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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
[X] THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
OR
TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF
[ ] THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ___________
COMMISSION FILE NUMBER: 1-10883
WABASH NATIONAL CORPORATION
---------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-1375208
-------- ----------
(State of Incorporation) (IRS Employer
Identification Number)
[WABASH NATIONAL LOGO]
1000 Sagamore Parkway South,
Lafayette, Indiana 47905
------------------ -----
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code: (765) 771-5300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months and has been subject to such filing requirements
for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
The number of shares of common stock outstanding at October 22, 2004 was
27,352,368.
1
WABASH NATIONAL CORPORATION
INDEX
FORM 10-Q
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2004 and December 31, 2003 3
Condensed Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2004 and 2003 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
Item 4. Controls and Procedures 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 20
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits 25
Signatures 26
2
WABASH NATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
2004 2003
------------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 14,832 $ 12,552
Accounts receivable, net 134,041 66,641
Current portion of finance contracts 2,680 4,727
Inventories 113,120 84,996
Prepaid expenses and other 7,400 10,249
--------- ---------
Total current assets 272,073 179,165
PROPERTY, PLANT AND EQUIPMENT, net 125,893 130,594
EQUIPMENT LEASED TO OTHERS, net 15,354 21,187
FINANCE CONTRACTS, net of current portion 3,785 6,155
GOODWILL, net 36,063 36,045
OTHER ASSETS 16,589 23,890
--------- ---------
$ 469,757 $ 397,036
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 8,729 $ 7,337
Accounts payable 89,348 68,437
Other accrued liabilities 53,341 61,421
--------- ---------
Total current liabilities 151,418 137,195
LONG-TERM DEBT, net of current maturities 234,234 219,979
OTHER NONCURRENT LIABILITIES AND CONTINGENCIES 9,476 17,700
STOCKHOLDERS' EQUITY:
Preferred stock, 25,000,000 shares authorized, 0 shares issued and outstanding - -
Common stock 75,000,000 shares authorized, $0.01 par value, 27,350,725
and 26,849,257 shares issued and outstanding, respectively 274 269
Additional paid-in capital 249,408 242,682
Retained deficit (175,087) (220,502)
Accumulated other comprehensive income 1,313 992
Treasury stock at cost, 59,600 common shares (1,279) (1,279)
--------- ---------
Total stockholders' equity 74,629 22,162
--------- ---------
$ 469,757 $ 397,036
========= =========
See Notes to Condensed Consolidated Financial Statements.
3
WABASH NATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
2004 2003 2004 2003
-------- -------- -------- --------
NET SALES $277,243 $215,450 $753,739 $668,189
COST OF SALES 240,321 198,438 657,060 603,366
LOSS ON ASSET IMPAIRMENT - - - 28,500
-------- -------- ------- --------
Gross profit 36,922 17,012 96,679 36,323
GENERAL AND ADMINISTRATIVE EXPENSES 10,389 11,792 31,073 32,318
SELLING EXPENSES 3,775 4,627 11,401 15,555
-------- -------- ------- --------
Income (loss) from operations 22,758 593 54,205 (11,550)
OTHER INCOME (EXPENSE):
Interest expense (2,944) (8,746) (8,610) (27,630)
Foreign exchange gains and losses, net 486 (271) (59) 5,318
Loss on debt extinguishment - (18,940) - (18,940)
Other, net 414 (2,277) 798 (2,677)
-------- -------- ------- --------
Income (loss) before income taxes 20,714 (29,641) 46,334 (55,479)
INCOME TAX PROVISION 420 - 919 -
-------- -------- ------- --------
Net income (loss) 20,294 (29,641) 45,415 (55,479)
PREFERRED STOCK DIVIDENDS - 264 - 792
-------- -------- ------- --------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $ 20,294 $(29,905) $45,415 $(56,271)
======== ======== ======= ========
BASIC NET INCOME (LOSS) PER SHARE $ 0.74 $ (1.16) $ 1.67 $ (2.19)
======== ======== ======= ========
DILUTED NET INCOME (LOSS) PER SHARE $ 0.62 $ (1.16) $ 1.42 $ (2.19)
======== ======== ======= ========
COMPREHENSIVE INCOME (LOSS)
Net income (loss) $ 20,294 $(29,641) $ 45,415 $(55,479)
Foreign currency translation adjustment 1,143 (208) 321 236
-------- -------- ------- --------
NET COMPREHENSIVE INCOME (LOSS) $ 21,437 $(29,849) $ 45,736 $(55,243)
======== ======== ======== ========
See Notes to Condensed Consolidated Financial Statements.
4
WABASH NATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Nine Months
Ended September 30,
--------------------------
2004 2003
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 45,415 $ (55,479)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization 14,745 19,115
Net (gain) loss on the sale of assets (405) 652
Provision for losses on accounts receivable and finance contracts (30) 1,011
Cash used for restructuring activities (2,993) (229)
Trailer valuation charges 415 2,261
Loss on debt extinguishment - 18,940
Loss on asset impairment - 28,500
Changes in operating assets and liabilities:
Accounts receivable (67,370) (53,771)
Inventories (26,989) 22,732
Refundable income taxes 72 921
Prepaid expenses and other 1,202 4,328
Accounts payable and accrued liabilities 15,844 7,630
Other, net 1,145 1,526
--------- ---------
Net cash used in operating activities (18,949) (1,863)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,760) (3,747)
Proceeds from asset sales - 53,479
Proceeds from sale of leased equipment and finance contracts - 5,305
Principal payments received on finance contracts 4,039 5,969
Proceeds from the sale of property, plant and equipment 2,116 1,762
--------- ---------
Net cash provided by investing activities 395 62,768
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of bank term loan and revolving credit facility - 135,309
Proceeds from issuance of convertible senior notes - 125,000
Proceeds from exercise of stock options 5,187 1,687
Borrowings under trade receivables and revolving credit facilities 534,916 109,618
Payments under trade receivables and revolving credit facilities (511,999) (109,618)
Payments under long-term debt and capital lease obligations (7,270) (344,322)
Preferred stock dividends - (1,584)
Debt issuance costs paid - (10,077)
--------- ---------
Net cash provided by (used in) financing activities 20,834 (93,987)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,280 (33,082)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,552 35,659
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,832 $ 2,577
========= =========
See Notes to Condensed Consolidated Financial Statements.
5
WABASH NATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The condensed consolidated financial statements of Wabash National
Corporation (the Company) have been prepared without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, the accompanying condensed consolidated financial statements contain
all material adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the consolidated financial position of the Company,
its results of operations and cash flows. The condensed consolidated financial
statements included herein should be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's 2003 Annual
Report on Form 10-K, as amended.
Certain items previously reported in specific condensed consolidated
financial statement captions have been reclassified to conform to the 2004
presentation.
During the period ended September 30, 2004, there were no accounting
pronouncements issued that would have an affect on the Company's financial
position, results of operations, or cash flow.
2. INVENTORIES
Inventories consisted of the following (in thousands):
September 30, December 31,
2004 2003
------------ -----------
Raw material and components $ 35,977 $ 24,189
Work in process 4,912 4,364
Finished goods 53,294 38,198
After-market parts 6,210 5,953
Used trailers 12,727 12,292
-------- --------
$113,120 $ 84,996
======== ========
3. RESTRUCTURING AND OTHER RELATED CHARGES
In connection with the Company's exit from manufacturing product for
export outside the North American market, international leasing and financing
activities and the consolidation of certain domestic operations in 2000, charges
totaling $48.2 million were recorded, of which $47.9 million has been utilized.
During the third quarter of 2004, the Company reached a final settlement of $1.8
million related to certain of its financial and equipment guarantee obligations.
At September 30, 2004, the remaining reserve balance amounted to $0.3 million.
4. DEBT
The Company has $125 million of 3.25% senior unsecured convertible notes
(Convertible Notes) due August 1, 2008, which are convertible into approximately
6.5 million shares of the Company's stock. The notes have a conversion price of
$19.20 or a rate of 52.0833 shares per $1,000 principal amount of notes.
Interest is payable semi-annually on February 1 and August 1.
6
The Company has an asset-based loan facility (ABL Facility) due September
23, 2006 that includes a $31.7 million term loan and a $175 million revolver.
The revolver is secured by inventory and accounts receivable and the amount
available to borrow varies in relation to the balances of those accounts. As of
September 30, 2004, borrowing capacity under the revolver was $148.4 million, of
which $83.3 million was outstanding. Interest on the revolver is at the London
Interbank Offer Rate (LIBOR) plus 225 basis points, or the bank's prime rate
plus 25 basis points. At September 30, 2004, the 30-day LIBOR rate was 1.8401%.
The Company pays a commitment fee on the unused portion of the facility at a
rate of 37.5 basis points per annum. For the quarter ended September 30, 2004,
the weighted average interest rate was 4.43%.
The term loan is secured by the Company's property, plant and equipment.
Interest is variable, based on LIBOR plus 225 basis points, or the bank's prime
rate plus 25 basis points. For the quarter ended September 30, 2004, the
weighted average interest rate was 4.32%. Quarterly principal payments of $1.7
million commenced on January 1, 2004.
On September 29, 2004, the Company amended its ABL Facility. Most notably,
the amendment lowered the Company's interest rate by 25 basis points and up to
100 basis points depending upon the Company's fixed charge coverage ratio,
eliminated the requirement to make excess cash flow payments beginning in April
2005 and increased capital expenditure limits from $15 million to $20 million in
2005. There were no changes in the maturity date or scheduled payments under the
ABL Facility.
The ABL Facility agreement contains covenants that require, among other
things, minimum fixed charge coverage and maximum senior debt to EBITDA
coverage. Also, the agreement places limits on capital expenditures and
additional borrowings. As of September 30, 2004, the Company was in compliance
with all loan covenants.
Scheduled maturities for the remainder of 2004 and future years are as
follows (in thousands):
2004 $ 2,182
2005 8,729
2006 107,052
2007 -
2008 125,000
-----------
242,963
Less: Current maturities (8,729)
-----------
$ 234,234
===========
5. STOCK-BASED COMPENSATION
The Company follows APB No. 25, Accounting for Stock Issued to Employees,
in accounting for its stock options and, accordingly, no compensation cost has
been recognized for stock options in the consolidated financial statements. In
accordance with SFAS No. 148, Accounting for Stock Based Compensation Transition
and Disclosure, the following table illustrates the effect on net income and net
income per share as if the Company had applied the fair value recognition
provisions of SFAS No. 123, Accounting for Stock Based Compensation to
stock-based employee compensation.
7
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
(in thousands, except for per share amounts)
Reported net income (loss) $ 20,294 $ (29,641) $ 45,415 $ (55,479)
Pro forma stock-based compensation expense (net of tax) (588) (748) (1,710) (1,985)
---------- ---------- ---------- ----------
Proforma net income (loss) $ 19,706 $ (30,389) $ 43,705 $ (57,464)
========== ========== ========== ==========
Basic earnings per share:
Reported net income (loss) per share $ 0.74 $ (1.16) $ 1.67 $ (2.19)
Proforma stock-based compensation expense (net of tax) per share (0.02) (0.03) (0.06) (0.07)
---------- ---------- ---------- ----------
Pro forma net income (loss) per share $ 0.72 $ (1.19) $ 1.61 $ (2.26)
========== ========== ========== ==========
Diluted earnings per share:
Reported net income (loss) per share $ 0.62 $ (1.16) $ 1.42 $ (2.19)
Pro forma stock-based compensation expense (net of tax) per share (0.02) (0.03) (0.05) (0.07)
---------- ---------- ---------- ----------
Pro forma net income (loss) per share $ 0.60 $ (1.19) $ 1.37 $ (2.26)
========== ========== ========== ==========
6. CONTINGENCIES
a. LITIGATION
Various lawsuits, claims and proceedings have been or may be instituted or
asserted against the Company arising in the ordinary course of business,
including those pertaining to product liability, labor and health related
matters, successor liability, environmental and possible tax assessments. While
the amounts claimed could be substantial, the ultimate liability cannot now be
determined because of the considerable uncertainties that exist. Therefore, it
is possible that results of operations or liquidity in a particular period could
be materially affected by certain contingencies. However, based on facts
currently available, management believes that the disposition of matters that
are currently pending or asserted will not have a material adverse effect on the
Company's financial position, liquidity or results of operations.
Brazil Joint Venture
In March 2001, Bernard Krone Industria e Comercio de Maquinas Agricolas
Ltda. ("BK") filed suit against the Company in the Fourth Civil Court of
Curitiba in the State of Parana, Brazil. This action seeks recovery of damages
plus pain and suffering. Because of the bankruptcy of BK, this proceeding is now
pending before the Second Civil Court of Bankruptcies and Creditors
Reorganization of Curitiba, State of Parana (No. 232/99).
This case grows out of a joint venture agreement between BK and the
Company, which was generally intended to permit BK and the Company to market the
RoadRailer(R) trailer in Brazil and other areas of South America. When BK was
placed into the Brazilian equivalent of bankruptcy late in 2000, the joint
venture was dissolved. BK subsequently filed its lawsuit against the Company
alleging among other things that it was forced to terminate business with other
companies because of the exclusivity and non-compete clauses purportedly found
in the joint venture agreement. In its complaint, BK asserts that it has been
damaged by these alleged wrongs by the Company in the approximate amount of $8.4
million.
The Company answered the complaint in May 2001, denying any wrongdoing.
The Company believes that the claims asserted against it by BK are without merit
and intends to defend itself vigorously against those claims. The Company
believes that the resolution of this lawsuit will not have a material adverse
effect on its financial position, liquidity or future results of operations;
however, at this early stage of the proceeding, no assurance can be given as to
the ultimate outcome of the case.
8
Environmental
In September 2003, the Company was noticed as a potentially responsible
party (PRP) by the United States Environmental Protection Agency pertaining to
the Motorola 52nd Street, Phoenix, Arizona Superfund Site pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act. PRPs
include current and former owners and operators of facilities at which hazardous
substances were disposed of. EPA's allegation that the Company was a PRP arises
out of the operation of a former branch facility located approximately five
miles from the original site. The Company does not expect that these proceedings
will have a material adverse effect on the Company's financial condition or
results of operations.
On September 28, 2004, the Company entered a plea to two misdemeanor
violations of the Clean Water Act and agreed to pay a $0.4 million fine pursuant
to a plea agreement. In addition, the Company and the United States
Environmental Protection Agency (EPA) have concluded negotiations regarding the
terms and conditions of a compliance agreement that involves environmental
training, auditing and similar activities by the Company. The compliance
agreement is currently awaiting signature by the EPA. The Company does not
believe that the entering into of the compliance agreement will have a material
adverse impact on the results or operations of the Company.
7. NET INCOME PER SHARE
Per share results have been computed based on the average number of common
shares outstanding. The following table presents the number of incremental
weighted average shares used in computing diluted per share amounts (in
thousands, except per share amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2004 2003 2004 2003
------- -------- ------- --------
Basic earnings (loss) per share:
Net income (loss). applicable to common stockholders $20,294 $(29,905) $45,415 $(56,271)
======= ======== ======= ========
Weighted average common shares outstanding 27,314 25,802 27,150 25,721
======= ======== ======= ========
Basic income (loss) per share $ 0.74 $ (1.16) $ 1.67 $ (2.19)
======= ======== ======= ========
Diluted earnings (loss) per share:
Net income (loss) applicable to common stockholders $20,294 $(29,905) $45,415 $(56,271)
After-tax equivalent of interest on convertible notes 1,210 - 3,618 -
------- -------- ------- --------
Diluted net income (loss) applicable to common stockholders $21,504 $(29,905) $49,033 $(56,271)
======= ======== ======= ========
Weighted average common shares outstanding 27,314 25,802 27,150 25,721
Dilutive stock options/shares 721 - 870 -
Convertible notes equivalent shares 6,510 - 6,510 -
------- -------- ------- --------
Diluted weighted average common shares outstanding 34,545 25,802 34,530 25,721
======= ======== ======= ========
Diluted income (loss) per share $ 0.62 $ (1.16) $ 1.42 $ (2.19)
======= ======== ======= ========
9
The 2003 diluted weighted average shares outstanding excluded the
antidilutive effects of preferred stock convertible into 823,200 shares, and
356,787 shares and 179,671 shares of stock options for the three and nine
months, respectively.
8. SEGMENTS
The Company has two reportable segments: manufacturing and retail and
distribution. The manufacturing segment produces and sells new trailers to the
retail and distribution segment or to customers who purchase trailers direct or
through independent dealers. The retail and distribution segment includes the
sale, leasing and financing of new and used trailers, as well as the sale of
after-market parts and service through its retail branch network. In addition,
the retail and distribution segment in 2003 included the sale of after-market
parts.
Reportable segment information is as follows (in thousands):
Retail and Consolidated
Manufacturing Distribution Eliminations Totals
------------- ------------ ------------ ------------
THREE MONTHS ENDED SEPTEMBER 30, 2004
Net Sales
External customers $215,522 $ 61,721 $ - $ 277,243
Intersegment sales 24,849 - (24,849) -
-------- --------- -------- ---------
Total Net Sales $240,371 $ 61,721 $ (24,849) $ 277,243
======== ========= ========= =========
Income (Loss) from Operations $ 20,599 $ 509 $ 1,650 $ 22,758
Assets $444,988 $ 187,165 $(162,396) $ 469,757
THREE MONTHS ENDED SEPTEMBER 30, 2003
Net Sales
External customers $147,093 $ 68,357 $ - $ 215,450
Intersegment sales 5,707 265 (5,972) -
-------- --------- -------- ---------
Total Net Sales $152,800 $ 68,622 $ (5,972) $ 215,450
======== ========= ========= =========
Income (Loss) from Operations $ 2,387 $ (1,815) $ 21 $ 593
Assets $393,449 $ 216,407 $(161,879) $ 447,977
NINE MONTHS ENDED SEPTEMBER 30, 2004
Net Sales
External customers $575,266 $ 178,473 $ - $ 753,739
Intersegment sales 81,140 1,975 (83,115) -
-------- --------- -------- ---------
Total Net Sales $656,406 $ 180,448 $ (83,115) $ 753,739
======== ========= ========= =========
Income (Loss) from Operations $ 56,402 $ (1,547) $ (650) $ 54,205
Assets $444,988 $ 187,165 $(162,396) $ 469,757
NINE MONTHS ENDED SEPTEMBER 30, 2003
Net Sales
External customers $446,714 $ 221,475 $ - $ 668,189
Intersegment sales 40,226 878 (41,104) -
-------- --------- -------- ---------
Total Net Sales $486,940 $ 222,353 $ (41,104) $ 668,189
======== ========= ========= =========
Income (Loss) from Operations $ 21,202 $ (33,072) $ 320 $ (11,550)
Assets $393,449 $ 216,407 $(161,879) $ 447,977
10
Product Information
The Company offers products primarily in three categories: new trailers,
used trailers and parts and service. Other sales include leasing revenues,
interest income from finance contracts and freight. The following table sets
forth the major product categories and their percentage of total net sales
(dollars in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- ---------------------------------
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
$ % $ % $ % $ %
------- ----- ------- ----- ------- ----- ------- -----
New Trailers 243,047 87.7 162,374 75.4 657,571 87.2 499,813 74.8
Used Trailers 14,485 5.2 16,514 7.7 40,963 5.5 53,273 8.0
Parts & Service 15,654 5.6 27,071 12.6 43,988 5.8 85,805 12.8
Other 4,057 1.5 9,491 4.3 11,217 1.5 29,298 4.4
------- ----- ------- ----- ------- ----- ------- -----
Total Net Sales 277,243 100.0 215,450 100.0 753,739 100.0 668,189 100.0
======= ===== ======= ===== ======= ===== ======= =====
9. RECENT DEVELOPMENT
On October 12, 2004, the Company filed a registration statement with the
Securities and Exchange Commission in connection with its plan to sell up to
3,000,000 shares of common stock through an underwritten public offering to be
managed by Merrill Lynch & Co., Bear, Stearns & Co. Inc. and BB&T Capital
Markets. In addition, the Company may sell up to 450,000 shares to cover an
underwriters over-allotment option. The Company intends to use all of the net
proceeds from this public offering to repay a portion of its outstanding secured
bank indebtedness.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements. Additional written or
oral forward-looking statements may be made by the Company from time to time in
filings with the Securities and Exchange Commission or otherwise. The words
"believe," "expect," "anticipate," and "project" and similar expressions
identify forward-looking statements, which speak only as of the date the
statement is made. Such forward-looking statements are within the meaning of
that term in Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such statements may
include, but are not limited to, information regarding revenues, income or loss,
capital expenditures, acquisitions, number of retail branch openings, plans for
future operations, financing needs or plans, the impact of inflation and plans
relating to services of the Company, as well as assumptions relating to the
foregoing. Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events
and actual results could differ materially from those set forth in, contemplated
by or underlying the forward-looking statements. Statements in this report,
including those set forth in "Management's Discussion and Analysis of Financial
Condition and Results of Operations," describe factors, among others, that could
contribute to or cause such differences.
Although we believe that our expectations that are expressed in these
forward-looking statements are reasonable, we cannot promise that our
expectations will turn out to be correct. Our actual results could be materially
different from and worse than our expectations. Important risks and factors that
could cause our actual results to be materially different from our expectations
include the factors that are disclosed elsewhere herein, including, but not
limited to, Item 5 of Part II hereof.
11
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
net sales for the periods indicated:
Percentage of Net Sales
----------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ --------------------
2004 2003 2004 2003
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 86.7 92.1 87.2 90.3
Loss on asset impairment - - - 4.3
----- ----- ----- -----
Gross profit 13.3 7.9 12.8 5.4
General and administrative expense 3.7 5.5 4.1 4.8
Selling expense 1.4 2.1 1.5 2.3
----- ----- ----- -----
Income (loss) from operations 8.2 0.3 7.2 (1.7)
Interest expense (1.1) (4.1) (1.1) (4.1)
Foreign exchange gains and losses, net 0.2 (0.1) - 0.8
Loss on debt extinguishment - (8.8) - (2.8)
Other, net 0.2 (1.1) - (0.5)
----- ----- ----- -----
Income (loss) before income taxes 7.5 (13.8) 6.1 (8.3)
Income tax provision 0.2 - 0.1 -
----- ----- ----- -----
Net income (loss) 7.3% (13.8)% 6.0% (8.3)%
===== ===== ===== =====
The industry recovery that began in 2003 continued into the third quarter
of 2004 and it is expected to continue over the balance of the year as
production of trailers is anticipated to increase from approximately 183,000
units to approximately 230,000 units in 2004 according to ACT Research Company,
LLC estimates. The expansion in production is predicated on a number of factors
including improving general economic conditions and pent-up trucking industry
demand for replacement units as the average age of trailer fleets increases.
Regulations regarding driver hours (hours of service) that became effective
January 2004 have had limited impact on business to date.
The industry is enjoying a period of improvement and we expect to
participate in the industry growth because our core customers are among the
largest participants in the trucking industry, our DuraPlate(R) trailer
continues to have increased market acceptance and penetration and we are
expanding our presence into the middle market carriers - approximately 1,250
carriers with fleet sizes ranging from 250 to 5,000 units.
We believe that Wabash is well positioned to benefit from any increased
demand for trailers because of the improvements that have been made over the
last three years. As a result of our continuous improvement initiatives, we have
reduced our total cost of producing a trailer and effectively increased
production capacity. Additionally, we have become more efficient in the use of
working capital. Since January 2004, we have experienced significant price
volatility in our principal raw materials: steel, aluminum and timber. More
recently, availability of raw materials due to supplier capacity constraints and
a constrained distribution system have become a more serious concern. We have
experienced some intermittent shortages that we have been able to manage
through. We expect the trend of rising material prices and constrained
availability will continue near term. We believe that our long-term
relationships with suppliers have been advantageous in mitigating raw material
issues. We responded to increased raw material costs by implementing price
increases on new trailers in March 2004 ranging from 4.5% to 6%, as contract
terms allow. We continue to pass on raw material increases as competitive
conditions allow.
12
While we have experienced some nominal order cancellations and postponements, we
do not anticipate any significant impact on our overall market share.
THREE MONTHS ENDED SEPTEMBER 30, 2004
NET SALES
Net sales increased $61.7 million from the third quarter 2003, which
included $18.0 million of sales associated with certain assets of our trailer
rental and leasing and aftermarket parts distribution businesses which were sold
in September 2003 (Asset Sales). By business segment, net sales to external
customers and related units sold were as follows (in millions):
Three Months Ended September 30,
---------------------------------------
2004 2003 % Change
-------- -------- --------
Sales by segment:
Manufacturing $ 215.5 $ 147.1 46%
Retail and Distribution 61.7 68.4 (10%)
-------- --------
Total $ 277.2 $ 215.5 29%
======== ========
New trailer units:
Manufacturing 12,100 8,900 36%
Retail and Distribution 1,600 1,000 60%
-------- --------
Total 13,700 9,900 38%
======== ========
Used trailer units 1,700 3,100 (45%)
======== ========
Improving conditions in both the overall economy and the transportation
industry drove a 36% increase in unit volume in the manufacturing segment.
Average selling prices increased approximately 7.5% from the prior year period
as material price increases were passed along to the end users.
Third quarter 2004 sales in the retail and distribution segment were lower
than the prior year period which included $18.0 million of sales associated with
the aforementioned Assets Sales. The 2004 period saw a 60% increase in new
trailer unit sales equal to $14.9 million in sales offset in part by reductions
in used trailer sales. The decrease in used trailer sales resulted from
constrained used equipment availability, as transportation companies retain
equipment to meet requirements. Branch parts and service sales increased $1.2
million despite the closing of four full service branches during 2003.
GROSS PROFIT
Gross profit as a percent of sales was 13.3% in the third quarter of 2004
compared to 7.9% in the 2003 period. As discussed below, both of our segments
contributed as follows (in millions):
Three Months Ended September 30,
-----------------------------------------
2004 2003 $ Change
-------- -------- --------
Gross Profit by segment:
Manufacturing $ 30.1 $ 10.9 $ 19.2
Retail and Distribution 5.2 6.1 (0.9)
Eliminations 1.6 - 1.6
-------- -------- -------
Total Gross Profit $ 36.9 $ 17.0 $ 19.9
======== ======== =======
The increase in the manufacturing segment's gross profit primarily
resulted from increased volume of $6.3 million and improved labor and overhead
utilization of $10.6 million, reflecting the
13
benefits of continuous improvement initiatives, reductions in cycle times and
cost controls. Raw material cost increases were essentially offset by increases
in selling prices.
Gross profit in the retail and distribution segment in 2004 benefited from
increased new trailer sales, improved margins on used trailers and higher parts
and service sales. The 2003 period included $3.2 million of profit associated
with the Asset Sales.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses during the third quarter of 2004
decreased $1.4 million from the 2003 period. The 2004 period included $0.6
million in increased technology costs and $0.4 million in higher employee
related costs. The 2003 period included a charge of $0.9 million related to
branch closings, $0.6 million in legal reserves and $0.6 million in costs from
operations affected by the Asset Sales.
SELLING EXPENSE
Selling expenses decreased $0.8 million to $3.8 million for the third
quarter of 2004, compared to $4.6 million in the prior year period due to the
impact of the Asset Sales and the closing of 12 branch locations during the
third quarter of 2003.
OTHER INCOME (EXPENSE)
Interest expense totaled $2.9 million for the 2004 quarter; a decrease of
$5.8 million from the prior year period due to lower effective interest rates
resulting from the debt refinancings completed in the third quarter of 2003 and
reduced average borrowings.
We recorded a foreign exchange gain of $0.5 million in the 2004 quarter
compared to a loss of $0.3 million in the 2003 period, reflecting the relative
weakness of the US dollar compared to the Canadian dollar in the 2004 quarter.
Loss on debt extinguishment in 2003 of $18.9 million represents the
additional costs associated with the early extinguishment of the Company's
Senior Series Notes and Bank Debt.
Other, net was income of $0.4 million for the three months ended September
30, 2004, compared to an expense of $2.3 million for the 2003 period. The 2003
expense included a $1.0 million loss on the sale of certain assets.
INCOME TAXES
We recognized income tax provision of $0.4 million related to Federal and
State alternative minimum tax in the third quarter of 2004. No ordinary income
tax provision was recognized in 2004 due to the utilization of net operating
loss (NOL) carryforwards. No income tax provision was recognized in 2003.
Because of uncertainty related to the realizability of NOLs in excess of those
utilized, a full valuation allowance continues to be recorded against the
related deferred tax assets at September 30, 2004.
14
NINE MONTHS ENDED SEPTEMBER 30, 2004
NET SALES
Net sales increased $85.5 million compared to the 2003 period. The nine
months ended September 30, 2003 included $58.9 million of sales associated with
the Asset Sales. By business segment, net sales to external customers and
related units sold were as follows (in millions):
Nine Months Ended September 30,
--------------------------------------
2004 2003 % Change
---- ---- --------
Net Sales by segment:
Manufacturing $ 575.2 $ 446.7 29%
Retail and Distribution 178.5 221.5 (19%)
-------- --------
Total $ 753.7 $ 668.2 13%
======== ========
New trailer units:
Manufacturing 32,800 26,600 23%
Retail and Distribution 4,700 3,100 52%
-------- --------
Total 37,500 29,700 26%
======== ========
Used trailer units 5,500 9,900 (44%)
======== ========
Improving conditions in both the overall economy and the transportation
industry drove a 23% increase in unit volume in the manufacturing segment. To
meet production requirements, we have increased headcount by approximately 400.
Average selling prices increased approximately 4.2% from the prior year period
primarily reflecting increases in raw materials.
The 2004 sales in the retail and distribution segment were lower than the
prior year period which included $58.9 million of sales associated with the
aforementioned Assets Sales. A $34.5 million increase in new trailer sales
caused by a 52% increase in units was offset by reductions in used trailer. The
decrease in used trailer sales resulted from constrained used equipment
availability, as transportation companies retain equipment to meet requirements.
Branch parts and services sales were flat despite closing four full service
locations in 2003.
GROSS PROFIT
Gross profit as a percent of sales was 12.8% for the nine months ended
September 30, 2004 compared to 5.4% for same period in 2003, which included a
$28.5 million asset impairment charge taken on certain assets of our rental and
leasing and aftermarket parts assets. As discussed below, both of our segments
contributed as follows (in millions):
Nine Months Ended September 30,
---------------------------------------
2004 2003 $ Change
-------- ------- --------
Gross Profit (loss) by segment:
Manufacturing $ 84.1 $ 45.6 $ 38.5
Retail and Distribution 13.2 (9.6) 22.8
Eliminations (0.6) 0.3 (0.9)
-------- ------- ------
Total Gross Profit $ 96.7 $ 36.3 $ 60.4
======== ======= ======
The manufacturing segment's gross profit as a percentage of sales was
14.6% in 2004, a 4.4 percentage point increase from the prior year period.
Average per trailer raw material costs, including the effects of product mix,
increased approximately 8% from the prior period due to increases in our key raw
15
materials - principally steel and wood, which we were able to partially offset
through selling price increases. The shortfall from rising material costs was
more than offset by the impact of higher volumes of $16.3 million, the continued
improvement in our labor and overhead utilization of $20.0 million and a
reduction in warranty expense.
The 2004 gross profit in the retail and distribution segment was higher
than the prior year. The first nine months of 2003 included a $28.5 million
asset impairment charge and $10.3 million of gross profit associated with the
Asset Sales. Gross profit in 2004 was positively impacted by higher new trailer
volumes and margins and improved used trailer margins, offset by continued
constraints on used trailer volumes. The 2004 period includes $1.1 million of
profit related to RoadRailer(R) bogies from our finance and leasing business.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the nine months ended September
30, 2004 decreased $1.2 million from the prior year. The 2004 period included
$2.8 million in higher employee related costs and $2.0 million in increased
technology costs. The 2003 period included $2.6 million in debt refinancing
costs, $2.0 million in costs from operations affected by the Asset Sales, $1.1
million in bad debt reserves related to our finance and leasing business, and
$0.9 million related to branch closings, reduced in part by the recovery of $1.0
million in taxes.
SELLING EXPENSE
Selling expense decreased $4.2 million to $11.4 million in the first nine
months of 2004, compared to $15.6 million in the prior year period due to the
impact of the Asset Sales and the closing of 12 branch locations during the
third quarter of 2003.
OTHER INCOME (EXPENSE)
Interest expense totaled $8.6 million for the nine months; a decrease of
$19.0 million from the prior year period due to lower effective interest rates
resulting from the debt refinancings completed in the third quarter of 2003 and
reduced average borrowings.
We incurred a foreign exchange loss of $0.1 million in the first nine
months of 2004 compared to a gain of $5.3 million in the same period of 2003,
reflecting the parity of the US dollar compared to the Canadian dollar in 2004
versus a significant weakening of the US dollar relative to the Canadian dollar
in the first six months of 2003.
Loss on debt extinguishment of $18.9 million in 2003 represents the
additional costs associated with the early extinguishment of the Company's
Senior Series Notes and Bank Debt.
Other, net was income of $0.8 million for the nine months ended September
30, 2004, compared to an expense of $2.7 million for the 2003 period. The 2004
income includes gains on the sale of closed branch properties. The 2003 expense
included a $1.3 million charge for the settlement of a legacy RoadRailer(R)
transaction and a $1.0 million loss on the sale of certain assets.
INCOME TAXES
We recognized income tax provision of $0.9 million related to Federal and
State alternative minimum tax in the first nine months of 2004. No ordinary tax
provision was recognized in 2004 due to the utilization of net operating loss
(NOL) carryforwards. No income tax expense was recognized in 2003. Because of
uncertainty related to the realizability of NOLs in excess of those utilized, a
full
16
valuation allowance continues to be recorded against the related deferred tax
assets at September 30, 2004.
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL STRUCTURE
Our capital structure is primarily supported by debt as a result of the
significant losses incurred during the years 2000 through 2003. Due to our
financial and operational restructuring and the significant improvements in
manufacturing made over the last two to three years, we were able to stabilize
our financial footing. Our objective is to generate operating cash flows
sufficient to satisfy normal requirements for working capital and capital
expenditures and to better balance the mix of debt and equity in our capital
structure.
EQUITY OFFERING
On October 12, 2004, we filed a registration statement with the Securities
and Exchange Commission in connection with our plan to sell up to 3,000,000
shares of common stock through an underwritten public offering to be managed by
Merrill Lynch & Co., Bear, Stearns & Co. Inc. and BB&T Capital Markets. In
addition, we may sell up to 450,000 shares to cover an underwriters
over-allotment option. We intend to use all of the net proceeds from this public
offering to repay a portion of our outstanding secured bank indebtedness.
DEBT AMENDMENT
On September 29, 2004, we amended our ABL Facility. Most notably, the
amendment lowered our interest rate by 25 basis points and up to 100 basis
points depending upon our fixed charge coverage ratio, eliminated the
requirement to make excess cash flow payments beginning in April 2005 and
increased capital expenditure limits from $15 million to $20 million in 2005.
There were no changes in the maturity date or scheduled payments under the ABL
Facility.
CASH FLOW
Operating activities consumed $18.9 million in cash for the nine months
ended September 30, 2004 compared to $1.9 million in the prior year period.
Improved cash flows from net income (adjusted for non-cash items) of $45.1
million was not sufficient to fund increased working capital requirements as
outlined below.
- Accounts receivables increased $67.4 million during the first nine
months of 2004 compared to $53.8 million in the comparable quarter
of 2003 period. Accounts receivables were primarily impacted by an
increase in days sales outstanding. Days sales outstanding, a
measure of working capital efficiency that measures the amount of
time a receivable is outstanding, was 45 days at September 30, 2004,
which was up 10 days compared to the prior year period.
- Inventory increased $27.0 million during the first nine months of
2004 compared to decreasing $22.7 million in the comparable period
of 2003. This increase is reflective of the increased production
levels, greater safety stock, increased raw material costs and the
timing of customer pick-ups. The 2003 period was positively impacted
by reductions in new and used trailer inventories. Inventory turns,
a commonly used measure of working capital efficiency that measures
how quickly inventory turns, improved to approximately eight times,
a 35% improvement from the prior year.
17
- Accounts payable and accrued liabilities increased approximately
$8.2 million over the prior year in line with increased production
as well as the Company no longer being subjected to vendor payment
term restrictions that were in place in 2003.
Investing activities provided $0.4 million for the nine months ended
September 30, 2004, a decrease of $62.4 million from the prior year period
resulting primarily from proceeds of $58.8 million from the sale of assets.
Financing activities provided $20.8 million during the nine months ended
September 30, 2004 resulting from $22.9 million in borrowings under its
revolving credit facilities to fund working capital requirements and $5.2
million from stock options exercised, offset by debt payments of $7.3 million,
including $1.7 million from proceeds on the sale of closed branch properties.
Capital Expenditures
Capital spending amounted to $5.8 million thus far in 2004 and is
anticipated to be approximately $10 million for the full year. Spending is
focused on productivity improvement and capacity maintenance.
Outlook
As of September 30, 2004, our liquidity position, cash on hand and
available borrowing capacity amounted to approximately $79.8 million and debt
and lease obligations, both on and off the balance sheet, amounted to
approximately $252 million (including $9 million off-balance sheet). We expect
that in 2004, Wabash will be able to generate sufficient cash flow from
operations to fund working capital and capital spending requirements and to
further reduce indebtedness. However, it is possible that we may not generate
sufficient cash flow or secure additional funds for these purposes. Because we
must use a portion of our cash from operations to pay our debt service
obligations, our high level of debt means we have less funds available for
working capital, capital spending requirements and other purposes than we would
otherwise have. Further, we may be more highly leveraged than our competitors,
which would be a competitive disadvantage in the event of a downturn in the
general economic condition of our business.
OFF-BALANCE SHEET TRANSACTIONS
As of September 30, 2004, we had approximately $9 million in off-balance
sheet debt. We did not enter into any material off-balance sheet debt or
operating lease transactions during the quarter.
BACKLOG
Orders that have been confirmed by the customer in writing and can be
produced during the next 18 months are included in backlog. Orders that comprise
the backlog may be subject to changes in quantities, delivery, specifications
and terms. Our backlog of orders was approximately $283 million at September 30,
2004 compared to $200 million at December 31, 2003. We expect to complete the
majority of our existing backlog orders within the next 12 months.
CUSTOMER CREDIT RISK
We sublease certain highly specialized RoadRailer(R) equipment to Grupo
Transportation Marititma Mexicana SA (TMM), who is experiencing financial
difficulties. On August 5, 2004, TMM completed the restructuring of its existing
debt agreements. Customer payments, which have historically been timely, are
behind schedule. The customer owes us $7.4 million secured by highly specialized
RoadRailer(R) equipment, which due to the nature of the equipment, has a minimal
recovery value.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
In addition to the risks inherent in our operations, we have exposure to
financial and market risk resulting from volatility in commodity prices,
interest rates and foreign exchange rates. The following discussion provides
additional detail regarding our exposure to these risks.
a. COMMODITY PRICE RISKS
We are exposed to fluctuation in commodity prices through the purchase of
raw materials that are processed from commodities such as aluminum, steel, wood
and virgin plastic pellets. Given the historical volatility of certain commodity
prices, this exposure can significantly impact product costs. We may manage
aluminum price changes by entering into fixed price contracts with our
suppliers. As of September 30, 2004, we had outstanding purchase commitments of
approximately $42.2 million through December 2005 for materials that will be
used in the production process. Because we typically do not set prices for our
products more than 45-90 days in advance of our commodity purchases, we can take
into account the cost of the commodity in setting our prices for each order. To
the extent that we are unable to offset the increased commodity costs in our
product prices, our results would be materially and adversely affected.
b. INTEREST RATES
As of September 30, 2004, we had approximately $115 million of floating
rate debt outstanding under our various financing agreements. A hypothetical 100
basis-point increase in the floating interest rate from the current level would
correspond to approximately a $1.1 million increase in interest expense over a
one-year period. This sensitivity analysis does not account for the change in
our competitive environment indirectly related to the change in interest rates
and the potential managerial action taken in response to these changes.
c. FOREIGN EXCHANGE RATES
We are subject to fluctuations in the Canadian dollar exchange rate that
impact intercompany transactions with our Canadian subsidiary, as well as U.S.
denominated transactions between the Canadian subsidiaries and unrelated
parties. A five cent change in the Canadian exchange rate would result in an
approximately $0.7 million impact on results of operations. We have Canadian
dollar foreign currency forward contracts in an effort to mitigate potential
Canadian currency fluctuation impact on working capital requirements. As of
September 30, 2004, we had outstanding $2.8 million in forward contracts to be
settled in various increments over the next five months. The contracts are
marked-to-market and not subject to hedge accounting. We do not hold or issue
derivative financial instruments for speculative purposes.
ITEM 4. CONTROLS AND PROCEDURES
The principal executive officer and principal financial officer of the
Company have evaluated the effectiveness of the disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end
of the period covered by this quarterly report (the "Evaluation Date"). Based on
such evaluation, such officers have concluded that, as of the Evaluation Date,
the Company's disclosure controls and procedures are effective in alerting them
on a timely basis to material information relating to the Company required to be
included in the Company's periodic filings under the Exchange Act.
19
Since the Evaluation Date, there have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
such controls.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 28, 2004, the Company entered a plea to two misdemeanor
violations of the Clean Water Act and agreed to pay a $0.4 million fine pursuant
to a plea agreement. In addition, the Company and the United States
Environmental Protection Agency (EPA) have concluded negotiations regarding the
terms and conditions of a compliance agreement that involves environmental
training, auditing and similar activities by the Company. The compliance
agreement is currently awaiting signature by the EPA. The Company does not
believe that the entering into of the compliance agreement will have a material
adverse impact on the results or operations of the Company.
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
RISK FACTORS
You should carefully consider the risks described below. Realization of
any of the following risks could have a material adverse effect on our business,
financial condition, cash flows and results of operations.
RISKS RELATED TO OUR BUSINESS, STRATEGY AND OPERATIONS
WE HAVE GENERATED SIGNIFICANT LOSSES IN RECENT PERIODS.
We incurred significant net losses during the last three years. While in
the first nine months of 2004, ended September 30, 2004, we reported net income
of $45.4 million, we have reported net losses of $232.2 million, $56.2 million
and $57.2 million for the years ended December 31, 2001, 2002 and 2003,
respectively. Our ability to achieve and sustain profitability in the future
will depend on the successful continued implementation of measures to reduce
costs and achieve sales goals. While we have taken steps to lower operating
costs and reduce interest expense, and have seen our sales improve in recent
periods, we cannot assure you that our cost-reduction measures will be
successful, sales will be sustained or increased or that we will achieve a
sustained return to profitability.
OUR INVENTORIES ARE NOT MANAGED BY PERPETUAL INVENTORY CONTROL SYSTEMS.
The systems and processes we use to manage and value our inventories
require significant manual intervention and the verification of actual
quantities requires physical inventories, which we take several times a year.
Breakdowns of these systems and processes, and errors in inventory estimates
derived from these systems and processes, could go undetected until the next
physical inventory and adversely affect our operations and financial results.
20
WE ARE SUBJECT TO NEW CORPORATE GOVERNANCE AND INTERNAL CONTROLS REPORTING
REQUIREMENTS, AND OUR COSTS RELATED TO COMPLIANCE WITH, OR OUR FAILURE TO COMPLY
WITH, EXISTING AND FUTURE REQUIREMENTS COULD ADVERSELY AFFECT OUR BUSINESS.
We face new corporate governance requirements under the Sarbanes-Oxley Act
of 2002, as well as new rules and regulations subsequently adopted by the SEC,
the Public Company Accounting Oversight Board and the NYSE. These laws, rules
and regulations continue to evolve and may become increasingly stringent in the
future. In particular, we will be required to include management and auditor
reports on internal controls as part of our annual report for the year ended
December 31, 2004 pursuant to Section 404 of the Sarbanes-Oxley Act. We are in
the process of evaluating our control structure to help ensure that we will be
able to comply with Section 404 of the Sarbanes-Oxley Act. We cannot assure you
that we will be able to fully comply with these laws, rules and regulations that
address corporate governance, internal control reporting and similar matters.
Our failure to comply with these laws, rules and regulations may materially
adversely affect our reputation, financial condition and the value of our
securities.
AN ADVERSE CHANGE IN OUR CUSTOMER RELATIONSHIPS OR IN THE FINANCIAL CONDITION OF
OUR CUSTOMERS COULD ADVERSELY AFFECT OUR BUSINESS.
We have corporate partnering relationships with a number of customers
where we supply the requirements of these customers. We do not have binding
agreements with these customers. Our success is dependent, to a significant
extent, upon the continued strength of these relationships and the growth of our
corporate partners. We often are unable to predict the level of demand for our
products from these partners, or the timing of their orders. In addition, the
same economic conditions that adversely affect us also often adversely affect
our customers. As some of our customers are highly leveraged and have limited
access to capital, their continued existence may be uncertain. One of our
customers, Grupo Transportation Marititma Mexicana SA (TMM), which is located in
Mexico, has been experiencing financial difficulties and on August 5, 2004,
announced that it had completed the restructuring of its existing debt
agreements. Payments from TMM to us are currently behind schedule. The customer
owes us $7.4 million as of September 30, 2004 secured by highly specialized
RoadRailer(R) equipment, which due to the nature of the equipment, has a minimal
recovery value. The loss of a significant customer or unexpected delays in
product purchases could adversely affect our business and results of operations.
OUR TECHNOLOGY AND PRODUCTS MAY NOT ACHIEVE MARKET ACCEPTANCE, WHICH COULD
ADVERSELY AFFECT OUR COMPETITIVE POSITION.
We continue to introduce new products, such as the DuraPlate(R) HD and the
Freight-Pro(R) trailer. We cannot assure you that these or other new products or
technologies will achieve sustained market acceptance. In addition, new
technologies or products that our competitors introduce may render our products
obsolete or uncompetitive. We have taken steps to protect our proprietary rights
in our new products. However, the steps we have taken to protect them may not be
sufficient or may not be enforced by a court of law. If we are unable to protect
our proprietary rights, other parties may attempt to copy or otherwise obtain or
use our products or technology. If competitors are able to use our technology,
our ability to compete effectively could be harmed.
WE HAVE A LIMITED NUMBER OF SUPPLIERS OF RAW MATERIALS; AN INCREASE IN THE PRICE
OF RAW MATERIALS OR THE INABILITY TO OBTAIN RAW MATERIALS COULD ADVERSELY AFFECT
OUR RESULTS OF OPERATIONS.
We currently rely on a limited number of suppliers for certain key
components in the manufacturing of truck trailers, such as tires, landing gear,
axles and specialty steel coil used in DuraPlate(R) panels. From time to time,
there have been and may in the future continue to be shortages of supplies of
raw materials or our suppliers may place us on allocation, which would have an
adverse impact on our ability to meet demand for our products. Raw material
shortages and allocations may result
21
in inefficient operations and a build-up of inventory, which can negatively
affect our working capital position. In addition, if the price of raw materials
were to increase and we were unable to increase our selling prices or reduce our
operating costs to offset the price increases, our operating margins would be
adversely affected. The loss of any of our suppliers or their inability to meet
our price, quality, quantity and delivery requirements could have a significant
impact on our results of operations.
DISRUPTION OF OUR MANUFACTURING OPERATIONS OR MANAGEMENT INFORMATION SYSTEMS
WOULD HAVE AN ADVERSE EFFECT ON OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
We manufacture our products at two trailer manufacturing facilities in
Lafayette, Indiana, and one hardwood floor facility in Harrison, Arkansas. Our
primary manufacturing facility accounts for approximately 85% of our
manufacturing output. An unexpected disruption in our production at either of
these facilities or in our management information systems for any length of time
would have an adverse effect on our business, financial condition and results of
operations.
THE LOSS OF KEY PERSONNEL COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
Many of our executive officers, including our CEO William P. Greubel and
COO Richard J. Giromini, are critical to the management and direction of our
business. Our future success depends, in large part, on our ability to retain
these officers and other capable management personnel. The unexpected loss of
the services of any of our key personnel could have an adverse effect on the
operation of our business, as we may be unable to find suitable management to
replace departing executives on a timely basis.
THE INABILITY TO REALIZE ADDITIONAL COSTS SAVINGS COULD WEAKEN OUR COMPETITIVE
POSITION.
If we are unable to continue to successfully implement our program of cost
reduction and continuous improvement, we may not realize additional anticipated
cost savings, which could weaken our competitive position.
WE ARE SUBJECT TO CURRENCY EXCHANGE RATE FLUCTUATIONS, WHICH COULD ADVERSELY
AFFECT OUR FINANCIAL PERFORMANCE.
We are subject to currency exchange rate risk related to sales through our
factory-owned retail distribution centers in Canada. For the nine months ended
September 30, 2004 and the year ended December 31, 2003, currency exchange rate
fluctuations had an unfavorable impact of $0.1 million and a favorable impact of
$5.3 million, respectively, on our results of operations. We cannot assure you
that future currency exchange rate fluctuations will not have an adverse affect
on our results of operations equivalent to or more severe than that for the nine
months ended September 30, 2004.
RISKS RELATED TO OUR SUBSTANTIAL INDEBTEDNESS
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.
We are currently highly leveraged and have substantial debt in relation to
our stockholders' equity. As of September 30, 2004, we had an aggregate of $243
million of outstanding indebtedness. [Although we are in registration for a
common stock offering that is intended to reduce our debt, if we were to close
that offering we would continue to have substantial debt after applying the
proceeds from that offering.]
22
Our high level of debt could have important consequences to our investors,
including:
- we may not be able to secure additional funds for working capital,
capital expenditures, debt service requirements or general corporate
purposes;
- we will need to use a portion of our cash flow from operations to
pay principal of and interest on our debt, which will reduce the
amount of funds available to us for other purposes;
- we may be more highly leveraged than our competitors, which could
put us at a competitive disadvantage; and
- we may not be able to adjust rapidly to changing market conditions,
which may make us more vulnerable in the event of a downturn in the
general economic conditions of our business.
RESTRICTIVE COVENANTS IN OUR DEBT INSTRUMENTS COULD LIMIT OUR FINANCIAL AND
OPERATING FLEXIBILITY AND SUBJECT US TO OTHER RISKS.
The agreements governing our indebtedness include certain covenants that
restrict, among other things, our ability to:
- incur additional debt;
- pay dividends on our equity or repurchase our equity;
- make certain investments;
- create certain liens; and
- consolidate, merge or transfer all or substantially all of our
assets.
Our ability to comply with such agreements may be affected by events
beyond our control, including prevailing economic, financial and industry
conditions. In addition, upon the occurrence of an event of default under our
debt agreements, the lenders could elect to declare all amounts outstanding
under our debt agreements, together with accrued interest, to be immediately due
and payable.
RISKS PARTICULAR TO THE INDUSTRY IN WHICH WE OPERATE
OUR BUSINESS IS HIGHLY CYCLICAL, WHICH COULD ADVERSELY AFFECT OUR SALES AND
RESULTS OF OPERATIONS.
The truck trailer manufacturing industry historically has been and is
expected to continue to be cyclical, as well as affected by overall economic
conditions. New trailer production for the trailer industry as a whole was
approximately 140,000 in both 2001 and 2002 and approximately 183,000 in 2003.
Customers historically have replaced trailers in cycles that run from five to
twelve years, depending on service and trailer type. Poor economic conditions
can adversely affect demand for new trailers and in the past have led to an
overall aging of trailer fleets beyond this typical replacement cycle.
Customers' buying patterns can also reflect regulatory changes, such as the new
federal hours-of-service rules and anticipated 2007 federal emissions standards.
Our business is likely to continue to be highly cyclical based on current and
expected economic conditions and regulatory factors.
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SIGNIFICANT COMPETITION IN THE INDUSTRY IN WHICH WE OPERATE MAY RESULT IN OUR
COMPETITORS OFFERING NEW OR BETTER PRODUCTS AND SERVICES OR LOWER PRICES, WHICH
COULD RESULT IN A LOSS OF CUSTOMERS AND A DECREASE IN OUR REVENUES.
The truck trailer manufacturing industry is highly competitive. We compete
with other manufacturers of varying sizes, some of which may have greater
financial resources than we do. Barriers to entry in the standard truck trailer
manufacturing industry are low. As a result, it is possible that additional
competitors could enter the market at any time. In the recent past, the
manufacturing over-capacity and high leverage of some of our competitors, along
with the bankruptcies and financial stresses that affected the industry,
contributed to significant pricing pressures.
If we are unable to compete successfully with other trailer manufacturers,
we could lose customers and our revenues may decline. In addition, competitive
pressures in the industry may affect the market prices of our new and used
equipment, which, in turn, may adversely affect our sales margins and results of
operations.
WE ARE SUBJECT TO EXTENSIVE GOVERNMENTAL LAWS AND REGULATIONS, AND OUR COSTS
RELATED TO COMPLIANCE WITH, OR OUR FAILURE TO COMPLY WITH, EXISTING OR FUTURE
LAWS AND REGULATIONS COULD ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF
OPERATIONS.
The length, height, width, maximum weight capacity and other
specifications of truck trailers are regulated by individual states. The Federal
government also regulates certain truck trailer safety features, such as lamps,
reflective devices, tires, air-brake systems and rear-impact guards. Changes or
anticipation of changes in these regulations can have a material impact on our
financial results, as our customers may defer purchasing decisions and we may
have to reengineer products. In addition, we are subject to various
environmental laws and regulations dealing with the transportation, storage,
presence, use, disposal and handling of hazardous materials, discharge of storm
water and underground fuel storage tanks and may be subject to liability
associated with operations of prior owners of acquired property. On September
28, 2004, we entered a plea to two misdemeanor violations of the federal Clean
Water Act and agreed to pay a $400,000 fine pursuant to a plea agreement
resulting from a federal environmental investigation into our former Huntsville,
Tennessee facility. If we are found to be in violation of applicable laws or
regulations in the future, it could have an adverse effect on our business,
financial condition and results of operations. Our costs of complying with these
or any other current or future environmental regulations may be significant. In
addition, if we fail to comply with existing or future laws and regulations, we
may be subject to governmental or judicial fines or sanctions.
A DECLINE IN THE VALUE OF USED TRAILERS COULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS.
General economic and industry conditions, as well as the supply of used
trailers, influence the value of used trailers. As part of our normal business
practices, we maintain used trailer inventories and have entered into finance
contracts secured by used trailers, as well as residual guarantees and purchase
commitments for used trailers. Declines in the market value for used trailers or
the need to dispose of excess inventories has had, and could in the future have,
an adverse effect on our business, financial condition and results of
operations.
PRODUCT LIABILITY AND OTHER CLAIMS.
As a manufacturer of products widely used in commerce, we are subject to
regular product liability claims as well as warranty and similar claims alleging
defective products. From time to time claims may involve material amounts and
novel legal theories, and any insurance we carry may prove inadequate to
insulate us from material liabilities for these claims.
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RISKS RELATED TO AN INVESTMENT IN OUR COMMON STOCK
OUR COMMON STOCK HAS EXPERIENCED, AND MAY CONTINUE TO EXPERIENCE, PRICE
VOLATILITY AND A LOW TRADING VOLUME.
The trading price of our common stock has been and may continue to be
subject to large fluctuations. Our common stock price may increase or decrease
in response to a number of events and factors, including:
- trends in our industry and the markets in which we operate;
- changes in the market price of the products we sell;
- the introduction of new technologies or products by us or our
competitors;
- changes in expectations as to our future financial performance,
including financial estimates by securities analysts and investors;
- operating results that vary from the expectations of securities
analysts and investors;
- announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures, financings or
capital commitments;
- changes in laws and regulations; and
- general economic and competitive conditions.
This volatility may adversely affect the prices of our common stock
regardless of our operating performance. The price of our common stock also may
be adversely affected by the amount of common stock issuable upon conversion of
our 3 1/4% convertible senior notes due 2008. Assuming $125 million in aggregate
principal amount of these notes are converted at a conversion price of $19.20,
the number of shares of our common stock outstanding would increase by
approximately 6.5 million, or approximately 21.5%, after giving effect to the
shares we expect to issue in our pending common stock offering.
In addition, our common stock has experienced low trading volume in the
past.
WE ARE NOT CURRENTLY ABLE TO PAY CASH DIVIDENDS.
Since December 2001, we have not declared or paid cash or other dividends
on our common stock. In addition, the terms of our existing debt agreements
prohibit the payment of cash dividends on our common stock.
ITEM 6. EXHIBITS
(a) Exhibits:
10.20 Waiver and Amendment No. 4 to Loan and Security Agreement dated
September 29, 2004, incorporated by reference to the Registrant's
Form 8-K/A filed on September 30, 2004.
10.21 Form of Associate Stock Option Agreements under the Wabash
National 2004 Stock Incentive Plan.
10.22 Form of Associate Restricted Stock Agreements dated under the
Wabash National 2004 Stock Incentive Plan.
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10.23 Form of Executive Stock Option Agreements dated under the Wabash
National 2004 Stock Incentive Plan.
10.24 Form of Executive Restricted Stock Agreements dated under the
Wabash National 2004 Stock Incentive Plan.
31.01 Certification of Principal Executive Officer
31.02 Certification of Principal Financial Officer
32.01 Written Statement of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WABASH NATIONAL CORPORATION
Date: October 27, 2004 By: /s/ Robert J. Smith
------------------------------------
Robert J. Smith
Senior Vice President and Chief
Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
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