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 (together with its subsidiaries, the “Company,” “Wabash,” “we,” “our,” or “us”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (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 ability to effectively integrate Supreme and realize expected synergies and benefits from the Supreme acquisition;
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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, including the impact of tariffs or other international trade developments;
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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, including our ability to attract and retain qualified personnel;
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our ability to develop and commercialize new products;
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acceptance of new technologies 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, 2018
. 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
three and six
months ended
June 30, 2019
and
2018
:
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Three Months Ended June 30,
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Six Months Ended June 30,
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2019
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2018
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2019
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2018
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Net sales
|
100.0
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%
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100.0
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%
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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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86.0
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%
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86.1
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%
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86.5
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%
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86.5
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%
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Gross profit
|
14.0
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%
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13.9
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%
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13.5
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%
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13.5
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%
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General and administrative expenses
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4.2
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%
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4.2
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%
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4.9
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%
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4.6
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%
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Selling expenses
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1.4
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%
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1.4
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%
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1.4
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%
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1.5
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%
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Amortization of intangibles
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0.8
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%
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0.8
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%
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0.9
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%
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0.9
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%
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Other operating expenses
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—
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%
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—
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%
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—
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%
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0.1
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%
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Income from operations
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7.6
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%
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7.5
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%
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6.3
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%
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6.4
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%
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Interest expense
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(1.1
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)%
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(1.2
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)%
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(1.2
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)%
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(1.3
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)%
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Other, net
|
0.2
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%
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0.7
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%
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0.1
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%
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1.1
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%
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Income before income taxes
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6.7
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%
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7.0
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%
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5.2
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%
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6.2
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%
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Income tax expense
|
1.7
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%
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1.8
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%
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1.2
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%
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1.4
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%
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Net income
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5.0
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%
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5.2
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%
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4.0
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%
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4.8
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%
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For the three month period ended
June 30, 2019
, we recorded net sales of
$626.1
million compared to
$612.7
million in the prior year period. Net sales for the three month period ended
June 30, 2019
increased
$13.4
million, or
2.2%
, compared to the prior year period, due primarily to 4.6% increase in truck body unit shipments, which contributed to a
$13.6
million increase in sales within our Final Mile Products segment. Gross profit margin increased to
14.0%
in the
second
quarter of
2019
compared to
13.9%
in the prior year period driven by the sale of the Aviation Truck Equipment business partially offset by an unfavorable sales mix in the Commercial Trailer Products and Final Mile Products reporting segments. We continue to be encouraged by the strong market demand within all of our reporting segments as well as the expectation that overall industry shipment and production levels will remain above replacement demand for the remainder of
2019
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, 2019
, selling, general and administrative expenses
increased
$0.7 million
as compared to the same period in
2018
. The increase was largely due to higher employee related costs, including employee incentive programs, compared to the same period in the prior year. As a percentage of net sales, selling, general and administrative expenses was
5.6%
in the
second
quarter of
2019
, consistent with 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, 2019
Compared with the
Three Months Ended June 30, 2018
Net Sales
Net sales in the
second
quarter of
2019
increased
$13.4
million, or
2.2%
, compared to the
second
quarter of
2018
. By business segment, prior to the elimination of intercompany sales, sales and related units sold were as follows (dollars in thousands):
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Three Months Ended June 30,
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Change
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2019
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2018
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Amount
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%
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(prior to elimination of intersegment sales)
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Sales by Segment
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Commercial Trailer Products
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$
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400,864
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$
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402,507
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$
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(1,643
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(0.4
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)%
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Diversified Products
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97,026
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94,085
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2,941
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3.1
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%
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Final Mile Products
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134,817
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121,209
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13,608
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11.2
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%
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Eliminations
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(6,654
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)
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(5,111
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)
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(1,543
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)
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Total
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$
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626,053
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$
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612,690
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$
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13,363
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2.2
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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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14,250
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15,650
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(1,400
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)
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(8.9
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)%
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Diversified Products
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750
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650
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|
100
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15.4
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%
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Total
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15,000
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16,300
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(1,300
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)
|
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(8.0
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)%
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|
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|
|
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|
Used Trailers
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(units)
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|
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|
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|
Commercial Trailer Products
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—
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250
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|
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(250
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)
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(100.0
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)%
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Diversified Products
|
25
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50
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(25
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)
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(50.0
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)%
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Total
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25
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300
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(275
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)
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(91.7
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)%
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Commercial Trailer Products segment sales, prior to the elimination of intersegment sales, were
$400.9 million
for the
second
quarter of
2019
, a decrease of
$1.6 million
, or
0.4%
, compared to the
second
quarter of
2018
. New trailers shipped during the
second
quarter of
2019
totaled
14,250
trailers compared to
15,650
trailers in the prior year period, an
8.9%
decrease. The decrease in net sales is primarily attributable to selling approximately 1,400 fewer new trailers and 250 fewer used trailers compared to the same period in
2018
. Partially offsetting the lower new and used trailer sales volumes was the impact of pricing efforts undertaken in response to increases in commodity and labor costs experienced in 2018 and a $1.6 million increase in parts and service revenue compared to the
second
quarter of
2018
.
Diversified Products segment sales, prior to the elimination of intersegment sales, were
$97.0 million
for the
second
quarter of
2019
, an increase of
$2.9 million
, or
3.1%
, compared to the
second
quarter of
2018
. New trailer sales increased $11.7 million, or 31.2%, from the prior year period driven by higher demand for tank trailers compared to the
second
quarter of
2018
. New trailer shipments for the
second
quarter of
2019
totaled
750
units compared to
650
units in the prior year period. Equipment sales decreased $6.0 million, or 25.0%, compared to the prior year period mostly due to $7.9 million decrease in sales as a result of the sale of the Aviation and Truck Equipment business in January 2019. Sales of our parts and service product offerings totaled $29.0 million for the
second
quarter of
2019
, a decrease of $2.9 million or 9.1% as compared to the prior year period.
Final Mile Products segment sales, prior to the elimination of intersegment sales, were
$134.8 million
in the
second
quarter of
2019
, an increase of
$13.6 million
, or
11.2%
, compared to the
second
quarter of
2018
. New truck body sales increased $11.8 million, or 9.9%, from the prior year period driven by a 5.1% increase in truck body unit shipments in the
second
quarter of
2019
, compared to the prior year period.
Cost of Sales
Cost of sales was
$538.4
million in the
second
quarter of
2019
, an increase of $11.0 million, or 2.1%, compared to the prior year period. Cost of sales is comprised of material costs, a variable expense, and other manufacturing costs, comprised of both fixed and variable expenses, including direct and indirect labor, outbound freight, and overhead expenses.
Commercial Trailer Products segment cost of sales was $354.0 million in the
second
quarter of
2019
, a decrease of $1.0 million, or 2.9%, compared to the prior year period. The decrease was primarily driven by a $3.0 million decrease in materials costs due to lower new trailer sales levels. Other manufacturing costs increased $2.0 million as compared to the prior year period due to an unfavorable sales mix.
Diversified Products segment cost of sales was $76.9 million in the
second
quarter of
2019
, a decrease of $0.5 million, or 0.6%, compared to the prior period. The decrease in cost of sales is primarily due to the sale of the Aviation Truck Equipment business, partially offset by higher sales volumes.
Final Mile Product segment cost of sales was $113.5 million in
second
quarter of
2019
, an increase of $13.2 million, or 13.2%, compared to the prior period. The increase was primarily driven by a $10.4 million increase in materials costs and a $2.8 million increase in other manufacturing costs related to increased sales volumes and product mix.
Gross Profit
Gross profit was
$87.7 million
in the
second
quarter of
2019
, an increase of
$2.3 million
from the prior year period. Gross profit as a percentage of sales was
14.0%
for the
second
quarter of
2019
, compared to
13.9%
for the same period in
2018
. Gross profit by segment was as follows (dollars in thousands):
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|
Three Months Ended June 30,
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Change
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|
2019
|
|
2018
|
|
Amount
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%
|
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Gross Profit by Segment
|
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|
Commercial Trailer Products
|
$
|
46,906
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|
|
$
|
47,513
|
|
|
$
|
(607
|
)
|
|
(1.3
|
)%
|
|
Diversified Products
|
20,123
|
|
|
16,692
|
|
|
3,431
|
|
|
20.6
|
%
|
|
Final Mile Products
|
21,289
|
|
|
20,923
|
|
|
366
|
|
|
1.7
|
%
|
|
Corporate and Eliminations
|
(668
|
)
|
|
187
|
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|
(855
|
)
|
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|
|
Total
|
$
|
87,650
|
|
|
$
|
85,315
|
|
|
$
|
2,335
|
|
|
2.7
|
%
|
Commercial Trailer Products segment gross profit was
$46.9 million
for the
second
quarter of
2019
compared to
$47.5 million
for the
second
quarter of
2018
. Gross profit, prior to the elimination of intersegment sales, as a percentage of net sales, was
11.7%
in the
second
quarter of
2019
compared to
11.8%
in the
2018
period. The decreases in gross profit is attributable to lower sales volumes. The decrease in gross profit margin, while relatively flat between periods, is primarily due to an unfavorable sales mix.
Diversified Products segment gross profit was
$20.1 million
for the
second
quarter of
2019
compared to
$16.7 million
in the same quarter of
2018
. Gross profit, prior to the elimination of intersegment sales, as a percentage of net sales, was
20.7%
in the
second
quarter of
2019
compared to
17.7%
in the
2018
period. The increase in gross profit as a percentage of net sales compared to the prior year period was primarily driven by the divestiture of the Aviation and Truck Equipment business completed early in the first quarter of 2019, a favorable sales mix and improved operational efficiencies compared to the prior year period.
Final Mile Products segment gross profit was
$21.3 million
for the
second
quarter of
2019
compared to
$20.9 million
in the same quarter of
2018
. Gross profit, prior to the elimination of intersegment sales, as a percentage of sales, was
15.8%
in the
second
quarter of
2019
compared to
17.3%
in the
2018
period. The decrease in gross profit as a percentage of net sales compared to the prior year period was primarily driven by higher commodity and component costs and an unfavorable sales mix.
General and Administrative Expenses
General and administrative expenses for the
second
quarter of
2019
increased
$0.7 million
, or
2.8%
, from the prior year period. The increase was largely due to $0.7 million of higher employee related costs, including benefits and incentive programs, compared to the same period in the prior year. As a percentage of net sales, general and administrative expenses were
4.2%
for the
second
quarter of
2019
, consistent with the
second
quarter of
2018
.
Selling Expenses
Selling expenses were
$8.5 million
in the
second
quarter of
2019
, a decrease of $0.1 million, or 0.7%, compared to the prior year period. The decrease was largely due to lower selling expenses as a result of the sale of the Aviation and Truck Equipment business in January 2019. As a percentage of net sales, selling expenses were
1.4%
for the
second
quarter of
2019
, consistent the
second
quarter of
2018
.
Amortization of Intangibles
Amortization of intangibles was
$5.1 million
for the
second
quarter of
2019
compared to
$4.9 million
in the prior year period. Amortization of intangibles for both periods primarily includes amortization expense recognized for intangible assets recorded from the acquisition of Walker in May 2012, certain assets acquired from Beall in February 2013, and Supreme in September 2017.
Other Income (Expense)
Interest expense
for the
second
quarter of
2019
totaled
$7.0 million
compared to
$7.2 million
in the
second
quarter of
2018
. Interest expense relates to interest and non-cash accretion charges on our Term Loan Credit Agreement and Senior Notes. The decrease from the previous year period is primarily due to the retirement of the Convertible Notes in 2018.
Other, net
for the
second
quarter of
2019
represented income of
$1.1 million
as compared to income of
$4.0 million
for the prior year period. Income for the current year period is primarily related to interest income. Income for the prior year period is primarily related to the gains recognized on the sale of former branch locations in the
second
quarter of 2018.
Income Taxes
We recognized income tax expense of
$10.6 million
in the
second
quarter
2019
compared to
$11.0 million
for the same period in the prior year. The effective tax rate for the
second
quarter of
2019
and
2018
were
25.6%
and
25.7%
, respectively. These effective tax rates differ from the U.S. Federal statutory rate of 21% primarily due to the impact of state and local taxes and recognition of excess tax benefits on share-based compensation.
Six Months Ended June 30, 2019
Compared with the
Six Months Ended June 30, 2018
Net Sales
Net sales in the first
six
months of
2019
increased $55.2 million, or 5.0%, compared to the first
six
months of
2018
. 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,
|
|
Change
|
|
|
2019
|
|
2018
|
|
Amount
|
|
%
|
|
|
(prior to elimination of intersegment sales)
|
|
Sales by Segment
|
|
|
|
|
|
|
|
|
Commercial Trailer Products
|
$
|
741,909
|
|
|
$
|
729,930
|
|
|
$
|
11,979
|
|
|
1.6
|
%
|
|
Diversified Products
|
196,674
|
|
|
189,288
|
|
|
7,386
|
|
|
3.9
|
%
|
|
Final Mile Products
|
235,666
|
|
|
196,668
|
|
|
38,998
|
|
|
19.8
|
%
|
|
Eliminations
|
(15,022
|
)
|
|
(11,877
|
)
|
|
(3,145
|
)
|
|
|
|
Total
|
$
|
1,159,227
|
|
|
$
|
1,104,009
|
|
|
$
|
55,218
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
New Trailer Shipments
|
(units)
|
|
|
|
|
|
Commercial Trailer Products
|
26,650
|
|
|
28,300
|
|
|
(1,650
|
)
|
|
(5.8
|
)%
|
|
Diversified Products
|
1,450
|
|
|
1,200
|
|
|
250
|
|
|
20.8
|
%
|
|
Total
|
28,100
|
|
|
29,500
|
|
|
(1,400
|
)
|
|
(4.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
Used Trailer Shipments
|
(units)
|
|
|
|
|
|
Commercial Trailer Products
|
50
|
|
|
750
|
|
|
(700
|
)
|
|
(93.3
|
)%
|
|
Diversified Products
|
50
|
|
|
50
|
|
|
—
|
|
|
—
|
%
|
|
Total
|
100
|
|
|
800
|
|
|
(700
|
)
|
|
(87.5
|
)%
|
Commercial Trailer Products segment sales prior to the elimination of intersegment sales were $741.9 million for the first
six
months of
2019
, an increase of $12.0 million, or 1.6%, compared to the first
six
months of
2018
. Trailers shipped during the first
six
months of
2019
totaled 26,650 trailers compared to 28,300 trailers in the prior year period, a 5.8% decrease. Pricing actions taken to offset the increased cost of materials resulted in a $16.2 million increase in new trailer sales despite the decrease in shipments compared to the prior year period. Parts and service revenue for the
six
-month period of
2019
totaled $21.0 million, an increase of $3.3 million or 18.5% from the prior year period due to stronger focus on aftermarket parts and services. Used trailer sales decreased $6.8 million compared to the prior year period primarily due to a 700 unit decrease in used trailer shipments in the first
six
months of
2019
compared to the prior year period.
Diversified Products segment sales prior to the elimination of intersegment sales were $196.7 million for the first
six
months of
2019
, an increase of $7.4 million, or 3.9%, compared to the same period of
2018
. Trailers shipped during the first
six
months of
2019
totaled 1,450 trailers compared to 1,200 trailers in the prior year period, a 20.8% increase. The increase in new trailer shipments compared to the prior year period resulted in a $23.7 million increase in sales. Equipment sales decreased $14.9 million, or 29.7%, compared to the prior year period. Parts and service sales decreased $1.0 million, or 1.4%, compared to the prior year
period. Decreases in equipment and parts and service sales are primarily due to the divestiture of the Aviation Truck Equipment business in January 2019.
Final Mile Products segment sales, prior to the elimination of intersegment sales, were $235.7 million for the first
six
months of
2019
, an increase of $39.0 million, or 19.8% from the first
six
months of
2018
. Increased truck body unit shipments of 19.0% drove a $36.2 million increase in equipment sales compared to the prior year period.
Cost of Sales
Cost of sales was $1,002.9 million in the first
six
months of
2019
, an increase of $48.3 million, or 5.1%, compared to the prior year period. Cost of sales is comprised of material costs, a variable expense, and other manufacturing costs, comprised of both fixed and variable expenses, including direct and indirect labor, outbound freight, and overhead expenses.
Commercial Trailer Products segment cost of sales was $659.0 million in the first
six
months of
2019
, an increase of $13.1 million, or 2.0%, compared to the prior year period. The increase was primarily driven by a $9.2 million increase in materials costs due to material cost inflation as compared to the prior year period. Other manufacturing costs increased $3.9 million as compared to the prior year period due to higher labor costs.
Diversified Products segment cost of sales was $156.5 million in the first
six
months of
2019
, an increase of $1.1 million, or 0.7%, compared to the prior period. The increase was primarily due to higher material and labor costs due to higher sales volumes and material cost inflation compared to the prior year period. Partially offsetting these increases was a decrease in cost of sales as a result of the sale of the Aviation and Truck Equipment business.
Final Mile Product segment cost of sales was $200.9 million in first
six
months of
2019
, an increase of $36.6 million, or 22.3% compared to the prior year period. The increase was primarily driven by increased sales volumes and an unfavorable product mix.
Gross Profit
Gross profit was $156.3 million in the first
six
months of
2019
, an increase of $6.9 million from the prior year period. Gross profit as a percentage of sales was 13.5% for the first
six
months, consistent with the same period in
2018
. Gross profit by segment was as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
Change
|
|
|
2019
|
|
2018
|
|
$
|
|
%
|
|
Gross Profit by Segment
|
|
|
|
|
|
|
|
|
Commercial Trailer Products
|
$
|
82,846
|
|
|
$
|
84,036
|
|
|
$
|
(1,190
|
)
|
|
(1.4
|
)%
|
|
Diversified Products
|
40,222
|
|
|
33,990
|
|
|
6,232
|
|
|
18.3
|
%
|
|
Final Mile Products
|
34,813
|
|
|
32,455
|
|
|
2,358
|
|
|
7.3
|
%
|
|
Corporate
|
(1,541
|
)
|
|
(1,048
|
)
|
|
(493
|
)
|
|
|
|
Total
|
$
|
156,340
|
|
|
$
|
149,433
|
|
|
$
|
6,907
|
|
|
4.6
|
%
|
Commercial Trailer Products segment gross profit was $82.8 million for the first
six
months of
2019
compared to $84.0 million for the prior year period. Gross profit prior to the elimination of intersegment sales, as a percentage of net sales, was 11.2% in
2019
compared to 11.5% in the prior period. The decreases in gross profit and gross profit margin as compared to the prior year period were primarily driven by higher commodity and component costs as well as higher labor costs, including higher levels of overtime and lower productivity.
Diversified Products segment gross profit was $40.2 million for the first half of
2019
compared to $34.0 million in the same period of
2018
. Gross profit prior to the elimination of intersegment sales, as a percentage of net sales, was 20.5% in the
2019
period compared to 18.0% in the prior period. The increase in gross profit as a percentage of net sales compared to the prior year period was due primarily driven by improved operational efficiencies compared to the prior year period, as well as the divestiture of the Aviation Truck Equipment business in January 2019.
Final Mile Products segment gross profit was $34.8 million for the first
six
months of
2019
compared to $32.5 million in the same period of 2018. Gross profit, as a percentage of sales, was 14.8% in the first
six
months of
2019
, compared to 16.5% in the prior year period. The decrease in gross profit as a percentage of net sales compared to the prior year period was primarily driven by higher commodity and component costs as well as higher labor costs, and unfavorable product mix.
General and Administrative Expenses
General and administrative expenses for the first
six
months of
2019
increased $5.8 million, or 11.3%, from the prior year period. The increase was largely due to a $2.1 million loss on disposal of machinery and equipment in our Commercial Trailer Products and Diversified Products reportable segments, as well as $1.3 million of higher employee related costs, including benefits and incentive programs, compared to the same period in the prior year. As a percentage of sales, general and administrative expenses were 4.9% for the
2019
period as compared to 4.6% for the same period of
2018
.
Selling Expenses
Selling expenses were $16.7 million in the first
six
months of
2019
, a decrease of $0.2 million, or 1.1%, compared to the prior year period. The decrease was largely due to the divestiture of the Aviation Truck Equipment business, partially offset by an increase of $0.3 million in employee related costs, including benefits and incentive programs, and a $0.3 million increase in advertising and promotion efforts. As a percentage of net sales, selling expenses were 1.4% for the
2019
period as compared to 1.5% for the same period of
2018
.
Amortization of Intangibles
Amortization of intangibles was $10.2 million for the first
six
months of
2019
compared to $9.9 million in the prior year period. Amortization of intangibles for the current year period were the result of expenses recognized for intangible assets recorded from the acquisitions of Walker in May 2012, certain assets of Beall in February 2013, and Supreme in September 2017.
Other Income (Expense)
Interest expense
for the first
six
months of
2019
totaled $14.1 million compared to $14.6 million in the prior year period. Interest expense for the current year period is primarily related to interest and non-cash accretion charges on our Term Loan Credit Agreement and Senior Notes. The decrease from the previous year period is due to the retirement of the Convertible Notes completed in 2018.
Other, net
for the first
six
months of
2019
represented income of $0.9 million as compared to income of $12.0 million for the prior year period. The current and previous year periods include gains on the sale of former retail branch locations.
Income Taxes
The Company recognized income tax expense of $13.8 million in the first
six
months of
2019
compared to $15.9 million for the same period in the prior year. The effective tax rate for the first
six
months of
2019
and
2018
were
23.2%
and
23.0%
, respectively. These effective tax rates differ from the U.S. Federal statutory rate of 21% primarily due to the impact of state and local taxes and recognition of excess tax benefits on share-based compensation.
Liquidity and Capital Resources
Capital Structure
Our capital structure is comprised of a mix of debt and equity. As of
June 30, 2019
, our debt to equity ratio was approximately 1.0:1.0. 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. In the first
six
months of
2019
we made voluntary prepayments totaling $15.0 million against our Term Loan Credit Agreement and paid dividends of $9.1 million. For the remainder of
2019
, 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 Revolving Credit Agreement.
Debt Agreements and Related Amendments
Senior Notes
On September 26, 2017, we issued Senior Notes due 2025 (the “Senior Notes”) with an aggregate principal amount of $325 million. The Senior Notes bear interest at the rate of 5.50% per annum from the date of issuance, and will pay interest semi-annually in cash on April 1 and October 1 of each year, beginning on April 1, 2018. We used the net proceeds of $318.9 million from the sale of the Senior Notes to finance a portion of the acquisition of Supreme and to pay related fees and expenses. The Senior Notes are guaranteed on a senior unsecured basis by all of our direct and indirect existing and future domestic restricted subsidiaries, subject to certain restrictions. The Senior Notes and related guarantees are our and our guarantors’ general unsecured senior obligations and are subordinate to all of our and our guarantors’ existing and future secured debt to the extent of the assets securing that secured obligation. In addition, the Senior Notes are structurally subordinate to any of existing and future debt of any of our subsidiaries that are not guarantors, to the extent of the assets of those subsidiaries. The Senior Notes will mature on October 1, 2025.
The indenture for the Senior Notes restricts our ability and the ability of certain of our subsidiaries, subject to certain exceptions and qualifications, to: (i) incur additional indebtedness; (ii) pay dividends or make other distributions in respect of, or repurchase or redeem, our capital stock or with respect to any other interest or participation in, or measured by, our profits; (iii) make loans and certain investments; (iv) sell assets; (v) create or incur liens; (vi) enter into transactions with affiliates; and (vii) consolidate, merge or sell all or substantially all of our assets.
The indenture for the Senior Notes contains customary events of default, including payment defaults, breaches of covenants, failure to pay certain judgments and certain events of bankruptcy, insolvency and reorganization. As of
June 30, 2019
, we were in compliance with all covenants.
Contractual coupon interest expense and accretion of discount and fees for the Senior Notes for the three months ended
June 30, 2019
, and
2018
was
$4.6 million
in each period, and
$9.2 million
for each six-month period, and is included in
Interest Expense
on our Condensed Consolidated Statements of Operations.
Revolving Credit Agreement
On December 21, 2018, we entered into the Second Amended and Restated Credit Agreement (the “Revolving Credit Agreement”), among us, certain of our subsidiaries as borrowers (together with us, the “Borrowers”), the lenders from time to time party thereto, Wells Fargo Capital Finance, LLC and Citizens Business Capital, which amended and restated our existing amended and restated revolving credit agreement, dated as of May 8, 2012.
The Revolving Credit Agreement is guaranteed by certain of our subsidiaries (the “Revolver Guarantors”) and is secured by (i) first priority security interests 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 (A) equity interests of each direct subsidiary held by the Borrowers and each Revolver Guarantors, and (B) substantially all other tangible and intangible assets of the Borrowers and the Revolver Guarantors, excluding real property (the “Term Priority Collateral”).
The Revolving Credit Agreement has a scheduled maturity date of December 21, 2023, subject to certain springing maturity events.
U
nder the Revolving Credit Agreement, the lenders agree to make available to us a $175 million revolving credit facility. We have the option to increase the total commitment under the facility to up to $275 million, subject to certain conditions. Subject to availability, the Revolving Credit Agreement provides for a letter of credit subfacility in an amount not in excess of $15 million, and allows for swingline loans in an amount not in excess of $17.5 million. Outstanding borrowings under the Revolving Credit agreement bear interest at an annual rate, at the Borrowers’ election, equal to (i) LIBOR plus a margin ranging from 1.25% to 1.75% or (ii) a base rate plus a margin ranging from 0.25% to 0.75%, in each case depending upon the monthly average excess availability under the revolving loan facility. The Borrowers are required to pay a monthly unused line fee equal to 0.20% times the average daily unused availability along with other customary fees and expenses thereunder.
The Revolving Credit Agreement contains customary covenants limiting our ability and certain of our affiliates to, among other things, pay cash dividends, incur debt or liens, redeem or repurchase stock, enter into transactions with affiliates, merge, dissolve, repay subordinated indebtedness, make investments and dispose of assets. In addition, we will be required to maintain a minimum fixed charge coverage ratio of not less than 1.0 to 1.0 as of the end of any period of 12 fiscal months (commencing with the month ending December 31, 2018) when excess availability under the Revolving Credit Agreement is less than 10% of the total revolving commitment.
As of
June 30, 2019
, we were in compliance with all covenants of the Credit Agreement.
Term Loan Credit Agreement
In May 2012, we entered into the Term Loan Credit Agreement (as amended, the “Term Loan Credit Agreement”), which provides for, among other things, (x) a senior secured term loan of $188.0 million that matures on March 19, 2022, subject to certain springing maturity events (the “Term Loans”), and (y) an uncommitted accordion feature to provide for additional senior secured term loans of up to $75 million plus an unlimited amount provided that the senior secured leverage ratio would not exceed 3.00 to 1.00, subject to certain conditions (the “Term Loan Facility”).
On November 17, 2017, we entered into Amendment No. 5 to the Term Loan Credit Agreement (“Amendment No. 5”). As of the Amendment No. 5 date, $188.0 million of the Term Loans were outstanding. Under Amendment No. 5, the lenders agreed to provide us term loans in the same aggregate principal amount of the outstanding Term Loans, which were used to refinance the outstanding Term Loans.
The Term Loan Credit Agreement is guaranteed by certain of our subsidiaries, 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.
The Term Loan Credit Agreement 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. As of
June 30, 2019
, we were in compliance with all covenants.
For the three-month periods ended
June 30, 2019
and
2018
, under the Term Loan Credit Agreement we paid interest of
$2.2 million
and
$2.0 million
, respectively, and principal of
$15.0 million
and
$0.5 million
during each period. For the six-month periods ended
June 30, 2019
and
2018
, we paid interest of
$4.4 million
and
$3.9 million
, respectively, and principal of
$15.5 million
and
$0.9 million
in each period. We recognized a loss on debt extinguishment of
$0.1 million
in connection with the prepayment of principal in the second quarter of 2019, included in
Other, net
in the Condensed Consolidated Statement of Operations. As of
June 30, 2019
, we had
$170.2 million
outstanding under the Term Loan Credit Agreement, of which none was classified as current on our Condensed Consolidated Balance Sheet.
For each three-month period ended
June 30, 2019
and
2018
, 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. For each six-month period ended
June 30, 2019
and
2018
, we incurred charges of
$0.1 million
for amortization of fees and original issuance discount.
Cash Flows
Cash provided by operating activities for the first six months of 2019 totaled $61.0 million, compared to $40.5 million during the same period in 2018. The cash provided by operations during the current year period was the result of net income adjusted for various non-cash activities including depreciation, amortization, loss on the sale of assets, deferred taxes, stock-based compensation, accretion of debt discount, and a $11.4 million increase in working capital. Changes in key working capital accounts for 2019 and 2018 are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2019
|
|
2018
|
|
Change
|
|
Source (Use) of cash:
|
|
|
|
|
|
|
Accounts receivable
|
$
|
10,886
|
|
|
$
|
(46,564
|
)
|
|
$
|
57,450
|
|
|
Inventories
|
(80,163
|
)
|
|
(56,057
|
)
|
|
(24,106
|
)
|
|
Accounts payable and accrued liabilities
|
58,210
|
|
|
72,792
|
|
|
(14,582
|
)
|
|
Net use of cash
|
$
|
(11,067
|
)
|
|
$
|
(29,829
|
)
|
|
$
|
18,762
|
|
Accounts receivable decreased by $10.9 million in the first six months of 2019 as compared to a $46.6 million increase 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 25 days in 2019 as compared to 29 days in the same period in 2018. The decrease in accounts receivable during the first six months of 2019 was primarily due to strong customer collections during the quarter. Inventory increased by $80.2 million during the first six months of 2019 as compared to $56.1 million in the 2018 period. Our inventory turns, a commonly used measure of working capital efficiency that measures how quickly inventory turns per year, was approximately 8 times in both the 2019 and 2018 periods. The increase in inventory for the 2019 period was primarily due to higher finished goods and raw materials inventory resulting from increased demand for the first six months of 2019, as well as continued strong demand into the third quarter. Accounts payable and accrued liabilities increased by $58.2 million in 2019 compared to an increase of $72.8 million for the same period in 2018. Days payable outstanding, a measure of working capital efficiency that measures the amount of time a payable is outstanding, was 34 days in 2019 as compared to 31 days in the same period in 2018. The increase during the first six months of 2019 was primarily due to continued strong production levels and purchasing activities required to meet current demand.
Investing activities used $15.0 million during the first six months of 2019, as compared to providing $8.4 million in the same period in 2018. Investing activities for the first six months of 2019 include capital expenditures of $15.0 million. Investing activities for the prior year period were primarily related to proceeds from the sale of certain branch location assets totaling $19.5 million, partially offset by capital expenditures of $11.1 million.
Financing activities used $38.6 million during the first six months of 2019 as compared to $111.1 million in the same period in 2018. Cash used in financing activities during the current year period primarily relates to principal payments under the term loan credit facility of $15.5 million, common stock repurchases of $13.9 million, and cash dividends paid to our shareholders of $9.1 million. Cash used in financing activities in the first six months of 2018 primarily relates to the repurchase of Convertible Notes totaling $80.2 million, common stock repurchases of $21.4 million and cash dividends paid to our shareholders of $9.3 million.
As of June 30, 2019, our liquidity position, defined as cash on hand and available borrowing capacity, amounted to $307.4 million, representing an increase of $19.7 million compared to June 30, 2018 and an increase of $7.9 million compared to December 31,
2018. Total debt and finance lease obligations amounted to $496.1 million as of June 30, 2019. As we continue to see a strong demand environment within the trailer industry and excellence in operational performance across all of our business segments, we believe our liquidity is adequate to fund our currently planned operations, working capital needs and capital expenditures for the remainder of 2019.
Capital Expenditures
Capital spending amounted to $15.0 million for the first six months of 2019 and is anticipated to be approximately $40 million for 2019. Capital spending for 2019 has been and is expected to continue to be primarily utilized to support maintenance, growth, and productivity improvement initiatives within our facilities.
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, 2019 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
|
Total
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving Facility (due 2020)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Term Loan Credit Facility (due 2022)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
170,228
|
|
|
—
|
|
|
—
|
|
|
170,228
|
|
|
Senior Notes (due 2025)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
325,000
|
|
|
325,000
|
|
|
Finance Leases (including principal and interest)
|
|
180
|
|
|
361
|
|
|
361
|
|
|
30
|
|
|
|
|
—
|
|
|
932
|
|
|
Total debt
|
|
180
|
|
|
361
|
|
|
361
|
|
|
170,258
|
|
|
—
|
|
|
325,000
|
|
|
496,160
|
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
2,153
|
|
|
3,621
|
|
|
3,032
|
|
|
1,797
|
|
|
1,594
|
|
|
2,008
|
|
|
14,205
|
|
|
Total other
|
|
2,153
|
|
|
3,621
|
|
|
3,032
|
|
|
1,797
|
|
|
1,594
|
|
|
2,008
|
|
|
14,205
|
|
|
Other commercial commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of Credit
|
|
7,769
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,769
|
|
|
Raw Material Purchase Commitments
|
|
102,623
|
|
|
5,129
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
107,752
|
|
|
Chassis Converter Pool Agreements
|
|
16,410
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16,410
|
|
|
Total other commercial commitments
|
|
126,802
|
|
|
5,129
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
131,931
|
|
|
Total obligations
|
|
$
|
129,135
|
|
|
$
|
9,111
|
|
|
$
|
3,393
|
|
|
$
|
172,055
|
|
|
$
|
1,594
|
|
|
$
|
327,008
|
|
|
$
|
642,296
|
|
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 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 2.25% or (ii) a base rate plus a margin of 1.25%. The Term Loan Credit Agreement matures in March 2022, subject to certain springing maturity events.
Scheduled payments for our Senior Notes exclude interest payments. The Notes bear interest at the rate of 5.5% per annum from the date of issuance, payable semi-annually on April 1 and October 1.
Finance leases represent future minimum lease payments including interest. Operating leases represent the total future minimum lease payments.
We have standby letters of credit totaling $7.8 million issued in connection with workers compensation claims and surety bonds.
We have $107.8 million in purchase commitments with our suppliers and through financial derivatives through March 2020 for various raw material commodities, including aluminum, steel, nickel and polyethylene as well as other raw material components which are within normal production requirements.
We, through our subsidiary Supreme, obtain most vehicle chassis for our specialized vehicle products directly from the chassis manufacturers under converter pool agreements. Chassis are obtained from the manufacturers based on orders from customers, and to a lesser extent, for unallocated orders. Although each manufacturer’s agreement has different terms and conditions, the
agreements generally state that the manufacturer will provide a supply of chassis to be maintained from time to time at our various facilities with the condition that we will store such chassis and will not move, sell, or otherwise dispose of such chassis except under the terms of the agreement. The manufacturer transfers the chassis to us on a “restricted basis,” retaining the sole authority to authorize commencement of work on the chassis and to make certain other decisions with respect to the chassis including the terms and pricing of sales of the chassis to the manufacturer’s dealers. The manufacturer also does not transfer the certificate of origin to us nor permit us to sell or transfer the chassis to anyone other than the manufacturer (for ultimate resale to a dealer). Although we are party to related finance agreements with manufacturers, we have not historically settled, nor expect to in the future settle, any related obligations in cash. Instead, the obligation is settled by the manufacturer upon reassignment of the chassis to an accepted dealer, and the dealer is invoiced for the chassis by the manufacturer. Accordingly, as of June 30, 2019 our outstanding chassis converter pool with the manufacturer totaled $11.7 million and we have included this financing agreement on our consolidated balance sheets within
prepaid expenses and other
and
other accrued liabilities
. All other chassis programs through our Supreme subsidiary are handled as consigned inventory belonging to the manufacturer and totaled approximately $4.7 million. Under these agreements, if the chassis is not delivered to a customer within a specified time frame we are required to pay a finance or storage charge on the chassis. Additionally, we receives finance support funds from the manufacturer when the chassis are assigned into our chassis pool. Typically, chassis are converted and delivered to customers within 90 days of the receipt of the chassis.
Backlog
Orders that have been confirmed by customers in writing, have defined delivery time frames 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, terms or cancellation. Our backlog of orders was $1.2 billion at
June 30, 2019
compared to $1.8 billion at
December 31, 2018
and $1.2 billion at
June 30, 2018
. We expect to complete the majority of our backlog orders as of
June 30, 2019
within 12 months of this date.
Outlook
The demand environment for trailers remained strong through the
second
quarter of
2019
, as evidenced by our strong backlog and a trailer demand forecast by industry forecasters above replacement demand levels for the next several years. Recent estimates from industry analysts, ACT Research Company (“ACT”) and FTR Associates (“FTR”), forecast trailer demand for
2019
and beyond to remain healthy. ACT currently estimates trailer production to be approximately 330,600 trailers for
2019
, representing an increase of 2.4% as compared to
2018
, and forecasting continued demand levels to be above replacement demand into the foreseeable future with estimated demand for
2020
to be approximately 270,900 and annual average demand for the four-year period ending
2024
to be approximately 271,300 new trailers. FTR anticipates new trailer production to be approximately 320,000 new trailers in
2019
, representing an increase of 0.9% as compared to
2018
, and projecting a decrease in
2020
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
2019
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 have had and may continue to 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, axles, suspensions, aluminum extrusions, specialty steel coil, and chassis. 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 our extensive dealer network to market and sell our products. Continuing to identify attractive opportunities to leverage our core competencies, proprietary technology and core manufacturing expertise into new applications and end markets enables us to deliver greater value to our customers and stakeholders.
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, 2018
. There have been no material changes to the summary provided in that report.