers
continue to support healthy demand for new trailers. While we do expect to see some decrease in trailer volumes from the current
levels, we believe the demand environment will remain healthy into 2017 as fleet age, regulatory compliance requirements and customer
profitability all continue to support healthy trailer demand above replacement levels. Additionally, we expect to continue efforts
to drive productivity improvements throughout the business and develop growth opportunities through new product introductions and
market expansion opportunities in order to grow revenues and margins as well as capitalize on macro growth trends.
For the three month
period ended September 30, 2016, selling, general and administrative expenses decreased $0.7 million as compared to the same period
in 2015 primarily due to lower employee related costs, including employee incentive programs. As a percentage of net sales, selling,
general and administrative expenses increased to 5.1% in the third quarter of 2016 as compared to 4.6% in the prior year period.
During the second quarter
of 2016, we realigned our reporting segments and, as a result, the businesses previously operating within the former retail segment
are now reported under either Commercial Trailer Products or Diversified Products in effort to strengthen the alignment between
the our manufacturing businesses and the retail sales and service operations, improve profitability and capitalize on growth opportunities.
As a result of the realignment of reporting segments, we now manage our business in two segments: Commercial Trailer Products and
Diversified Products. The Commercial Trailer Products segment manufactures standard and customized van and platform trailers,
truck bodies and other transportation related equipment to customers who purchase directly from us, through independent dealers
or Company owned branch locations in which we also provide service and support capabilities. The Diversified Products segment,
comprised of four strategic business units including, Tank Trailer, Aviation & Truck Equipment, Process Systems and Composites,
focuses on our commitment to expand our customer base and diversify our product offerings and revenues. The Diversified Products
segment also seeks to extend our market leadership by leveraging the proprietary DuraPlate
®
panel technology, drawing
on our core manufacturing expertise and making available products that are complementary to truck and tank trailers and transportation
equipment. The prior year financial performance for each of our reporting segments below has been restated to reflect the realignment.
Our management team continues to be focused
on increasing overall shareholder value by optimizing our manufacturing operations to match the current demand environment, implementing
cost savings initiatives and lean manufacturing techniques, strengthening our capital structure, developing innovative products
that enable our customers to succeed, improving earnings and continuing diversification of the business into higher margin, less
cyclical opportunities that leverage our intellectual and process capabilities.
Three Months Ended September 30,
2016
Net Sales
Net sales in the third
quarter of 2016 decreased $67.1 million, or 12.6%, compared to the third quarter of 2015. By business segment, prior to the elimination
of intercompany sales, sales and related units sold were as follows (dollars in thousands):
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
Change
|
|
(prior to elimination of intersegment sales)
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
Sales by Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Trailer Products
|
|
$
|
380,514
|
|
|
$
|
406,410
|
|
|
$
|
(25,896
|
)
|
|
|
(6.4
|
)
|
Diversified Products
|
|
|
87,450
|
|
|
|
127,787
|
|
|
|
(40,337
|
)
|
|
|
(31.6
|
)
|
Eliminations
|
|
|
(3,692
|
)
|
|
|
(2,847
|
)
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
464,272
|
|
|
$
|
531,350
|
|
|
$
|
(67,078
|
)
|
|
|
(12.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Trailers
|
|
|
(units)
|
|
|
|
|
|
|
|
|
|
Commercial Trailer Products
|
|
|
14,900
|
|
|
|
15,500
|
|
|
|
(600
|
)
|
|
|
(3.9
|
)
|
Diversified Products
|
|
|
550
|
|
|
|
1,000
|
|
|
|
(450
|
)
|
|
|
(45.0
|
)
|
Total
|
|
|
15,450
|
|
|
|
16,500
|
|
|
|
(1,050
|
)
|
|
|
(6.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Used Trailers
|
|
|
(units)
|
|
|
|
|
|
|
|
|
Commercial Trailer Products
|
|
|
200
|
|
|
|
450
|
|
|
|
(250
|
)
|
|
|
(55.6
|
)
|
Diversified Products
|
|
|
50
|
|
|
|
50
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
250
|
|
|
|
500
|
|
|
|
(250
|
)
|
|
|
(50.0
|
)
|
Commercial Trailer
Products segment sales prior to the elimination of intersegment sales were $380.5 million for the third quarter of 2016, a decrease
of $25.9 million, or 6.4%, compared to the third quarter of 2015. Trailers shipped during the third quarter of 2016 totaled 14,900
trailers compared to 15,500 trailers in the prior year period, a 3.9% decrease. The decrease in trailer shipments as well as an
approximate 1.0% decrease in the average selling price of trailers due to product mix as compared to the prior year period primarily
drove the decrease in sales. Used trailer sales decreased $5.5 million, or 65.4%, compared to the prior year period primarily due
to decreased availability of used trailers as 250 fewer used trailers were shipped in the third quarter of 2016 compared to the
prior year period. Parts and service sales decreased $2.0 million, or 12.6%, compared to the prior year period primarily due to
fewer retail branch locations resulting from the transition of our Phoenix, Arizona branch to an independent dealer in July 2016.
Diversified Products
segment sales prior to the elimination of intersegment sales were $87.5 million for the third quarter of 2016, down $40.3 million,
or 31.6%, compared to the third quarter of 2015. New trailer sales decreased $32.1 million, or 49.8%, from the prior year period
as new trailer shipments during the third quarter of 2016 totaled 550 units, a decrease from the 1,000 trailers shipped during
the prior year period, due primarily to lower demand for tank trailers within the chemical and energy end markets. Sales of our
components, parts and service product offerings decreased $3.4 million, or 10.4%, as compared to the prior year period primarily
due to lower volume of our composite products. Equipment sales decreased $4.6 million, or 15.3%, compared to the prior year period
as a result of lower volume of engineered products and aviation and truck equipment.
Gross Profit
Gross profit was $83.5
million in the third quarter of 2016, a decrease of $2.5 million from the prior year period. Gross profit as a percentage of sales
was 18.0% for the current quarter and 16.2% for the same period in 2015. Gross profit by segment was as follows (dollars in thousands):
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
Gross Profit by Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Trailer Products
|
|
$
|
64,681
|
|
|
$
|
55,355
|
|
|
$
|
9,326
|
|
|
|
16.8
|
|
Diversified Products
|
|
|
18,947
|
|
|
|
30,978
|
|
|
|
(12,031
|
)
|
|
|
(38.8
|
)
|
Corporate
|
|
|
(169
|
)
|
|
|
(311
|
)
|
|
|
142
|
|
|
|
|
|
Total
|
|
$
|
83,459
|
|
|
$
|
86,022
|
|
|
$
|
(2,563
|
)
|
|
|
(3.0
|
)
|
Commercial Trailer
Products segment gross profit was $64.7 million for the third quarter of 2016 compared to $55.4 million for the third quarter of
2015. Gross profit prior to the elimination of intersegment sales, as a percentage of net sales, was 17.0% in the third quarter
of 2016 compared to 13.6% in the 2015 period. The 340 basis point improvement in gross profit margin as compared to the prior year
period was primarily driven by favorable material costs, including cost optimization through product design and sourcing, an improved
pricing environment and operational efficiencies.
Diversified Products
segment gross profit was $18.9 million for the third quarter of 2016 compared to $31.0 million in the same quarter of 2015. Gross
profit prior to the elimination of intersegment sales, as a percentage of net sales, was 21.7% in the third quarter of 2016 compared
to 24.2% in the 2015 period. The decreases in gross profit and gross profit as a percentage of net sales compared to the prior
year period was primarily due to the reduced leverage of fixed costs from the lower production volumes, most notably within the
tank trailer business.
General and Administrative Expenses
General and administrative
expenses were $17.2 million for the third quarter of 2016, a decrease of $0.6 million, or 3.6%, from the prior year period, as
decreases in employee related costs, including employee incentive programs, of $1.9 million were partially offset by increases
in professional fees and information technology related costs of $1.3 million. As a percentage of sales, general and administrative
expenses were 3.7% for the current quarter as compared to 3.4% for the third quarter of 2015.
Selling Expenses
Selling expenses were
$6.4 million in the third quarter of 2016, a decrease of $0.1 million, or 0.7%, compared to the prior year period as decreases
in employee related costs, including employee incentive programs, were offset by higher advertising and promotional expenses. As
a percentage of net sales, selling expenses were 1.4% for the third quarter of 2016, up slightly from 1.2% for the third quarter
of 2015.
Amortization of Intangibles
Amortization of intangibles
was $5.0 million for the third quarter of 2016 compared to $5.3 million in the prior year period. Amortization of intangibles for
both periods were primarily the result of expenses recognized for intangible assets recorded from the acquisition of Walker Group
Holdings (“Walker”) in May 2012 and certain assets of Beall Corporation (“Beall”) in February 2013.
Other Income (Expense)
Interest expense
for the third quarter of 2016 totaled $3.9 million compared to $4.8 million in the third quarter of 2015. Interest expense for
both periods is primarily related to interest and non-cash accretion charges on our Notes (as defined below) and Term Loan Credit
Agreement (as defined below). The decrease from the prior year period is primarily due to the repurchase of Notes completed in
the fourth quarter of 2015 and the first quarter of 2016.
Other, net
for
the third quarter of 2016 represented income of $0.8 million as compared to an expense of $0.2 million for the prior year period.
The current year period primarily consists of a $0.7 million gain on the transition of our branch location in Phoenix, Arizona
to an independent dealer facility.
Income Taxes
We recognized income
tax expense of $18.4 million in the third quarter of 2016 compared to $19.5 million for the same period in the prior year. The
effective tax rate for the third quarter of 2016 was 35.5%, which differs from the U.S. Federal statutory rate of 35% primarily
due to the impact of state and local taxes offset by the benefit of the U.S. Internal Revenue Code domestic manufacturing deduction,
research and development tax credits and the benefit from the repurchase of our Notes.
Nine Months Ended September 30, 2016
Net Sales
Net sales in the first
nine months of 2016 decreased $100.4 million, or 6.8%, compared to the first nine months of 2015. By business segment, prior to
the elimination of intercompany sales, sales and related units sold were as follows (dollars in thousands):
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
Change
|
|
(prior to elimination of intersegment sales)
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
Sales by Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Trailer Products
|
|
$
|
1,126,767
|
|
|
$
|
1,148,263
|
|
|
$
|
(21,496
|
)
|
|
|
(1.9
|
)
|
Diversified Products
|
|
|
266,609
|
|
|
|
344,233
|
|
|
|
(77,624
|
)
|
|
|
(22.5
|
)
|
Eliminations
|
|
|
(9,989
|
)
|
|
|
(8,718
|
)
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,383,387
|
|
|
$
|
1,483,778
|
|
|
$
|
(100,391
|
)
|
|
|
(6.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Trailers
|
|
|
(units)
|
|
|
|
|
|
|
|
|
|
Commercial Trailer Products
|
|
|
44,250
|
|
|
|
45,100
|
|
|
|
(850
|
)
|
|
|
(1.9
|
)
|
Diversified Products
|
|
|
1,600
|
|
|
|
2,650
|
|
|
|
(1,050
|
)
|
|
|
(39.6
|
)
|
Total
|
|
|
45,850
|
|
|
|
47,750
|
|
|
|
(1,900
|
)
|
|
|
(4.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Used Trailers
|
|
|
(units)
|
|
|
|
|
|
|
|
|
|
Commercial Trailer Products
|
|
|
750
|
|
|
|
1,350
|
|
|
|
(600
|
)
|
|
|
(44.4
|
)
|
Diversified Products
|
|
|
100
|
|
|
|
100
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
850
|
|
|
|
1,450
|
|
|
|
(600
|
)
|
|
|
(41.4
|
)
|
Commercial Trailer
Products segment sales prior to the elimination of intersegment sales were $1,126.8 million for the first nine months of 2016,
a decrease of $21.5 million, or 1.9%, compared to the first nine months of 2015. The decrease in sales was due primarily to lower
trailer shipments. Trailers shipped during the first nine months of 2016 totaled 44,250 trailers compared to 45,100 trailers in
the prior year period, a 1.9% decrease. Used trailer sales decreased $11.9 million, or 53.8%, compared to the prior year period
primarily due to decreased availability and selective management of product through fleet trade packages, as 600 fewer used trailers
shipped in the first nine months of 2016 compared to the prior year period. Parts and service sales decreased $2.6 million, or
5.6%, compared to the prior year period.
Diversified Products
segment sales prior to the elimination of intersegment sales were $266.6 million for the first nine months of 2016, down $77.6
million, or 22.5%, compared to the same period of 2015. New trailer sales decreased $73.3 million, or 43.2%, from the prior year
period as new trailer shipments during the first nine months of 2016 totaled 1,600 units, a decrease of 1,050 trailers, or 39.6%,
as compared to the prior year period, due primarily to a decrease in demand for tank trailers within the chemical and energy end
markets. Sales of our components, parts and service product offerings decreased $5.0 million, or 5.3%, as compared to the prior
year period due to lower volume. Equipment sales increased $1.5 million, or 1.9%, compared to the prior year period.
Gross Profit
Gross profit was $254.0
million in the first nine months of 2016, an increase of $38.4 million from the prior year period. Gross profit as a percentage
of sales was 18.4% for the first nine months and 14.5% for the same period in 2015. Gross profit by segment was as follows (dollars
in thousands):
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
Gross Profit by Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Trailer Products
|
|
$
|
194,104
|
|
|
$
|
136,667
|
|
|
$
|
57,437
|
|
|
|
42.0
|
|
Diversified Products
|
|
|
62,095
|
|
|
|
80,010
|
|
|
|
(17,915
|
)
|
|
|
(22.4
|
)
|
Corporate
|
|
|
(2,150
|
)
|
|
|
(1,052
|
)
|
|
|
(1,098
|
)
|
|
|
|
|
Total
|
|
$
|
254,049
|
|
|
$
|
215,625
|
|
|
$
|
38,424
|
|
|
|
17.8
|
|
Commercial Trailer
Products segment gross profit was $194.1 million for the first nine months of 2016 compared to $136.7 million for the prior year
period. Gross profit prior to the elimination of intersegment sales, as a percentage of net sales, was 17.2% in 2016 compared to
11.9% in the 2015 period. The 530 basis point increase in gross profit margin was primarily driven by improved pricing, favorable
material costs, including cost optimization through product design and sourcing, and continued operational efficiencies as compared
to the prior year period.
Diversified Products
segment gross profit was $62.1 million for the first nine months of 2016 compared to $80.0 million in the same period of 2015.
Gross profit prior to the elimination of intersegment sales, as a percentage of net sales, increased slightly to 23.3% in the 2016
period compared to 23.2% in the 2015 period. The increase in gross profit as a percentage of net sales compared to the prior year
period was the result of favorable material costs and continued operational efficiencies offset by lower volumes and the reduced
leverage of fixed costs from lower production levels.
General and Administrative Expenses
General and administrative
expenses were $55.1 million for the first nine months of 2016, an increase of $1.3 million, or 2.5%, from the prior year period
as a result of a $2.1 million increase in outside service and professional fee expenditures, as well as a $0.8 million increase
in various other operating expenses, primarily information technology related costs. These increases were offset by a $1.6 million
decrease in employee related costs, including employee incentive programs. As a percentage of sales, general and administrative
expenses were 4.0% for the 2016 period as compared to 3.6% for the same period of 2015.
Selling Expenses
Selling expenses were
$20.4 million in the first nine months of 2016, an increase of $0.2 million, or 1.0%, compared to the prior year period, as a $0.5
million increase in advertising and promotional efforts were partially offset by lower employee related costs, including employee
incentive programs. As a percentage of net sales, selling expenses were 1.5% for the 2016 period, up slightly from 1.4% for the
prior year period.
Amortization of Intangibles
Amortization of intangibles
was $15.0 million for the first nine months of 2016 compared to $15.9 million in the prior year period. Amortization of intangibles
for both periods were primarily the result of expenses recognized for intangible assets recorded from the acquisition of Walker
in May 2012 and certain assets of Beall in February 2013.
Impairment of Goodwill
We review goodwill
for impairment, at the reporting unit level, annually and whenever events or circumstances indicate that the carrying value of
goodwill may not be recoverable. During the second quarter of 2016, with the realignment of our reporting segments, we performed
an analysis to determine the allocations of goodwill and test for impairment. Based on this analysis, we determined that the portion
of goodwill allocated to our retail branch operations was impaired as the fair value of the reporting unit did not exceed its carrying
value resulting in an impairment charge for the Commercial Trailer Products reporting segment of $1.7 million.
Other Income (Expense)
Interest expense
for the first nine months of 2016 totaled $11.9 million compared to $14.8 million in the prior year period. Interest expense for
both periods is primarily related to interest and non-cash accretion charges on our Notes and Term Loan Credit Agreement. The decrease
from the prior year period is primarily due to Notes repurchases completed in the fourth quarter of 2015 and the first quarter
of 2016.
Other, net
for
the first nine months of 2016 represented income of $0.2 million as compared to income of $2.5 million for the prior year period.
The current year period primarily consists of a gain of $0.7 million related to the transition of our retail branch location in
Phoenix, Arizona to an independent dealer facility offset by a loss on early extinguishment of debt of $0.5 million related to
the Notes repurchase in February 2016. The prior year period primarily consists of an $8.3 million gain on the sale of real estate
in Fontana, California and Portland, Oregon within the Company-owned retail branch network, partially offset by $5.6 million of
accelerated amortization and related fees in connection with the refinancing of our Term Loan Credit Agreement and amending our
Credit Agreement.
Income Taxes
We recognized income
tax expense of $53.8 million in the first nine months of 2016 compared to $42.4 million for the same period in the prior year.
The effective tax rate for the nine months of 2016 was 35.8%, which differs from the U.S. Federal statutory rate of 35% primarily
due to the impact of state and local taxes offset by the benefit of the U.S. Internal Revenue Code domestic manufacturing deduction
and research and development credits as well as the benefit from the repurchase of our Notes.
Liquidity and Capital Resources
Capital Structure
Our capital structure
is comprised of a mix of debt and equity. As of September 30, 2016, our debt to equity ratio was approximately 0.6:1.0. Our long-term
objective is to generate operating cash flows sufficient to support the growth within our businesses and increase shareholder value.
This objective will be achieved through a balanced capital allocation strategy of maintaining strong liquidity, deleveraging our
balance sheet, investing in the business, both organically and strategically, and returning capital to our shareholders. For the
remainder of 2016 and 2017, we expect to continue our commitment to fund our working capital requirements and capital expenditures
supporting both organic growth and productivity improvements while also returning capital to our shareholders and deleveraging
our balance sheet through cash flows from operations as well as available borrowings under our existing Credit Agreement (as defined
below).
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 September 30, 2016, the Notes were not convertible based on the above criteria.
If the Notes outstanding at September 30, 2016 were converted as of September 30, 2016, the if-converted value would exceed the
principal amount by approximately $21 million.
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 $145.1 million from
the sale of the Notes to fund a portion of the purchase price of the acquisition of Walker in May 2012.
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 over the life of
the Notes using the effective interest rate method.
In December 2015, we
executed agreements with existing holders of the Notes to repurchase $54.2 million in principal amount of such Notes, of which
$19.0 million was acquired in that month for $22.9 million, excluding accrued interest. The remaining $35.2 million in principal
amount of the Notes was acquired in February 2016 for $42.1 million, excluding accrued interest. We recognized a loss on debt extinguishment
of $0.5 million from the February 2016 repurchase, which is included in
Other, net
on our Condensed Consolidated Statements
of Operations.
Revolving Credit Agreement
In June 2015, we entered
into a Joinder and First Amendment to Amended and Restated Credit Agreement, First Amendment to Amended and Restated Security Agreement
and First Amendment to Amended and Restated Guaranty Agreement (the “Amendment”) by and among us, certain of our subsidiaries
designated as Loan Parties (as defined in the Amendment), Wells Fargo Capital Finance, LLC, as arranger and administrative agent
(the “Agent”), and the other lenders party thereto. The Amendment amends, among other things, the Amended and Restated
Credit Agreement (as amended, the “Credit Agreement”), dated as of May 8, 2012, among us, certain of our subsidiaries
from time to time party thereto (together with us, the “Borrowers”), the several lenders from time to time party thereto,
and the Agent and provides for, among other things, a five year, $175 million senior secured revolving credit facility (the “Credit
Facility”).
The Amendment, among
other things, (i) increases the total commitments under the Credit Facility from $150 million to $175 million, and (ii) extends
the maturity date of the Credit Facility from May 2017 to June 2020, but provides for an accelerated maturity in the event our
outstanding Notes are not converted, redeemed, repurchased or refinanced in full on or before the date that is 121 days prior to
the maturity date thereof and we are not then maintaining, and continue to maintain until the Notes are converted, redeemed, repurchased
or refinanced in full, (x) Liquidity of at least $125 million and (y) availability under the Credit Facility of at least $25 million.
Liquidity, as defined in the Credit Agreement, reflects the difference between (i) the sum of (A) unrestricted cash and cash equivalents
and (B) availability under the Credit Facility and (ii) the amount necessary to fully redeem the Notes.
In addition, the Amendment
(i) provides that borrowings under the Credit Facility will bear interest, at the Borrowers’ election, at (x) LIBOR plus
a margin ranging from 150 basis points to 200 basis points (in lieu of the previous range from 175 basis points to 225 basis points),
or (y) a base rate plus a margin ranging from 50 basis points to 100 basis points (in lieu of the previous range from 75 basis
points to 125 basis points), in each case, based upon the monthly average excess availability under the Credit Facility, (ii) provides
that the monthly unused line fee shall be equal to 25 basis points (which amount was previously 37.5 basis points) times the average
unused availability under the Credit Facility, (iii) provides that if availability under the Credit Facility is less than 12.5%
(which threshold was previously 15%) of the total commitment under the Credit Facility or if there exists an event of default,
amounts in any of the Borrowers’ and the subsidiary guarantors’ deposit accounts (other than certain excluded accounts)
will be transferred daily into a blocked account held by the Agent and applied to reduce the outstanding amounts under the Credit
Facility, (iv) provides that we will be required to maintain a minimum fixed charge coverage ratio of not less than 1.1 to 1.0
as of the end of any period of 12 fiscal months when excess availability under the Credit Facility is less than 10% (which threshold
was previously 12.5%) of the total commitment under the Credit Facility and (v) amends certain negative covenants in the Credit
Agreement.
The Credit Agreement
is guaranteed by certain of the Company’s subsidiaries (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 defined
below) customary permitted liens and certain other permitted liens) (A) equity interests of each direct subsidiary held by the
Borrower and each Revolver 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 Revolver 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 Credit Agreement and the Term Loan Credit Agreement are governed
by an Intercreditor Agreement between the Revolver Agent and the Term Agent (as defined below) (the “Intercreditor Agreement”).
Subject to the terms
of the Intercreditor Agreement, if the covenants under the Credit Agreement are breached, the lenders may, subject to various customary
cure rights, require the immediate payment of all amounts outstanding and foreclose on collateral. Other customary events of default
in the Credit Agreement include, without limitation, failure to pay obligations when due, initiation of insolvency proceedings,
defaults on certain other indebtedness, and the incurrence of certain judgments that are not stayed, satisfied, bonded or discharged
within 30 days.
As of September 30,
2016, we were in compliance with all covenants of the Credit Agreement.
Term Loan Credit Agreement
In May 2012 we entered
into a credit agreement among us, the several lenders from time to time party thereto, Morgan Stanley Senior Funding, Inc., as
administrative agent, joint lead arranger and joint bookrunner (the “Term Agent”), and Wells Fargo Securities, LLC,
as joint lead arranger and joint bookrunner (the “Term Loan Credit Agreement”), which initially provided, among other
things, for a senior secured term loan facility of $300 million. Also in May 2012, certain of our subsidiaries (the “Term
Guarantors”) entered into a general continuing guarantee of our obligations under the Term Loan Credit Agreement in favor
of the Term Agent (the “Term Guarantee”).
In April 2013, we entered
into Amendment No.1 to Credit Agreement (the “Amendment No. 1”), which became effective on May 9, 2013. As of the Amendment
No. 1 date, there was $297.0 million of term loans outstanding under the Term Loan Credit Agreement (the “Initial Loans”),
of which we paid $20.0 million in connection with Amendment No. 1. Under Amendment No. 1, the lenders agreed to provide us term
loans in an aggregate principal amount of $277.0 million, which were exchanged for and used to refinance the Initial Loans (the
“Tranche B-1 Loans”).
In March 2015, we entered
into Amendment No. 2 to Credit Agreement (“Amendment No. 2”). As of the Amendment No. 2 date, there was $192.8 million
of the Tranche B-1 Loans outstanding. Under Amendment No. 2, the lenders agreed to provide to us term loans in an aggregate principal
amount of $192.8 million (the “Tranche B-2 Loans”), which were used to refinance the outstanding Tranche B-1 Loans.
The Tranche B-2 Loans mature in March 2022, but provide for an accelerated maturity in the event our outstanding Notes are not
converted, redeemed, repurchased or refinanced in full on or before the date that is 91 days prior to the maturity date thereof
and we are not then maintaining, and continue to maintain until the Notes are converted, redeemed, repurchased or refinanced in
full, liquidity of at least $125 million. Liquidity, as defined in the Term Loan Credit Agreement, reflects the difference between
(i) the sum of (A) unrestricted cash and cash equivalents and (B) the amount available and permitted to be drawn under our existing
Credit Agreement and (ii) the amount necessary to fully redeem the Notes. The Tranche B-2 Loans shall amortize in equal quarterly
installments in aggregate amounts equal to 0.25% of the original principal amount of the Tranche B-2 Loans, with the balance payable
at maturity, and will bear interest at a rate, at our election, equal to (i) LIBOR (subject to a floor of 1.00%) plus a margin
of 3.25% or (ii) a base rate plus a margin of 2.25%.
Amendment No. 2 also
amends the Term Loan Credit Agreement by (i) removing the maximum senior secured leverage ratio test, (ii) modifying the accordion
feature, as described in the Term Loan Credit Agreement, to provide for a senior secured incremental term loan facility in an aggregate
amount not to exceed the greater of (A) $75 million (less the aggregate amount of (1) any increases in the maximum revolver amount
under the existing Credit Agreement and (2) certain permitted indebtedness incurred for the purpose of prepaying or repurchasing
the Notes) and (B) an amount such that the senior secured leverage ratio would not be greater than 3.0 to 1.0, subject to certain
conditions, including obtaining commitments from any one or more lenders, whether or not currently party to the Term Loan Credit
Agreement, to provide such increased amounts. The senior secured leverage ratio is defined in the Term Loan Credit Agreement and
reflects a ratio of consolidated net total secured indebtedness to consolidated EBITDA and (iii) amending certain negative covenants.
The Term Loan Credit
Agreement, as amended, is guaranteed by the Term Guarantors and is secured by (i) first-priority liens on and security interests
in the Term Priority Collateral, and (ii) second-priority security interests in the Revolver Priority Collateral. In addition,
the Term Loan Credit Agreement, as amended, contains customary covenants limiting our ability to, among other things, pay cash
dividends, incur debt or liens, redeem or repurchase stock, enter into transactions with affiliates, merge, dissolve, pay off subordinated
indebtedness, make investments and dispose of assets.
Subject to the terms
of the Intercreditor Agreement, if the covenants under the Term Loan Credit Agreement, as amended, are breached, the lenders may,
subject to various customary cure rights, require the immediate payment of all amounts outstanding and foreclose on collateral.
Other customary events of default in the Term Loan Credit Agreement, as amended, include, without limitation, failure to pay obligations
when due, initiation of insolvency proceedings, defaults on certain other indebtedness, and the incurrence of certain judgments
that are not stayed, satisfied, bonded or discharged within 60 days.
For the nine months
ended September 30, 2016 and 2015, under the Term Loan Credit Agreement we paid interest of $6.2 million and $6.4 million, respectively,
and principal of $1.4 million and $1.0 million, respectively. As of September 30, 2016, we had $190.0 million outstanding under
the Term Loan Credit Agreement, of which $1.9 million was classified as current on the Company’s Condensed Consolidated Balance
Sheet.
For the nine months
ended September 30, 2016 and 2015, we incurred charges of approximately $0.1 million and $0.2 million, respectively, for amortization
of fees and original issuance discount which is included in
Interest Expense
in the Condensed Consolidated Statements of
Operations.
Cash Flow
Cash provided by operating
activities for the first nine months of 2016 totaled $106.0 million, compared to $104.7 million during the same period in 2015.
Cash provided by operations during the current year period was the result of net income adjusted for various non-cash activities
of $135.7 million, including depreciation, amortization, deferred income taxes, stock-based compensation, non-cash interest expense,
loss on debt extinguishment and impairment of goodwill, partially offset by a $29.6 million increase in working capital. Increases
in working capital for the current year period can be attributed primarily to increased levels of finished goods, as well as an
increase in purchasing activities resulting from higher inventory requirements necessary to meet customer demand partially offset
by an increase in accounts payable activity. Changes in key working capital accounts for the first nine months of 2016 as compared
to the same period in 2015 are summarized below (in millions):
Source (Use) of cash:
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
Accounts receivable
|
|
$
|
(5,117
|
)
|
|
$
|
(3,744
|
)
|
|
$
|
(1,373
|
)
|
Inventories
|
|
|
(29,587
|
)
|
|
|
(50,366
|
)
|
|
|
20,779
|
|
Accounts payable and accrued liabilities
|
|
|
15,478
|
|
|
|
58,465
|
|
|
|
(42,987
|
)
|
Net source (use) of cash
|
|
|
(19,226
|
)
|
|
|
4,355
|
|
|
|
(23,581
|
)
|
Accounts receivable
increased by $5.1 million in the first nine months of 2016 as compared to an increase of $3.7 million in the prior year period.
Days sales outstanding, a measure of working capital efficiency that measures the average amount of time a receivable is outstanding,
was 31 days in the 2016 period and 24 days in the 2015 period. The increase in accounts receivable during the first nine months
of 2016 was primarily due to the timing of shipments and customer collections during the quarter. Inventory increased by $29.6
million during the first nine months of 2016 as compared to an increase of $50.4 million in the 2015 period. The increase in inventory
for the 2016 period was primarily due to higher finished goods inventory resulting from production levels exceeding shipments for
the first nine months of 2016. Our inventory turns, a commonly used measure of working capital efficiency that measures how quickly
on average inventory turns per year, was approximately 8 times in both the 2016 and 2015 periods. Accounts payable and accrued
liabilities increased by $15.5 million in 2016 compared to an increase of $58.5 million for the same period in 2015. The increase
during the first nine months of 2016 was primarily due to continued strong production levels and purchasing activities required
to meet current demand. Days payable outstanding, a measure of working capital efficiency that measures the average amount of time
a payable is outstanding, was 25 days in 2016 as compared to 27 days in the same period in 2015.
Investing activities
used $12.8 million during the first nine months of 2016 compared to $4.7 million used during the same period in 2015. Investing
activities for the first nine months of 2016 were comprised primarily of capital expenditures totaling $15.0 million partially
offset by the $2.3 million of proceeds from the transition of our retail branch location in Phoenix, Arizona to an independent
dealer facility in July 2016. Investing activities for the first nine months of 2015 include capital expenditures of $12.6 million
as well as $5.4 million of restricted cash available to be used for asset reinvestments under our Term Loan Credit Agreement partially
offset by proceeds from the sale of property, plant and equipment totaling $13.2 million, which comprised primarily of the sale
of our former Retail branch real estate.
Financing activities
used $82.4 million during the first nine months of 2016 as compared to $48.9 million used in the same period in 2015. Cash used
in financing activities during the current year period primarily relates to the repurchase of Notes totaling $42.1 million and
common stock repurchases through our share repurchase program of $40.7 million. Cash used in financing activities in the first
nine months of 2015 relates to the repurchase of common stock through our share repurchase program totaling $41.4 million, principal
payments under existing debt and capital lease obligations of $5.2 million, and debt issuance costs of $2.6 million incurred in
relation to Amendment No. 2 to our Term Loan Credit Agreement and the amendment to our Credit Agreement.
As of September 30,
2016, our liquidity position, defined as cash on hand and available borrowing capacity, amounted to $359.0 million, representing
an increase of $11.1 million compared to December 31, 2015. Total debt and capital lease obligations amounted to $282.5 million
as of September 30, 2016. In February 2016, we repurchased $35.2 million in principal of the Notes for $42.1 million. As we continue
to see strong demand in the overall trailer industry, and based on our operating performance metrics, we believe our liquidity
is adequate to fund operations, working capital needs and capital expenditures for the remainder of 2016 and 2017.
Capital Expenditures
Capital spending amounted
to $15.0 million for the first nine months of 2016 and is anticipated to approximately $25 million for 2016. Capital spending for
2016 has been and is expected to continue to be primarily utilized to support growth, productivity improvements and environmental,
health and safety initiatives within our facilities.
Off-Balance Sheet Transactions
As of September 30,
2016, we had approximately $6.7 million in operating lease commitments. We did not enter into any material off-balance sheet debt
or operating lease transactions during the quarter ended September 30, 2016.
Contractual Obligations and Commercial Commitments
A summary of payments
of our contractual obligations and commercial commitments, both on and off balance sheet, as of September 30, 2016 for the remaining
three months of 2016 and the calendar years thereafter are as follows (in thousands):
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEBT:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Facility (due 2020)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Convertible Senior Notes (due 2018)
|
|
|
-
|
|
|
|
-
|
|
|
|
95,835
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
95,835
|
|
Term Loan Credit Facility (due 2022)
|
|
|
482
|
|
|
|
1,928
|
|
|
|
1,928
|
|
|
|
1,928
|
|
|
|
1,928
|
|
|
|
181,758
|
|
|
|
189,952
|
|
Other Debt
|
|
|
131
|
|
|
|
539
|
|
|
|
93
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
763
|
|
Capital Leases (including
principal and interest)
|
|
|
205
|
|
|
|
594
|
|
|
|
461
|
|
|
|
361
|
|
|
|
361
|
|
|
|
391
|
|
|
|
2,373
|
|
TOTAL DEBT
|
|
$
|
818
|
|
|
$
|
3,061
|
|
|
$
|
98,317
|
|
|
$
|
2,289
|
|
|
$
|
2,289
|
|
|
$
|
182,149
|
|
|
$
|
288,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
$
|
837
|
|
|
$
|
2,918
|
|
|
$
|
1,823
|
|
|
$
|
885
|
|
|
$
|
194
|
|
|
$
|
30
|
|
|
$
|
6,687
|
|
TOTAL OTHER
|
|
$
|
837
|
|
|
$
|
2,918
|
|
|
$
|
1,823
|
|
|
$
|
885
|
|
|
$
|
194
|
|
|
$
|
30
|
|
|
$
|
6,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMMERCIAL
COMMITMENTS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of Credit
|
|
$
|
5,661
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,661
|
|
Raw Material Purchase Commitments
|
|
|
16,758
|
|
|
|
18,781
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35,539
|
|
TOTAL OTHER COMMERCIAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
|
|
$
|
22,419
|
|
|
$
|
18,781
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
41,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL OBLIGATIONS
|
|
$
|
24,074
|
|
|
$
|
24,760
|
|
|
$
|
100,140
|
|
|
$
|
3,174
|
|
|
$
|
2,483
|
|
|
$
|
182,179
|
|
|
$
|
336,810
|
|
Scheduled payments
for our Credit Facility exclude interest payments as rates are variable. Borrowings under the Credit Facility bear interest at
a variable rate based on the London Interbank Offer Rate (LIBOR) or a base rate determined by the lender’s prime rate plus
an applicable margin, as defined in the agreement. Outstanding borrowings under the Credit Facility bear interest at a rate, at
our election, equal to (i) LIBOR plus a margin ranging from 1.50% to 2.00% or (ii) a base rate plus a margin ranging from 0.50%
to 1.00%, in each case depending upon the monthly average excess availability under the Credit Facility. We are required to pay
a monthly unused line fee equal to 0.25% times the average daily unused availability along with other customary fees and expenses
of our agent and lenders.
Scheduled payments
for our Notes exclude interest payments which bear interest at the rate of 3.375% per annum from the date of issuance, payable
semi-annually on May 1 and November 1.
Scheduled payments
for our Term Loan Credit Agreement, as amended, exclude interest payments as rates are variable. Borrowings under the Term Loan
Credit Agreement, as amended, bear interest at a variable rate, at our election, equal to (i) LIBOR (subject to a floor of 1.00%)
plus a margin of 3.25% or (ii) a base rate plus a margin of 2.25%. The Term Loan Credit Agreement matures in March 2022, but provides
for an accelerated maturity in the event our outstanding Notes are not converted, redeemed, repurchased or refinanced in full on
or before the date that is 91 days prior to the maturity date thereof and we are not then maintaining, and continue to maintain
until the Notes are converted, redeemed, repurchased or refinanced in full, liquidity of at least $125 million.
Capital leases represent
future minimum lease payments including interest. Operating leases represent the total future minimum lease payments.
We have standby letters
of credit totaling $5.7 million issued in connection with workers compensation claims and surety bonds.
We have $35.5 million
in purchase commitments through December 2017 for various raw material commodities, including aluminum, steel and nickel as well
as other raw material components which are within normal production requirements.
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
$643 million at September 30, 2016 compared to $1,209 million at December 31, 2015 and $1,097 million at September 30, 2015. We
expect to complete the majority of our existing backlog orders within the next 12 months.
OUTLOOK
The demand environment
for trailers remained strong through the first nine months of 2016, as evidenced by our strong backlog, a trailer demand forecast
by industry forecasters above replacement demand levels for the next several years and our ability to increase prices and improve
margins. Recent estimates from industry analysts, ACT Research Company (“ACT”) and FTR Associates (“FTR”),
forecast demand for 2016 and beyond to remain healthy. ACT currently estimates demand to be approximately 283,000 trailers for
2016, representing a decrease of 8.2% as compared to 2015, and forecasting continued demand levels to be above replacement demand
into the foreseeable future with estimated demand for 2017 to be approximately 239,000 and annual average demand for the four year
period ending 2021 to be approximately 258,000 new trailers. FTR anticipates new trailer production to be approximately 276,000
new trailers in 2016, representing a decrease of 8.6% as compared to 2015 as well as projecting a decrease in 2017 with production
totaling 240,000 trailers. In spite of a strong forecasted demand environment, there remain downside risks relating to issues with
both the domestic and global economies, including the housing, energy and construction-related markets in the U.S.
Other potential risks
we face for the remainder of 2016 and into 2017 will primarily relate to our ability to effectively manage our manufacturing operations
as well as the cost and supply of raw materials, commodities and components. Significant increases in the cost of certain commodities,
raw materials or components could have an adverse effect on our results of operations. As has been our practice, we will endeavor
to pass raw material and component price increases to our customers in addition to continuing our cost management and hedging activities
in an effort to minimize the risk changes in material costs could have on our operating results. In addition, we rely on a limited
number of suppliers for certain key components and raw materials in the manufacturing of our products, including tires, landing
gear, axles, suspensions aluminum extrusions and specialty steel coil. At the current and expected demand levels, there may be
shortages of supplies of raw materials or components which would have an adverse impact on our ability to meet demand for our products.
We believe we are well-positioned
for long-term success in the trailer industry because: (1) our core customers are among the dominant participants in the trucking
industry; (2) our DuraPlate
®
and other industry leading brand trailers continue to have increased market acceptance;
(3) our focus is on developing solutions that reduce our customers’ trailer maintenance and operating costs providing the
best overall value; and (4) our presence throughout North America utilizing both our extensive independent dealer network in addition
to the Company-owned branch locations to market and sell our products.
Based on the published
industry demand forecasts, customer feedback regarding their current requirements, our existing backlog of orders and our continued
efforts to be selective in our order acceptance to ensure we obtain appropriate value for our products, we expect 2016 total unit shipments to be at the low end of our 60,000 to 62,000 shipment range communicated
previously, which reflects trailer volumes 7% lower than 2015 demand levels
and consistent with the decrease in demand as projected by industry forecasters for the overall trailer market. While our expectations
for trailer volumes are similar to the demand levels forecasted by industry analysts, our focus on continuing to grow margins within
our Commercial Trailer Products segment and the continued productivity and cost optimization initiatives through all of our businesses,
we expect to see continued operational improvements as compared to the prior year.
We are not relying
solely on strong new trailer volumes and price recovery to improve operations and enhance our profitability. We believe our corporate
strategy to continue our transformation into a diversified industrial manufacturer will provide us the opportunity to address new
markets, enhance our financial profile and reduce the cyclicality within our business. While demand for some of these products
is dependent on the development of new products, customer acceptance of our product solutions and the general expansion of our
customer base and distribution channels, we remain committed to enhancing and diversifying our business model through the organic
and strategic initiatives. Through our two operating segments we offer a wide array of products and customer-specific solutions
that we believe provide a good foundation for achieving these goals. In addition, we have been and will continue to 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We
have included a summary of our Critical Accounting Policies and Estimates in our annual report on Form 10-K for the year ended
December 31, 2015. There have been no material changes to the summary provided in that report.