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ITEM 2.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING
STATEMENTS
This Quarterly Report
of Wabash National Corporation (together with its subsidiaries, the “Company,” “Wabash,” “we”
or “us”) 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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our business plan;
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our expected revenues, income or loss;
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our ability to manage our indebtedness;
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our strategic plan and plans for future operations;
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financing needs, plans and liquidity, including for working capital
and capital expenditures;
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our ability to achieve sustained profitability;
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reliance on certain customers and corporate relationships;
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availability and pricing of raw materials;
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availability of capital and financing;
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dependence on industry trends;
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the outcome of any pending litigation or notice of environmental
dispute;
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export sales and new markets;
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engineering and manufacturing capabilities and capacity;
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acceptance of new technology and products;
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government regulation; and
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assumptions relating to the foregoing.
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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 Annual Report on Form 10-K for
the year ended December 31, 2016. 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, except as required by law.
RESULTS OF OPERATIONS
The following table
sets forth certain operating data as a percentage of net sales for the periods indicated:
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Percentage
of Net Sales
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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2017
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|
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2016
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2017
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|
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2016
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Net sales
|
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100.0
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%
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|
|
100.0
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%
|
|
|
100.0
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%
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|
|
100.0
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%
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Cost of sales
|
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84.5
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80.7
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84.1
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81.4
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Gross profit
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15.5
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|
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19.3
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15.9
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18.6
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|
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|
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General and administrative expenses
|
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4.4
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3.9
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4.7
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4.1
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Selling expenses
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1.4
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1.5
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1.5
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1.5
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Amortization of intangibles
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0.9
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1.1
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1.1
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1.1
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Impairment of goodwill
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-
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0.3
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-
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0.2
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Income from operations
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|
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8.9
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12.5
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8.6
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11.7
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Interest expense
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(0.7
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)
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(0.8
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)
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(0.7
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)
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(0.9
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)
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Other, net
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0.1
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|
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(0.1
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)
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0.2
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(0.1
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)
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Income before income taxes
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|
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8.3
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|
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11.6
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8.1
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10.7
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|
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|
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|
|
|
|
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|
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Income tax expense
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3.0
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4.1
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2.7
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3.8
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Net income
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5.3
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%
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7.5
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%
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5.4
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%
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6.9
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%
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For the three and
six month period ended June 30, 2017, we recorded net sales of $435.9 million and $798.6 million, respectively, compared to $471.4
million and $919.1 million, respectively, in the prior year periods. Net sales for the three month period ended June 30, 2017
decreased $35.5 million, or 7.5%, compared to the prior year period, due primarily to a decrease in new trailer shipments of approximately
1,800 units, or 11.3%. Gross profit margin decreased to 15.5% in the second quarter of 2017 compared to 19.3% in the prior year
period driven by lower volumes and higher commodity costs. While 2017 will likely reflect a pullback in overall trailer demand
from levels achieved in 2016, we continue to be encouraged by the strong market demand within the dry and refrigerated trailer
segment as well as the expectation that overall industry shipment and production levels will remain above replacement demand for
the remainder of 2017 as many key structural and market drivers continue to support healthy demand for new trailers. In addition,
we expect to continue our focused efforts to drive ongoing improvements throughout the business, deliver new opportunities to
expand our 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.
For the three month
period ended June 30, 2017, selling, general and administrative expenses decreased $0.6 million as compared to the same period
in 2016 primarily due to lower employee related costs, including employee incentive programs. As a percentage of net sales, selling,
general and administrative expenses increased to 5.8% in the second quarter of 2017 as compared to 5.4% in the prior year period.
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 opportunities
that leverage our intellectual and process capabilities.
Three Months Ended June 30, 2017
Net Sales
Net sales in the second
quarter of 2017 decreased $35.5 million, or 7.5%, compared to the second quarter of 2016. By business segment, prior to the elimination
of intercompany sales, sales and related units sold were as follows (dollars in thousands):
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Three Months Ended June
30,
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(prior to elimination of
intersegment sales)
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Change
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2017
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2016
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$
|
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%
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Sales by Segment
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Commercial Trailer Products
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$
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348,140
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$
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382,212
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$
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(34,072
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)
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(8.9
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)
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Diversified Products
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90,827
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92,870
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(2,043
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)
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(2.2
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)
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Eliminations
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(3,064
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)
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(3,644
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)
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Total
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$
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435,903
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$
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471,438
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$
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(35,535
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)
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(7.5
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)
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|
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|
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New Trailers
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(units)
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Commercial Trailer Products
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13,600
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15,350
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(1,750
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)
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(11.4
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)
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Diversified
Products
|
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550
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|
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|
550
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-
|
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-
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Total
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14,150
|
|
|
|
15,900
|
|
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(1,750
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)
|
|
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(11.0
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Used Trailers
|
|
|
(units)
|
|
|
|
|
|
|
|
|
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Commercial Trailer Products
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|
|
50
|
|
|
|
300
|
|
|
|
(250
|
)
|
|
|
(83.3
|
)
|
Diversified
Products
|
|
|
50
|
|
|
|
50
|
|
|
|
-
|
|
|
|
-
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Total
|
|
|
100
|
|
|
|
350
|
|
|
|
(250
|
)
|
|
|
(71.4
|
)
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Commercial Trailer
Products segment sales prior to the elimination of intersegment sales were $348.1 million for the second quarter of 2017, a decrease
of $34.1 million, or 8.9%, compared to the second quarter of 2016. New trailers shipped during the second quarter of 2017 totaled
13,600 trailers compared to 15,350 trailers in the prior year period, an 11.4% decrease due primarily to lower market demand.
The decrease in new trailer shipments, partially offset by a 3.6% increase in the average selling price of trailers compared to
the prior year period, resulted in a $30.4 million decrease in new trailer sales. Parts and service revenue for the second quarter
of 2017 totaled $13.1 million, a decrease of $1.7 million, or 11.6%, as compared to the second quarter of 2016 primarily due to
fewer retail branch locations in the current year. Used trailer sales decreased $2.2 million, or 63.9%, compared to the prior
year period primarily due to decreased availability through trade packages as 250 fewer used trailers were shipped in the second
quarter of 2017 compared to the prior year period.
Diversified Products
segment sales prior to the elimination of intersegment sales were $90.8 million for the second quarter of 2017, down $2.0 million,
or 2.2%, compared to the second quarter of 2016. New trailer sales decreased $0.9 million, or 2.7%, from the prior year period
due to lower pricing as 550 new trailers were shipped in both the second quarter of 2017 and 2016. Equipment sales decreased $0.5
million, or 2.2%, compared to the prior year period as a result of lower demand for our non-trailer related products. Sales of
our parts and service product offerings totaled $32.2 million for the second quarter of 2017, a decrease of $0.3 million or 1.0%
as compared to the prior year period.
Gross Profit
Gross profit was $67.7
million in the second quarter of 2017, a decrease of $23.4 million from the prior year period. Gross profit as a percentage of
sales was 15.5% for the current quarter and 19.3% for the same period in 2016. Gross profit by segment was as follows (dollars
in thousands):
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
2017
|
|
|
2016
|
|
|
$
|
|
|
%
|
|
Gross Profit by Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Trailer Products
|
|
$
|
50,882
|
|
|
$
|
69,027
|
|
|
$
|
(18,145
|
)
|
|
|
(26.3
|
)
|
Diversified Products
|
|
|
17,149
|
|
|
|
22,938
|
|
|
|
(5,789
|
)
|
|
|
(25.2
|
)
|
Corporate
|
|
|
(353
|
)
|
|
|
(901
|
)
|
|
|
548
|
|
|
|
|
|
Total
|
|
$
|
67,678
|
|
|
$
|
91,064
|
|
|
$
|
(23,386
|
)
|
|
|
(25.7
|
)
|
Commercial Trailer
Products segment gross profit was $50.9 million for the second quarter of 2017 compared to $69.0 million for the second quarter
of 2016. Gross profit prior to the elimination of intersegment sales, as a percentage of net sales, was 14.6% in the second quarter
of 2017 compared to 18.1% in the 2016 period. The decrease in gross profit margin as compared to the prior year period was primarily
driven by decreases in new trailer shipments during the quarter as well as higher commodity costs.
Diversified Products
segment gross profit was $17.1 million for the second quarter of 2017 compared to $22.9 million in the same quarter of 2016. Gross
profit prior to the elimination of intersegment sales, as a percentage of net sales, was 18.9% in the second quarter of 2017 compared
to 24.6% in the 2016 period. The decrease in gross profit as a percentage of net sales compared to the prior year period was due
primarily driven by product mix and higher commodity costs.
General and Administrative Expenses
General and administrative expenses in
the second quarter of 2017 increased $0.5 million, or 2.8%, as compared to the same period in 2016 as decreases in salaries and
employee related costs, including employee incentive programs, of $0.8 million were more than offset by an increase in outside
services and professional fee expenditures, depreciation, and various other expenses totaling $1.3 million. As a percentage of
net sales, general and administrative expenses increased to 4.4% in the second quarter of 2017 as compared to 3.9% in the prior
year period.
Selling Expenses
Selling expenses were
$5.9 million in the second quarter of 2017, a decrease of $1.1 million, or 16.3%, compared to the prior year period primarily
due to a $0.8 million decrease in salaries and employee related costs, including employee incentive programs, as well as a $0.2
million decrease in advertising and promotional efforts. As a percentage of net sales, selling expenses were 1.4% for the second
quarter of 2017, down slightly from 1.5% for the second quarter of 2016.
Amortization of Intangibles
Amortization of intangibles
was $4.1 million for the second quarter of 2017 compared to $5.0 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 the acquisition of certain assets of Beall in February 2013.
Other Income (Expense)
Interest expense
for the second
quarter of 2017 totaled $2.9 million compared to $3.9 million in the second quarter of 2016. Interest expense for both periods
is primarily related to interest and non-cash accretion charges on our Convertible Senior Notes and Term Loan Credit Agreement.
The decrease from the prior year period is primarily due to the repurchase of Convertible Senior Notes completed over the previous
twelve months.
Income Taxes
We recognized income tax expense of $13.2 million in the second
quarter 2017 compared to $19.2 million for the same period in the prior year. The effective tax rate for the second quarter of
2017 and 2016 were 36.4% and 35.1%, respectively. These effective tax rates differ 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.
Six Months Ended June 30, 2017
Net Sales
Net sales in the first
six months of 2017 decreased $120.5 million, or 13.1%, compared to the first six months of 2016. By business segment, prior to
the elimination of intercompany sales, sales and related units sold were as follows (dollars in thousands):
|
|
Six Months Ended June 30,
|
|
(prior to elimination of
intersegment sales)
|
|
|
|
|
|
|
|
Change
|
|
|
|
2017
|
|
|
2016
|
|
|
$
|
|
|
%
|
|
Sales by Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Trailer Products
|
|
$
|
622,929
|
|
|
$
|
746,252
|
|
|
$
|
(123,323
|
)
|
|
|
(16.5
|
)
|
Diversified Products
|
|
|
180,737
|
|
|
|
179,159
|
|
|
|
1,578
|
|
|
|
0.9
|
|
Eliminations
|
|
|
(5,047
|
)
|
|
|
(6,297
|
)
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
798,619
|
|
|
$
|
919,114
|
|
|
$
|
(120,495
|
)
|
|
|
(13.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Trailers
|
|
|
(units)
|
|
|
|
|
|
|
|
|
|
Commercial Trailer Products
|
|
|
24,000
|
|
|
|
29,350
|
|
|
|
(5,350
|
)
|
|
|
(18.2
|
)
|
Diversified
Products
|
|
|
1,050
|
|
|
|
1,050
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
25,050
|
|
|
|
30,400
|
|
|
|
(5,350
|
)
|
|
|
(17.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Used Trailers
|
|
|
(units)
|
|
|
|
|
|
|
|
|
|
Commercial Trailer Products
|
|
|
150
|
|
|
|
550
|
|
|
|
(400
|
)
|
|
|
(72.7
|
)
|
Diversified
Products
|
|
|
50
|
|
|
|
50
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
200
|
|
|
|
600
|
|
|
|
(400
|
)
|
|
|
(66.7
|
)
|
Commercial Trailer
Products segment sales prior to the elimination of intersegment sales were $622.9 million for the first six months of 2017, a
decrease of $123.3 million, or 16.5%, compared to the first six months of 2016. Trailers shipped during the first six months of
2017 totaled 24,000 trailers compared to 29,350 trailers in the prior year period, an 18.2% decrease, due primarily to lower market
demand. The decrease in new trailer shipments compared to the prior year period resulted in $115.2 million decrease in sales.
Parts and service revenue for the six month period of 2017 totaled $25.8 million, a decrease of $3.1 million or 10.8% from the
prior year period due to fewer retail branch locations in the current year. Used trailer sales decreased $5.2 million, or 70.8%,
compared to the prior year period primarily due to decreased availability through trade packages as 400 fewer used trailers were
shipped in the first six months of 2017 compared to the prior year period.
Diversified Products
segment sales prior to the elimination of intersegment sales were $180.7 million for the first six months of 2017, up $1.6 million,
or 0.9%, compared to the same period of 2016. New trailer sales for the first six months of 2017 remained consistent with the
prior year period as new trailer shipments during the first half of both 2017 and 2016 totaled 1,050 units. Parts and service
sales increased $6.2 million, or 10.4%, as compared to the prior year period due to strong demand for our composite product offerings.
Equipment sales decreased $4.3 million, or 8.6%, compared to the prior year period as a result of lower demand for our non-trailer
products and truck-mounted equipment.
Gross Profit
Gross profit was $127.0
million in the first six months of 2017, a decrease of $43.6 million from the prior year period. Gross profit as a percentage
of sales was 15.9% for the first six months and 18.6% for the same period in 2016. Gross profit by segment was as follows (dollars
in thousands):
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
2017
|
|
|
2016
|
|
|
$
|
|
|
%
|
|
Gross Profit by Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Trailer Products
|
|
$
|
93,008
|
|
|
$
|
129,423
|
|
|
$
|
(36,415
|
)
|
|
|
(28.1
|
)
|
Diversified Products
|
|
|
34,742
|
|
|
|
43,148
|
|
|
|
(8,406
|
)
|
|
|
(19.5
|
)
|
Corporate
|
|
|
(715
|
)
|
|
|
(1,981
|
)
|
|
|
1,266
|
|
|
|
|
|
Total
|
|
$
|
127,035
|
|
|
$
|
170,590
|
|
|
$
|
(43,555
|
)
|
|
|
(25.5
|
)
|
Commercial Trailer
Products segment gross profit was $93.0 million for the first six months of 2017 compared to $129.4 million for the prior year
period. Gross profit prior to the elimination of intersegment sales, as a percentage of net sales, was 14.9% in 2017 compared
to 17.3% in the 2016 period. The decrease in gross profit margin as compared to the prior year period was primarily driven by
decreases in new trailer shipments during the first six months as well as higher commodity costs.
Diversified Products
segment gross profit was $34.7 million for the first half of 2017 compared to $43.1 million in the same period of 2016. Gross
profit prior to the elimination of intersegment sales, as a percentage of net sales, was 19.2% in the 2017 period compared to
24.0% in the 2016 period. The decrease in gross profit as a percentage of net sales compared to the prior year period was due
primarily driven by product mix, higher commodity costs and lower volume for our non-trailer related equipment and other engineered
products.
General and Administrative Expenses
General and administrative
expenses for the first six months of 2017 decreased $0.5 million, or 1.2%, from the prior year period as a result of a $1.1 million
decrease in salaries and employee related costs, including employee incentive programs, offset by an increase in outside services
and professional fee expenditures totaling $0.7 million. As a percentage of sales, general and administrative expenses were 4.7%
for the 2017 period as compared to 4.1% for the same period of 2016.
Selling Expenses
Selling expenses were
$12.1 million in the first six months of 2017, a decrease of $1.9 million, or 13.8%, compared to the prior year period, as a result
of a $1.2 million decrease in salaries and employee related costs, including employee incentive programs, as well as a $0.7 million
decrease in advertising and promotional efforts and travel expenses. As a percentage of net sales, selling expenses were 1.5%
for both the 2017 and 2016 periods.
Amortization of Intangibles
Amortization of intangibles
was $8.6 million for the first six months of 2017 compared to $10.0 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 the acquisition of certain assets of Beall in February 2013.
Other Income (Expense)
Interest expense
for the first six months of 2017 totaled $5.9 million compared to $8.0 million in the prior year period. Interest expense
for both periods is primarily related to interest and non-cash accretion charges on our Convertible Senior Notes and Term Loan
Credit Agreement. The decrease from the prior year period is primarily due to Convertible Senior Notes repurchases completed over
the previous twelve months.
Other, net
for
the first six months of 2017 represented income of $1.7 million as compared to an expense of $0.6 million for the prior year period.
The current year period primarily consists of a gain on the sale of certain branch assets, partially offset by a loss on debt
extinguishment for the refinance of our Term Loan Credit Agreement. The prior year period primarily consists of loss on early
extinguishment of debt of $0.5 million related to the Notes repurchase in February 2016.
Income Taxes
We recognized income
tax expense of $21.6 million in the first six months of 2017 compared to $35.4 million for the same period in the prior year.
The effective tax rate for the first six months of 2017 and 2016 were 33.4% and 35.9%, respectively. These effective tax rates
differ 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, in 2017, the recognition of excess tax benefits on stock-based
compensation.
Liquidity and Capital Resources
Capital Structure
Our capital structure
is comprised of a mix of debt and equity. As of June 30, 2017, our debt to equity ratio was approximately 0.5:1.0. 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 2017, we expect to continue our commitment to fund our working capital requirements and capital expenditures
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, and mature on May 1, 2018. The Notes are senior unsecured obligations and rank equally with our existing and future
senior unsecured debt. 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.
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; or (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 June 30, 2017,
we determined that the Notes would be convertible during the calendar quarter ending September 30, 2017 based on criteria in (A)
above. If the Notes outstanding at June 30, 2017 had been converted as of June 30, 2017, the if-converted value would exceed the
principal amount by approximately $39 million. It is our intent to settle conversions in cash for both the principal portion and
the excess of the conversion value over the principal portion. The Notes mature on May 1, 2018 and are classified as current within
the Condensed Consolidated Balance Sheet.
We account separately
for the liability and equity components of the Notes in accordance with authoritative guidance for convertible debt instruments
that may be settled in cash upon conversion. The guidance requires the carrying amount of the liability component to be estimated
by measuring the fair value of a similar liability that does not have an associated conversion feature. We determined that senior,
unsecured corporate bonds traded on the market represent a similar liability to the 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 the second quarter
of 2017, we repurchased $4.0 million in principal of such Notes for $7.3 million, excluding accrued interest. Additionally, in
2016 we acquired $82.0 million in principal for $98.9 million, excluding accrued interest. For the six months ended June 30, 2017
and 2016, we recognized a loss on debt extinguishment of $0.1 million and $0.5 million, respectively, for repurchase activity,
which is included in
Other, net
on the 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 not 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 (1) the sum of (A) unrestricted
cash and cash equivalents and (B) availability under the Credit Facility and (2) 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.
On May 3, 2017 we
entered into the Second Amendment to Amended and Restated Credit Agreement (the “Second Amendment”). The Second Amendment
provides for revisions to the asset sale and lien covenants that conform certain provisions of the Credit Agreement to corresponding
provisions of our term loan facility by, among other things, (i) increasing amounts allowed per calendar year for certain asset
sales from $20 million to the greater of $30 million and 5.0% of consolidated tangible assets, (ii) permitting the proceeds of
such increased amount of asset sales to be reinvested in lieu of making mandatory prepayments of indebtedness and (iii) increasing
the time permitted for incurring purchase money debt following the acquisition of assets financed thereby from 20 days to 180
days.
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 June 30, 2017,
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, $297.0 million of term loans were 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, $192.8 million
of the Tranche B-1 Loans were 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 not 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 (x) LIBOR (subject to
a floor of 1.00%) plus a margin of 3.25% or (y) a base rate plus a margin of 2.25%.
Amendment No. 2 also
amended 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, and (iii) amending certain negative covenants. 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.
Furthermore, on February
24, 2017, we entered into Amendment No. 3 to Credit Agreement (“Amendment No. 3”). As of February 24, 2017, $189.5
million of the Tranche B-2 Loans were outstanding. Under Amendment No. 3, the lenders agreed to provide term loans in the same
aggregate principal amount of the outstanding Tranche B-2 Loans (the “Tranche B-3 Loans”), which were used to refinance
the outstanding Tranche B-2 Loans. The Tranche B-3 Loans shall amortize in equal quarterly installments, in aggregate amounts
equal to 0.25% of the initial principal amount of the Tranche B-3 Loans, with the balance payable at maturity, and will bear interest
at a rate, at the Company’s election, equal to (i) LIBOR (subject to a floor of 0%) plus a margin of 2.75% or (ii) a base
rate (subject to a floor of 0%) plus a margin of 1.75%. Amendment No. 3 also provides for a 1% prepayment premium applicable in
the event we enter into a refinancing of, or amendment in respect of, the Tranche B-3 Loans on or prior to the six month anniversary
of the effective date of Amendment No. 3 that, in either case, results in the all-in yield (including, for purposes of such determination,
the applicable interest rate, margin, original issue discount, upfront fees and interest rate floors, but excluding any customary
arrangement, structuring, commitment or underwriting fees) of such refinancing or amendment being less than the all-in yield (determined
on the same basis) on the Tranche B-3 Loans. Except as amended by Amendment No. 3, the remaining terms of the Credit Agreement
remain in full force and effect.
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 six months
ended June 30, 2017 and 2016, under the Term Loan Credit Agreement, we paid interest of $3.8 million and $4.2 million, respectively,
and principal of $0.9 million and $1.0 million, respectively. We recognized a loss on debt extinguishment of $0.6 million during
the first quarter of 2017 in connection with Amendment No. 3, which was included in
Other, net
on the Company’s Condensed
Consolidated Statements of Operations. As of June 30, 2017, we had $188.5 million outstanding under the Term Loan Credit Agreement,
of which $1.9 million was classified as current on the Condensed Consolidated Balance Sheet.
For each six month
period ended June 30, 2017 and 2016 we incurred charges of less than $0.1 million 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 six months of 2017 totaled $75.2 million, compared to $76.3 million during the same period in 2016. Cash
provided by operations during the current year period was the result of net income adjusted for various non-cash activities including
depreciation, amortization, deferred income taxes, stock-based compensation, non-cash interest expense, loss on debt extinguishment,
and a $9.2 million decrease in working capital. Decreases in working capital for the current year period can be attributed primarily
to lower accounts receivable from strong customer collections and increases in accounts payable and accrued liabilities offset
by an increase in finished goods inventory. Changes in key working capital accounts for the first six months of 2017 as compared
to the same period in 2016 are summarized below (in thousands):
Source (Use) of cash:
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
Accounts receivable
|
|
$
|
30,656
|
|
|
$
|
20,873
|
|
|
$
|
9,783
|
|
Inventories
|
|
|
(60,748
|
)
|
|
|
(46,034
|
)
|
|
|
(14,714
|
)
|
Accounts payable and accrued liabilities
|
|
|
35,285
|
|
|
|
25,154
|
|
|
|
10,131
|
|
Net source (use) of cash
|
|
|
5,193
|
|
|
|
(7
|
)
|
|
|
5,200
|
|
Accounts receivable
decreased by $30.7 million in the first six months of 2017 as compared to a decrease of $20.9 million in the prior year period.
Days sales outstanding, a measure of working capital efficiency that measures the amount of time a receivable is outstanding,
was 26 days in 2017 as compared to 25 days in the same period in 2016. The decrease in accounts receivable during the first six
months of 2017 was primarily due to strong customer collections during the quarter. Inventory increased by $60.7 million during
the first six months of 2017 as compared to an increase of $46.0 million in the 2016 period. The increase in inventory for the
2017 period was primarily due to higher finished goods inventory resulting from production levels exceeding shipments for the
first six months of 2017. Our inventory turns, a measure of working capital efficiency that measures how quickly inventory turns
per year, was approximately eight times in the 2017 and 2016 periods. Accounts payable and accrued liabilities increased by $35.3
million in 2017 compared to an increase of $25.2 million for the same period in 2016. The increase during the first six months
of 2017 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 amount of time a payable is outstanding, was 27
days in 2017 as compared to 26 days in the same period in 2016.
Investing activities
used $5.9 million during the first six months of 2017, and used $8.1 million in the same period in 2016. Investing activities
for the first six months of 2017 include capital expenditures of $10.9 million offset by proceeds from the sale of certain former
branch location assets totaling $4.9 million.
Financing activities
used $54.2 million during the first six months of 2017 as compared to $59.4 million used in the same period in 2016. Cash used
in financing activities during the current year period primarily relates to common stock repurchases through our share repurchase
program of $38.5 million, cash dividends paid to our shareholders and holders of our Notes of $7.8 million, and the repurchase
of Notes totaling $7.3 million offset by proceeds from the exercise of stock options of $5.6 million. Cash used in financing activities
in the first six months of 2016 primarily relates to the repurchase of Notes totaling $42.1 million and common stock repurchases
through our share repurchase program of $15.9 million.
As of June 30, 2017,
our liquidity position, defined as cash on hand and available borrowing capacity, amounted to $348.2 million, representing a decrease
of $8.7 million compared to June 30, 2016 and an increase of $15.2 million compared to December 31, 2016. Total debt and capital
lease obligations amounted to $233.5 million as of June 30, 2017. As we continue to see a strong demand environment within the
trailer industry and excellence in operational performance across our business, we believe our liquidity is adequate to fund our
currently planned operations, working capital needs and capital expenditures for the remainder of 2017.
Capital Expenditures
Capital spending amounted
to $10.9 million for the first six months of 2017 and is anticipated to be in the range of $30 million to $35 million for 2017.
Capital spending for 2017 has been and is expected to continue to be primarily utilized to support growth, maintenance, productivity
improvements, and environmental, health and safety initiatives within our facilities.
Off-Balance Sheet Transactions
As of June 30, 2017,
we had approximately $5.2 million in operating lease commitments. We did not enter into any material off-balance sheet debt or
operating lease transactions during the quarter ended June 30, 2017.
Contractual Obligations and Commercial Commitments
A summary of payments
of our contractual obligations and commercial commitments, both on and off balance sheet, as of June 30, 2017 for the remaining
six months of 2017, and the calendar years thereafter are as follows (in thousands):
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Thereafter
|
|
|
Total
|
|
DEBT:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving Facility (due 2020)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Convertible Senior Notes (due 2018)
|
|
|
-
|
|
|
|
44,938
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
44,938
|
|
Term Loan Credit Facility (due 2022)
|
|
|
947
|
|
|
|
1,895
|
|
|
|
1,895
|
|
|
|
1,895
|
|
|
|
1,895
|
|
|
|
179,997
|
|
|
|
188,524
|
|
Other Debt
|
|
|
273
|
|
|
|
92
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
365
|
|
Capital Leases (including principal
and interest)
|
|
|
247
|
|
|
|
461
|
|
|
|
361
|
|
|
|
361
|
|
|
|
361
|
|
|
|
30
|
|
|
|
1,821
|
|
TOTAL DEBT
|
|
$
|
1,467
|
|
|
$
|
47,386
|
|
|
$
|
2,256
|
|
|
$
|
2,256
|
|
|
$
|
2,256
|
|
|
$
|
180,027
|
|
|
$
|
235,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
$
|
1,468
|
|
|
$
|
2,043
|
|
|
$
|
1,043
|
|
|
$
|
387
|
|
|
$
|
303
|
|
|
$
|
-
|
|
|
$
|
5,244
|
|
TOTAL OTHER
|
|
$
|
1,468
|
|
|
$
|
2,043
|
|
|
$
|
1,043
|
|
|
$
|
387
|
|
|
$
|
303
|
|
|
$
|
-
|
|
|
$
|
5,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMMERCIAL COMMITMENTS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of Credit
|
|
$
|
5,433
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,433
|
|
Raw Material Purchase Commitments
|
|
|
36,785
|
|
|
|
1,088
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
37,873
|
|
TOTAL OTHER COMMERCIAL COMMITMENTS
|
|
$
|
42,218
|
|
|
$
|
1,088
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
43,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL OBLIGATIONS
|
|
$
|
45,153
|
|
|
$
|
50,517
|
|
|
$
|
3,299
|
|
|
$
|
2,643
|
|
|
$
|
2,559
|
|
|
$
|
180,027
|
|
|
$
|
284,198
|
|
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. 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.
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 0.00%)
plus a margin of 2.75% or (ii) a base rate plus a margin of 1.75%. 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 $5.4 million issued in connection with workers compensation claims and surety bonds.
We have $37.9 million
in purchase commitments through March 2018 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 $762 million
at June 30, 2017 compared to $802 million at December 31, 2016 and $860 million at June 30, 2016. 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 six months of 2017, 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 maintain strong margins.
Recent estimates from industry analysts, ACT Research Company (“ACT”) and FTR Associates (“FTR”), forecast
trailer demand for 2017 and beyond to remain healthy. ACT currently estimates trailer shipments to be approximately 276,000 trailers
for 2017, representing a decrease of 3.4% as compared to 2016, and forecasting continued demand levels to be above replacement
demand into the foreseeable future with estimated demand for 2018 to be approximately 258,000 and annual average demand for the
four year period ending 2022 to be approximately 261,000 new trailers. FTR anticipates new trailer production to be approximately
274,000 new trailers in 2017, representing a decrease of 2.8% as compared to 2016 as well as projecting an increase in 2018 with
production totaling 285,000 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 2017 and into 2018 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 remain
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 a strong
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 estimate that for the
full year 2017 total new trailers shipped to be in the range of 53,000 to 56,000 units, which reflects trailer volumes 8% to 13%
lower than 2016 demand levels and is slightly more than the decrease in demand as projected by industry forecasters for the overall
trailer market. Combining our expectations that trailer demand will remain historically strong throughout the year and our focus
on continued productivity and cost optimization initiatives through all of our businesses, we expect to see strong operational
performance throughout the remainder of 2017.
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 impact of 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 in the marketplace.
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, 2016. There have been no material changes to the summary provided in that report.