UNITED STATES 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 QUARTER ENDED SEPTEMBER 30, 2005 OR TRANSITION REPORT UNDER SECTION 13 0R 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) 1000 Sagamore Parkway South, [WABASH NATIONAL LOGO] 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 [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X] The number of shares of common stock outstanding at October 28, 2005 was 31,255,438.
WABASH NATIONAL CORPORATION INDEX FORM 10-Q <TABLE> <CAPTION> Page ---- <S> <C> PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets at September 30, 2005 and December 31, 2004 3 Condensed Consolidated Statements of Operations For the three and nine months ended September 30, 2005 and 2004 4 Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2005 and 2004 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures about Market Risk 16 Item 4. Controls and Procedures 17 PART II - OTHER INFORMATION Item 1. Legal Proceedings 17 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 17 Item 3. Defaults upon Senior Securities 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Information 17 Item 6. Exhibits 18 Signature 18 </TABLE> 2
WABASH NATIONAL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) <TABLE> <CAPTION> September 30, December 31, 2005 2004 -------------- ------------ (Unaudited) <S> <C> <C> ASSETS CURRENT ASSETS: Cash and cash equivalents $ 28,633 $ 41,928 Accounts receivable, net 118,838 87,512 Current portion of finance contracts 1,618 2,185 Inventories 164,703 94,600 Deferred income taxes 8,253 - Prepaid expenses and other 5,732 14,425 -------------- ------------ Total current assets 327,777 240,650 PROPERTY, PLANT AND EQUIPMENT, net 130,025 124,701 EQUIPMENT LEASED TO OTHERS, net 7,741 14,030 FINANCE CONTRACTS, net of current portion 382 3,319 GOODWILL 34,984 34,511 DEFFERRED INCOME TAXES 34,341 - OTHER ASSETS 20,188 14,835 -------------- ------------ $ 555,438 $ 432,046 ============== ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $ 1,000 $ 2,000 Accounts payable 111,057 78,107 Other accrued liabilities 45,780 52,442 -------------- ------------ Total current liabilities 157,837 132,549 LONG-TERM DEBT, net of current maturities 125,000 125,500 OTHER NONCURRENT LIABILITIES AND CONTINGENCIES 9,116 9,423 STOCKHOLDERS' EQUITY: Preferred stock, 300,000 shares authorized, 0 shares issued and outstanding - - Common stock 75,000,000 shares authorized, $0.01 par value, 31,253,123 and 30,807,370 shares issued and outstanding, respectively 315 309 Additional paid-in capital 336,708 325,512 Retained deficit (74,941) (162,097) Accumulated other comprehensive income 2,682 2,129 Treasury stock at cost, 59,600 common shares (1,279) (1,279) -------------- ------------ Total stockholders' equity 263,485 164,574 -------------- ------------ $ 555,438 $ 432,046 ============== ============ </TABLE> See Notes to Condensed Consolidated Financial Statements. 3
WABASH NATIONAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (Unaudited) <TABLE> <CAPTION> Three Months Nine Months Ended September 30, Ended September 30, ------------------- ------------------- 2005 2004 2005 2004 --------- -------- -------- --------- <S> <C> <C> <C> <C> NET SALES $ 293,834 $277,243 $872,922 $ 753,739 COST OF SALES 263,749 240,321 772,330 657,060 --------- -------- -------- --------- Gross profit 30,085 36,922 100,592 96,679 GENERAL AND ADMINISTRATIVE EXPENSES 10,068 10,569 29,499 31,352 SELLING EXPENSES 3,810 3,775 11,772 11,401 --------- -------- -------- --------- Income from operations 16,207 22,578 59,321 53,926 OTHER INCOME (EXPENSE): Interest expense (1,666) (2,944) (4,889) (8,610) Foreign exchange gains and losses, net 698 486 246 (59) Other, net 1,975 594 978 1,077 --------- -------- -------- --------- Income before income taxes 17,214 20,714 55,656 46,334 INCOME TAX (BENEFIT) EXPENSE (6,441) 420 (35,736) 919 --------- -------- -------- --------- NET INCOME $ 23,655 $ 20,294 $ 91,392 $ 45,415 ========= ======== ======== ========= COMMON STOCK DIVIDENDS DECLARED $ 0.045 $ - $ 0.135 $ - ========= ======== ======== ========= BASIC NET INCOME PER SHARE $ 0.76 $ 0.74 $ 2.94 $ 1.67 ========= ======== ======== ========= DILUTED NET INCOME PER SHARE $ 0.66 $ 0.62 $ 2.50 $ 1.42 ========= ======== ======== ========= COMPREHENSIVE INCOME Net income $ 23,655 $ 20,294 $ 91,392 $ 45,415 Foreign currency translation adjustment 934 1,143 553 321 --------- -------- -------- --------- NET COMPREHENSIVE INCOME $ 24,589 $ 21,437 $ 91,945 $ 45,736 ========= ======== ======== ========= </TABLE> See Notes to Condensed Consolidated Financial Statements. 4
WABASH NATIONAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) <TABLE> <CAPTION> Nine Months Ended September 30, ------------------- 2005 2004 --------- -------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 91,392 $ 45,415 Adjustments to reconcile net cash provided by (used in) operating activities: Depreciation and amortization 11,864 14,745 Net gain on the sale of assets (1,069) (405) Recovery of losses on accounts receivable and finance contracts (23) (30) Deferred income taxes (35,986) - Cash used for restructuring activities - (2,993) Trailer valuation charges 161 415 Changes in operating assets and liabilities: Accounts receivable (31,139) (67,370) Finance contracts 3,254 4,039 Inventories (70,212) (26,989) Prepaid expenses and other 1,697 1,274 Accounts payable and accrued liabilities 29,048 15,844 Other, net 1,652 1,145 --------- -------- Net cash provided by (used in) operating activities 639 (14,910) --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (22,989) (5,760) Proceeds from the sale of property, plant and equipment 9,623 2,116 --------- -------- Net cash used in investing activities (13,366) (3,644) --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options 3,752 5,187 Borrowings under revolving credit facilities 15,286 534,916 Payments under revolving credit facilities (15,286) (511,999) Payments under long-term debt (1,500) (7,270) Common stock dividends paid (2,820) - --------- -------- Net cash (used in) provided by financing activities (568) 20,834 --------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (13,295) 2,280 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 41,928 12,552 --------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 28,633 $ 14,832 ========= ========= </TABLE> 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 2004 Annual Report on Form 10-K. Certain items previously reported in specific condensed consolidated financial statement captions have been reclassified to conform to the 2005 presentation. 2. INVENTORIES Inventories consisted of the following (in thousands): <TABLE> <CAPTION> September 30, 2005 December 31, 2004 ------------------ ----------------- <S> <C> <C> Raw material and components $ 55,673 $ 35,941 Work in process 11,619 4,653 Finished goods 71,387 35,222 After-market parts 5,845 6,115 Used trailers 20,179 12,669 -------- -------- $164,703 $ 94,600 ======== ======== </TABLE> 3. NEW ACCOUNTING PRONOUNCEMENTS Share-Based Payments. In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 123 (revised 2004), Share-Based Payment. SFAS No. 123R, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, superceded Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statements of Cash Flows. SFAS No. 123R requires that all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based upon their fair value. The current pro forma disclosure of the impact on earnings is no longer permitted. This Statement is effective for fiscal years beginning after June 15, 2005. Based upon options outstanding as of September 30, 2005, expense, net of tax, calculated using the Black-Scholes model would amount to approximately $1.0 million in 2006. 4. CONTINGENCIES 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. 6
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. <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, -------------------------- -------------------------- 2005 2004 2005 2004 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> (in thousands, except for per share amounts) Reported net income $ 23,655 $ 20,294 $ 91,392 $ 45,415 Pro forma stock-based employee compensation expense (net of tax) (1,012) (768) (2,976) (1,989) Stock-based employee compensation expense recorded (net of tax) 393 180 1,000 279 ---------- ---------- ---------- ---------- Proforma net income $ 23,036 $ 19,706 $ 89,416 $ 43,705 ========== ========== ========== ========== Basic net income per share: Reported net income per share $ 0.76 $ 0.74 $ 2.94 $ 1.67 ========== ========== ========== ========== Pro forma net income per share $ 0.74 $ 0.72 $ 2.87 $ 1.61 ========== ========== ========== ========== Diluted net income per share: Reported net income per share $ 0.66 $ 0.62 $ 2.50 $ 1.42 ========== ========== ========== ========== Pro forma net income per share $ 0.64 $ 0.60 $ 2.45 $ 1.37 ========== ========== ========== ========== </TABLE> 6. 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): <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, ------------------- ------------------- 2005 2004 2005 2004 ------- ------- ------- ------- <S> <C> <C> <C> <C> Basic net income per share: Net income $23,655 $20,294 $91,392 $45,415 ======= ======= ======= ======= Weighted average common shares outstanding 31,249 27,314 31,121 27,150 ======= ======= ======= ======= Basic net income per share $ 0.76 $ 0.74 $ 2.94 $ 1.67 ======= ======= ======= ======= Diluted net income per share: Net income $23,655 $20,294 $91,392 $45,415 After-tax equivalent of interest on convertible notes 1,234 1,210 3,679 3,618 ------- ------- ------- ------- Diluted net income $24,889 $21,504 $95,071 $49,033 ======= ======= ======= ======= Weighted average common shares outstanding 31,249 27,314 31,121 27,150 Dilutive stock options/shares 196 721 314 870 Convertible notes equivalent shares 6,548 6,510 6,534 6,510 ------- ------- ------- ------- Diluted weighted average common shares outstanding 37,993 34,545 37,969 34,530 ======= ======= ======= ======= Diluted net income per share $ 0.66 $ 0.62 $ 2.50 $ 1.42 ======= ======= ======= ======= </TABLE> 7
7. 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. Reportable segment information is as follows (in thousands): <TABLE> <CAPTION> Retail and Consolidated Manufacturing Distribution Eliminations Totals ------------- ------------ ------------ ------------ <S> <C> <C> <C> <C> THREE MONTHS ENDED SEPTEMBER 30, 2005 Net Sales External customers $ 231,302 $ 62,532 $ - $ 293,834 Intersegment sales 26,803 - (26,803) - --------- --------- --------- --------- Total Net Sales $ 258,105 $ 62,532 $ (26,803) $ 293,834 ========= ========= ========= ========= Income from Operations $ 14,794 $ 636 $ 777 $ 16,207 Assets $ 523,659 $ 195,883 $(164,104) $ 555,438 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 from Operations $ 20,419 $ 509 $ 1,650 $ 22,578 Assets $ 444,988 $ 187,165 $(162,396) $ 469,757 NINE MONTHS ENDED SEPTEMBER 30, 2005 Net Sales External customers $ 686,990 $ 185,932 $ - $ 872,922 Intersegment sales 90,794 - (90,794) - --------- --------- --------- --------- Total Net Sales $ 777,784 $ 185,932 $ (90,794) $ 872,922 ========= ========= ========= ========= Income from Operations $ 57,562 $ 2,343 $ (584) $ 59,321 Assets $ 523,659 $ 195,883 $(164,104) $ 555,438 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 $ 56,123 $ (1,547) $ (650) $ 53,926 Assets $ 444,988 $ 187,165 $(162,396) $ 469,757 </TABLE> 8
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): <TABLE> <CAPTION> Three Months Ended September 30, Nine Months Ended September 30, ------------------------------------------- ------------------------------------------- 2005 2004 2005 2004 ------------------- ------------------- ------------------- -------------------- $ % $ % $ % $ % ------- ------- ------- ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> <C> New Trailers 261,829 89.1 243,047 87.7 776,910 89.0 657,571 87.2 Used Trailers 13,041 4.5 14,485 5.2 38,918 4.4 40,963 5.5 Parts & Service 15,076 5.1 15,654 5.6 45,272 5.2 43,988 5.8 Other 3,888 1.3 4,057 1.5 11,822 1.4 11,217 1.5 ------- ------- ------- ------- ------- ------- ------- ------- Total Net Sales 293,834 100.0 277,243 100.0 872,922 100.0 753,739 100.0 ======= ======= ======= ======= ======= ======= ======= ======= </TABLE> 8. INCOME TAXES In 2005, management analyzed its projected future income and determined that a portion of its previously reserved deferred tax assets were more likely than not realizable based on criteria set forth in SFAS No. 109, Accounting for Income Taxes. As a result, the Company reversed $35.9 million of valuation allowance, of which $29.3 million was recorded in the second quarter of 2005. In addition, the Company has utilized $23.0 million of net operating losses (NOL) to offset current year income. The Company will continue to utilize NOLs through December 31, 2005 to offset 2005 income. The following table provides a reconciliation of differences from the U.S. Federal statutory rate (in thousands): <TABLE> <CAPTION> Nine Months Ended September 30, ------------------------------ 2005 2004 ------------- ------------ <S> <C> <C> Pretax book income $ 55,656 $ 46,334 U.S. Federal tax expense at 35% statutory rate $ 19,480 $ 16,217 U.S. Federal alternative minimum tax 1,095 927 State income taxes 2,992 2,193 Reversal of tax valuation allowance (35,879) - Current utilization of net operating losses (23,030) (19,363) Other (394) 945 -------- -------- Total income tax (benefit) expense $(35,736) $ 919 ======== ======== </TABLE> ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This report, including documents incorporated herein by reference, contains forward-looking statements. Additional written or oral forward-looking statements may be made by Wabash 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 Wabash, 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. 9
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 under the heading "Risk Factors" in our Form 10-K for the year ended December 31, 2004 and elsewhere herein, including, but not limited to, Item 5 of Part II hereof. RESULTS OF OPERATIONS The following table sets forth certain operating data as a percentage of net sales for the periods indicated: <TABLE> <CAPTION> Percentage of Net Sales -------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, -------------------- -------------------- 2005 2004 2005 2004 ----- ----- ----- ----- <S> <C> <C> <C> <C> Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 89.8 86.7 88.5 87.2 ----- ----- ----- ----- Gross profit 10.2 13.3 11.5 12.8 General and administrative expenses 3.4 3.8 3.4 4.2 Selling expense 1.3 1.3 1.3 1.5 ----- ----- ----- ----- Income from operations 5.5 8.2 6.8 7.1 Interest expense (0.5) (1.1) (0.5) (1.1) Foreign exchange gains and losses, net 0.2 0.2 - - Other, net 0.7 0.2 0.1 0.1 ----- ----- ----- ----- Income before income taxes 5.9 7.5 6.4 6.1 Income tax (benefit) expense (2.2) 0.2 (4.1) 0.1 ----- ----- ----- ----- Net income 8.1% 7.3% 10.5% 6.0% ===== ===== ===== ===== </TABLE> The industry recovery that began in 2003 continues and production of trailers is anticipated to increase from approximately 229,000 units (171,000 van units) in 2004 to approximately 254,000 units (180,000 van units) in 2005 according to ACT Research Company, LLC (ACT) estimates. The improvement is predicated on a number of factors including improved general economic conditions and pent-up trucking industry demand for replacement units as the average age of trailer fleets increases. Recent economic indicators show a tightening of the market and a general slowdown in the U.S. economy, the full impact of which we are not able to determine at this time. On August 19, 2005, the Department of Transportation issued revised hours-of-service regulations with minor changes to the rules in effect since January 1, 2004. To date, regulations regarding driver hours have had no discernible impact on our business. We have participated in the industry growth because our core customers are among the largest participants in the trucking industry, our DuraPlate(R) trailer continues to gain market penetration and we are expanding our presence into the middle market carriers - approximately 1,250 carriers with fleet sizes ranging from 250 to 7,500 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. In 2004, there was significant price volatility in our principal raw materials, steel and timber. At the beginning of 2005, we experienced approximately a 5% increase in overall raw material and component prices and they have remained reasonably constant since then. 10
THREE MONTHS ENDED SEPTEMBER 30, 2005 NET SALES Net sales increased $16.6 million in the third quarter of 2005, while the volume of new and used trailers sold decreased 1% and 18%, respectively, compared to the third quarter of 2004. By business segment, net external sales and related units sold were as follows (in millions, except unit data): <TABLE> <CAPTION> Three Months Ended September 30, ------------------------------------- 2005 2004 % Change ------ ------ ---------- <S> <C> <C> <C> Sales by Segment: Manufacturing $ 231.3 $215.5 7% Retail and Distribution 62.5 61.7 1% ------- ------ Total $ 293.8 $277.2 6% ======= ====== New trailers: (units) Manufacturing 12,200 12,100 1% Retail and Distribution 1,400 1,600 (13%) ------- ------ Total 13,600 13,700 (1%) ======= ====== Used trailers 1,400 1,700 (18%) ======= ====== </TABLE> Manufacturing sales increased primarily due to higher selling prices per unit in part from passing through increases in raw material costs, offset in part by an unfavorable product mix in the third quarter of 2005, which included a significant increase in the number of lower priced double, container and converter dolly units. Units shipped for 2005 were negatively impacted as we and our customers confronted logistics and high fuel costs associated with the Gulf hurricanes. Third quarter 2005 sales in the retail and distribution segment were up $0.8 million compared to the prior year third quarter. New trailer sales in this segment improved $2.8 million primarily as a result of higher selling prices, despite a decline in unit volume. Used trailer sales were flat compared to the prior year quarter due to continued constraints on used equipment availability, offset by higher selling prices resulting from strong market conditions and a sales mix containing later model units. Parts and service sales declined $1.4 million due to having four fewer full-service branches. GROSS PROFIT Gross profit decreased to $30.1 million for the third quarter of 2005 from $36.9 million in the third quarter of 2004. Gross profit in 2005 as a percent of sales was 10.2% for the quarter compared to 13.3% for the same period in 2004. As discussed below, both of our segments were impacted as follows (in millions): <TABLE> <CAPTION> Three Months Ended September 30, --------------------------------- 2005 2004 % Change ----- ----- -------- <S> <C> <C> <C> Gross Profit by Segment: Manufacturing $24.5 $30.1 (19%) Retail and Distribution 4.8 5.2 (8%) Eliminations 0.8 1.6 (50%) ----- ----- Total Gross Profit $30.1 $36.9 (18%) ===== ===== </TABLE> The manufacturing segment's gross profit as a percentage of sales was 10.6% in 2005, a 3.4 percentage point decline from the prior year quarter. The decrease in margin percentage primarily resulted from a product mix that included a larger portion of lower margin container, double and FreightPro(R) units than the mix in the comparable 2004 quarter and the impact of manufacturing inefficiencies related to utilization of personnel, parts shortages and an increased focus on product quality. During the second quarter, we implemented a number of initiatives to rectify production issues. Although overall manufacturing productivity declined in the third 11
quarter compared to the second quarter of this year, the corrective actions gained significant traction in September 2005 and have since registered the highest levels of productivity and the lowest levels of overtime since June 2005. The retail and distribution segment's gross profit as a percent of sales was 7.7% in the third quarter 2005 compared to 8.4% in the 2004 period. New trailer margins declined in the quarter as material cost increases more than offset increases in selling prices. Service margins as a percent of sales were up for the quarter primarily due to the impact of continuous improvement initiatives resulting in improved service productivity. Used trailer margins were up in the 2005 period due to the overall strength of the used trailer market. OTHER INCOME (EXPENSE) Interest expense totaled $1.7 million for the quarter ended September 30, 2005, a decrease of $1.3 million from the prior year period primarily due to reduced average borrowings. Other, net for the three months ended September 30, 2005 primarily related to a gain on the sale of a property. INCOME TAXES In 2005, we analyzed our projected future income and determined that a portion of our previously reserved deferred tax assets were more likely than not realizable based on criteria set forth in SFAS No. 109. As a result, we have reversed $6.6 million of valuation allowance in the third quarter of 2005. In addition, we utilized $7.3 million of net operating losses (NOL) to offset third quarter income. We will continue to utilize NOLs through December 31, 2005 to offset 2005 income. We recognized income tax expense of $0.4 million in the 2004 period primarily related to Federal and state alternative minimum tax (AMT). Based on current estimates, we believe we have sufficient tax NOL carryforwards to offset income tax liabilities that would otherwise arise during 2005. NINE MONTHS ENDED SEPTEMBER 30, 2005 NET SALES Net sales increased $119.2 million for the nine months of 2005 compared to the 2004 period. By business segment, net external sales and related units sold were as follows (in millions, except unit data): <TABLE> <CAPTION> Nine Months Ended September 30, ----------------------------------- 2005 2004 % Change ------ ------ -------- <S> <C> <C> <C> Sales by Segment: Manufacturing $687.0 $575.2 19% Retail and Distribution 185.9 178.5 4% ------ ------ Total $872.9 $753.7 16% ====== ====== New trailers: (units) Manufacturing 35,700 32,800 9% Retail and Distribution 4,300 4,700 (9%) ------ ------ Total 40,000 37,500 7% ====== ====== Used trailers 4,200 5,500 (24%) ====== ====== </TABLE> Manufacturing sales increased due to higher unit volumes and prices, which were offset in part by a change in product mix resulting from an increasing percentage of lower priced double, container and converter dolly units in the 2005 period. The increase in selling prices resulted from passing through most increases in raw material costs. Sales for the nine months of 2005 in the retail and distribution segment were up $7.4 million compared to the prior year period. New trailer sales in this segment increased $8.6 million primarily as a result of higher selling 12
prices, which outpaced the impact of a decline in unit volume. A modest increase in used trailer sales was achieved despite inventory constraints as selling prices were positively impacted by market conditions and product mix. Sales for parts and service were relatively flat compared to the 2004 period, despite having four fewer full-service branches. Leasing revenues declined $1.5 million as we continue to wind-down that business. GROSS PROFIT Gross profit for the nine months of 2005 increased $3.9 million to $100.6 million compared to $96.7 million for the nine months of 2004. Gross profit as a percent of sales was 11.5% compared to 12.8% for the same period in 2004. As discussed below, both of our segments were impacted as follows (in millions): <TABLE> <CAPTION> Nine Months Ended September 30, ------------------------------- 2005 2004 % Change -------- ------- -------- <S> <C> <C> <C> Gross Profit by Segment: Manufacturing $ 85.8 $ 84.1 2% Retail and Distribution 15.4 13.2 17% Eliminations (0.6) (0.6) - -------- ------- Total Gross Profit $ 100.6 $ 96.7 4% ======== ======= </TABLE> The manufacturing segment's gross profit for the nine months of 2005 was positively impacted by an increase in unit volume over the 2004 period and our ability to offset increases in the average per trailer raw material costs, including the effects of product mix, with increased selling prices. Gross profit as a percentage of sales was 12.5% in 2005, a 2.1 percentage point decrease from the nine months in 2004. The decrease in margin percentage primarily resulting from a product mix with a larger percentage of lower margin units than the comparable 2004 period and the impact of manufacturing inefficiencies that arose towards the end of the second quarter 2005 related to the utilization of personnel, parts shortages and an increased focus on product quality. The corrective actions initiated at that time gained significant traction in September 2005 and have since registered the highest level of productivity and the lowest levels of overtime since June 2005. Further, gross profit for the nine months of 2005 was negatively impacted by additional warranty reserve requirements of $1.1 million for trailers produced prior to 2003, while the 2004 period received a benefit of $1.4 million related to specific warranty issues. Both adjustments were recorded in the second quarters of their respective years. We also incurred additional trailer delivery costs of $2.1 million in 2005 compared to 2004. The 2004 period also benefited from the favorable outcome of residual contingencies of $0.7 million. The retail and distribution segment continued to attain improved gross profit for the nine months of 2005 through favorable market conditions and internal initiatives. The retail and distribution segment's gross profit as a percent of sales increased to 8.3% in the 2005 period from 7.4% in the 2004 period. Parts and service margins as a percent of sales were up for the nine months of 2005 compared to the 2004 period due to improved volumes and productivity. Used trailer margins were up in the 2005 period due to the overall strength of the used trailer market. New trailer margins declined slightly in the 2005 period as selling price increases were unable to fully offset material cost increases. The 2004 period included $1.1 million of profit related to RoadRailer(R) bogies from our finance and leasing business. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses decreased $1.9 million in the nine months of 2005 to $29.5 million from $31.4 million in the prior year period primarily due to reductions in outside professional fees and compensation costs. The 2004 period benefited from the recovery of taxes of $0.6 million. OTHER INCOME (EXPENSE) Interest expense totaled $4.9 million for the nine months ended September 30, 2005, a decrease of $3.7 million from the prior year period primarily due to reduced average borrowings. Other, net for the nine months ended September 30, 2005 was income of $1.0 million compared to income of $1.1 million in the 2004 period. Income in both years was primarily related to gains on the sale of properties. 13
INCOME TAXES In 2005, we analyzed our projected future income and determined that a portion of our previously reserved deferred tax assets were more likely than not realizable based on criteria set forth in SFAS No. 109. As a result, we have reversed $35.9 million of valuation allowance. In addition, we utilized $23.0 million of NOLs to offset current year income. We will continue to utilize NOLs through December 31, 2005 to offset 2005 income. We recognized income tax expense of $0.9 million in the 2004 period primarily related to Federal and state AMT. Based on current estimates, we believe we have sufficient tax NOL carryforwards to offset income tax liabilities that would otherwise arise during 2005. LIQUIDITY AND CAPITAL RESOURCES CAPITAL STRUCTURE Today, our capital structure is comprised of a mix of equity and debt. As of September 30, 2005, our debt to equity ratio is approximately 1:2. Our objective is to generate operating cash flows sufficient to satisfy normal requirements for working capital and capital expenditures and be positioned to take advantage of market opportunities. DEBT AMENDMENT On September 23, 2005, we entered into an amendment of our loan and security agreement with our lenders to, among other things, increase dividend payments per fiscal year to $20 million and allow the repurchase of up to $50 million of Common Stock over the remaining term of the agreement. Under our repurchase program, we may repurchase stock on the open market or in private transactions, at times and amounts deemed appropriate. We may limit or terminate the program at any time. As of September 30, 2005, no shares were repurchased. CASH FLOW Cash provided by operating activities at September 30, 2005 amounted to $0.6 million, an increase of $15.5 million from the prior year period as a $6.2 million increase in net income (adjusted for non-cash items) was partially offset by increases in working capital. The following is a discussion of factors impacting certain working capital items in the nine months of 2005 compared to the nine months of 2004. - Accounts receivables increased $31.1 million in 2005 compared to $67.4 million in 2004. Days sales outstanding, a measure of working capital efficiency that measures the amount of time a receivable is outstanding, was 37 days at September 30, 2005, a decrease of eight days versus the same period in the prior year and an increase of nine days from December 31, 2004. - Inventory increased $70.2 million in 2005 compared to $27.0 in 2004. Inventory turns, a commonly used measure of working capital efficiency that measures how quickly inventory is converted into sales, were approximately six times compared to eight times in the prior year. The inventory increases are primarily due to a change in production levels, timing of raw materials deliveries, price increases and higher new and used trailer inventories. Raw material inventories increased due to production levels and adjusting our just-in-time deliveries to improve first-pass yields. Used trailer inventories increased as several trade deals were closed recently. New trailer inventories were impacted by driver shortages resulting in pick-up and delivery delays. - Accounts payable and accrued liabilities increased approximately $29.0 million in 2005 compared to $15.8 million in 2004 in line with increases in inventory. Investing activities used $13.4 million in the nine months of 2005, a change of $9.7 million from the nine months of 2004 resulting primarily from increased capital spending. Financing activities used $0.6 million during the nine months of 2005, a change of $21.4 million from the nine months of 2004 primarily due to reduced borrowings under our revolving credit facility and the payment of dividends in the 2005 period. 14
Capital Expenditures Capital spending amounted to approximately $23.0 million for the nine month period of 2005 and is anticipated to be in the range of $30 million to $35 million for 2005. The spending included $13.5 million related to production line automation and ERP system projects. Outlook Entering the third quarter of 2005, we were faced with several challenges most notably employee turnover, production delays and product quality. We are pleased to report that our initiatives in these areas: better pre-assessment and training of temporary staffing, improved fit and finish and higher levels of first-pass yield (FPY) were able to gain traction in the latter portion of the quarter and are expected to positively impact the fourth quarter and 2006. Specifically, we were able to increase temporary employee retention and preparedness and improve our FPY levels. The impact on production has been a return to early second quarter of 2005 production levels, while reducing the number of temporary associates and the required overtime, both of which should provide cost savings going forward, and a move toward reductions in our work-in-process trailer inventory by year-end. We are also seeing some relief from the driver shortage experienced in the third quarter resulting from the impact on shipping of the hurricanes that hit the Gulf Coast. This shortage impacted our customer's ability to pick-up their trailers. For the fourth quarter, we expect shipments to be in the 15,000 to 16,000 unit range and that margins should show improvements from the third quarter as a result of increased manufacturing productivity and possibly some modest relief in material costs. Looking ahead to 2006, we anticipate only a modest 2% increase in van industry production, reaching 173,000 units compared to the ACT estimates of 180,000 units. The reduced rate of growth in 2006 compared to the preceding years results from the expected truck buy in advance of emission regulation that become effective in 2007. We expect a 10% increase in unit sales as we continue to expand our presence with mid-market accounts and the continued acceptance of DuraPlate(R) as the product of choice. The number of units booked for 2006 are well ahead of what they were a year ago; however, they are primarily comprised of larger fleets. Also, the number of units booked for the prior year occurred very late in a cycle that normally extends from September to April. Selling prices will be under some pressure as available capacity exists in the industry and raw materials and components prices will continue to increase as we are again seeing steel industry pressure for price increases. The industry growth 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. We expect to participate in any industry growth there is because (1) our core customers are among the dominant participants in the trucking industry, (2) our DuraPlate(R) trailer continues to have increased market penetration, (3) our focus on developing solutions that reduce our customers' trailer maintenance cost, and (4) the success we are achieving expanding our presence into the middle market carriers. Thus far in 2005, we have added 41 new middle market customers representing orders of approximately 5,700 units that will be produced over the next several years. As of September 30, 2005, our liquidity position, defined as cash on hand and available borrowing capacity, amounted to approximately $147.0 million and total debt and lease obligations amounted to approximately $131.3 million (including $5.3 million of operating lease commitments). We expect that in 2005, we will be able to generate sufficient cash flow from operations to fund working capital and capital expenditure requirements. 15
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS We have included a summary of our Contractual Obligations and Commercial Commitments in our annual report on Form 10-K for the year ended December 31, 2004, filed on March 3, 2005. During 2005, we have seen our used trailer trade commitments increase to $27.1 million at September 30, 2005 from $4.4 million as of December 31, 2004 due to the trade deals recently closed. Additionally, we have capital expenditure commitments of $3.5 million related to our production line automation project. OFF-BALANCE SHEET TRANSACTIONS During the second quarter of 2005, we entered into a $2.2 million three-year lease of computer equipment. Future minimum lease payments for this lease amount to $0.8 million per year. As of September 30, 2005, we had approximately $5.3 million in operating lease commitments. CRITICAL ACCOUNTING POLICIES AND ESTIMATES We have included a summary of our Critical Accounting Estimates in our annual report on Form 10-K for the year ended December 31, 2004, filed on March 3, 2005. There have been no material changes to the summary provided in that report. 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 $490 million at September 30, 2005 compared to $380 million at June 30, 2005. We expect to complete the majority of our existing backlog orders within the next twelve months. CUSTOMER CREDIT RISK We sublease certain highly specialized RoadRailer(R) equipment to Grupo Transportation Marititma Mexicana SA (TMM), who is experiencing financial difficulties. In August 2004, TMM completed the restructuring of its debt agreements and has sold certain assets. Customer payments, which have historically been timely, are behind schedule. The customer owes us $6.4 million secured by highly specialized RoadRailer(R) equipment, which due to the nature of the equipment, has a minimal recovery value. 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 polyethylene. 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, 2005, we had outstanding purchase commitments of approximately $11.0 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. 16
B. INTEREST RATES As of September 30, 2005, we had no floating rate debt outstanding. 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 $0.9 million impact on results of operations. We have entered into Canadian dollar foreign currency forward contracts in an effort to mitigate potential Canadian currency fluctuation impact on working capital requirements. As of September 30, 2005, we had outstanding $4.3 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 DISCLOSURE CONTROLS AND PROCEDURES Based on an evaluation under the supervision and with the participation of our management, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 14a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) were effective as of September 30, 2005. CHANGES IN INTERNAL CONTROLS There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the third quarter of fiscal 2005 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There has been no material changes in legal proceedings from the items disclosed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission. ITEM 2. UNREGISTERED SALES 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 in our Form 10-K for the year ended December 31, 2004, including those under the heading "Risk Factors" appearing in Item 7B of Part II of the Form 10-K, in addition to risk factors discussed below and other information contained or incorporated by reference in this 17
Report before investing in our securities. Realization of any of the following risks could have a material adverse effect on our business, financial condition, cash flows and results of operations. WE ARE IN THE INITIAL STAGES OF A PROJECT TO IMPLEMENT A COMPANY-WIDE ENTERPRISE RESOURCE PLANNING (ERP) SYSTEM, AND IF OUR IMPLEMENTATION IS UNSUCCESSFUL OR PROVES MORE COSTLY THAN EXPECTED OUR BUSINESS COULD BE HARMED. The project to implement a new ERP system is in its initial stages. Our new ERP system is expected to integrate departments and functions across the Company, enhance the ability to service customers and improve our control environment. We may encounter delays and unforeseen costs in this process. If we are unable to implement the ERP system successfully, we may not be able to properly serve our customers or realize expected efficiencies. WE MAY NOT BE SUCCESSFUL IN OUR PLANS TO UPGRADE OUR PRODUCTION LINES AND REALIZE INCREASED LEVELS OF EFFICIENCY. In 2005, we began the first phase of what is planned to be a four-phase three-year project to replace four trailer assembly lines using technology adapted from the automotive industry at a cost of approximately $10 million per line. Our costs to replace the lines could exceed our estimates, the technology may not work as planned and we may not be able to meet our estimated timeline. Even if we are successful in replacing the production lines, we may not realize the level of costs savings that we estimate. ITEM 6. EXHIBITS (a) Exhibits: <TABLE> <S> <C> 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). </TABLE> 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: November 7, 2005 By: /s/ Robert J. Smith ------------------------------- Robert J. Smith Senior Vice President and Chief Financial Officer (Principal Financial Officer) 18