WABASH NATIONAL Corp - Quarter Report: 2021 March (Form 10-Q)
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 the Securities Exchange Act of 1934 | |||||||
For the quarterly period ended March 31, 2021
or
| ☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |||||||
For the transition period from to _
Commission File Number: 001-10883
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 | |||||||||||
| Lafayette | Indiana | 47905 | |||||||||
| (Address of Principal Executive Offices) | (Zip Code) | ||||||||||
Registrant’s telephone number, including area code: (765) 771-5300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Common Stock, $0.01 par value | WNC | New York Stock Exchange | ||||||||||||
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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☒ | ||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||
| Emerging growth company | ☐ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of common stock outstanding at April 23, 2021 was 51,517,070.
WABASH NATIONAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
| Page | ||||||||
2
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
WABASH NATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
| March 31, 2021 | December 31, 2020 | ||||||||||
| (Unaudited) | |||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 168,887 | $ | 217,677 | |||||||
| Accounts receivable, net | 134,360 | 101,301 | |||||||||
| Inventories, net | 227,172 | 163,750 | |||||||||
| Prepaid expenses and other | 90,225 | 63,036 | |||||||||
| Total current assets | 620,644 | 545,764 | |||||||||
| Property, plant, and equipment, net | 206,598 | 209,676 | |||||||||
| Goodwill | 199,552 | 199,560 | |||||||||
| Intangible assets, net | 161,097 | 166,887 | |||||||||
| Other assets | 38,463 | 39,583 | |||||||||
| Total assets | $ | 1,226,354 | $ | 1,161,470 | |||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of long-term debt | $ | — | $ | — | |||||||
| Current portion of finance lease obligations | 293 | 348 | |||||||||
| Accounts payable | 170,961 | 104,425 | |||||||||
| Other accrued liabilities | 127,324 | 130,980 | |||||||||
| Total current liabilities | 298,578 | 235,753 | |||||||||
| Long-term debt | 448,214 | 447,979 | |||||||||
| Finance lease obligations | — | 30 | |||||||||
| Deferred income taxes | 52,333 | 46,777 | |||||||||
| Other non-current liabilities | 24,927 | 26,052 | |||||||||
| Total liabilities | 824,052 | 756,591 | |||||||||
| Commitments and contingencies | |||||||||||
| Stockholders’ equity: | |||||||||||
Common stock 200,000,000 shares authorized, $0.01 par value, 51,711,291 and 52,536,482 shares outstanding, respectively | 757 | 755 | |||||||||
| Additional paid-in capital | 647,960 | 644,695 | |||||||||
| Retained earnings | 106,483 | 107,233 | |||||||||
| Accumulated other comprehensive income | 21,860 | 7,633 | |||||||||
Treasury stock at cost, 24,111,035 and 23,004,607 common shares, respectively | (374,758) | (355,437) | |||||||||
| Total stockholders' equity | 402,302 | 404,879 | |||||||||
| Total liabilities and stockholders’ equity | $ | 1,226,354 | $ | 1,161,470 | |||||||
The accompanying notes are an integral part of these Condensed Consolidated Statements.
3
WABASH NATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited – dollars in thousands, except per share amounts)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Net sales | $ | 392,003 | $ | 387,074 | |||||||
| Cost of sales | 344,837 | 350,331 | |||||||||
| Gross profit | 47,166 | 36,743 | |||||||||
| General and administrative expenses | 22,867 | 26,192 | |||||||||
| Selling expenses | 6,665 | 7,998 | |||||||||
| Amortization of intangible assets | 5,798 | 5,495 | |||||||||
| Impairment and other, net | 621 | 107,114 | |||||||||
| Income (loss) from operations | 11,215 | (110,056) | |||||||||
| Other income (expense): | |||||||||||
| Interest expense | (6,150) | (6,272) | |||||||||
| Other, net | (14) | 120 | |||||||||
| Other expense, net | (6,164) | (6,152) | |||||||||
| Income (loss) before income tax expense (benefit) | 5,051 | (116,208) | |||||||||
| Income tax expense (benefit) | 1,834 | (9,561) | |||||||||
| Net income (loss) | $ | 3,217 | $ | (106,647) | |||||||
| Net income (loss) per share: | |||||||||||
| Basic | $ | 0.06 | $ | (2.01) | |||||||
| Diluted | $ | 0.06 | $ | (2.01) | |||||||
| Weighted average common shares outstanding (in thousands): | |||||||||||
| Basic | 52,126 | 53,156 | |||||||||
| Diluted | 53,044 | 53,156 | |||||||||
| Dividends declared per share | $ | 0.08 | $ | 0.08 | |||||||
The accompanying notes are an integral part of these Condensed Consolidated Statements.
4
WABASH NATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited – dollars in thousands)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Net income (loss) | $ | 3,217 | $ | (106,647) | |||||||
| Other comprehensive income (loss), net of tax: | |||||||||||
| Foreign currency translation adjustment | (303) | (1,636) | |||||||||
| Unrealized gain (loss) on derivative instruments | 14,530 | (3,883) | |||||||||
| Total other comprehensive income (loss) | 14,227 | (5,519) | |||||||||
| Comprehensive income (loss) | $ | 17,444 | $ | (112,166) | |||||||
The accompanying notes are an integral part of these Condensed Consolidated Statements.
5
WABASH NATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited – dollars in thousands)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net income (loss) | $ | 3,217 | $ | (106,647) | |||||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities | |||||||||||
| Depreciation | 6,432 | 5,624 | |||||||||
| Amortization of intangibles | 5,798 | 5,495 | |||||||||
| Net gain on sale of property, plant and equipment | (193) | (3) | |||||||||
| Deferred income taxes | 661 | (1,849) | |||||||||
| Stock-based compensation | 2,032 | (917) | |||||||||
| Impairment | 817 | 107,114 | |||||||||
| Non-cash interest expense | 296 | 265 | |||||||||
| Accounts receivable | (33,059) | 34,522 | |||||||||
| Inventories | (63,422) | (59,001) | |||||||||
| Prepaid expenses and other | (7,031) | (838) | |||||||||
| Accounts payable and accrued liabilities | 61,789 | 8,235 | |||||||||
| Other, net | 259 | (2,054) | |||||||||
| Net cash used in operating activities | (22,404) | (10,054) | |||||||||
| Cash flows from investing activities | |||||||||||
| Capital expenditures | (4,165) | (6,278) | |||||||||
| Proceeds from the sale of property, plant, and equipment | 203 | 25 | |||||||||
| Net cash used in investing activities | (3,962) | (6,253) | |||||||||
| Cash flows from financing activities | |||||||||||
| Proceeds from exercise of stock options | 1,235 | — | |||||||||
| Dividends paid | (4,253) | (4,482) | |||||||||
| Borrowings under revolving credit facilities | 114 | 45,040 | |||||||||
| Payments under revolving credit facilities | (114) | (40) | |||||||||
| Principal payments under finance lease obligations | (85) | (80) | |||||||||
| Debt issuance costs paid | — | (9) | |||||||||
| Stock repurchases | (19,321) | (10,051) | |||||||||
| Net cash (used in) provided by financing activities | (22,424) | 30,378 | |||||||||
| Cash and cash equivalents: | |||||||||||
| Net (decrease) increase in cash, cash equivalents, and restricted cash | (48,790) | 14,071 | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 217,677 | 140,516 | |||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | 168,887 | $ | 154,587 | |||||||
| Supplemental disclosures of cash flow information: | |||||||||||
| Cash paid for interest | $ | 1,436 | $ | 1,543 | |||||||
| Refunds received for income taxes | $ | (403) | $ | (511) | |||||||
The accompanying notes are an integral part of these Condensed Consolidated Statements.
6
WABASH NATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited – dollars in thousands)
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Losses | Treasury Stock | Total | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2020 | 52,536,482 | $ | 755 | $ | 644,695 | $ | 107,233 | $ | 7,633 | $ | (355,437) | $ | 404,879 | ||||||||||||||||||||||||||||
| Net income for the period | 3,217 | 3,217 | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | (303) | (303) | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 101,083 | 1 | 2,031 | 2,032 | |||||||||||||||||||||||||||||||||||||
| Stock repurchase | (1,038,674) | (19,321) | (19,321) | ||||||||||||||||||||||||||||||||||||||
| Common stock dividends | (3,967) | (3,967) | |||||||||||||||||||||||||||||||||||||||
| Unrealized gain on derivative instruments, net of tax | 14,530 | 14,530 | |||||||||||||||||||||||||||||||||||||||
| Common stock issued in connection with: | |||||||||||||||||||||||||||||||||||||||||
| Stock option exercises | 112,400 | 1 | 1,234 | 1,235 | |||||||||||||||||||||||||||||||||||||
| Balances at March 31, 2021 | 51,711,291 | $ | 757 | $ | 647,960 | $ | 106,483 | $ | 21,860 | $ | (374,758) | $ | 402,302 | ||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Losses | Treasury Stock | Total | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2019 | 53,473,620 | $ | 750 | $ | 638,917 | $ | 221,841 | $ | (3,978) | $ | (336,542) | $ | 520,988 | ||||||||||||||||||||||||||||
| Net loss for the period | (106,647) | (106,647) | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | (1,636) | (1,636) | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 141,223 | 3 | (920) | (917) | |||||||||||||||||||||||||||||||||||||
| Stock repurchase | (766,122) | (10,051) | (10,051) | ||||||||||||||||||||||||||||||||||||||
| Common stock dividends | (3,885) | (3,885) | |||||||||||||||||||||||||||||||||||||||
| Unrealized loss on derivative instruments, net of tax | (3,883) | (3,883) | |||||||||||||||||||||||||||||||||||||||
| Balances at March 31, 2020 | 52,848,721 | $ | 753 | $ | 637,997 | $ | 111,309 | $ | (9,497) | $ | (346,593) | $ | 393,969 | ||||||||||||||||||||||||||||
The accompanying notes are an integral part of these Condensed Consolidated Statements.
7
WABASH NATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
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 (the “SEC”). 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 its 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 Annual Report on Form 10-K for the year ended December 31, 2020.
2. NEW ACCOUNTING PRONOUNCEMENTS
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” which provides practical expedients and exceptions for applying Generally Accepted Accounting Principles (“GAAP”) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by the amendments in this update apply only to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued as a result of reference rate reform. These amendments are not applicable to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. ASU No. 2020-04 is effective as of March 12, 2020 through December 31, 2022 and may be applied to contract modifications and hedging relationships from the beginning of an interim period that includes or is subsequent to March 12, 2020. The Company will adopt this standard when LIBOR is discontinued. The Company is evaluating the impact the new standard will have on our condensed consolidated financial statements and related disclosures but does not anticipate a material impact.
3. REVENUE RECOGNITION
The Company recognizes revenue from the sale of its products when obligations under the terms of a contract with our customers are satisfied; this occurs with the transfer of control of our products and replacement parts or throughout the completion of service work. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring promised goods or services to a customer and excludes all taxes collected from the customer. Shipping and handling fees are included in Net sales and the associated costs included in Cost of sales in the Condensed Consolidated Statements of Operations. For shipping and handling costs that take place after the transfer of control, the Company applies the practical expedient and treats such costs as a fulfillment cost. Incidental items that are immaterial in the context of the contract are recognized as expense. For performance obligations satisfied over time, which include certain equipment-related sales within our Diversified Products reportable segment that have no alternative use and contain an enforceable right to payment, as well as service work whereby the customer simultaneously receives and consumes the benefits provided, the Company recognizes revenue on the basis of the Company’s efforts or inputs to the satisfaction of these performance obligations, measured by actual total cost incurred to the total estimated costs for each project. Total revenue recognized over time was not material to the condensed consolidated financial statements for all periods presented.
The Company has identified three separate and distinct performance obligations: 1) the sale of a trailer or equipment, 2) the sale of replacement parts, and 3) service work. For trailer, truck body, equipment, and replacement part sales, control is transferred and revenue is recognized from the sale upon shipment to or pick up by the customer in accordance with the contract terms. The Company does not have any material extended payment terms as payment is received shortly after the point of sale. Accounts receivable are recorded when the right to consideration becomes unconditional. The Company does have customers who pay for the product prior to the transfer of control which is recorded as customer deposits in Other accrued liabilities as shown in Note 10. Customer deposits are recognized as revenue when the Company performs its obligations under the contract and transfers control of the product.
8
4. GOODWILL
Goodwill and Q1 2020 Impairment
As of March 31, 2021, goodwill allocated to our Commercial Trailer Products, Diversified Products (“DPG”), and Final Mile Products (“FMP”) segments was approximately $2.6 million, $125.0 million, and $71.9 million, respectively. The Company considered whether there were any indicators of impairment during the three months ended March 31, 2021 and concluded there were none.
The Company did not perform in-line with expectations during the first quarter of 2020, partially as a result of the COVID-19 pandemic. In addition, subsequent to December 31, 2019, the Company’s share price and market capitalization declined. As a result, indicators of impairment were identified and the Company performed an interim quantitative assessment as of March 31, 2020, utilizing a combination of the income and market approaches, which were weighted evenly. The results of the quantitative analysis indicated the carrying value of the FMP and Tank Trailers (which is within the DPG segment) reporting units exceeded their respective fair values and, accordingly, goodwill impairment charges of $95.8 million and $11.0 million, respectively, were recorded during the first quarter of 2020. The goodwill impairment charges, which were based on Level 3 fair value measurements, are included in Impairment and other, net in the Condensed Consolidated Statements of Operations.
The changes in the carrying amounts of goodwill from December 31, 2019 through the three-month period ended March 31, 2021 were as follows (in thousands):
| Commercial Trailer Products | Diversified Products | Final Mile Products | Total | ||||||||||||||||||||
| Balance at December 31, 2019 | |||||||||||||||||||||||
| Goodwill | 4,288 | 140,686 | 167,715 | 312,689 | |||||||||||||||||||
| Accumulated impairment losses | (1,663) | — | — | (1,663) | |||||||||||||||||||
| Net balance as of December 31, 2019 | 2,625 | 140,686 | 167,715 | 311,026 | |||||||||||||||||||
| Goodwill impairments | — | (10,971) | (95,766) | (106,737) | |||||||||||||||||||
| Impact of divestiture on goodwill | — | (4,685) | — | $ | (4,685) | ||||||||||||||||||
| Effects of foreign currency | — | (44) | — | (44) | |||||||||||||||||||
| Balance at December 31, 2020 | |||||||||||||||||||||||
| Goodwill | 4,288 | 135,957 | 167,715 | 307,960 | |||||||||||||||||||
| Accumulated impairment losses | (1,663) | (10,971) | (95,766) | (108,400) | |||||||||||||||||||
| Net balance as of December 31, 2020 | 2,625 | 124,986 | 71,949 | 199,560 | |||||||||||||||||||
| Effects of foreign currency | — | (8) | — | (8) | |||||||||||||||||||
| Balance at March 31, 2021 | |||||||||||||||||||||||
| Goodwill | 4,288 | 135,949 | 167,715 | 307,952 | |||||||||||||||||||
| Accumulated impairment losses | (1,663) | (10,971) | (95,766) | (108,400) | |||||||||||||||||||
| Net balance as of March 31, 2021 | 2,625 | 124,978 | 71,949 | 199,552 | |||||||||||||||||||
5. INVENTORIES, NET
Inventories are stated at the lower of cost, determined on either the first-in, first-out or average cost method, or net realizable value. Inventories, net of reserves, consist of the following components (in thousands):
| March 31, 2021 | December 31, 2020 | ||||||||||
| Raw materials and components | $ | 134,085 | $ | 99,418 | |||||||
| Finished goods | 77,747 | 44,695 | |||||||||
| Work in progress | 8,806 | 11,592 | |||||||||
| Aftermarket parts | 5,453 | 6,567 | |||||||||
| Used trailers | 1,081 | 1,478 | |||||||||
| $ | 227,172 | $ | 163,750 | ||||||||
6. PREPAID EXPENSES AND OTHER
Prepaid expenses and other current assets consist of the following (in thousands):
| March 31, 2021 | December 31, 2020 | ||||||||||
| Chassis converter pool agreements | $ | 18,234 | $ | 17,767 | |||||||
| Assets held for sale | 2,247 | 1,897 | |||||||||
| Income tax receivables | 16,532 | 18,073 | |||||||||
| Insurance premiums & maintenance/subscription agreements | 9,235 | 4,384 | |||||||||
| Commodity swap contracts | 33,091 | 13,750 | |||||||||
| All other | 10,886 | 7,165 | |||||||||
| $ | 90,225 | $ | 63,036 | ||||||||
Chassis converter pool agreements represent chassis transferred to the Company on a restricted basis by the manufacturer, who retains the sole authority to authorize commencement of work on the chassis and to make certain other decisions with respect to the chassis including the terms and pricing of sales to the manufacturer’s dealers. Assets held for sale are related to land parcels and property, plant, and equipment assets that are unused and are actively being marketed for sale. Insurance premiums and maintenance/subscription agreements are charged to expense over the contractual life, which is generally one year or less. As further described in Note 8, commodity swap contracts relate to our hedging activities (that are in an asset position) to mitigate the risks associated with fluctuations in commodity prices. Other items primarily consist of contract assets related to contracts for which the Company recognizes revenue over time, and investments held by the Company’s captive insurance subsidiary. There is no restricted cash included in prepaid expenses and other current assets as of March 31, 2021 and December 31, 2020.
7. DEBT
Long-term debt consists of the following (in thousands):
| March 31, 2021 | December 31, 2020 | ||||||||||
| Senior Notes due 2025 | $ | 315,000 | $ | 315,000 | |||||||
| New Term Loan Credit Agreement due 2027 | 138,835 | 138,835 | |||||||||
| 453,835 | 453,835 | ||||||||||
| Less: unamortized discount and fees | (5,621) | (5,856) | |||||||||
| Less: current portion | — | — | |||||||||
| $ | 448,214 | $ | 447,979 | ||||||||
Senior Notes
On September 26, 2017, the Company issued Senior Notes due 2025 (the “Senior Notes”) with an aggregate principal amount of $325 million. The Senior Notes bear interest at the rate of 5.50% per annum from the date of issuance, and pay interest semi-annually in cash on April 1 and October 1 of each year. The Company used the net proceeds of $318.9 million from the sale of the Senior Notes to finance a portion of the acquisition of Supreme and to pay related fees and expenses. The Senior Notes are guaranteed on a senior unsecured basis by all direct and indirect existing and future domestic restricted subsidiaries, subject to certain restrictions. The Senior Notes and related guarantees are the Company’s and the guarantors’ general unsecured senior obligations and are subordinate to all of the Company’s and the guarantors’ existing and future secured debt to the extent of the assets securing that secured obligation. In addition, the Senior Notes are structurally subordinate to any existing and future debt of any of the Company’s subsidiaries that are not guarantors, to the extent of the assets of those subsidiaries. The Senior Notes will mature on October 1, 2025.
The indenture for the Senior Notes restricts the Company’s ability and the ability of certain of its subsidiaries, subject to certain exceptions and qualifications, to: (i) incur additional indebtedness; (ii) pay dividends or make other distributions in respect of, or repurchase or redeem, its capital stock or with respect to any other interest or participation in, or measured by, its profits; (iii) make loans and certain investments; (iv) sell assets; (v) create or incur liens; (vi) enter into transactions with affiliates; and (vii) consolidate, merge or sell all or substantially all of its assets.
The indenture for the Senior Notes contains customary events of default and covenants. As of March 31, 2021, the Company was in compliance with all covenants.
10
Contractual coupon interest expense and accretion of discount and fees for the Senior Notes for the three-month periods ended March 31, 2021 and 2020, was $4.5 million and $4.6 million, respectively. Contractual coupon interest expense and accretion of discount and fees are included in Interest expense on the Company’s Condensed Consolidated Statements of Operations.
Revolving Credit Agreement
On December 21, 2018, the Company entered into the Second Amended and Restated Credit Agreement among the Company, certain of its subsidiaries as borrowers (together with the Company, the “Borrowers”), the lenders from time to time party thereto, and Wells Fargo Capital Finance, LLC as the administrative agent (the “Revolver Agent”), which amended and restated the Company’s existing amended and restated revolving credit agreement, dated as of May 8, 2012.
On September 28, 2020, the Company entered into the First Amendment to Second Amended and Restated Credit Agreement (together with the Second Amended and Restated Credit Agreement, the “Revolving Credit Agreement” or “Revolving Facility”) among the Company, certain of its subsidiaries party thereto, the lenders party thereto, and the Revolver Agent. The Amendment primarily made conforming changes to the provisions in the Revolving Credit Agreement to reflect modifications made under the new term loan credit agreement, which is described in more detail below.
The Revolving Credit Agreement is guaranteed by certain subsidiaries of the Company (the “Revolver Guarantors”) and is secured by (i) first priority security interests in substantially all personal property of the Borrowers and the Revolver Guarantors, consisting of accounts receivable, inventory, cash, deposit and securities accounts and any cash or other assets in such accounts and, to the extent evidencing or otherwise related to such property, all general intangibles, licenses, intercompany debt, letter of credit rights, commercial tort claims, chattel paper, instruments, supporting obligations, documents and payment intangibles (collectively, the “Revolver Priority Collateral”), and (ii) second-priority liens on and security interests in (A) equity interests of each direct subsidiary held by the Borrowers and each Revolver Guarantor, and (B) substantially all other tangible and intangible assets of the Borrowers and the Revolver Guarantors, excluding real property (the “Term Priority Collateral”).
The Revolving Credit Agreement has a scheduled maturity date of December 21, 2023, subject to certain springing maturity events.
Under the Revolving Credit Agreement, the lenders agree to make available to the Company a $175 million revolving credit facility. The Company has the option to increase the total commitment under the facility to up to $275 million, subject to certain conditions. Subject to availability, the Revolving Credit Agreement provides for a letter of credit subfacility in an amount not in excess of $15 million, and allows for swingline loans in an amount not in excess of $17.5 million. Outstanding borrowings under the Revolving Credit Agreement will bear interest at an annual rate, at the Borrowers’ election, equal to (i) London Interbank Offer Rate (“LIBOR”) plus a margin ranging from 1.25% to 1.75% or (ii) a base rate plus a margin ranging from 0.25% to 0.75%, in each case depending upon the monthly average excess availability under the revolving loan facility. The Borrowers are required to pay a monthly unused line fee equal to 0.20% times the average daily unused availability along with other customary fees and expenses thereunder.
The Revolving Credit Agreement contains various customary covenants. In addition, the Company will be required to maintain a minimum fixed charge coverage ratio of not less than 1.0 to 1.0 as of the end of any period of 12 fiscal months when excess availability under the Revolving Credit Agreement is less than 10% of the total revolving commitment. The Company was in compliance with all covenants as of March 31, 2021.
During the three-month period ended March 31, 2021, and as of March 31, 2021, there were no amounts outstanding under the Revolving Facility. The Company paid no interest under the Revolving Credit Agreement during the three-month period ended March 31, 2021.
During the three-month period ended March 31, 2020, the Company drew $45.0 million under the Revolving Credit Agreement as a precautionary measure in response to the uncertainty caused by the COVID-19 pandemic. As of March 31, 2020, outstanding borrowings totaled $45.0 million, of which none was classified as current on the Company’s Condensed Consolidated Balance Sheets. For the three-month period ended March 31, 2020, the Company paid less than $0.1 million of interest. During the second quarter of 2020, the Company repaid the $45.0 million in outstanding borrowings.
The Company’s liquidity position, defined as cash on hand and available borrowing capacity on the Revolving Facility, amounted to $337.3 million as of March 31, 2021 and $384.0 million as of December 31, 2020.
11
New and Old Term Loan Credit Agreements
On September 28, 2020, the Company entered into a Term Loan Credit Agreement (the “New Term Loan Credit Agreement”) among the Company, the lenders from time to time party thereto, and Wells Fargo Bank, National Association, as the administrative agent (the “Term Agent”), providing for a senior secured term loan facility of $150 million that was advanced at closing. The New Term Loan Credit Agreement refinanced and replaced that certain Term Loan Credit Agreement, dated as of May 8, 2012 (as amended, restated, supplemented or otherwise modified from time to time, the “Old Term Loan Credit Agreement”), among the Company, the lenders party thereto and Morgan Stanley Senior Funding, Inc., as the administrative agent.
The New Term Loan Credit Agreement is guaranteed by certain subsidiaries of the Company (the “Term Loan Guarantors”) and is secured by (i) second priority security interests (subject only to the liens securing the Revolving Credit Agreement, customary permitted liens, and certain other permitted liens) in substantially all personal property of the Company and the Term Loan Guarantors, consisting of accounts receivable, inventory, cash, deposit and securities accounts and any cash or other assets in such accounts and, to the extent evidencing or otherwise related to such property, all general intangibles, licenses, intercompany debt, letter of credit rights, commercial tort claims, chattel paper, instruments, supporting obligations, documents and payment intangibles, and (ii) first priority security interests (subject only to customary permitted liens and certain other permitted liens) in (A) subject to certain limitations, equity interests of each direct subsidiary held by the Company and each Term Loan Guarantor, and (B) substantially all other tangible and intangible assets of the Company and the Term Loan Guarantors, including equipment, general intangibles, intercompany notes, investment property and intellectual property, but excluding real property. The respective priorities of the security interests securing the New Term Loan Credit Agreement and the Revolving Credit Agreement are governed by an Intercreditor Agreement, dated as of September 28, 2020, between the Term Agent and the Revolver Agent (the “Intercreditor Agreement”). The New Term Loan Credit Agreement has a scheduled maturity date of September 28, 2027. The loans under the New Term Loan Credit Agreement amortize in quarterly installments equal to 0.25% of the original principal amount of the term loans issued thereunder, with the balance payable at maturity.
Outstanding borrowings under the New Term Loan Credit Agreement bear interest at a rate, at the Company’s election, equal to (i) LIBOR (subject to a floor of 0.75% per annum) plus a margin of 3.25% per annum or (ii) a base rate plus a margin of 2.25% per annum.
The New Term Loan Credit Agreement contains customary covenants limiting the ability of the Company and its subsidiaries to, among other things, pay cash dividends, incur debt or liens, redeem or repurchase stock, enter into transactions with affiliates, merge, dissolve, pay off subordinated indebtedness, make investments and dispose of assets. As of March 31, 2021, the Company was in compliance with all covenants.
Subject to the terms of the Intercreditor Agreement, if the covenants under the New Term Loan Credit Agreement are breached, the lenders may, subject to various customary cure rights, require the immediate payment of all amounts outstanding and foreclose on collateral. Other customary events of default in the New Term Loan Credit Agreement include, without limitation, failure to pay obligations when due, initiation of insolvency proceedings, defaults on certain other indebtedness, and the incurrence of certain judgments that are not stayed, satisfied, bonded or discharged within 60 days.
As of March 31, 2021, the Company had $138.8 million outstanding under the New Term Loan Credit Agreement, of which none was classified as current on the Company’s Condensed Consolidated Balance Sheets. For the three-month period ended March 31, 2021, the Company paid interest of $1.4 million under the New Term Loan Credit Agreement and made no principal payments. For the three-month period ended March 31, 2020, under the Old Term Loan Credit Agreement the Company paid interest of $1.4 million and made no principal payments.
For each three-month period ended March 31, 2021 and 2020, the Company incurred charges of less than $0.1 million for amortization of fees and original issuance discount. Amortization of fees and original issuance discount are included in Interest expense in the Condensed Consolidated Statements of Operations.
8. FINANCIAL DERIVATIVE INSTRUMENTS
Commodity Pricing Risk
As of March 31, 2021, the Company was party to commodity swap contracts for specific commodities with notional amounts of approximately $129.0 million. The Company uses commodity swap contracts to mitigate the risks associated with fluctuations in commodity prices impacting its cash flows related to inventory purchases from suppliers. The Company does not hedge all commodity price risk.
At inception, the Company designated the commodity swap contracts as cash flow hedges. The contracts mature at specified monthly settlement dates and will be recognized into earnings through January 2022. The effective portion of the hedging transaction is recognized in Accumulated Other Comprehensive Income (“AOCI”) and transferred to earnings when the forecasted hedged transaction takes place or when the forecasted hedged transaction is no longer probable to occur.
12
Financial Statement Presentation
As of March 31, 2021 and December 31, 2020, the fair value carrying amount of the Company’s derivative instruments were recorded as follows (in thousands):
| Asset / (Liability) Derivatives | ||||||||||||||||||||
| Balance Sheet Caption | March 31, 2021 | December 31, 2020 | ||||||||||||||||||
| Derivatives designated as hedging instruments | ||||||||||||||||||||
| Commodity swap contracts | Prepaid expenses and other | $ | 33,091 | $ | 13,750 | |||||||||||||||
| Commodity swap contracts | Accounts payable and Other accrued liabilities | (1,625) | (366) | |||||||||||||||||
| Total derivatives designated as hedging instruments | $ | 31,466 | $ | 13,384 | ||||||||||||||||
The following table summarizes the gain or loss recognized in AOCI as of March 31, 2021 and December 31, 2020 and the amounts reclassified from AOCI into earnings for the three months ended March 31, 2021 and 2020 (in thousands):
| Amount of Gain Recognized in AOCI on Derivatives (Effective Portion, net of tax) | Location of Gain (Loss) Reclassified from AOCI into Earnings (Effective Portion) | Amount of Gain (Loss) Reclassified from AOCI into Earnings | ||||||||||||||||||||||||||||||
| March 31, 2021 | December 31, 2020 | Three Months Ended March 31, | ||||||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||||||||
| Derivatives instruments | ||||||||||||||||||||||||||||||||
| Commodity swap contracts | $ | 24,345 | $ | 9,815 | Cost of sales | $ | 1,035 | $ | (1,785) | |||||||||||||||||||||||
Over the next 12 months, the Company expects to reclassify approximately $32.5 million of pretax deferred gains, related to the commodity swap contracts, from AOCI to cost of sales as inventory purchases are settled.
9. LEASES
The Company records a right-of-use ("ROU") asset and lease liability for substantially all leases for which it is a lessee, in accordance with Accounting Standards Codification (“ASC”) 842. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company has no significant lease agreements in place for which the Company is a lessor. At inception of a contract, the Company considers all relevant facts and circumstances to assess whether or not the contract represents a lease by determining whether or not the contract conveys the right to control the use of an identified asset, either explicit or implicit, for a period of time in exchange for consideration.
The Company leases certain industrial spaces, office spaces, land, and equipment. Some leases include one or more options to renew, with renewal terms that can extend the lease term from generally to 5 years. The exercise of lease renewal options is at the Company’s sole discretion, and are included in the lease term only to the extent such renewal options are reasonably certain of being exercised at lease commencement. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. During the three months ended March 31, 2021, leased assets obtained in exchange for new operating lease liabilities were insignificant. During the three months ended March 31, 2020, leased assets obtained in exchange for new operating lease liabilities totaled approximately $1.5 million. As of March 31, 2021, obligations related to operating leases that we have executed but have not yet commenced totaled approximately $1.8 million on a non-discounted basis, which we generally expect to be recognized over the next 10 years.
13
Leased assets and liabilities included within the Condensed Consolidated Balance Sheets consist of the following (in thousands):
| Classification | March 31, 2021 | December 31, 2020 | ||||||||||||||||||
| Right-of-Use Assets | ||||||||||||||||||||
| Operating | $ | 9,837 | $ | 10,842 | ||||||||||||||||
| Finance | Property, plant and equipment, net of depreciation | 2,766 | 2,802 | |||||||||||||||||
| Total leased ROU assets | $ | 12,603 | $ | 13,644 | ||||||||||||||||
| Liabilities | ||||||||||||||||||||
| Current | ||||||||||||||||||||
| Operating | $ | 3,768 | $ | 4,117 | ||||||||||||||||
| Finance | Current portion of finance lease obligations | 293 | 348 | |||||||||||||||||
| Noncurrent | ||||||||||||||||||||
| Operating | 6,309 | 6,967 | ||||||||||||||||||
| Finance | Finance lease obligations | — | 30 | |||||||||||||||||
| Total lease liabilities | $ | 10,370 | $ | 11,462 | ||||||||||||||||
Lease costs included in the Condensed Consolidated Statements of Operations consist of the following (in thousands):
| Classification | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | ||||||||||||||||||
| Operating lease cost | Cost of sales, selling expenses and general and administrative expense | $ | 1,255 | $ | 1,398 | |||||||||||||||
| Finance lease cost | ||||||||||||||||||||
| Amortization of ROU leased assets | Depreciation and amortization within Cost of sales | 36 | 36 | |||||||||||||||||
| Interest on lease liabilities | Interest expense | 8 | 21 | |||||||||||||||||
| Net lease cost | $ | 1,299 | $ | 1,455 | ||||||||||||||||
Maturity of the Company’s lease liabilities as of March 31, 2021 is as follows (in thousands):
| Operating Leases | Finance Leases | Total | ||||||||||||||||||
| 2021 (remainder) | $ | 3,337 | $ | 271 | $ | 3,608 | ||||||||||||||
| 2022 | 3,067 | 30 | 3,097 | |||||||||||||||||
| 2023 | 2,211 | — | 2,211 | |||||||||||||||||
| 2024 | 1,111 | — | 1,111 | |||||||||||||||||
| 2025 | 563 | — | 563 | |||||||||||||||||
| Thereafter | 722 | — | 722 | |||||||||||||||||
| Total lease payments | $ | 11,011 | $ | 301 | $ | 11,312 | ||||||||||||||
| Less: interest | 934 | 8 | ||||||||||||||||||
| Present value of lease payments | $ | 10,077 | $ | 293 | ||||||||||||||||
14
As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. Remaining lease term and discount rates are as follows:
| March 31, 2021 | December 31, 2020 | |||||||||||||
| Weighted average remaining lease term (years) | ||||||||||||||
| Operating leases | 3.5 | 3.6 | ||||||||||||
| Finance leases | 0.8 | 1.1 | ||||||||||||
| Weighted average discount rate | ||||||||||||||
| Operating leases | 5.08 | % | 5.07 | % | ||||||||||
| Finance leases | 6.16 | % | 6.16 | % | ||||||||||
Lease costs included in the Condensed Consolidated Statements of Cash Flows are as follows (in thousands):
| Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | |||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||||||||||||
| Operating cash flows from operating leases | $ | 1,258 | $ | 1,377 | ||||||||||
| Operating cash flows from finance leases | $ | 5 | $ | 10 | ||||||||||
| Financing cash flows from finance leases | $ | 85 | $ | 80 | ||||||||||
10. OTHER ACCRUED LIABILITIES
The following table presents the major components of Other accrued liabilities (in thousands):
| March 31, 2021 | December 31, 2020 | ||||||||||
| Warranty | $ | 20,658 | $ | 20,570 | |||||||
| Chassis converter pool agreements | 18,234 | 17,767 | |||||||||
| Payroll and related taxes | 12,436 | 16,163 | |||||||||
| Customer deposits | 31,118 | 37,792 | |||||||||
| Self-insurance | 14,211 | 12,086 | |||||||||
| Accrued interest | 8,699 | 4,368 | |||||||||
| Operating lease obligations | 3,768 | 4,117 | |||||||||
| Accrued taxes | 6,375 | 4,790 | |||||||||
| All other | 11,825 | 13,327 | |||||||||
| $ | 127,324 | $ | 130,980 | ||||||||
The following table presents the changes in the product warranty accrual included in Other accrued liabilities (in thousands):
| 2021 | 2020 | ||||||||||
| Balance as of January 1 | $ | 20,570 | $ | 22,575 | |||||||
| Provision for warranties issued in current year | 1,397 | 973 | |||||||||
| Payments | (1,309) | (1,203) | |||||||||
| Balance as of March 31 | $ | 20,658 | $ | 22,345 | |||||||
The Company offers a limited warranty for its products with a coverage period that ranges between and 5 years, except that the coverage period for DuraPlate® trailer panels is 10 years. The Company passes through component manufacturers’ warranties to our customers. The Company’s policy is to accrue the estimated cost of warranty coverage at the time of the sale.
15
11. FAIR VALUE MEASUREMENTS
The Company’s fair value measurements are based upon a three-level valuation hierarchy. These valuation techniques are based upon the transparency of inputs (observable and unobservable) to the valuation of an asset or liability as of the measurement date. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value hierarchy:
▪Level 1 — Valuation is based on quoted prices for identical assets or liabilities in active markets;
▪Level 2 — Valuation is based on quoted prices for similar assets or liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for the full term of the financial instrument; and
▪Level 3 — Valuation is based upon other unobservable inputs that are significant to the fair value measurement.
Recurring Fair Value Measurements
The Company maintains a non-qualified deferred compensation plan which is offered to senior management and other key employees. The amount owed to participants is an unfunded and unsecured general obligation of the Company. Participants are offered various investment options with which to invest the amount owed to them, and the plan administrator maintains a record of the liability owed to participants by investment. To minimize the impact of the change in market value of this liability, the Company has elected to purchase a separate portfolio of investments through the plan administrator similar to those chosen by the participant.
The investments purchased by the Company include mutual funds, which are classified as Level 1, and life-insurance contracts valued based on the performance of underlying mutual funds, which are classified as Level 2. Additionally, upon the Company’s acquisition of Supreme in 2017, the Company acquired a pool of investments made by a wholly owned captive insurance subsidiary. These investments are comprised of mutual funds, which are classified as Level 1.
The fair value of the Company’s derivatives is estimated with a market approach using third-party pricing services, which have been corroborated with data from active markets or broker quotes.
Fair value measurements and the fair value hierarchy level for the Company’s assets and liabilities measured at fair value on a recurring basis, are shown below (in thousands):
| Frequency | Asset / (Liability) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||||||
| March 31, 2021 | ||||||||||||||||||||||||||||||||
| Commodity swap contracts | Recurring | 31,466 | — | 31,466 | — | |||||||||||||||||||||||||||
| Mutual funds | Recurring | 5,050 | 5,050 | — | — | |||||||||||||||||||||||||||
| Life-insurance contracts | Recurring | 17,229 | — | 17,229 | — | |||||||||||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||||||||
| Commodity swap contracts | Recurring | 13,384 | — | 13,384 | — | |||||||||||||||||||||||||||
| Mutual funds | Recurring | 5,331 | 5,331 | — | — | |||||||||||||||||||||||||||
| Life-insurance contracts | Recurring | 16,930 | — | 16,930 | — | |||||||||||||||||||||||||||
Estimated Fair Value of Debt
The estimated fair value of debt at March 31, 2021 consists of the Senior Notes due 2025 and borrowings under the New Term Loan Credit Agreement. The fair value of the Senior Notes due 2025 and New Term Loan Credit Agreement are based upon third party pricing sources, which generally do not represent daily market activity or represent data obtained from an exchange, and are classified as Level 2. The interest rates on the Company’s borrowings under the Revolving Facility are adjusted regularly to reflect current market rates and thus when any amounts are outstanding carrying value approximates fair value for these borrowings.
16
The Company’s carrying and estimated fair value of debt at March 31, 2021 and December 31, 2020 were as follows (in thousands):
| March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||
| Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||||||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||||||||||||||||
| Instrument | |||||||||||||||||||||||||||||||||||||||||||||||
| Senior Notes due 2025 | $ | 311,525 | $ | — | $ | 319,313 | $ | — | $ | 311,357 | $ | — | $ | 319,140 | $ | — | |||||||||||||||||||||||||||||||
| New Term Loan Credit Agreement | 136,689 | — | 136,860 | — | 136,622 | — | 136,280 | — | |||||||||||||||||||||||||||||||||||||||
| $ | 448,214 | $ | — | $ | 456,173 | $ | — | $ | 447,979 | $ | — | $ | 455,420 | $ | — | ||||||||||||||||||||||||||||||||
The fair value of debt is based on current public market prices for disclosure purposes only. Unrealized gains or losses are not recognized in the financial statements as long-term debt is presented at carrying value, net of unamortized premium or discount and unamortized deferred financing costs.
12. COMMITMENTS AND CONTINGENCIES
As of March 31, 2021, the Company was named as a defendant or was otherwise involved in numerous legal proceedings and governmental examinations, in connection with the conduct of its business activities, in various jurisdictions, both in the United States and internationally. On the basis of information currently available to it, management does not believe that existing proceedings and investigations will have a material impact on our consolidated financial condition or liquidity if determined in a manner adverse to the Company. However, such matters are unpredictable, and we could incur judgments or enter into settlements for current or future claims that could materially and adversely affect our financial statements. Costs associated with the litigation and settlements of legal matters are reported within General and administrative expenses in the Condensed Consolidated Statements of Operations.
Environmental Disputes
In August 2014, the Company received notice as a potentially responsible party (“PRP”) by the South Carolina Department of Health and Environmental Control (the “DHEC”) pertaining to the Philip Services Site located in Rock Hill, South Carolina pursuant to the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) and corresponding South Carolina statutes. PRPs include parties identified through manifest records as having contributed to deliveries of hazardous substances to the Philip Services Site between 1979 and 1999. The DHEC’s allegation that the Company was a PRP arises out of four manifest entries in 1989 under the name of a company unaffiliated with Wabash National (or any of its former or current subsidiaries) that purport to be delivering a de minimis amount of hazardous waste to the Philip Services Site “c/o Wabash National Corporation.” As such, the Philip Services Site PRP Group (the “PRP Group”) notified Wabash in August 2014 that it was offering the Company the opportunity to resolve any liabilities associated with the Philip Services Site by entering into a Cash Out and Reopener Settlement Agreement (the “Settlement Agreement”) with the PRP Group, as well as a Consent Decree with the DHEC. The Company has accepted the offer from the PRP Group to enter into the Settlement Agreement and Consent Decree, while reserving its rights to contest its liability for any deliveries of hazardous materials to the Philips Services Site. The requested settlement payment is immaterial to the Company’s financial conditions and results of operations, and as a result, if the Settlement Agreement and Consent Decree are finalized, the payment to be made by the Company thereunder is not expected to have a material adverse effect on the Company’s financial condition or results of operations.
On November 13, 2019, the Company received a notice that it was considered one of several PRPs by the Indiana Department of Environmental Management (“IDEM”) under CERCLA and state law related to substances found in soil and groundwater at a property located at 817 South Earl Avenue, Lafayette, Indiana (the “Site”). The Company has never owned or operated the Site, but the Site is near certain of the Company’s owned properties. The Company has agreed to implement a limited work plan to further investigate the source of the contamination at the Site and have worked with IDEM and other PRPs to finalize the terms of the work plan. The Company submitted its initial site investigation report to IDEM during the third quarter of 2020, indicating that the data collected by the Company’s consultant confirmed that the Company’s properties are not the source of contamination at the Site. IDEM issued to the PRPs a request for a Further Site Investigation (“FSI”) work plan, and with IDEM’s permission the Company submitted a Work Plan Addendum on December 17, 2020 for limited additional groundwater sampling work in lieu of a full FSI work plan. IDEM approved the Work Plan Addendum and the additional work was conducted in March 2021. The results are currently being analyzed. As of March 31, 2021, based on the information available, the Company does not expect this matter to have a material adverse effect on its financial condition or results of operations.
17
Chassis Converter Pool Agreements
The Company, through Supreme, obtains most vehicle chassis for its specialized vehicle products directly from the chassis manufacturers under converter pool agreements. Chassis are obtained from the manufacturers based on orders from customers, and in some cases, for unallocated orders. The agreements generally state that the manufacturer will provide a supply of chassis to be maintained at the Company’s facilities with the condition that we will store such chassis and will not move, sell, or otherwise dispose of such chassis except under the terms of the agreement. In addition, the manufacturer typically retains the sole authority to authorize commencement of work on the chassis and to make certain other decisions with respect to the chassis including the terms and pricing of sales of the chassis to the manufacturer’s dealers. The manufacturer also does not transfer the certificate of origin to the Company nor permit the Company to sell or transfer the chassis to anyone other than the manufacturer (for ultimate resale to a dealer). Although the Company is party to related finance agreements with manufacturers, the Company has not historically settled, nor expects to in the future settle, any related obligations in cash. Instead, the obligation is settled by the manufacturer upon reassignment of the chassis to an accepted dealer, and the dealer is invoiced for the chassis by the manufacturer. Accordingly, as of March 31, 2021, the Company’s outstanding chassis converter pool with the manufacturer totaled $18.2 million and has included this financing agreement on the Company’s Condensed Consolidated Balance Sheets within Prepaid expenses and other and Other accrued liabilities. All other chassis programs through its Supreme subsidiary are handled as consigned inventory belonging to the manufacturer and totaled approximately $5.9 million. Under these agreements, if the chassis is not delivered to a customer within a specified time frame the Company is required to pay a finance or storage charge on the chassis. Additionally, the Company receives finance support funds from manufacturers when the chassis are assigned into the Company’s chassis pool. Typically, chassis are converted and delivered to customers within 90 days of the receipt of the chassis by the Company.
13. NET INCOME (LOSS) PER SHARE
Basic earnings per share is calculated based on the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined based on the weighted average number of common shares outstanding during the period combined with the incremental average common shares that would have been outstanding assuming the conversion of all potentially dilutive common shares into common shares as of the earliest date possible. The calculation of basic and diluted net income (loss) per share is determined using net income (loss) applicable to common stockholders as the numerator and the number of shares included in the denominator as shown below (in thousands, except per share amounts). Due to the net loss applicable to common stockholders for the three-month period ended March 31, 2020, no securities had a dilutive impact for this period.
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Basic net income (loss) per share: | |||||||||||
| Net income (loss) applicable to common stockholders | $ | 3,217 | $ | (106,647) | |||||||
| Weighted average common shares outstanding | 52,126 | 53,156 | |||||||||
| Basic net income (loss) per share | $ | 0.06 | $ | (2.01) | |||||||
| Diluted net income (loss) per share: | |||||||||||
| Net income (loss) applicable to common stockholders | $ | 3,217 | $ | (106,647) | |||||||
| Weighted average common shares outstanding | 52,126 | 53,156 | |||||||||
| Dilutive stock options and restricted stock | 918 | — | |||||||||
| Diluted weighted average common shares outstanding | 53,044 | 53,156 | |||||||||
| Diluted net income (loss) per share | $ | 0.06 | $ | (2.01) | |||||||
18
14. STOCK-BASED COMPENSATION
The Company recognizes all share-based payments based upon their fair value. The Company grants restricted stock units subject to specific service, performance, and/or market conditions. The Company’s policy is to recognize expense for awards that have service conditions only subject to graded vesting using the straight-line attribution method. The fair value of service and performance-based units is based on the market price of a share of underlying common stock at the date of grant. The fair values of the awards that contain market conditions are estimated using a Monte Carlo simulation approach in a risk-neutral framework to model future stock price movements based upon historical volatility, risk-free rates of return, and correlation matrix. The amount of compensation costs related to restricted stock units and performance units not yet recognized was $17.2 million at March 31, 2021, for which the expense will be recognized through 2024.
15. STOCKHOLDERS’ EQUITY
Share Repurchase Program
In November 2018, the Company announced that the Board of Directors approved the repurchase of an additional $100 million in shares of common stock over a three-year period. This authorization was an increase to the previous $100 million repurchase programs approved in February 2017 and February 2016. The repurchase program is set to expire on February 28, 2022. Stock repurchases under this program may be made in the open market or in private transactions at times and in amounts determined by the Company. As of March 31, 2021, $33.3 million remained available under the program.
Common and Preferred Stock
The Board of Directors has the authority to issue common and unclassed preferred stock of up to 200 million shares and 25 million shares, respectively, with par value of $0.01 per share, as well as to fix dividends, voting and conversion rights, redemption provisions, liquidation preferences, and other rights and restrictions.
Accumulated Other Comprehensive Income (Loss)
Changes in AOCI by component, net of tax, for the three months ended March 31, 2021 are summarized as follows (in thousands):
| Foreign Currency Translation | Derivative Instruments | Total | ||||||||||||||||||
| Balances at December 31, 2020 | $ | (2,182) | $ | 9,815 | $ | 7,633 | ||||||||||||||
Net unrealized gains (losses) arising during the period(a) | (303) | 15,305 | 15,002 | |||||||||||||||||
Less: Net realized gains (losses) reclassified to net income(b) | — | 775 | 775 | |||||||||||||||||
| Net change during the period | (303) | 14,530 | 14,227 | |||||||||||||||||
| Balances at March 31, 2021 | (2,485) | 24,345 | 21,860 | |||||||||||||||||
—————————
(a) Derivative instruments net of $5.2 million of tax liability for the three months ended March 31, 2021.
(b) Derivative instruments net of $0.3 million of tax liability for the three months ended March 31, 2021.
Changes in AOCI by component, net of tax, for the three months ended March 31, 2020 are summarized as follows (in thousands):
| Foreign Currency Translation | Derivative Instruments | Total | ||||||||||||||||||
| Balances at December 31, 2019 | $ | (1,866) | $ | (2,112) | $ | (3,978) | ||||||||||||||
Net unrealized gains (losses) arising during the period(c) | (1,636) | (5,217) | (6,853) | |||||||||||||||||
Less: Net realized gains (losses) reclassified to net loss(d) | — | (1,334) | (1,334) | |||||||||||||||||
| Net change during the period | (1,636) | (3,883) | (5,519) | |||||||||||||||||
| Balances at March 31, 2020 | (3,502) | (5,995) | (9,497) | |||||||||||||||||
—————————
(c) Derivative instruments net of $1.8 million of tax benefit for the three months ended March 31, 2020.
(d) Derivative instruments net of $0.5 million of tax benefit for the three months ended March 31, 2020.
19
16. INCOME TAXES
For the three months ended March 31, 2021, the Company recognized income tax expense of $1.8 million compared to an income tax benefit of $9.6 million for the same period in the prior year. The effective tax rates for the first three months of 2021 and 2020 were 36.3% and 8.2%, respectively. For the first three months of 2021, the effective tax rate differs from the US Federal statutory rate of 21% primarily due to the impact of state and local taxes and discrete items incurred related to stock-based compensation. For the first three months of 2020, the effective tax rate differs from the US Federal statutory rate of 21% primarily due to the impact of state and local taxes, impairment of non-deductible goodwill, provisions related to the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) passed in March 2020, and discrete items incurred related to stock-based compensation.
Certain provisions of the CARES Act had a significant impact on the effective tax rate, income tax payable, and deferred income tax positions of the Company for 2020. The CARES Act permits net operating losses (“NOLs”) incurred in tax years 2020, 2019, and 2018 to offset 100% of taxable income and be carried-back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company evaluated the impact of the CARES Act during the year ended December 31, 2020 and recorded an income tax receivable of $13.2 million for the benefit of carrying back the NOL for the year ended December 31, 2020. As the Company is carrying the losses back to years beginning before January 1, 2018, the receivable was recorded at the previous 35% federal tax rate rather than the current statutory rate of 21%.
17. LONG-LIVED ASSETS
During the first quarter of 2021, the Company impaired unused and obsolete property, plant, and equipment assets totaling approximately $0.8 million. The impairment charges are included in Impairment and other, net in the Condensed Consolidated Statements of Operations.
18. SEGMENTS
a. Segment Reporting
The Company manages its business in three segments: Commercial Trailer Products, Diversified Products, and Final Mile Products. The Commercial Trailer Products segment manufactures standard and customized van and platform trailers and other transportation related equipment for customers who purchase directly from the Company or through independent dealers. The Diversified Products segment, comprised of three strategic business units including, Tank Trailer, Process Systems and Composites, focuses on the Company’s commitment to expand its customer base, diversify its product offerings and revenues and extend its market leadership by leveraging its proprietary DuraPlate® panel technology, drawing on its core manufacturing expertise and making available products that are complementary to truck and tank trailers and transportation equipment. The Final Mile Products segment manufactures truck bodies for customers in the final mile space.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies except that the Company evaluates segment performance based on income (loss) from operations. The Company has not allocated certain corporate related administrative costs, interest and income taxes included in the corporate and eliminations segment to the Company’s other reportable segments. The Company accounts for intersegment sales and transfers at cost plus a specified mark-up.
20
Reportable segment information is as follows (in thousands):
| Three Months Ended March 31, 2021 | Commercial Trailer Products | Diversified Products | Final Mile Products | Corporate and Eliminations | Consolidated | |||||||||||||||||||||||||||
| Net sales | ||||||||||||||||||||||||||||||||
| External customers | $ | 246,771 | $ | 68,167 | $ | 77,065 | $ | — | $ | 392,003 | ||||||||||||||||||||||
| Intersegment sales | 938 | 5,841 | — | (6,779) | — | |||||||||||||||||||||||||||
| Total net sales | $ | 247,709 | $ | 74,008 | $ | 77,065 | $ | (6,779) | $ | 392,003 | ||||||||||||||||||||||
| Income (loss) from operations | $ | 20,865 | $ | 6,089 | $ | (3,947) | $ | (11,792) | $ | 11,215 | ||||||||||||||||||||||
| Assets | $ | 300,257 | $ | 273,176 | $ | 377,815 | $ | 275,106 | $ | 1,226,354 | ||||||||||||||||||||||
| Three Months Ended March 31, 2020 | Commercial Trailer Products | Diversified Products | Final Mile Products | Corporate and Eliminations | Consolidated | |||||||||||||||||||||||||||
| Net sales | ||||||||||||||||||||||||||||||||
| External customers | $ | 250,945 | $ | 75,859 | $ | 60,270 | $ | — | $ | 387,074 | ||||||||||||||||||||||
| Intersegment sales | 30 | 7,099 | — | (7,129) | — | |||||||||||||||||||||||||||
| Total net sales | $ | 250,975 | $ | 82,958 | $ | 60,270 | $ | (7,129) | $ | 387,074 | ||||||||||||||||||||||
| Income (loss) from operations | $ | 15,871 | $ | (6,070) | $ | (108,041) | $ | (11,816) | $ | (110,056) | ||||||||||||||||||||||
| Assets | $ | 359,699 | $ | 301,883 | $ | 413,693 | $ | 150,136 | $ | 1,225,411 | ||||||||||||||||||||||
b. Product Information
The Company offers products primarily in four general categories: (1) new trailers, (2) used trailers, (3) components, parts and service, and (4) equipment and other. The following table sets forth the major product categories and their percentage of consolidated net sales (dollars in thousands):
| Three Months Ended March 31, 2021 | Commercial Trailer Products | Diversified Products | Final Mile Products | Eliminations | Consolidated | |||||||||||||||||||||||||||||||||
| New trailers | $ | 238,665 | $ | 30,266 | $ | — | $ | — | $ | 268,931 | 68.6 | % | ||||||||||||||||||||||||||
| Used trailers | 165 | 847 | — | — | 1,012 | 0.3 | % | |||||||||||||||||||||||||||||||
| Components, parts and service | 5,941 | 29,966 | 3,723 | (5,843) | 33,787 | 8.6 | % | |||||||||||||||||||||||||||||||
| Equipment and other | 2,938 | 12,929 | 73,342 | (936) | 88,273 | 22.5 | % | |||||||||||||||||||||||||||||||
| Total net sales | $ | 247,709 | $ | 74,008 | $ | 77,065 | $ | (6,779) | $ | 392,003 | 100.0 | % | ||||||||||||||||||||||||||
| Three Months Ended March 31, 2020 | Commercial Trailer Products | Diversified Products | Final Mile Products | Eliminations | Consolidated | |||||||||||||||||||||||||||||||||
| New trailers | $ | 237,901 | $ | 43,312 | $ | — | $ | — | $ | 281,213 | 72.7 | % | ||||||||||||||||||||||||||
| Used trailers | 318 | 1,210 | — | — | 1,528 | 0.4 | % | |||||||||||||||||||||||||||||||
| Components, parts and service | 9,272 | 26,082 | 3,722 | (7,100) | 31,976 | 8.3 | % | |||||||||||||||||||||||||||||||
| Equipment and other | 3,484 | 12,354 | 56,548 | (29) | 72,357 | 18.7 | % | |||||||||||||||||||||||||||||||
| Total net sales | $ | 250,975 | $ | 82,958 | $ | 60,270 | $ | (7,129) | $ | 387,074 | 100.0 | % | ||||||||||||||||||||||||||
19. SUBSEQUENT EVENTS
In April 2021, the Company made a voluntarily payment of $15.0 million under the New Term Loan Credit Agreement. A loss on debt extinguishment charge of approximately $0.2 million will be recorded as part of the repayment.
21
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report of Wabash National Corporation (together with its subsidiaries, the “Company,” “Wabash,” “we,” “our,” or “us”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements may include the words “may,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect,” “plan” or “anticipate” and other similar words. Our “forward-looking statements” include, but are not limited to, statements regarding:
▪our ability to effectively manage and operate our business given the ongoing uncertainty caused by the COVID-19 pandemic;
▪the highly cyclical nature of our business;
▪demand for our products;
▪the relative strength or weakness of the overall economy;
▪our expected revenues, income or loss;
▪our ability to achieve sustained profitability;
▪dependence on industry trends;
▪our strategic plan and plans for future operations;
▪availability and pricing of raw materials, including the impact of tariffs or other international trade developments;
▪the level of competition that we face;
▪reliance on certain customers, suppliers and corporate relationships;
▪our ability to develop and commercialize new products;
▪acceptance of new technologies and products;
▪export sales and new markets;
▪engineering and manufacturing capabilities and capacity, including our ability to attract and retain qualified personnel;
▪government regulations;
▪the outcome of any pending litigation or notice of environmental dispute;
▪the risks associated with climate change and related government regulation;
▪availability of capital and financing, including for working capital and capital expenditures;
▪our ability to manage our indebtedness;
▪our ability to effectively integrate Supreme and realize expected synergies and benefits from the Supreme acquisition; and
▪assumptions relating to the foregoing.
Although we believe that the expectations expressed in our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and are subject to inherent risks and uncertainties, such as those disclosed in this Quarterly Report. Important risks and factors that could cause our actual results to be materially different from our expectations include the factors that are disclosed in “Item 1A-Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020. Each forward-looking statement contained in this Quarterly Report reflects our management’s view only as of the date on which that forward-looking statement was made. We are not obligated to update forward-looking statements or publicly release the result of any revisions to them to reflect events or circumstances after the date of this Quarterly Report or to reflect the occurrence of unanticipated events, except as required by law.
22
COVID-19 Update
In March 2020, a global pandemic was declared by the World Health Organization (the “WHO”) related to COVID-19. This pandemic continues to create significant uncertainties and disruption in the global economy. We are closely monitoring the most recent developments regarding the pandemic, and we continue to remain focused on the health and safety of our employees, as well as the health of our business, both in the short and long-term. We monitor, evaluate, and manage our operating plans in light of the most recent developments on an ongoing basis. Further, we continue to adhere to best-practice safe guidelines by recognized health experts, like the WHO, as well as any applicable government mandates related to the COVID-19 pandemic. We remain focused on business continuity and seeking to ensure our facilities remain operational where safe and appropriate to do so.
The safety and well-being of our employees has been, and will remain, our highest priority. In early March 2020, we assembled a pandemic response team to manage the changes necessary to adapt to the rapidly-changing environment. This response team continues to meet regularly with our senior leadership team to provide updates and continuously monitor the most recent developments. Actions we have taken to protect our employees include, but are not limited to:
▪Within our factories, we are providing personal protective equipment for our employees, conducting daily health monitoring, and have modified our operations to embrace social distancing where possible.
▪Within our office environments, a number of our employees remain working remotely. This allows ample space for those coming in to the office to spread out and distance effectively.
▪We are utilizing daily health screenings and self-declaration for employees, contractors, and visitors, and we are encouraging employees with symptoms to stay home.
▪We have implemented pandemic continuity plans.
▪We are informing our employees about the vaccines and encouraging them to get vaccinated.
We continue to monitor the evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities, and may take additional actions based on their requirements and recommendations.
We are also working with local food banks, schools, healthcare facilities, and other nonprofit organizations to support agencies and families in need, including the following:
▪We manufactured thousands of full splash protective face shields that were donated to hospitals, cancer centers, surgery centers, dentist offices and other healthcare facilities.
▪We manufactured partitions so a local gym could open safely.
▪We moved refrigerated trailers from our lots to assist hospitals. We also coordinated movement of refrigerated product from our dealer lots across the country to serve a similar need.
▪We donated refrigerated trailers to transport food for school lunch pickups.
▪We provided FEMA and local governments descriptions of capabilities as they amass their options and determine next steps for today, tomorrow, and into the future.
▪We manufactured vessels which are used in rapid COVID-19 testing.
While the global market downturn and overall impacts on our operations are expected to be temporary, the duration of the impacts cannot be estimated at this time. Should the disruptions continue for an extended period of time or worsen, the impact on our production, supply chain, and overall business could have a material adverse effect on our results of operations, financial condition, and cash flows.
23
Results of Operations
The following table sets forth certain operating data as a percentage of net sales for the three months ended March 31, 2021 and 2020:
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Net sales | 100.0 | % | 100.0 | % | |||||||
| Cost of sales | 88.0 | % | 90.5 | % | |||||||
| Gross profit | 12.0 | % | 9.5 | % | |||||||
| General and administrative expenses | 5.8 | % | 6.8 | % | |||||||
| Selling expenses | 1.7 | % | 2.1 | % | |||||||
| Amortization of intangibles | 1.5 | % | 1.4 | % | |||||||
| Impairment and other, net | 0.2 | % | 27.7 | % | |||||||
| Income (loss) from operations | 2.8 | % | (28.5 | %) | |||||||
| Interest expense | (1.6 | %) | (1.6 | %) | |||||||
| Other, net | — | % | — | % | |||||||
| Income (loss) before income tax expense (benefit) | 1.2 | % | (30.1 | %) | |||||||
| Income tax expense (benefit) | 0.5 | % | (2.5 | %) | |||||||
| Net income (loss) | 0.7 | % | (27.6 | %) | |||||||
For the three-month period ended March 31, 2021, we recorded net sales of $392.0 million compared to $387.1 million in the prior year period. Net sales for the three-month period ended March 31, 2021 increased $4.9 million, or 1.3%, compared to the prior year period, due primarily to a 34.7% increase in new truck body unit shipments on stronger demand in the final mile space, which contributed to a 27.9% increase in sales within the Final Mile Products reportable segment. This increase in sales in the Final Mile Products reportable segment was partially offset by decreases of 1.3% and 10.8% in the Commercial Trailer Products and Diversified Products reportable segments, respectively, which are further described below. Gross profit margin increased to 12.0% in the first quarter of 2021 compared to 9.5% in the prior year period primarily driven by higher volumes and continued realization of cost containment measures implemented during 2020, including headcount reductions. While we have observed an increase in overall industry demand thus far during 2021 compared to 2020’s suppressed levels, we have experienced some challenges as we ramp-up production and hire additional labor. However, we are focused on positioning ourselves to profitably capitalize on the increase in demand and industry upswings.
For the three-month period ended March 31, 2021, selling, general and administrative expenses declined $4.7 million as compared to the same period in 2020. The decrease compared to the same period in the prior year was primarily attributable to lower employee-related costs, including employee incentive and benefit programs, as well as lower travel and marketing-related expenses. The overall decreases were largely due to the continued realization of cost containment measures implemented during 2020, including headcount reductions and other cost containment measures. As a percentage of net sales, selling, general and administrative expenses decreased to 7.6% in the first quarter of 2021 as compared to 8.8% in the prior year period.
Our management team continues to be focused on increasing overall stockholder value by optimizing our manufacturing operations to match the current demand environment, implementing cost savings initiatives and enterprise lean techniques, strengthening our capital structure and maintaining strong liquidity, developing innovative products that enable our customers to succeed, improving earnings, and continuing diversification of the business into higher margin opportunities that leverage our intellectual and process capabilities.
24
Three Months Ended March 31, 2021 Compared with the Three Months Ended March 31, 2020
Net Sales
Net sales in the first quarter of 2021 increased $4.9 million, or 1.3%, compared to the first quarter of 2020. By business segment, prior to the elimination of intercompany sales, sales and related units sold were as follows (dollars in thousands):
| Three Months Ended March 31, | Change | ||||||||||||||||||||||
| 2021 | 2020 | Amount | % | ||||||||||||||||||||
| (prior to elimination of intersegment sales) | |||||||||||||||||||||||
| Sales by Segment | |||||||||||||||||||||||
| Commercial Trailer Products | $ | 247,709 | $ | 250,975 | $ | (3,266) | (1.3 | %) | |||||||||||||||
| Diversified Products | 74,008 | 82,958 | (8,950) | (10.8 | %) | ||||||||||||||||||
| Final Mile Products | 77,065 | 60,270 | 16,795 | 27.9 | % | ||||||||||||||||||
| Eliminations | (6,779) | (7,129) | 350 | ||||||||||||||||||||
| Total | $ | 392,003 | $ | 387,074 | $ | 4,929 | 1.3 | % | |||||||||||||||
| New Trailers | (units) | ||||||||||||||||||||||
| Commercial Trailer Products | 9,250 | 8,525 | 725 | 8.5 | % | ||||||||||||||||||
| Diversified Products | 420 | 625 | (205) | (32.8 | %) | ||||||||||||||||||
| Total | 9,670 | 9,150 | 520 | 5.7 | % | ||||||||||||||||||
| Used Trailers | (units) | ||||||||||||||||||||||
| Commercial Trailer Products | 15 | 35 | (20) | (57.1 | %) | ||||||||||||||||||
| Diversified Products | 25 | 35 | (10) | (28.6 | %) | ||||||||||||||||||
| Total | 40 | 70 | (30) | (42.9 | %) | ||||||||||||||||||
Commercial Trailer Products segment sales, prior to the elimination of intersegment sales, were $247.7 million for the first quarter of 2021, a decrease of $3.3 million, or 1.3%, compared to the first quarter of 2020. New trailers shipped during the first quarter of 2021 totaled 9,250 trailers compared to 8,525 trailers in the prior year period, an increase of 8.5%. The 8.5% increase in new trailer shipments resulted in a 0.3% increase in new trailer revenue. Revenue per new trailer unit decreased 7.6% from the prior year period due to product mix (a higher mix of pup trailers in the current year) and customer mix. Sales of our parts and service product offerings totaled $5.9 million for the first quarter of 2021, a decrease of $3.3 million, or 36%, as compared to the prior year period, primarily due to the closure of several service locations.
Diversified Products segment sales, prior to the elimination of intersegment sales, were $74.0 million for the first quarter of 2021, a decrease of $9.0 million, or 10.8%, compared to the first quarter of 2020. New trailer shipments for the first quarter of 2021 totaled 420 units compared to 625 units in the prior year period, resulting in a decrease in new trailer revenue of $13.0 million, or 30.1%. The decreases in new trailer shipments and revenue is primarily attributable to the sale of Beall® in Q4 2020, which accounted for approximately $5.8 million of revenue during the first quarter of 2020, as well as production ramp-up issues and certain raw material shortages. However, revenue per new trailer unit increased 2.1% year-over-year. Sales of our parts and service product offerings totaled $30.0 million for the first quarter of 2021, an increase of $3.9 million or 14.9% as compared to the prior year period due to strong demand in this market segment. Equipment and other revenue increased $0.6 million, or 4.7%, compared to the prior year period.
Final Mile Products segment sales, prior to the elimination of intersegment sales, were $77.1 million in the first quarter of 2021, an increase of $16.8 million, or 27.9%, compared to the first quarter of 2020. New truck body sales increased $17.0 million, or 30.7%. The increase in truck body sales is primarily due to a 35.8% increase in truck body unit shipments in the first quarter of 2021 compared to the prior year period. Parts and service revenue was materially consistent with the prior year period. The overall increase in net sales compared to the prior year period is attributable to stronger demand in this market segment.
Cost of Sales
Cost of sales was $344.8 million in the first quarter of 2021, a decrease of $5.5 million, or 1.6%, compared to the prior year period. Cost of sales is comprised of material costs, a variable expense, and other manufacturing costs, comprised of both fixed and variable expenses, including direct and indirect labor, outbound freight, and overhead expenses.
25
Commercial Trailer Products segment cost of sales was $220.5 million in the first quarter of 2021, a decrease of $6.7 million, or 2.9%, compared to the prior year period. While new trailer production increased, the decrease in cost of sales was primarily driven by lower manufacturing costs, including a $3.8 million decrease in materials costs due to the change in product mix. An additional decrease relates to lower operating and employee-related costs, due in part to the continued realization of cost containment measures implemented during 2020 to reduce our operating costs.
Diversified Products segment cost of sales was $58.9 million in the first quarter of 2021, a decrease of $8.9 million, or 13.1%, compared to the prior period. The decrease in cost of sales was primarily due to lower sales volumes, which resulted in lower materials costs of $2.6 million as well as a decrease in direct/indirect labor costs of $1.5 million. The lower sales and shipments were driven by the sale of Beall® in Q4 2020 and production ramp-up issues.
Final Mile Product segment cost of sales was $70.6 million in the first quarter of 2021, an increase of $10.1 million, or 16.7%, compared to the prior period. The increase, which was primarily driven by higher sales and production volumes on stronger demand, was due to a $7.6 million increase in materials costs and higher labor costs. These increases were partially offset by lower fixed costs, due in part to the continued realization of cost containment measures implemented during 2020.
Gross Profit
Gross profit was $47.2 million in the first quarter of 2021, an increase of $10.4 million from the prior year period. Gross profit as a percentage of net sales was 12.0% for the first quarter of 2021, compared to 9.5% for the same period in 2020. Gross profit by segment was as follows (dollars in thousands):
| Three Months Ended March 31, | Change | ||||||||||||||||||||||
| 2021 | 2020 | Amount | % | ||||||||||||||||||||
| Gross Profit by Segment | |||||||||||||||||||||||
| Commercial Trailer Products | $ | 27,235 | $ | 23,843 | $ | 3,392 | 14.2 | % | |||||||||||||||
| Diversified Products | 15,103 | 15,141 | (38) | (0.3 | %) | ||||||||||||||||||
| Final Mile Products | 6,456 | (244) | 6,700 | 2,745.9 | % | ||||||||||||||||||
| Corporate and Eliminations | (1,628) | (1,997) | 369 | ||||||||||||||||||||
| Total | $ | 47,166 | $ | 36,743 | $ | 10,423 | 28.4 | % | |||||||||||||||
Commercial Trailer Products segment gross profit was $27.2 million for the first quarter of 2021 compared to $23.8 million for the first quarter of 2020. Gross profit, prior to the elimination of intersegment sales, as a percentage of net sales, was 11.0% in the first quarter of 2021 compared to 9.5% in the comparative 2020 period. The overall increase in gross profit as a percentage of net sales was partially attributable to the continued realization of cost containment measures implemented during 2020 to lower our operating costs. Because of these efforts, along with a favorable product mix in the current year period, gross profit as a percentage of net sales for the first quarter of 2021 increased compared to the prior year period despite sales being materially consistent.
Diversified Products segment gross profit was $15.1 million for the first quarter of 2021 compared to $15.1 million for the first quarter of 2020. Gross profit, prior to the elimination of intersegment sales, as a percentage of net sales, was 20.4% in the first quarter of 2021 compared to 18.3% in the 2020 period. Despite the decrease in new trailer shipments and revenue, gross profit as a percentage of net sales increased from the prior year. This was primarily attributable to the continued realization of cost containment efforts implemented throughout 2020 to reduce our operating costs.
Final Mile Products segment gross profit was $6.5 million for the first quarter of 2021 compared to $(0.2) million in the same quarter of 2020. Gross profit, prior to the elimination of intersegment sales, as a percentage of net sales, was 8.4% in the first quarter of 2021 compared to (0.4)% in the 2020 period. The overall increase in gross profit as a percentage of net sales was largely attributable to the 27.9% increase in sales while cost of sales increased only 16.6% compared to the prior year period. Fixed costs as a percentage of sales decreased from the prior year period as we continued to realize reductions in fixed costs due in part to our cost containment measures implemented throughout 2020.
General and Administrative Expenses
General and administrative expenses for the first quarter of 2021 decreased $3.3 million, or 12.7%, from the prior year period. The decrease from the prior year period was largely due to a decrease of approximately $2.0 million in employee-related costs, including benefits and incentive programs, as well as a decrease in travel-related costs and professional fees of approximately $0.5 million and $0.2 million, respectively. The overall decrease in general and administrative expenses was due in part to our implementation of cost containment measures during 2020, including headcount reductions. As a percentage of net sales, general and administrative expenses were 5.8% for the first quarter of 2021 compared to 6.8% for the first quarter of 2020.
26
Selling Expenses
Selling expenses were $6.7 million in the first quarter of 2021, a decrease of $1.3 million, or 16.7%, compared to the prior year period. The decrease was primarily attributable to lower advertising and promotional expenses of approximately $0.9 million as well as lower travel-related costs of approximately $0.4 million. An additional decrease relates to lower employee-related costs, including benefits and incentive programs, of approximately $0.2 million. These decreases were partially offset by immaterial increases in other selling expenses. The overall decrease in selling expenses was partially attributable to our implementation of cost containment measures during 2020. As a percentage of net sales, selling expenses were 1.7% for the first quarter of 2021 compared to 2.1% for the first quarter of 2020.
Amortization of Intangibles
Amortization of intangibles was $5.8 million for the first quarter of 2021 compared to $5.5 million in the prior year period. Amortization of intangibles was the result of expenses recognized for intangible assets recorded from the acquisitions of Walker in May 2012, certain assets of Beall® in February 2013 (which was sold during the fourth quarter of 2020 as further described in our Annual Report on Form 10-K for the year ended December 31, 2020), and Supreme in September 2017.
Impairment and Other, Net
Impairment and other, net was $0.6 million and $107.1 million for the three months ended March 31, 2021 and 2020, respectively. During the first quarter of 2021, we impaired unused and obsolete property, plant, and equipment assets totaling approximately $0.8 million. In addition, for the three months ended March 31, 2021, we sold property, plant, and equipment assets resulting in a gain on sale of approximately $0.2 million. Activity during the first quarter of 2020 was primarily the result of goodwill impairment charges within the Final Mile Products and Diversified Products segments totaling $106.8 million.
Other Income (Expense)
Interest expense for the first quarter of 2021 totaled $6.2 million compared to $6.3 million in the first quarter of 2020. Interest expense relates to interest and non-cash accretion charges on our New (during 2021) and Old (during 2020) Term Loan Credit Agreements, Senior Notes, and Revolving Credit Agreement. The decrease from the prior year period is primarily due to our voluntary prepayment of $10.0 million against our Senior Notes during the third quarter of 2020.
Other, net for the first quarter of 2021 represented expense of less than $0.1 million as compared to income of $0.1 million for the prior year period. Expense for the current year period is attributable to individually insignificant expenses and partially offsetting income items. Income for the prior year period is primarily related to interest income.
Income Taxes
We recognized income tax expense of $1.8 million in the first quarter of 2021 compared to an income tax benefit of $9.6 million for the same period in the prior year. The effective tax rate for this period was 36.3% compared to 8.2% for the same period in the prior year. For the first three months of 2021, the effective tax rate differs from the US Federal statutory rate of 21% primarily due to the impact of state and local taxes and discrete items incurred related to stock-based compensation. For the first three months of 2020, the effective tax rate differs from the US Federal statutory rate of 21% primarily due to the impact of state and local taxes, impairment of non-deductible goodwill, provisions related to the CARES Act, and discrete items incurred related to stock-based compensation.
Liquidity and Capital Resources
Capital Structure
Our capital structure is comprised of a mix of debt and equity. As of March 31, 2021, our debt to equity ratio, including our finance lease obligations, was approximately 1.1:1.0. Our long-term objective is to generate operating cash flows sufficient to support the growth within our businesses and increase shareholder value. This objective will be achieved through a balanced capital allocation strategy of sustaining strong liquidity, maintaining healthy leverage ratios, investing in the business, both organically and strategically, and returning capital to our shareholders.
During the first quarter of 2021, in keeping to this balanced approach, we paid dividends of approximately $4.3 million and repurchased shares under our share repurchase program totaling $18.2 million. In addition, as further described in our Annual Report on Form 10-K for the year ended December 31, 2020, during the third quarter of 2020 we used the proceeds from our $150.0 million New Term Loan Credit Agreement to pay off the $135.2 million outstanding balance on the Old Term Loan Credit Agreement. We used the remaining proceeds to pay related issuance costs and expenses as well as repay $10.0 million against our Senior Notes, which are now our nearest maturity of outstanding debt due October 2025. Collectively, these actions demonstrate our confidence in the financial outlook of the Company and our ability to generate cash flow, both near and long term, and reinforce our overall commitment to deliver shareholder value while maintaining the flexibility to continue to execute our strategic plan for profitable growth and diversification.
27
Our liquidity position, defined as cash on hand and available borrowing capacity on the Revolving Facility, amounted to $337.3 million as of March 31, 2021, an increase of 22% compared to $277.2 million as of March 31, 2020 and a decrease of 12% from $384.0 million as of December 31, 2020. While we believe a certain degree of uncertainty remains in the industry due in part to the COVID-19 pandemic, we believe we are well-positioned to capitalize on the expected increase in industry demand and production throughout 2021 and beyond. For 2021, we expect to continue our commitment to fund our working capital requirements and capital expenditures, including maintaining our assets to capitalize on any economic and/or industry upswings, while also responsibly returning capital to our shareholders. We will continue to adjust to changes in the current environment, preserve the strength of our balance sheet, prioritize the safety of our employees, and ensure the liquidity and financial well-being of the Company.
Debt Agreements and Related Amendments
Senior Notes
On September 26, 2017, we issued Senior Notes due 2025 (the “Senior Notes”) with an aggregate principal amount of $325 million. The Senior Notes bear interest at the rate of 5.50% per annum from the date of issuance, and will pay interest semi-annually in cash on April 1 and October 1 of each year. We used the net proceeds of $318.9 million from the sale of the Senior Notes to finance a portion of the acquisition of Supreme and to pay related fees and expenses. The Senior Notes are guaranteed on a senior unsecured basis by all of our direct and indirect existing and future domestic restricted subsidiaries, subject to certain restrictions. The Senior Notes and related guarantees are our and our guarantors’ general unsecured senior obligations and are subordinate to all of our and our guarantors’ existing and future secured debt to the extent of the assets securing that secured obligation. In addition, the Senior Notes are structurally subordinate to any of existing and future debt of any of our subsidiaries that are not guarantors, to the extent of the assets of those subsidiaries. The Senior Notes will mature on October 1, 2025.
The indenture for the Senior Notes restricts our ability and the ability of certain of our subsidiaries, subject to certain exceptions and qualifications, to: (i) incur additional indebtedness; (ii) pay dividends or make other distributions in respect of, or repurchase or redeem, our capital stock or with respect to any other interest or participation in, or measured by, our profits; (iii) make loans and certain investments; (iv) sell assets; (v) create or incur liens; (vi) enter into transactions with affiliates; and (vii) consolidate, merge or sell all or substantially all of our assets.
The indenture for the Senior Notes contains customary events of default, including payment defaults, breaches of covenants, failure to pay certain judgments and certain events of bankruptcy, insolvency and reorganization. As of March 31, 2021, we were in compliance with all covenants, and while the duration and severity of the ongoing COVID-19 pandemic are unknown at this time, we do not anticipate that the pandemic will impact our ability to remain in compliance with these covenants.
Contractual coupon interest expense and accretion of discount and fees for the Senior Notes for the three-month periods ended March 31, 2021 and 2020, was $4.5 million and $4.6 million, respectively. Contractual coupon interest expense and accretion of discount and fees are included in Interest expense on our Condensed Consolidated Statements of Operations.
Revolving Credit Agreement
On December 21, 2018, we entered into the Second Amended and Restated Credit Agreement (the “Revolving Credit Agreement”), among us, certain of our subsidiaries as borrowers (together with us, the “Borrowers”), the lenders from time to time party thereto, Wells Fargo Capital Finance, LLC and Citizens Business Capital, which amended and restated our existing amended and restated revolving credit agreement, dated as of May 8, 2012.
On September 28, 2020, we entered into the First Amendment to Second Amended and Restated Credit Agreement (together with the Second Amended and Restated Credit Agreement, the “Revolving Credit Agreement” or “Revolving Facility”) among us, certain of our subsidiaries party thereto, the lenders party thereto, and the Revolver Agent. The Amendment primarily made conforming changes to the provisions in the Revolving Credit Agreement to reflect modifications made under the new term loan credit agreement, which is described in more detail below.
The Revolving Credit Agreement is guaranteed by certain of our subsidiaries (the “Revolver Guarantors”) and is secured by (i) first priority security interests in substantially all personal property of the Borrowers and the Revolver Guarantors, consisting of accounts receivable, inventory, cash, deposit and securities accounts and any cash or other assets in such accounts and, to the extent evidencing or otherwise related to such property, all general intangibles, licenses, intercompany debt, letter of credit rights, commercial tort claims, chattel paper, instruments, supporting obligations, documents and payment intangibles (collectively, the “Revolver Priority Collateral”), and (ii) second-priority liens on and security interests in (A) equity interests of each direct subsidiary held by the Borrowers and each Revolver Guarantors, and (B) substantially all other tangible and intangible assets of the Borrowers and the Revolver Guarantors, excluding real property (the “Term Priority Collateral”).
The Revolving Credit Agreement has a scheduled maturity date of December 21, 2023, subject to certain springing maturity events.
28
Under the Revolving Credit Agreement, the lenders agree to make available to us a $175 million revolving credit facility. We have the option to increase the total commitment under the facility to up to $275 million, subject to certain conditions. Subject to availability, the Revolving Credit Agreement provides for a letter of credit subfacility in an amount not in excess of $15 million, and allows for swingline loans in an amount not in excess of $17.5 million. Outstanding borrowings under the Revolving Credit Agreement bear interest at an annual rate, at the Borrowers’ election, equal to (i) LIBOR plus a margin ranging from 1.25% to 1.75% or (ii) a base rate plus a margin ranging from 0.25% to 0.75%, in each case depending upon the monthly average excess availability under the revolving loan facility. The Borrowers are required to pay a monthly unused line fee equal to 0.20% times the average daily unused availability along with other customary fees and expenses thereunder.
The Revolving Credit Agreement contains customary covenants limiting our ability and certain of our affiliates to, among other things, pay cash dividends, incur debt or liens, redeem or repurchase stock, enter into transactions with affiliates, merge, dissolve, repay subordinated indebtedness, make investments and dispose of assets. In addition, we will be required to maintain a minimum fixed charge coverage ratio of not less than 1.0 to 1.0 as of the end of any period of 12 fiscal months (commencing with the month ending December 31, 2018) when excess availability under the Revolving Credit Agreement is less than 10% of the total revolving commitment. We were in compliance with all covenants as of March 31, 2021, and while the duration and severity of the ongoing COVID-19 pandemic remain unknown at this time, we do not anticipate that the pandemic will impact our ability to remain in compliance with these covenants.
During the three-month period ended March 31, 2021, and as of March 31, 2021, there were no amounts outstanding under the Revolving Facility. We paid no interest under the Revolving Credit Agreement during the three-month period ended March 31, 2021.
During the three-month period ended March 31, 2020, we drew $45.0 million under the Revolving Credit Agreement as a precautionary measure in response to the uncertainty caused by the COVID-19 pandemic. As of March 31, 2020, outstanding borrowings totaled $45.0 million, of which none was classified as current on our Condensed Consolidated Balance Sheets. For the three-month period ended March 31, 2020, we paid less than $0.1 million of interest. During the second quarter of 2020, we repaid the $45.0 million in outstanding borrowings.
Our liquidity position, defined as cash on hand and available borrowing capacity on the Revolving Facility, amounted to $337.3 million as of March 31, 2021, a decrease of 12% from $384.0 million as of December 31, 2020 and increase of 22% from March 31, 2020.
New and Old Term Loan Credit Agreements
On September 28, 2020, we entered into a Term Loan Credit Agreement (the “New Term Loan Credit Agreement”) among us, the lenders from time to time party thereto, and Wells Fargo Bank, National Association, as the administrative agent (the “Term Agent”), providing for a senior secured term loan facility of $150 million that was advanced at closing. The New Term Loan Credit Agreement refinanced and replaced that certain Term Loan Credit Agreement, dated as of May 8, 2012 (as amended, restated, supplemented or otherwise modified from time to time, the “Old Term Loan Credit Agreement”), among us, the lenders party thereto and Morgan Stanley Senior Funding, Inc., as the administrative agent.
The New Term Loan Credit Agreement is guaranteed by certain of our subsidiaries (the “Term Loan Guarantors”) and is secured by (i) second priority security interests (subject only to the liens securing the Revolving Credit Agreement, customary permitted liens, and certain other permitted liens) in substantially all of our personal property and the Term Loan Guarantors, consisting of accounts receivable, inventory, cash, deposit and securities accounts and any cash or other assets in such accounts and, to the extent evidencing or otherwise related to such property, all general intangibles, licenses, intercompany debt, letter of credit rights, commercial tort claims, chattel paper, instruments, supporting obligations, documents and payment intangibles, and (ii) first priority security interests (subject only to customary permitted liens and certain other permitted liens) in (A) subject to certain limitations, equity interests of each direct subsidiary held by us and each Term Loan Guarantor, and (B) substantially all of our other tangible and intangible assets and the Term Loan Guarantors, including equipment, general intangibles, intercompany notes, investment property and intellectual property, but excluding real property. The respective priorities of the security interests securing the New Term Loan Credit Agreement and the Revolving Credit Agreement are governed by an Intercreditor Agreement, dated as of September 28, 2020, between the Term Agent and the Revolver Agent (the “Intercreditor Agreement”). The New Term Loan Credit Agreement has a scheduled maturity date of September 28, 2027. The loans under the New Term Loan Credit Agreement amortize in quarterly installments equal to 0.25% of the original principal amount of the term loans issued thereunder, with the balance payable at maturity.
Outstanding borrowings under the New Term Loan Credit Agreement bear interest at a rate, at our election, equal to (i) LIBOR (subject to a floor of 0.75% per annum) plus a margin of 3.25% per annum or (ii) a base rate plus a margin of 2.25% per annum.
The New Term Loan Credit Agreement contains customary covenants limiting our ability and our subsidiaries to, among other things, pay cash dividends, incur debt or liens, redeem or repurchase stock, enter into transactions with affiliates, merge, dissolve, pay off subordinated indebtedness, make investments and dispose of assets. As of March 31, 2021, we were in compliance with
29
all covenants, and while the duration and severity of the ongoing COVID-19 pandemic remain unknown at this time, we do not anticipate that the pandemic will impact our ability to remain in compliance with these covenants.
Subject to the terms of the Intercreditor Agreement, if the covenants under the New Term Loan Credit Agreement are breached, the lenders may, subject to various customary cure rights, require the immediate payment of all amounts outstanding and foreclose on collateral. Other customary events of default in the New Term Loan Credit Agreement include, without limitation, failure to pay obligations when due, initiation of insolvency proceedings, defaults on certain other indebtedness, and the incurrence of certain judgments that are not stayed, satisfied, bonded or discharged within 60 days.
As of March 31, 2021, we had $138.8 million outstanding under the New Term Loan Credit Agreement, of which none was classified as current on our Condensed Consolidated Balance Sheets. For the three-month period ended March 31, 2021, we paid interest of $1.4 million under the New Term Loan Credit Agreement and made no principal payments. For the three-month period ended March 31, 2020, under the Old Term Loan Credit Agreement we paid interest of $1.4 million and made no principal payments.
For each three-month period ended March 31, 2021 and 2020, we incurred charges of less than $0.1 million for amortization of fees and original issuance discount. Amortization of fees and original issuance discount are included in Interest expense in the Condensed Consolidated Statements of Operations.
Cash Flows
Cash used in operating activities for the first three months of 2021 totaled $22.4 million, compared to $10.1 million during the same period in 2020. Cash used in operations during the current year period was the result of net income adjusted for various non-cash activities including depreciation, amortization, net gain on the sale of assets, deferred taxes, stock-based compensation, impairment, accretion of debt fees and discount, and a $41.7 million increase in working capital. Changes in key working capital accounts for 2021 and 2020 are summarized below (in thousands):
| Three Months Ended March 31, | |||||||||||||||||
| 2021 | 2020 | Change | |||||||||||||||
| Source (Use) of cash: | |||||||||||||||||
| Accounts receivable | $ | (33,059) | $ | 34,522 | $ | (67,581) | |||||||||||
| Inventories | (63,422) | (59,001) | (4,421) | ||||||||||||||
| Accounts payable and accrued liabilities | 61,789 | 8,235 | 53,554 | ||||||||||||||
| Net use of cash | $ | (34,692) | $ | (16,244) | $ | (18,448) | |||||||||||
Accounts receivable increased $33.1 million in the first three months of 2021 as compared to a $34.5 million decrease in the prior year period. Days sales outstanding, a measure of working capital efficiency that measures the amount of time a receivable is outstanding, was 31 days and 32 days in the 2021 and 2020 periods, respectively. The increase in accounts receivable during the first three months of 2021 was primarily due to the increase in shipments from the prior year period as well as the timing of shipments and receipt of customer payments. Inventory increased by $63.4 million during the first three months of 2021 as compared to an increase of $59.0 million in the 2020 period. Our inventory turns, a commonly used measure of working capital efficiency that measures how quickly inventory turns per year, was approximately 6 times in the 2021 period and 8 times in the 2020 period. The increase in inventory for the 2021 period was primarily attributable to higher finished goods inventory due to the timing of customer pick-ups and higher raw materials inventory to adjust to anticipated production. Accounts payable and accrued liabilities increased by $61.8 million in 2021 compared to an increase of $8.2 million for the same period in 2020. Days payable outstanding, a measure of working capital efficiency that measures the amount of time a payable is outstanding, was 45 days in the 2021 period compared to 38 days during the same period in 2020.
Investing activities used $4.0 million during the first three months of 2021, as compared to $6.3 million during the same period in 2020. Investing activities for the first three months of 2021 include capital expenditures of $4.2 million, which was a decrease compared to $6.3 million during the same period in 2020. For the first three months of 2021, investing activities also includes proceeds from the sale of property, plant, and equipment of $0.2 million. Proceeds from the sale of property, plant, and equipment for the first three months of 2020 were insignificant.
Financing activities used $22.4 million during the first three months of 2021 as compared to providing $30.4 million during the same period in 2020. Net cash used in financing activities during the current year period primarily relates to common stock repurchases and withholdings of $19.3 million and cash dividend payments to our shareholders of $4.3 million, partially offset by proceeds from the exercise of stock options of $1.2 million. Cash provided by financing activities in the first three months of 2020 primarily relate to borrowings under our Revolving Credit Facility of $45.0 million, partially offset by common stock repurchases and withholdings of $10.1 million and cash dividends paid to our shareholders of $4.5 million.
30
As of March 31, 2021, our liquidity position, defined as cash on hand and available borrowing capacity, amounted to $337.3 million, representing an increase of $60.1 million compared to March 31, 2020 and a decrease of $46.7 million compared to December 31, 2020. Total debt and finance lease obligations amounted to $454.1 million as of March 31, 2021. In addition, our nearest debt maturity is not until October 2025. While we believe a certain degree of uncertainty remains in the industry due in part to the COVID-19 pandemic, we believe we are well-positioned to capitalize on the expected increase in industry demand and production throughout 2021 and beyond.
Capital Expenditures
Capital spending amounted to approximately $4.2 million for the first three months of 2021 and is anticipated to be between $35 and $40 million for 2021. Capital spending for 2021 has been and is expected to continue to be primarily utilized to support maintenance, growth, and productivity improvement initiatives within our facilities, including expenditures to capitalize on any economic and/or industry upswings.
Goodwill Impairment
We assess goodwill for impairment at the reporting unit level on an annual basis as of October 1 and whenever events or changes in circumstances indicate a possible impairment. Subsequent to December 31, 2019, our share price and market capitalization declined. In addition, as a result of the COVID-19 pandemic and related impact on our results of operations, the Company did not perform in-line with expectations. As a result, indicators of impairment were identified and we performed an interim quantitative assessment as of March 31, 2020, utilizing a combination of the income and market approaches, which were weighted evenly. Key assumptions used in the analysis were discount rates of 17.0% and 13.5% for FMP and Tank Trailers (which is within the DPG segment), respectively, EBITDA margins, and a terminal growth rate of 3.0%. The results of the quantitative analysis indicated the carrying value of the FMP and Tank Trailers reporting units exceeded their fair values and, accordingly, goodwill impairment charges of $95.8 million and $11.0 million, respectively, were recorded during the first quarter of 2020. The goodwill impairment charges, which were based on Level 3 fair value measurements, are included in Impairment and other, net in the Condensed Consolidated Statements of Operations.
In addition, the results of the quantitative analysis performed as of March 31, 2020 indicated the fair value of the Process Systems reporting unit exceeded the carrying value by approximately 3%. Key assumptions used in the analysis were a discount rate of 14.5%, EBITDA margin, and a terminal growth rate of 3.0%. The Process Systems reporting unit designs and manufactures a broad range of products, such as isolators, stationary silos, and downflow booths used in a number of unique markets, including the chemical, dairy, food and beverage, pharmaceutical and nuclear markets. We believe this reporting unit’s broad range of innovative products in unique industries will result in sufficient future earnings. Based on the results of the interim quantitative test, we performed sensitivity analyses around the key assumptions used in the analysis, the results of which were: (a) a 100 basis point decrease in the EBITDA margin used to determine expected future cash flows would have resulted in an impairment of approximately $4.6 million, (b) a 100 basis point increase in the discount rate would have resulted in an impairment of approximately $4.5 million, and (c) a 100 basis point decrease in the terminal growth rate would have resulted in an impairment of approximately $1.2 million.
Future events and changing market conditions may require a re-evaluation of the assumptions used in the determination of fair value for each of our reporting units, including key assumptions used in the expected EBITDA margins and cash flows, as well as other key assumptions with respect to matters out of our control, such as discount rates and market multiple comparables.
We considered whether there were any indicators of impairment during the three months ended March 31, 2021 and concluded there were none.
31
Contractual Obligations and Commercial Commitments
A summary of payments of our contractual obligations and commercial commitments, both on and off balance sheet, as of March 31, 2021 are as follows (in thousands):
| 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | Total | ||||||||||||||||||||||||||||||||||||||
| Debt: | ||||||||||||||||||||||||||||||||||||||||||||
| New Term Loan Credit Agreement (due 2027) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 138,835 | $ | 138,835 | ||||||||||||||||||||||||||||||
| Revolving Facility (due 2023) | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Senior Notes (due 2025) | — | — | — | — | 315,000 | — | 315,000 | |||||||||||||||||||||||||||||||||||||
Interest payments on Revolving Facility, New Term Loan Credit Agreement, and Senior Notes 1 | 17,159 | 22,878 | 22,878 | 22,878 | 18,847 | 9,718 | 114,358 | |||||||||||||||||||||||||||||||||||||
| Finance Leases (including principal and interest) | 271 | 30 | — | — | — | — | 301 | |||||||||||||||||||||||||||||||||||||
| Total debt | 17,430 | 22,908 | 22,878 | 22,878 | 333,847 | 148,553 | 568,494 | |||||||||||||||||||||||||||||||||||||
| Other: | ||||||||||||||||||||||||||||||||||||||||||||
| Operating Leases | 3,337 | 3,067 | 2,211 | 1,111 | 563 | 722 | 11,011 | |||||||||||||||||||||||||||||||||||||
| Total other | 3,337 | 3,067 | 2,211 | 1,111 | 563 | 722 | 11,011 | |||||||||||||||||||||||||||||||||||||
| Other commercial commitments: | ||||||||||||||||||||||||||||||||||||||||||||
| Letters of Credit | 6,590 | — | — | — | — | — | 6,590 | |||||||||||||||||||||||||||||||||||||
| Raw Material Purchase Commitments | 128,974 | — | — | — | — | — | 128,974 | |||||||||||||||||||||||||||||||||||||
| Chassis Converter Pool Agreements | 24,134 | — | — | — | — | — | 24,134 | |||||||||||||||||||||||||||||||||||||
| Total other commercial commitments | 159,698 | — | — | — | — | — | 159,698 | |||||||||||||||||||||||||||||||||||||
| Total obligations | $ | 180,465 | $ | 25,975 | $ | 25,089 | $ | 23,989 | $ | 334,410 | $ | 149,275 | $ | 739,203 | ||||||||||||||||||||||||||||||
1 Future interest payments on variable rate long-term debt are estimated based on the rate in effect as of March 31, 2021.
Borrowings under the New Term Loan Credit Agreement bear interest at a rate, at our election, equal to (i) LIBOR (subject to a floor of 0.75% per annum) plus a margin of 3.25% per annum or (ii) a base rate plus a margin of 2.25% per annum.
Borrowings under the Revolving Facility bear interest at a variable rate based on the LIBOR or a base rate determined by the lender’s prime rate plus an applicable margin, as defined in the agreement. Outstanding borrowings under the Revolving Facility bear interest at a rate, at our election, equal to (i) LIBOR plus a margin ranging from 1.25% to 1.75% or (ii) a base rate plus a margin ranging from 0.25% to 0.75%, in each case depending upon the monthly average excess availability under the Revolving Facility. We are required to pay a monthly unused line fee equal to 0.20% times the average daily unused availability along with other customary fees and expenses of our agent and lenders. As of March 31, 2021, we had no amounts outstanding under our Revolving Facility.
The Senior Notes bear interest at the rate of 5.5% per annum from the date of issuance, payable semi-annually on April 1 and October 1.
Finance leases represent future minimum lease payments including interest. Operating leases represent the total future minimum lease payments. As of March 31, 2021, obligations related to operating leases that we have executed but have not yet commenced totaled approximately $1.8 million on a non-discounted basis, which we generally expect to be recognized over the next 10 years.
We have standby letters of credit totaling $6.6 million issued in connection with workers compensation claims and surety bonds.
We have $129.0 million in purchase commitments with our suppliers and through financial derivatives through December 2021 for various raw material commodities, including aluminum, steel, nickel and polyethylene as well as other raw material components which are within normal production requirements.
We, through our subsidiary Supreme, obtain most vehicle chassis for our specialized vehicle products directly from the chassis manufacturers under converter pool agreements. Chassis are obtained from the manufacturers based on orders from customers, and to a lesser extent, for unallocated orders. Although each manufacturer’s agreement has different terms and conditions, the agreements generally state that the manufacturer will provide a supply of chassis to be maintained from time to time at our various facilities with the condition that we will store such chassis and will not move, sell, or otherwise dispose of such chassis except under the terms of the agreement. The manufacturer transfers the chassis to us on a “restricted basis,” retaining the sole authority to authorize commencement of work on the chassis and to make certain other decisions with respect to the chassis including the terms and pricing of sales of the chassis to the manufacturer’s dealers. The manufacturer also does not transfer the certificate of origin to us nor permit us to sell or transfer the chassis to anyone other than the manufacturer (for ultimate resale to a dealer). Although we are party to related finance agreements with manufacturers, we have not historically settled, nor expect to in the future settle, any related obligations in cash. Instead, the obligation is settled by the manufacturer upon reassignment of the chassis to an accepted dealer, and the dealer is invoiced for the chassis by the manufacturer. Accordingly, as of March 31, 2021 our outstanding chassis converter pool with the manufacturer totaled $18.2 million and we have included this financing agreement
32
on our consolidated balance sheets within Prepaid expenses and other and Other accrued liabilities. All other chassis programs through our Supreme subsidiary are handled as consigned inventory belonging to the manufacturer and totaled approximately $5.9 million. Under these agreements, if the chassis is not delivered to a customer within a specified time frame we are required to pay a finance or storage charge on the chassis. Additionally, we receive finance support funds from the manufacturer when the chassis are assigned into our chassis pool. Typically, chassis are converted and delivered to customers within 90 days of the receipt of the chassis.
Backlog
Orders that have been confirmed by customers in writing, have defined delivery time frames, and can be produced during the next 18 months are included in our backlog. Orders that comprise our backlog may be subject to changes in quantities, delivery, specifications, terms or cancellation. Our backlog of orders was approximately $1,547 million at March 31, 2021, which is a 4% increase from approximately $1,482 million at December 31, 2020 and a 57% increase from $984 million at March 31, 2020. As we disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, we believe our backlog of orders is strong, especially considering the COVID-19 pandemic’s impact on our industry, operations, and demand for our products. We expect to complete the majority of our backlog orders as of March 31, 2021 within 12 months of this date.
Outlook
The trailer industry generally follows the transportation industry’s cycles. According to ACT Research Company (“ACT”), total United States trailer production in 2020 was approximately 206,000 trailers, a 38% decrease from 2019 production levels. As we enter 2021 with a certain degree of continued uncertainty from the COVID-19 pandemic, the outlook for the overall trailer market for 2021 indicates some recovery from suppressed 2020 levels. The most recent estimates from industry forecasters ACT and FTR Associates (“FTR”) indicate total United States trailer production levels for 2021 of approximately 290,000 and 284,000, respectively, which are more historically consistent production levels in the trailer industry. In addition, as noted above we believe our backlog of orders is strong, which is consistent with industry forecasters who have indicated backlogs are at high levels thus providing a solid foundation for 2021.
ACT estimates production levels for 2022, 2023, 2024, 2025, and 2026 to be 332,000, 294,000, 273,000, 295,000, and 286,000, respectively. In addition, as of April 2021 FTR estimates 2022 and 2023 new trailer production to be approximately 308,000 and 330,000, respectively. These estimates from ACT and FTR for the next several years are generally expected to be above replacement demand. While we believe these estimates to generally be reasonable, the unknown duration and severity of the ongoing COVID-19 pandemic creates some uncertainty in the industry and actual production and/or demand could vary significantly from these estimates.
Other potential risks we face for the remainder of 2021 will primarily relate to our ability to effectively manage our manufacturing operations and overall business with the expected increase in production. In addition, the cost and supply of raw materials, commodities, and components is a potential risk. Significant increases in the cost of certain commodities, raw materials or components have had and may continue to have an adverse effect on our results of operations. As has been our practice, we will endeavor to pass raw material and component price increases to our customers in addition to continuing our cost management and hedging activities in an effort to minimize the risk changes in material costs could have on our operating results. In addition, we rely on a limited number of suppliers for certain key components and raw materials in the manufacturing of our products, including tires, axles, suspensions, aluminum extrusions, specialty steel coil, and chassis. At the current and expected demand levels, there may be shortages of supplies of raw materials or components which would have an adverse impact on our ability to meet demand for our products. Despite these risks, we believe we are well positioned to capitalize on the expected strong overall demand levels while maintaining or growing margins through improvements in product pricing as well as productivity and other operational excellence initiatives.
For the remainder of 2021, we will continue to adjust to changes in the current environment, preserve the strength of our balance sheet, prioritize the safety of our employees, and ensure the liquidity and financial well-being of the Company. We believe we remain well-positioned for long-term success in the trailer industry because: (1) our core customers are among the major participants in the trucking industry; (2) our technology and innovation provides value-added solutions for our customers by reducing trailer operating costs, improving revenue opportunities, and solving unique transportation problems; (3) our Wabash Management System (“WMS”) principles and processes and focus on enterprise lean drives focus on the interconnected processes that are critical for success across our business; and (4) our significant brand recognition and presence throughout North America utilizing our extensive dealer network to market and sell our products. By continuing to be an innovation leader in the transportation, logistics, and distribution industries we expect to leverage our existing assets and capabilities into higher margin products and markets by delivering value-added customer solutions. Optimizing our product portfolio, operations, and processes to enhance manufacturing efficiency and agility is expected to well-position the Company to drive margin expansion, reinforce our customer relationships, and deliver greater value to our customers and stakeholders.
33
Critical Accounting Policies and Estimates
We have included a summary of our Critical Accounting Policies and Estimates in our Annual Report on Form 10-K for the year ended December 31, 2020. There have been no material changes to the summary provided in that report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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.
Commodity Prices
We are exposed to fluctuation in commodity prices through the purchase of various raw materials that are processed from commodities such as aluminum, steel, lumber, nickel, copper, and polyethylene. Given the volatility of certain commodity prices, this exposure can significantly impact product costs. We manage some of our commodity price changes by entering into fixed price contracts with our suppliers and through financial derivatives. As of March 31, 2021, we had $129.0 million in raw material purchase commitments through December 2021 for materials that will be used in the production process, as compared to $86.9 million as of December 31, 2020. We typically do not set prices for our products more than 45-90 days in advance of our commodity purchases and can, subject to competitive market conditions, 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.
Interest Rates
During the three-month period ended March 31, 2021, and as of March 31, 2021, there were no amounts outstanding under the Revolving Facility. As of March 31, 2021, we had outstanding borrowings under our New Term Loan Credit Agreement totaling approximately $138.8 million that bears interest at a floating rate, subject to a minimum interest rate. Based on any current borrowings under our Revolving Facility and the outstanding indebtedness under our New Term Loan Credit Agreement, a hypothetical 100 basis-point change in the floating interest rate would result in a corresponding change in interest expense over a one-year period of approximately $1.4 million. This sensitivity analysis does not account for the change in the competitive environment indirectly related to the change in interest rates and the potential managerial action taken in response to these changes.
Foreign Exchange Rates
We are subject to fluctuations in the British pound sterling and Mexican peso exchange rates that impact transactions with our foreign subsidiaries, as well as U.S. denominated transactions between these foreign subsidiaries and unrelated parties. A ten percent change in the British pound sterling or Mexican peso exchange rates would have an immaterial impact on results of operations. 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 the Company’s management, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) were effective as of March 31, 2021.
Changes in Internal Controls over Financial Reporting
There were no changes in the Company’s internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the first quarter of fiscal year 2021 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
See Item 3 of Part I of our Annual Report on Form 10-K for the year ended December 31, 2020. See also Note 12, “Commitments and Contingencies”, to our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report.
34
Item 1A. Risk Factors
You should carefully consider the risks described in our Annual Report on Form 10-K for the year ended December 31, 2020 including those under the heading “Risk Factors” appearing in Item 1A of Part I of the Form 10-K and other information contained in this Quarterly Report before investing in our securities. Realization of any of these risks could have a material adverse effect on our business, financial condition, cash flows and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Our Equity Securities
In November 2018, the Company announced that the Board of Directors approved the repurchase of an additional $100 million in shares of common stock over a three-year period. This authorization was an increase to the previous $100 million repurchase programs approved in February 2017 and February 2016. The repurchase program is set to expire on February 28, 2022. For the quarter ended March 31, 2021, we repurchased 1,038,674 shares pursuant to our repurchase program. Additionally, during this period there were 67,754 shares repurchased to cover minimum employee tax withholding obligations upon the vesting of restricted stock awards.
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Amount That May Yet Be Purchased Under the Plans or Programs ($ in millions) | ||||||||||||||||||||||
| January 1 - 31, 2021 | 299,023 | $ | 17.22 | 295,753 | $ | 46.4 | ||||||||||||||||||||
| February 1 - 28, 2021 | 498,688 | $ | 16.89 | 434,204 | $ | 39.0 | ||||||||||||||||||||
| March 1 - 31, 2021 | 308,717 | $ | 18.63 | 308,717 | $ | 33.3 | ||||||||||||||||||||
| Total | 1,106,428 | $ | 17.46 | 1,038,674 | $ | 33.3 | ||||||||||||||||||||
Item 6. Exhibits
| (a) | Exhibits | |||||||
| 101 | The following materials from Wabash National Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 are filed herewith, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets at March 31, 2021 and December 31, 2020, (ii) the Condensed Consolidated Statements of Operations for the three months ended March 31, 2021 and 2020, (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2021 and 2020, (iv) the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020, (v) the Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2021 and 2020, and (vi) Notes to Condensed Consolidated Financial Statements. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document. | |||||||
| 104 | Cover Page Interactive Data File (formatting as Inline XBRL and contained in Exhibit 101) | |||||||
35
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: April 28, 2021 | By: | /s/ Michael N. Pettit | ||||||
| Michael N. Pettit | ||||||||
| Senior Vice President and Chief Financial Officer (Principal Financial Officer) | ||||||||
36