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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
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: 1-10883
WABASH NATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-1375208
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
(WABASH NATIONAL (R) LOGO)
1000 SAGAMORE PARKWAY SOUTH
LAFAYETTE, INDIANA 47905
(ADDRESS OF PRINCIPAL (ZIP CODE)
EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (765) 771-5300
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common Stock, $.01 Par Value New York Stock Exchange
Series A Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 X No .
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No .
----- -----
The aggregate market value of voting stock held by non-affiliates of the
registrant as of June 30, 2004 was $747,413,042 based upon the closing price of
the Company's common stock as quoted on the New York Stock Exchange composite
tape on such date.
The number of shares outstanding of the registrant's Common Stock as of
February 23, 2005 was 30,852,779.
Part III of this Form 10-K incorporates by reference certain portions of
the registrant's Proxy Statement for its Annual Meeting of Stockholders to be
filed within 120 days after December 31, 2004.
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TABLE OF CONTENTS
WABASH NATIONAL CORPORATION
FORM 10-K FOR THE FISCAL
YEAR ENDED DECEMBER 31, 2004
PAGES
-----
PART I
Item 1 Business........................................................................ 3
Item 2 Properties...................................................................... 10
Item 3 Legal Proceedings............................................................... 10
Item 4 Submission of Matters to a Vote of Security Holders............................. 11
PART II
Item 5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities............................................... 11
Item 6 Selected Financial Data......................................................... 11
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................... 12
Item 7A Quantitative and Qualitative Disclosures about Market Risk...................... 23
Item 7B Risk Factors.................................................................... 24
Item 8 Financial Statements and Supplementary Data..................................... 28
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................... 52
Item 9A Controls and Procedures......................................................... 52
PART III
Item 10 Directors and Executive Officers of the Registrant.............................. 54
Item 11 Executive Compensation.......................................................... 55
Item 12 Security Ownership of Certain Beneficial Owners and Management ................. 55
Item 13 Certain Relationships and Related Transactions.................................. 55
Item 14 Principal Accountant Fees and Services.......................................... 55
PART IV
Item 15 Exhibits and Financial Statement Schedules...................................... 55
SIGNATURES ................................................................................ 57
2
FORWARD LOOKING STATEMENTS
This Report, including documents incorporated by reference, contains and
incorporates by reference "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934 (the "Exchange Act"). Forward-looking statements may include the words
"may," "will," "estimate," "intend," "continue," "believe," "expect," "plan" or
"anticipate" and other similar words. Our "forwarding-looking statements"
include, but are not limited to, statements regarding:
- our business plan;
- our expected revenues, income or loss and capital expenditures;
- plans for future operations;
- financing needs, plans and liquidity;
- our ability to achieve sustained profitability;
- reliance on certain customers and corporate partnerships;
- shortages of raw materials, availability of capital;
- dependence on industry trends;
- the outcome of any pending litigation;
- export sales and new markets;
- acceptance of new technology and products;
- government regulation; 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 Report. Each forward-looking statement contained in
this 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 Report or to
reflect the occurrence of unanticipated events.
Currently known risk factors that could cause actual results to differ
materially from our expectations are described in the section of this Report
entitled "Risk Factors." We urge you to carefully review that section for a more
complete discussion of the risks of an investment in the notes and our common
stock.
PART I
ITEM 1--BUSINESS
Wabash National Corporation ("Wabash," "Company," "us," "we" or "our") is
one of North America's leaders in designing, manufacturing and marketing
standard and customized truck trailers and related transportation equipment.
Founded in 1985 as a start-up, we grew to over $1.4 billion in sales in 1999,
and had approximately $1.0 billion in sales in 2004. We believe our success has
been the result of our longstanding relationships with our core customers,
innovative product development, broad product line, large distribution and
service network and corporate culture. Our management team is focused on
becoming the low-cost producer in the truck trailer industry through continuous
improvement and lean manufacturing initiatives.
We seek to identify and produce proprietary products that offer added value
to customers with the potential to generate higher profit margins than those of
standardized products. We believe that we have the engineering and manufacturing
capability to produce these products efficiently. Our proprietary DuraPlate(R)
composite truck trailer, which we introduced in 1996, has achieved widespread
acceptance by our customers. For the last three years, sales
3
of our DuraPlate(R) trailers represented approximately 80% of our total trailers
shipped. We are also a competitive producer of standardized products, and are
seeking to become a low-cost producer within our industry. We expect to continue
a program of product development and selective acquisitions of quality
proprietary products that further differentiate us from our competitors and
increase profit opportunities.
We market our transportation equipment under the Wabash(R), DuraPlate(R),
DuraPlateHD(R), FreightPro(R), Arcticlite(R) and RoadRailer(R) trademarks
directly to customers, through independent dealers and through our factory-owned
retail branch network. Historically, our marketing effort focuses on our
longstanding core customers that represent many of the largest companies in the
trucking industry. More recently, we have actively pursued the diversification
of our customer base focusing on approximately 1,250 carriers that we refer to
as mid-market. These carriers operate fleets of between 250 to 7,500 trailers,
which we estimate in total accounts for approximately one million trailers.
Longstanding core customers include - Schneider National, Inc.; J.B. Hunt
Transport Services, Inc.; Swift Transportation Corporation; Werner Enterprises,
Inc.; Heartland Express, Inc.; Crete Carrier Corporation; U.S. Xpress
Enterprises, Inc.; Knight Transportation, Inc.; Interstate Distributor Co.;
Yellow Roadway Corporation.; Old Dominion Freight Lines, Inc.; SAIA Motor
Freightlines, Inc.; and Vitran Express, Inc.
Mid-market customers include - CR England, Inc.; Marten Transport, LTD; USA
Logistics; ESTES Express Line, Inc.; Covenant Transportation, Inc.; Celadon
Group, Inc.; Jacobson Companies, Inc.; Aurora LLC; Landair Transport, Inc.; Xtra
Lease, Inc.; USF Corporation; and New Penn Motor Express, Inc.
Our relationship with our core customers has been central to our growth
since inception. Our factory-owned retail branch network, which we acquired in
1997, provides additional opportunities to distribute our products and also
offers national service and support capabilities for our customers. The retail
sale of new and used trailers, aftermarket parts and maintenance service through
our retail branch network generally provides enhanced margin opportunities.
Additionally, we have a network of 25 independent dealers.
Wabash was incorporated in Delaware in 1991 and is the successor by merger
to a Maryland corporation organized in 1985. Wabash operates in two segments:
(1) manufacturing and (2) retail and distribution. Financial results by segment,
including information about revenues from customers, measures of profit and loss
and total assets, and financial information regarding geographic areas and
export sales are discussed in detail within Footnote 15, Segment Reporting, of
the accompanying Consolidated Financial Statements. Additional information
concerning Wabash can be found on our website at www.wabashnational.com. Wabash
makes its electronic filings with the SEC, including its annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments
to these reports, available on its website free of charge as soon as practicable
after it files or furnishes them with the SEC. Information on the website is not
part of this Form 10-K.
REPOSITIONING ACTIVITIES
The year 2004 marks the second year of recovery for the industry after a
three-year downturn. During this period, we repositioned Wabash by focusing on
the continuous improvement of our manufacturing and retail operations, expanding
our customer base, introducing products that better address customers needs,
exiting non-core operations and strengthening our capital structure. We believe
Wabash is positioned to fully participate in the market growth that analysts are
predicting will continue into 2005 and beyond.
STRATEGY
We are committed to an operating strategy that seeks to deliver
profitability throughout industry cycles by executing on the core elements of
our strategic plan:
- CORPORATE FOCUS. We intend to continue our transition from an
organization focused on unit volume and revenue to one focused on
earnings and cash flow.
- PRODUCT DIFFERENTIATION. We intend to continue to provide
differentiated products that generate enhanced profit margins.
4
- CONTINUOUS IMPROVEMENTS. We are focused on continuing to reduce our
cost structure by adhering to continuous improvement and lean
manufacturing initiatives.
- CORE CUSTOMERS. We intend to maintain and enhance our long-standing
customer partnerships and create new revenue opportunities by offering
tailored transportation solutions.
- CUSTOMER DIVERSIFICATION. We intend to continue to expand and
diversify our customer base by focusing on middle market carriers with
trailer fleets ranging from 250 to 7,500 units.
- TRAILER PERFORMANCE IMPROVEMENTS. We are working on the development of
a DuraPlate(R) trailer that minimizes maintenance for 10 years.
- STRENGTHEN BALANCE SHEET. We intend to continue to enhance financial
flexibility enabling us to capitalize on future market opportunities.
INDUSTRY AND COMPETITION
Trucking in the United States, according to the American Trucking
Association (ATA), was estimated to be a $702 billion industry in 2003 (the
latest date such information is available), leading all other modes of
transportation. ATA estimates that approximately 69% of all freight tonnage is
carried by truck at some point during its shipment, accounting for approximately
87% of freight industry revenues. Trailer demand is a direct function of the
amount of freight to be transported. As the economy improves, it is forecasted
that truck carriers will need to expand their fleets, which typically results in
increased trailer orders. According to ACT Research Company, LLC (ACT), there
are approximately 2.8 million trailers in use today and the trailer replacement
demand is estimated at between 200,000 and 225,000 trailers per year.
In general, the trucking industry grew throughout the 1990's and peaked in
1999. A number of factors, including an economic downturn, fluctuations in fuel
prices, declining asset values, limited capital, record trucking company
failures and industry consolidation led to a historic reduction of 54% in
trailer purchases from 1999 to 2002. In early 2003, the trailer industry started
seeing signs of gradual improvement. The year 2003 ended with approximately
174,000 units built by the industry, a 24% improvement over 2002. The year 2004
continued the upturn in the trailer market, with approximately 229,000 trailer
units built in the year, an improvement of 32% over 2003. Most trucking
companies experienced very strong financial performances in 2004, as a capacity
constrained freight environment allowed trucking companies to raise freight
rates, in-turn improving profitability.
New truck emission regulations are to take effect in 2007, resulting in
cleaner, yet less fuel-efficient and costlier engines. As a consequence, many
trucking firms are accelerating purchases of tractors prior to the effective
date of the regulation, significantly reducing the historical trailer-to-tractor
ratio of 1.5 to 1, to less than 1 to 1 during 2004, according to ACT. We believe
that a return to historical averages could result in a significant increased
demand in trailers. In January 2004, new regulations reducing driver hours
(hours of service) for property-carrying commercial motor vehicles became
effective. As a result of Court intervention, on September 30, 2004, President
Bush signed the Surface Transportation Extension Act of 2004, allowing these
regulations to remain in effect until the earlier of a new regulation that
resolves Court-raised issues or September 30, 2005. Based upon the current
status of the regulation, it would be premature to attempt to determine the
ultimate resolution and the effect of the regulations on our industry.
Wabash, Great Dane and Utility are generally viewed as the top three
trailer manufacturers and have accounted for greater than 50% of new trailer
market share in recent years. During the severe industry downturn in 2001 and
2002, a number of trailer manufacturers went out of business, resulting in
greater industry consolidation. Despite market concentration, price competition
is fierce and differentiation is primarily through superior products, customer
relationships, service availability and cost.
5
The table below sets forth new trailer production for Wabash, its largest
competitors and for the trailer industry as a whole within North America. The
data is for all segments of the market including vans, dumps, flats, trucks,
etc. Since 2002, with the exception of intermodal containers, we have mostly
participated in the van segment of the market. The van production has grown from
a low of approximately 102,000 units in 2002 to approximately 171,000 units in
2004, an improvement of 68%. During this period, we have seen our market share
grow from approximately 26% to 28%.
2004 2003 2002 2001 2000 1999
------- ------- ------- ------- ------- -------
WABASH(1) 48,000 36,000 27,000 32,000 66,000 70,000
Great Dane 55,000 41,000 33,000(2) 22,000 47,000 58,000
Utility 31,000 24,000 18,000 16,000 29,000 31,000
Stoughton 15,000 9,900 10,000 6,000 15,000 15,000
Other principal producers 42,000 34,000 28,000 32,000 63,000 68,000
Total Industry 229,000 174,000(3) 140,000 140,000 271,000 306,000
(1) Does not include approximately 1,500, 1,300 and 6,000 intermodal containers
in 2004, 2003 and 2002, respectively.
(2) Data revised by publisher in 2004.
(3) Data revised by publisher in 2005.
Sources: Individual manufacturer information, some of which is estimated,
provided by Trailer Body Builders Magazine. Industry totals provided by A.C.T.
Research Company, L.L.C.
COMPETITIVE STRENGTHS
We believe our core competitive strengths include:
- LONG TERM CORE CUSTOMER RELATIONSHIPS - We are the exclusive provider
of trailers to a significant number of top tier trucking companies,
generating a revenue base that has helped to sustain us as one of the
market leaders.
- INNOVATIVE PRODUCT OFFERINGS - Our DuraPlate(R) proprietary technology
provides what we believe to be a superior trailer to our customers and
commands premium pricing. A DuraPlate(R) trailer is a composite plate
trailer constructed with material containing a high density
polyethylene core bonded between a high-strength steel skin. We
believe that the competitive advantages of our DuraPlate(R) trailers
over standard trailers include the following:
- operate three to five years longer;
- less costly to maintain; and
- higher trade-in values.
We have also successfully introduced innovations in our refrigerated
trailers and other product lines. For example, we introduced the
DuraplateHD(R) trailer and the FreightPro(R) sheet and post trailer in
2003 and wide-bodied Duraplate(R) intermodal containers in 2004.
- SIGNIFICANT MARKET SHARE AND BRAND RECOGNITION - We have been one of
the two largest manufacturers of trailers in North America in each of
the last 10 years, with one of the most widely recognized brands in
the industry. We believe we are currently the largest producer of van
trailers in North America.
- COMMITTED FOCUS ON OPERATIONAL EXCELLENCE - Safety, quality, on-time
delivery, productivity and cost reduction are the core elements of our
program of continuous improvement. We received the 2003 U.S. Senate
Productivity Award for the State of Indiana for the significant cost
savings and productivity we achieved in the prior two years.
- TECHNOLOGY - We are recognized by the trucking industry as being a
leader in developing technology to reduce trailer maintenance.
- CORPORATE CULTURE - We benefit from a value driven management team and
dedicated union-free workforce.
6
- EXTENSIVE DISTRIBUTION NETWORK - Twenty factory-owned retail branch
locations extend our sales network throughout North America,
diversifying our factory direct sales and supporting our national
service contracts.
REGULATION
Truck trailer length, height, width, maximum weight capacity and other
specifications are regulated by individual states. The federal government also
regulates certain safety features incorporated in the design of truck trailers,
including regulations that require anti-lock braking systems (ABS) and that
define rear impact guard standards. Manufacturing operations are subject to
environmental laws enforced by federal, state and local agencies (See
"Environmental Matters").
PRODUCTS
Since our inception, we have expanded our product offerings from a single
truck trailer product to a broad line of trailer related transportation
equipment. Our manufacturing segment specializes in the development of
innovative proprietary products for our key markets. Manufacturing segment sales
represented approximately 77%, 70%, and 60% of consolidated net sales in 2004,
2003 and 2002, respectively. Our current transportation equipment products
include the following:
- DuraPlate(R) Trailers. DuraPlate(R) trailers utilize a proprietary
technology that consists of a composite plate wall for increased
durability and greater strength. Our DuraPlate(R) trailers include our
recently introduced DuraPlateHD(R), a heavy duty version of our
regular DuraPlate(R) trailers.
- DuraPlate(R) Domestic Containers. DuraPlate(R) domestic containers
utilize the same proprietary technology as our DuraPlate(R) trailers
and consist of stackable containers, carried either on flat cars or
stacked two-high on special "Double-Stack" railcars.
- Smooth Aluminum Trailers. Smooth aluminum trailers, commonly known as
"sheet and post" trailers, are the commodity trailer product purchased
by the trucking industry. In 2003, we commercialized our new
FreightPro(R) trailer to increase our focus on sheet and post
trailers, which is the largest segment of the trailer market.
- Refrigerated Trailers. Refrigerated trailers have insulating foam in
the sidewalls and roof, which improves both the insulation
capabilities and durability of the trailers. Our refrigerated trailers
use our proprietary SolarGuard(R) technology, which we believe enables
customers to achieve lower costs through reduced fuel consumption and
reduced operating hours.
- RoadRailer(R) Equipment. The RoadRailer(R) intermodal system is a
patented bimodal technology consisting of a truck trailer and
detachable rail "bogie" which permits a trailer to run both over the
highway and directly on railroad lines.
- Other. Our other transportation equipment includes container chassis
and converter dollies.
Our retail and distribution segment focuses on the sale of new and used
trailers and providing parts and maintenance services as described below. Parts
and service and used trailer sales as a percentage of total sales were impacted
by increases in new trailer sales in 2004.
- New trailers produced by the manufacturing segment. Additionally, we
sell specialty trailers including tank trailers, dump trailers and
platform trailers produced by third parties, which are purchased in
smaller quantities for local or regional transportation needs. The
sale of new transportation equipment through the retail branch network
represented approximately 12.2%, 9.4% and 9.6% of net sales during
2004, 2003 and 2002, respectively.
- Replacement parts and accessories and maintenance service both for our
own and competitors' trailers and related equipment. Sales of these
products and service represented approximately 5.0%, 10.8% and 14.4%
of net sales during 2004, 2003 and 2002, respectively.
7
- Used transportation equipment primarily taken in trade from our
customers upon the sale of new trailers. The ability to remarket used
equipment promotes new sales by permitting trade-in allowances and
offering customers an outlet for the disposal of used equipment. The
sale of used trailers represented approximately 4.8%, 7.3% and 11.3%
of net sales during 2004, 2003 and 2002, respectively.
CUSTOMERS
Our customer base has historically included many of the nation's largest
truckload common carriers, leasing companies, private fleet carriers,
less-than-truckload (LTL) common carriers, and package carriers. Since 2002, we
have been successful in diversifying our customers from 61% of units sold
attributable to large core customers to 67% to non-core customers in 2004. This
has been accomplished while maintaining these core customer relationships. Our
five largest customers accounted for 23%, 27% and 30% of our aggregate net sales
in 2004, 2003 and 2002, respectively.
In 2004, no single customer represented at least 10% of our sales. In 2003,
Schneider National, Inc., accounted for approximately 14% of net sales and in
2002, J.B. Hunt Transportation Services, Inc. accounted for approximately 11% of
net sales. International sales, primarily to Canadian customers, accounted for
less than 10% of net sales for each of the last three years. We have established
relationships as a supplier to many large customers in the transportation
industry, including the following:
- Truckload Carriers: Schneider National, Inc.; J.B. Hunt Transport
Services, Inc.; Swift Transportation Corporation; Werner Enterprises,
Inc.; Heartland Express, Inc.; Crete Carrier Corporation; U.S. Xpress
Enterprises, Inc.; Knight Transportation, Inc.; and Interstate
Distributor Co.
- Leasing Companies: Transport International Pool, Inc.; Penske Truck
Leasing Co. LP; Wells Fargo Equipment Finance, Inc.; Xtra Lease, Inc.;
Transport Services, Inc.; and Aurora LLC.
- Private Fleets: Safeway, Inc.; The Home Depot, Inc.; The Kroger Co.;
and Sysco Corporation.
- Less-Than-Truckload Carriers: Yellow Roadway, Inc.; Old Dominion
Freight Lines, Inc.; SAIA Motor Freightlines, Inc.; FedEx Corp; and
Vitran Express, Inc.
MARKETING AND DISTRIBUTION
We market and distribute our products through the following channels:
- factory direct accounts;
- our factory-owned distribution network; and
- independent dealerships.
Factory direct accounts are generally large fleets, over 7,500 trailers
that are high volume purchasers. Historically, we have focused on the factory
direct market where customers are highly aware of the life-cycle costs of
trailer equipment and, therefore, are best equipped to appreciate the design and
value-added features of our products. In 2003, we launched sales and marketing
initiatives targeted at 1,250 mid-size fleets (operations with between 250 and
7,500 trailers) of the industry.
Our factory-owned distribution network generates retail sales of trailers
to smaller fleets and independent operators located in geographic regions where
our branches are located. This branch network enables us to provide maintenance
and other services to customers. The branch network and our Used Trailer Centers
provide an outlet for used trailers taken in trade upon the sale of new
trailers, which is a common practice with fleet customers.
We also sell our products through a nationwide network of over 25
independent dealerships. The dealers primarily serve mid-market and smaller
sized carriers and private fleets in the geographic region where the dealer is
located and on occasion may sell to large fleets. The dealers may also perform
service work for many of their customers.
8
RAW MATERIALS
We utilize a variety of raw materials and components including steel,
polyethylene, aluminum, lumber, tires and suspensions, which we purchase from a
limited number of suppliers. Significant price fluctuations or shortages in raw
materials or finished components may adversely affect our results of operations.
In 2004 and for the foreseeable future, we expect that the raw materials used in
the greatest quantity will be the steel, aluminum, polyethylene and wood used in
our trailers. Our component suppliers have advised us that they have adequate
capacity to meet our current and expected demands in 2005. Price increases for
principal raw materials and components, aluminum, steel, plastic and timber,
began during 2003, continued in 2004 and are expected to continue into 2005. Our
Harrison, Arkansas laminated hardwood floor facility provides the majority of
our requirements for trailer floors.
BACKLOG
Orders that have been confirmed by the customer in writing and can be
produced during the next 18 months are included in our backlog. Orders that
comprise backlog may be subject to changes in quantities, delivery,
specifications and terms. Our backlog of orders was approximately $280 million
and $200 million at December 31, 2004 and 2003, respectively. We expect to
complete the majority of our backlog orders within the next 12 months.
PATENTS AND INTELLECTUAL PROPERTY
Wabash holds or has applied for 63 patents in the United States on various
components and techniques utilized in our manufacture of truck trailers. In
addition, we hold or have applied for 44 patents in two foreign countries. Our
patents include intellectual property related to the manufacture of trailers
using our proprietary DuraPlate(R) product, which we believe offers us a
significant competitive advantage.
Wabash also holds or has applied for 31 trademarks in the United States, as
well as 13 trademarks in foreign countries. These trademarks include the
Wabash(R) and Wabash National(R) brand names as well as trademarks associated
with our proprietary products such as the DuraPlate(R) trailer and the
RoadRailer(R) trailer.
RESEARCH AND DEVELOPMENT
Research and development expenses are charged to earnings as incurred and
were $2.6 million, $2.1 million and $2.0 million in 2004, 2003 and 2002,
respectively.
ENVIRONMENTAL MATTERS
Our facilities are subject to various environmental laws and regulations,
including those relating to air emissions, wastewater discharges, the handling
and disposal of solid and hazardous wastes, and occupational safety and health.
Our operations and facilities have been and in the future may become the subject
of enforcement actions or proceedings for non-compliance with such laws or for
remediation of company-related releases of substances into the environment.
Resolution of such matters with regulators can result in commitments to
compliance abatement or remediation programs and in some cases the payment of
penalties. (See Item 3 "Legal Proceedings.")
We believe that our facilities are in substantial compliance with
applicable environmental laws and regulations. Our facilities have incurred, and
will continue to incur, capital and operating expenditures and other costs in
complying with these laws and regulations in both the United States and abroad.
However, we currently do not anticipate that the future costs of environmental
compliance will have a material adverse effect on our business, financial
condition or results of operations.
EMPLOYEES
As of December 31, 2004 and 2003, we had approximately 3,300 full-time
associates. No full-time associates were under a labor union contract as of
December 31, 2004. We place a strong emphasis on employee relations through
educational programs and quality improvement teams. We believe our employee
relations are good. Additionally, we had temporary employees of approximately
700 and approximately 500 at December 31, 2004 and 2003, respectively.
9
ITEM 2--PROPERTIES
MANUFACTURING FACILITIES
We own and operate two trailer manufacturing facilities in Lafayette,
Indiana and a trailer floor manufacturing facility, 0.5 million sq. ft., in
Harrison, Arkansas. Our main Lafayette facility, 1.2 million sq. ft., houses
truck trailer and composite material production, tool and die operations,
research laboratories, management offices and headquarters. The second Lafayette
facility is 0.6 million sq. ft. We have the capacity to produce approximately
75,000 trailers annually on a three-shift, five-day work week schedule.
We closed a trailer manufacturing plant located in Ft. Madison, Iowa
(255,000 sq. ft.) during 2001, and a flooring operation in Sheridan, Arkansas
(117,000 sq. ft.) during 2000. These properties are held for sale and are
classified in Prepaid Expenses and Other in the accompanying Consolidated
Balance Sheets.
RETAIL AND DISTRIBUTION FACILITIES
Retail and distribution facilities include 10 sales and service branches
and 10 locations that sell new and used trailers (seven of which are leased).
Each sales and service branch consists of an office, parts warehouse and service
space, and ranges in size from 20,000 to 50,000 square feet per facility.
Thirteen branches are located in nine states and seven branches are located in
six Canadian provinces.
During the fourth quarter of 2004, we committed to a plan to dispose of
certain retail and distribution facilities. As of December 31, 2004, six
facilities are held for sale and included in Prepaid Expenses and Other in the
accompanying Consolidated Balance Sheets.
We own a 0.3 million sq. ft. warehouse facility in Lafayette, Indiana.
Wabash owned properties are subject to security interests held by our bank
lenders.
ITEM 3--LEGAL PROCEEDINGS
There are certain lawsuits and claims pending against Wabash that arose in
the normal course of business. None of these claims are expected to have a
material adverse effect on our financial position or its results of operations.
Brazil Joint Venture
In March 2001, Bernard Krone Industria e Comercio de Maquinas Agricolas
Ltda. ("BK") filed suit against Wabash in the Fourth Civil Court of Curitiba in
the State of Parana, Brazil. This action seeks recovery of damages plus pain and
suffering. Because of the bankruptcy of BK, this proceeding is now pending
before the Second Civil Court of Bankruptcies and Creditors Reorganization of
Curitiba, State of Parana (No. 232/99).
This case grows out of a joint venture agreement between BK and Wabash
related to marketing the RoadRailer(R) trailer in Brazil and other areas of
South America. When BK was placed into the Brazilian equivalent of bankruptcy
late in 2000, the joint venture was dissolved. BK subsequently filed its lawsuit
against the Company alleging that it was forced to terminate business with other
companies because of exclusivity and non-compete clauses purportedly found in
the joint venture agreement. BK asserts damages of approximately $8.4 million.
We answered the complaint in May 2001, denying any wrongdoing. We believe
that the claims asserted by BK are without merit and we intend to defend our
position. We believe that the resolution of this lawsuit will not have a
material adverse effect on our financial position, liquidity or future results
of operations; however, at this stage of the proceeding, no assurance can be
given as to the ultimate outcome of the case.
Environmental
In September 2003, Wabash was noticed as a potentially responsible party
(PRP) by the United States Environmental Protection Agency pertaining to the
Motorola 52nd Street (Phoenix, Arizona) Superfund Site pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act. PRPs
include current and former
10
owners and operators of facilities at which hazardous substances were disposed
of. EPA's allegation that we were a PRP arises out of the operation of a former
branch facility located approximately five miles from the original site, which
we acquired and subsequently disposed of. According to the notice, the site
currently encompasses an area of groundwater contaminated by volatile organic
compounds seven miles long and one mile wide. The site was placed on the
National Priorities List in 1989. Motorola has been operating an interim
groundwater containment remedy since 2001. Wabash does not expect that these
proceedings will have a material adverse effect on our financial condition or
results of operations.
In connection with a federal environmental investigation into our former
Huntsville, Tennessee manufacturing facility, we paid a $0.4 million fine
related to two misdemeanor violations of the Clean Water Act, and entered into a
compliance agreement with the United States Environmental Protection Agency
(EPA), which was finalized in November 2004. We do not believe that the entering
into of the compliance agreement will have a material adverse impact on our
results or operations.
ITEM 4--SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None to report.
PART II
ITEM 5--MARKET FOR REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common stock is traded on the New York Stock Exchange (ticker
symbol: WNC). The number of record holders of the Company's common stock at
February 23, 2005 was 949.
On February 24, 2005, the Company's board of directors declared a quarterly
dividend of $0.045 per share to be paid on April 4, 2005 to holders of record on
March 17, 2005. The Company last paid dividends on its common shares in the
third quarter of 2001. The Company's asset-based loan agreements limit the
payment of cash dividends to up to $10 million per year. Payments of cash
dividends depend on future earnings, capital availability and financial
condition.
High and low stock prices for the last two years were:
High Low
------ ------
2003
First Quarter $ 9.12 $ 4.95
Second Quarter $15.11 $ 6.08
Third Quarter $19.75 $13.78
Fourth Quarter $30.39 $15.97
2004
First Quarter $30.73 $22.16
Second Quarter $29.53 $22.00
Third Quarter $30.91 $24.90
Fourth Quarter $28.55 $21.82
ITEM 6--SELECTED FINANCIAL DATA
The following selected consolidated financial data with respect to the
Company for each of the five years in the period ended December 31, 2004, have
been derived from the Company's consolidated financial statements. The following
information should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations and the consolidated
financial statements and notes thereto included elsewhere herein.
11
Years Ended December 31,
---------------------------------------------------------
2004 2003 2002 2001 2000
---------- -------- -------- --------- ----------
(Dollar amounts in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Net sales $1,041,096 $887,940 $819,568 $ 863,392 $1,332,172
Cost of sales 915,310 806,963 773,756 970,066 1,213,550
Loss on asset impairment -- 28,500 2,000 10,500 --
---------- -------- -------- --------- ----------
Gross profit (loss) 125,786 52,477 43,812 (117,174) 118,622
Selling, general and administrative
expenses 56,577 61,499 80,759 84,364 58,529
Restructuring charge -- -- 1,813 37,864 36,338
---------- -------- -------- --------- ----------
Income (loss) from operations 69,209 (9,022) (38,760) (239,402) 23,755
Interest expense (10,809) (31,184) (34,945) (23,520) (26,800)
Foreign exchange gains and losses, net 463 5,291 5 (1,706) --
Equity in losses of unconsolidated affiliate -- -- -- (7,668) (3,050)
Restructuring charges -- -- -- (1,590) (5,832)
Loss on debt extinguishment (607) (19,840) (1,314) -- --
Other, net 749 (2,472) 3,546 (1,139) 877
---------- -------- -------- --------- ----------
Income (loss) before income taxes 59,005 (57,227) (71,468) (275,025) (11,050)
Income tax expense (benefit) 600 -- (15,278) (42,857) (4,314)
---------- -------- -------- --------- ----------
Net income (loss) $ 58,405 $(57,227) $(56,190) $(232,168) $ (6,736)
========== ======== ======== ========= ==========
Basic earnings (loss) per common share $ 2.10 $ (2.26) $ (2.43) $ (10.17) $ (0.38)
========== ======== ======== ========= ==========
Diluted earnings (loss) per common share $ 1.80 $ (2.26) $ (2.43) $ (10.17) $ (0.38)
========== ======== ======== ========= ==========
Cash dividends declared per common share $ -- $ -- $ -- 0.09 $ 0.16
========== ======== ======== ========= ==========
Years Ended December 31,
----------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
(Dollar amounts in thousands)
BALANCE SHEET DATA:
Working capital $109,989 $ 41,970 $ 55,052 $111,299 $270,722
Total equipment leased to others & finance
contracts $ 19,534 $ 32,069 $132,853 $160,098 $108,451
Total assets $432,046 $397,036 $565,569 $692,504 $781,614
Total debt and capital lease obligations $127,500 $227,316 $346,857 $412,017 $238,260
Stockholders' equity $164,574 $ 22,162 $ 73,984 $130,985 $367,233
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") describes the matters that we consider to be
important to understanding the results of our operations for each of the three
years in the period ended December 31, 2004, and our capital resources and
liquidity as of December 31, 2004. Our discussion begins with our assessment of
the condition of the North American trailer industry along with a summary of the
actions we have taken to reposition Wabash. We then analyze the results of our
operations for the last three years, including the trends in the overall
business and our operations segments, followed by a discussion of our cash flows
and liquidity, capital markets events and transactions, our new credit facility,
and contractual commitments. We then provide a review of the critical accounting
judgments and estimates that we have made which we believe are most important to
an understanding of our MD&A and our consolidated financial statements. These
are the critical accounting policies that affect the recognition and measurement
of our transactions and the balances in our consolidated financial statements.
We conclude our MD&A with information on recent accounting
12
pronouncements which we adopted during the year, as well as those not yet
adopted that are expected to have an impact on our financial accounting
practices.
We have two reportable segments: manufacturing and retail and distribution.
The manufacturing segment produces trailers that are sold to customers who
purchase trailers directly or through independent dealers and to the retail and
distribution segment. The retail and distribution segment includes the sale of
new and used trailers, as well as the sale of aftermarket parts and service
through its retail branch network.
EXECUTIVE SUMMARY
The year 2004 marks the second year of recovery for the industry after a
three-year downturn. During this period, we repositioned Wabash by focusing
on the continuous improvement of our manufacturing and retail operations,
expanding our customer base, introducing products that better address customers
needs, exiting non-core operations and strengthening our capital structure. We
believe Wabash is positioned to fully participate in the market growth that
analysts are predicting will continue into 2005 and beyond.
OPERATING PERFORMANCE
We measure our operating performance in four key areas - Safety, Quality,
Productivity and Cost Reduction. Our objective, be better tomorrow than we are
today, is simple, straightforward and easily understood by all our associates.
- Safety. We have achieved a four-fold improvement in the total
recordable incident rate since June 2002, and our safety metrics have
improved each quarter for 10 straight quarters. We believe improved
safety translates into higher labor productivity and lower costs as a
result of less time missed due to injuries.
- Quality. We measure our quality performance in terms of:
- First pass yield: How many units pass all inspection criteria
without requiring rework? Our first pass yield metrics have
improved from 20% in 2002 to 95% during 2004.
- Warranty: We measure, among other things, the number and severity
of warranty claims. While improvements are being noted and we are
encouraged by the results, a longer term perspective is required
before declaring success.
- Productivity. We measure productivity on many fronts. Some key
indicators include production line speed, man-hours per trailer and
inventory levels. Improvements in these areas translate into:
- Increased available capacity, which we estimated to be over
75,000 units annually based on a three-shift, five-day work week.
- Effective management of inventory has resulted in inventory turns
of currently 10 turns per year compared to approximately six
turns in 2002.
- Cost Reduction. During 2002, we introduced our continuous improvement
initiative (CI). As of December 2004, we believe CI has become a way
of life. Since introduction, over 300 CI events have been completed.
As a result of our focus in these areas, we received the 2003 U.S. Senate
Productivity Award for the State of Indiana for the significant cost savings and
productivity we achieved in the prior two years.
INDUSTRY TRENDS
Freight transportation in the United States, according to the American
Trucking Association (ATA), was estimated to be a $702 billion industry in 2003
(the latest such information is available). ATA estimates that approximately 69%
of all freight tonnage is carried by trucks at some point during its shipment,
accounting for approximately 87% of freight industry revenue in the United
States. Trailer demand is a direct function of the
13
amount of freight to be transported. To monitor the state of the industry, we
evaluate a number of indicators related to trailer manufacturing and the
transportation industry. Information is obtained from sources such as A.C.T.
Research Co., LLC (ACT), ATA, Cass Logistics, and Eno Transportation Foundation.
Recent trends we have observed include the following:
- IMPROVEMENT IN THE NUMBER OF UNITS SHIPPED. After reaching a high
of approximately 306,000 units shipped in 1999, shipments by the
U.S. trailer industry declined to approximately 140,000 units in
each of 2001 and 2002. Unit shipments improved to approximately
174,000 units in 2003 and were approximately 229,000 in 2004. ACT
estimates that 2005 shipments will be approximately 271,000
units. Our view is that shipments will be approximately 5% to 10%
lower than the ACT forecast due to the impact of raw material
costs on trailer prices and tractor purchases in advance of new
emission regulations.
- INCREASING AGE OF TRUCKLOAD MOTOR CARRIER TRAILER FLEETS. During
the three-year period ending December 31, 2003, (the latest
such information is available) the average age of trailer fleets
increased from approximately 44 months to 55 months. We believe
this increase resulted in part from deferred purchases by many
motor carriers. This trend suggests to us that there may be
pent-up replacement demand for trailers.
- INCREASING RATE OF NEW TRAILER ORDERS. Quarterly industry order
placements were in the range of 10,000 units to 15,000 units per
month during each of the six quarters ended December 31, 2003.
During 2004, the total trailer quarterly average order rates
ranged from 18,500 to 26,000 units. The fourth quarter of 2004
order rate average of 26,000 units was the strongest quarterly
average order rate since 1999.
- OTHER DEVELOPMENTS. Other developments and our view of their
potential impact on the industry include:
- New federal emission standards that come into effect in 2007
could result in improved demand for trailers in 2005 and
part of 2006, as motor carriers may focus their capital
spending on tractors in advance of the regulations taking
effect. A similar pattern occurred in advance of the October
2002 enactment of new emission standards.
- Technology advances in trailer tracking and route management
implemented by motor carriers have increased trailer
utilization and lowered trailer-to-tractor ratios and could
result in trailer demand.
- New federal hours-of-service rules became effective in
January 2004. We initially believed that these rules would
negatively impact driver productivity and that this could
result in increased demand for trailers. As a result of
Court intervention, on September 30, 2004, President Bush
signed the Surface Transportation Extension Act of 2004,
allowing these regulations to remain in effect until the
earlier of a new regulation that resolves Court-raised
issues or September 30, 2005. To date, we believe that there
has been a limited amount of increased business as a result
of the regulation. If the regulation is permanently
suspended, there is the potential for cancellation of
refrigerated units and some increase of trade-ins that could
affect used trailer prices.
14
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
net sales for the periods indicated:
Percentage of Net Sales
Years Ended December 31,
------------------------
2004 2003 2002
----- ----- -----
Net sales 100.0% 100.0% 100.0%
Cost of sales 87.9 90.9 94.4
Loss on asset impairment -- 3.2 0.3
----- ----- -----
Gross profit 12.1 5.9 5.3
General and administrative expense 4.0 4.7 7.0
Selling expense 1.5 2.2 2.8
Restructuring charge -- -- 0.2
----- ----- -----
Income (loss) from operations 6.6 (1.0) (4.7)
Interest expense (1.0) (3.5) (4.3)
Foreign exchange gains and losses, net 0.1 0.6 --
Loss on debt extinguishment (0.1) (2.2) (0.2)
Other, net 0.1 (0.3) 0.5
----- ----- -----
Income (loss) before income taxes 5.7 (6.4) (8.7)
Income tax expense (benefit) 0.1 -- (1.8)
----- ----- -----
Net income (loss) 5.6% (6.4)% (6.9)%
2004 COMPARED TO 2003
NET SALES
Net sales in 2004 increased $153.2 million compared to the 2003 period. The
2003 year included $58.9 million of sales associated with our rental and leasing
and aftermarket parts distribution businesses (Asset Sales). By business
segment, net sales to external customers and related units sold were as follows
(in millions):
Year Ended December 31,
-----------------------------
2004 2003 % Change
-------- ------- --------
Net Sales by segment:
Manufacturing $ 806.0 $ 620.1 30%
Retail and Distribution 235.1 267.8 (12%)
-------- -------
Total $1,041.1 $ 887.9 17%
New trailer units:
Manufacturing 45,100 36,900 22%
Retail and Distribution 6,100 4,100 49%
-------- -------
Total 51,200 41,000 25%
Used trailer units 6,900 11,700 (41%)
Improving conditions in both the overall economy and the transportation
industry coupled with the expansion of our customer base, drove a 22% increase
in unit volume in the manufacturing segment. In response to significant
increases in raw material prices, we increased our average selling price
throughout the year. In the fourth quarter of 2004, our average selling price
increased approximately 10% compared to the 2003 period with the full year
increase being approximately 6%.
15
The 2004 sales in the retail and distribution segment were lower than the
prior year period, which included $58.9 million of sales associated with the
aforementioned Assets Sales. A $44.2 million increase in new trailer sales
caused by a 49% increase in units was partially offset by reductions in used
trailer sales. The decrease in used trailer sales resulted from constrained used
equipment availability, as transportation companies retain equipment to meet
requirements. Branch parts and services sales were up approximately 3% despite
closing four full service locations in 2003 and one during 2004.
GROSS PROFIT
Gross profit as a percent of sales was 12.1% in 2004 compared to 5.9% in
2003, which included a $28.5 million asset impairment charge taken on certain
assets of our rental and leasing and aftermarket parts assets. As discussed
below, both of our segments contributed as follows (in millions):
Years Ended December 31,
-------------------------
2004 2003 $ Change
------ ----- --------
Gross Profit (loss) by segment:
Manufacturing $110.8 $61.3 $49.5
Retail and Distribution 16.8 (9.2) 26.0
Eliminations (1.8) 0.4 (2.2)
------ ----- -----
Total Gross Profit $125.8 $52.5 $73.3
The manufacturing segment's gross profit as a percentage of sales was 13.7%
in 2004, a 3.8 percentage point increase from the prior year period. During
2004, due to increases in our key raw materials - principally steel and wood,
our average per trailer raw material costs, including the effects of product mix
increased approximately 9.7% from the prior period, which exceeded increases in
our average selling price resulting in a negative impact on gross profit of $6.5
million. The shortfall from rising material costs was more than offset by the
continued improvement in our labor and overhead utilization of $32.3 million,
the impact of higher volumes of $21.3 million and a reduction in warranty
expense of $1.4 million.
The 2004 gross profit in the retail and distribution segment improved $26.0
million from the prior year. The 2003 period included a $28.5 million asset
impairment charge and $10.3 million of gross profit associated with the Asset
Sales. Gross profit in 2004 was positively impacted by higher new trailer
volumes and margins and improved used trailer margins, offset by continued
constraints on used trailer volumes. The 2004 period includes $1.1 million of
profit related to the sale of used RoadRailer(R) bogies.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for 2004 of $41.6 million were flat
compared to the prior year. The 2004 period included $2.3 million in increased
technology costs and $1.0 million in charges related to legal settlements. The
2003 period included $2.6 million in debt refinancing costs, $2.0 million in
costs from operations affected by the Asset Sales and $0.9 million related to
branch closings.
SELLING EXPENSE
Selling expense decreased $4.9 million to $15.0 million in 2004, compared
to $19.9 million in the prior year period due to the impact of the Asset Sales
and the closing of 12 branch locations during 2003.
OTHER INCOME (EXPENSE)
Interest expense totaled $10.8 million in 2004; a decrease of $20.4 million
from the prior year period due to lower effective interest rates resulting from
the debt refinancing completed in the third quarter of 2003 and reduced average
borrowings.
Foreign exchange was a gain of $0.5 million in 2004 and a gain of $5.3
million in 2003, which reflected the significant weakening of the US dollar
relative to the Canadian dollar in 2003.
16
Loss on debt extinguishment was $19.8 million in 2003 and $0.6 million in
2004. The 2003 loss represents the additional costs associated with the early
extinguishment of the Company's Senior Series Notes and Bank Debt. The 2004 loss
represents the write-off of deferred debt costs associated with the pay-off of
our Bank Term Loan in the fourth quarter with proceeds from the common stock
issuance.
Other, net was income of $0.7 million in 2004, compared to an expense of
$2.5 million for the 2003 period. The 2003 expense included a $3.2 million loss
on the sale of a large portion of our finance portfolio, $1.3 million charge for
the settlement of a legacy RoadRailer(R) transaction and a $0.8 million loss on
the sale of certain assets, offset by gains of $2.9 million on the sale of
closed branch properties.
INCOME TAXES
In 2004, we recognized income tax expense of $0.6 million primarily related
to Federal and state alternative minimum tax (AMT). The 2004 income tax expense
is significantly below the normal statutory tax rate primarily because of the
utilization of net operating loss (NOL) carryforwards. No income tax expense or
benefit was recognized in 2003. Because of uncertainty related to the
realizability of NOLs in excess of those utilized, a full valuation allowance
continues to be recorded against deferred tax assets at December 31, 2004.
2003 COMPARED TO 2002
NET SALES
Net sales improved 8% from 2002. Base upon ACT data, the first quarter of
2002 is believed to have been the low point of the industry downturn that began
in 2000. By business segment, net external sales and related units sold were as
follows (dollars in millions):
Years Ended December 31,
----------------------------
2003 2002 % Change
------- ------- --------
Net Sales by segment:
Manufacturing $ 620.1 $ 492.3 26%
Retail and Distribution 267.8 327.3 (18)%
------- -------
Total $ 887.9 $ 819.6 8%
======= =======
New trailer units:
Manufacturing 36,900 30,900 19%
Retail and Distribution 4,100 3,600 14%
------- -------
Total 41,000 34,500 19%
======= =======
Used trailer units 11,700 17,600 (34)%
======= =======
The manufacturing segment's sales improvement was driven by demand for new
trailers and improved product mix. Average selling price increased 4.7%
primarily due to product mix: for example, we sold approximately 5,000 fewer
lower priced containers and chassis in 2003 compared to 2002.
The decrease in the retail and distribution segment's net sales reflects:
- used trailer sales decline of $27.5 million as unit sales fell 34% due
to completing the disposition of excess inventories during 2002 and
the impact of closing certain locations;
- the sale of certain assets of the aftermarket parts distribution
business and the trailer rental and leasing business in September 2003
primarily accounts for $27.7 million of the sales decline;
- branch parts and services sales decline of $8.7 million primarily due
to closing full service branches; offset by
- new trailer sales increase of $4.4 million due to a 19% increase in
equivalent store units sold, offset partially by the impact of closing
certain locations.
17
GROSS PROFIT (LOSS)
Gross profit as a percent of sales was 9.1% for 2003 compared to 5.6% in
2002, before asset impairment charges of $28.5 million and $2.0 million in 2003
and 2002, respectively. The 2003 asset impairment charge was taken on certain
assets of the rental and leasing and aftermarket parts businesses. A summary of
gross profit by segment follows (in millions):
Years Ended December 31,
------------------------
2003 2002 $ Change
----- ----- --------
Gross Profit (Loss) by segment:
Manufacturing $61.3 $22.2 $ 39.1
Retail and Distribution (9.2) 21.5 (30.7)
Eliminations 0.4 0.1 0.3
----- ----- ------
Total Gross Profit $52.5 $43.8 $ 8.7
===== ===== ======
The manufacturing segment's gross profit increased due to higher volumes
and improved product mix, coupled with realizing cost savings driven by our
continuous improvement initiatives. The segment's 2003 gross profit percentage
of 9.9% exceeded the 8.9% attained in 1999, the most recent production cycle
peak.
The retail and distribution segment's gross profit for 2003 was negatively
impacted by the $28.5 million asset impairment charge and $3.9 million in
trailer valuation charges. Gross profit for 2002 was negatively impacted by $4.8
million in loss contingencies and asset impairment charges related to equipment
held for lease and $5.4 million in used trailer valuation charges. Additionally,
the lower gross profit resulted from lower margins on used trailer sales and the
impact of selling certain assets of the rental and leasing and aftermarket parts
businesses in September 2003. New trailers margins held steady in relation to
2002.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased $16.0 million to $41.6
million for 2003, compared to $57.6 million for the same period in 2002. The
2003 expense included $2.6 million in debt restructuring costs, $0.9 million
related to the branch closings, offset in part by a $0.8 million recovery of VAT
taxes. The 2002 expense included $10.6 million in bad debt expense mainly
related to the finance and leasing businesses, $2.2 million in severance
accruals, $1.9 million in write-downs related to the disposition of our airplane
and $1.2 million in debt restructuring costs.
SELLING EXPENSES
Selling expenses decreased $3.2 million to $19.9 million in 2003, compared
to $23.1 million in 2002. The decrease primarily reflects the impact of retail
branch closings and the September 2003 sale of certain assets of our trailer
rental and leasing and aftermarket parts businesses.
OTHER INCOME (EXPENSE)
Interest expense totaled $31.2 million for 2003, a decrease of $3.8 million
from the prior year. Through the first three quarters of 2003, interest expense
exceeded that of 2002 due to higher interest rates and increased amortization of
debt costs resulting from debt restructurings in 2002 and 2003. The debt
refinancing and assets sales during the second half of 2003 resulted in lower
interest rates and average borrowings, respectively.
Foreign exchange gains and losses, net were gains of $5.3 million for 2003,
primarily occurring in the first six months of the year reflecting a
strengthening of the Canadian dollar compared to the U.S. dollar.
Loss on debt extinguishment of $19.8 million in 2003 primarily represents
the additional costs associated with the early extinguishment of our then
outstanding debt.
Other, net for 2003 was a net expense of $2.5 million compared to a net
income of $3.5 million for the same period in 2002. The 2003 period included a
$3.2 million loss on the sale of a large portion of our finance portfolio, $1.3
million charge for the settlement of a legacy RoadRailer(R) transaction and a
$0.8 million loss on the
18
sale of certain assets, offset in part by gains of $2.9 million on the sale of
closed branch properties. The 2002 period included gains on the sale of closed
branch properties.
INCOME TAXES
We recorded no income tax benefit in 2003 due to uncertainties surrounding
the realizability of benefits associated with NOLs. The 2002 benefit recorded
represents an additional realizable federal NOL carry-back claim filed and
received under the provisions of the Job Creation and Worker Assistance Act of
2002, which revised the permitted carry-back period for NOLs generated during
2001 from two years to five years.
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL STRUCTURE
Today, our capital structure is comprised of a mix of equity and debt after
overcoming significant losses incurred during the years 2000 through 2003. In
2004, we were able to further solidify our financial footing through improved
operating performance and proceeds from our equity offering, as well as
amendments to our bank debt agreements. These 2004 actions, described below,
resulted in repayment or refinancing of essentially all of our bank debt,
increased our financial flexibility and further reduced the effective rate on
borrowings. Our objective is to generate operating cash flows sufficient to
satisfy normal requirements for working capital and capital expenditures and be
positioned to take advantage of market opportunities.
Equity Offering
On November 3, 2004, we completed the issuance of 3,450,000 shares of our
common stock resulting in net proceeds of $75.7 million. With the proceeds from
the issuance, we paid off the remaining balance on our bank term loan of $25.8
million, using the remaining proceeds to pay down borrowings under our bank
revolver, in conjunction with the early pay-off of the bank term loan.
Debt Amendment
On December 30, 2004, we amended and restated our asset-based loan
agreement (ABL Facility), which we had originally entered into in September
2003. The amended facility is secured by our property, plant and equipment,
inventory and accounts receivable and the amount available to borrow varies in
relation to the balances of those accounts among other things, as defined in the
agreements. As of December 31, 2004, borrowing capacity was $117.6 million with
no debt outstanding. The most notable amendments to the facility included:
- Reduced the capacity under the ABL Facility from $175 million to $125
million.
- Extended the maturity date of the facility from September 30, 2006 to
September 30, 2007.
- Eliminated financial covenants and certain other restrictions so long
as unused availability remains above $40 million.
- Allowed payment of cash dividends up to $10 million per year.
- Reduced the borrowing rates and fees.
Interest on the ABL Facility is variable, based on the London Interbank
Offer Rate (LIBOR) plus 150 basis points or the bank's alternative rate, as
defined in the agreement. At December 31, 2004, the 30-day LIBOR was 2.4%. We
pay a commitment fee on the unused portion of the facility at a rate of 25
points per annum. All interest and fees are paid monthly. For the quarter ended
December 31, 2004, the weighted average interest rate was 4.56%.
Cash Flow
Operating activities provided $56.9 million in cash in 2004 compared to
$58.3 million in the prior year period. Improved cash flows from net income
(adjusted for non-cash items) of $57.9 million was more than sufficient to fund
increased working capital requirements as outlined below:
- Accounts receivables increased $20.6 million during 2004 compared to
an increase of $40.7 million in 2003, reflecting the higher level of
fourth quarter sales in both years and in 2003, comparatively strong
late in the year sales. Days sales outstanding, a measure of working
capital efficiency that
19
measures the amount of time a receivable is outstanding, was
approximately 28 days in both 2004 and 2003.
- Inventory increased $8.5 million during 2004 compared to decreasing
$51.4 million in 2003. The 2004 increase results from an average
increase in raw material costs of approximately 9.7% and early
purchase of approximately $6.0 million in raw materials in advance of
announced price increases partially offset by reductions in new and
used trailer units. The 2003 decrease results principally from the
reduction of new and used trailer units in inventory. Inventory turns,
a commonly used measure of working capital efficiency that measures
how quickly inventory turns, of 10 times in 2004 was comparable to the
prior year.
- Finance contracts decreased $11.4 million in 2004 from 2003 as the
wind down of our financing business continues.
Investing activities used $8.7 million in cash during 2004, a decrease of
$69.0 million from the cash provided in 2003, which included proceeds of $53.5
million from the sale of certain assets of our trailer leasing and rental and
aftermarket parts businesses. The 2004 period included capital expenditures of
$15.5 million, partially offset by proceeds of $6.8 million primarily from the
sale of closed properties.
Financing activities used $18.9 million in cash during 2004 primarily for
the repayment of $98.8 million in debt from proceeds of a $75.7 million issuance
of common stock with the remainder coming from operating cash flows. With the
exception of the convertible notes, we were able to pay-off substantially all of
our indebtedness in 2004.
Capital Expenditures
Capital spending amounted to approximately $15.5 million for 2004 and is
anticipated to be in the range of $25-35 million for 2005. Spending in 2005 is
planned to include approximately $10 million for the first phase of a $40
million multi-year program to replace four trailer assembly lines, approximately
$12 million of a $20 million two-year project for engineering and business
process systems improvements and approximately $7 million for normal
maintenances.
Outlook
The industry recovery that began in 2003 is expected to continue into 2005
and beyond. ACT estimates that production of trailers in 2005 will be
approximately 271,000 units. The continued expansion in production is predicated
on a number of factors including improving general economic conditions and
pent-up trucking industry demand for replacement units as the average age of
trailer fleets increases.
We expect to participate in the industry growth because (1) our core
customers are among the dominant participants in the trucking industry, (2) our
DuraPlate(R) trailer continues to have increased market acceptance, (3) our
focus on developing solutions that reduce our customers trailers maintenance
costs, and (4) the success we are achieving expanding our presence into the
middle market carriers - approximately 1,250 carriers with fleet sizes ranging
from 250 to 7,500 units that represent a fleet that totals approximately one
million trailers. In 2004, we added approximately 225 new customers and sold
approximately 6,000 units to this segment of the market.
We believe that Wabash is well positioned to benefit from an increased
demand for trailers because of the improvements that have been made over the
last three years. As a result of our continuous improvement initiatives, we have
reduced the total cost of producing a trailer and effectively increased
production capacity. Additionally, we have become much more efficient in the use
of working capital. Key to 2005 will be our ability to manage through the
customers perception that raw material prices will decline in the near term with
a corresponding decrease in new trailer prices. This perception results in
reduced order size and delays in order placement.
As of December 31, 2004, our liquidity position, cash on hand and available
borrowing capacity amounted to approximately $117.6 million and debt and lease
obligations, both on and off the balance sheet, amounted to approximately $132.6
million (including $5.1 million not on the balance sheet). We expect that in
2005, Wabash will be able to generate sufficient cash flow from operations to
fund working capital and capital expenditure requirements.
20
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
A summary of payments of our contractual obligations and commercial
commitments, both on and off balance sheet, as of December 31, 2004 are as
follows:
$ Millions 2005 2006 2007 2008 2009 Thereafter Total
---------- ----- ----- ---- ------ ---- ---------- ------
DEBT (excluding interest):
Senior Convertible Notes $ -- $ -- $ -- $125.0 $ -- $ -- $125.0
Bank Revolver -- -- -- -- -- -- --
Other Notes Payable 2.0 0.5 -- -- -- -- 2.5
----- ----- ---- ------ ---- ---- ------
TOTAL DEBT $ 2.0 $ 0.5 $ -- $125.0 $ -- $ -- $127.5
===== ===== ==== ====== ==== ==== ======
OTHER:
Currency Forward Contracts $ 0.8 $ -- $ -- $ -- $ -- $ -- $ 0.8
Operating Leases 2.4 1.6 0.4 0.2 0.1 0.4 5.1
----- ----- ---- ------ ---- ---- ------
TOTAL OTHER $ 3.2 $ 1.6 $0.4 $ 0.2 $0.1 $0.4 $ 5.9
===== ===== ==== ====== ==== ==== ======
OTHER COMMERCIAL COMMITMENTS:
Letters of Credit $ 7.4 $ -- $ -- $ -- $ -- $ -- $ 7.4
Purchase Commitments 45.3 9.0 -- -- -- -- 54.3
Residual Guarantees 3.0 9.9 3.5 -- -- -- 16.4
----- ----- ---- ------ ---- ---- ------
$55.7 $18.9 $3.5 $ -- $ -- $ -- $ 78.1
===== ===== ==== ====== ==== ==== ======
TOTAL OBLIGATIONS $60.9 $21.0 $3.9 $125.2 $0.1 $0.4 $211.5
===== ===== ==== ====== ==== ==== ======
Residual Guarantees represent purchase commitments related to certain new
and used trailer transactions as well as certain production equipment. We also
have purchase options of $52.8 million on the aforementioned trailers and
equipment. To the extent that the value of the underlying property is less than
the residual guarantee and the value is not expected to be recovered, we have
recorded a loss contingency.
Purchase Commitments include raw material purchase commitments and minimum
purchase commitments under a parts purchase agreement we entered into in
connection with the sale of certain assets of our aftermarket parts distribution
business. The raw material commitments relate to $33.3 million of aluminum
purchases. Under the parts purchase agreement, we are required to purchase
approximately $12.0 million and $9.0 million in parts from the buyer in 2005 and
2006, respectively. We do not believe the purchase commitments will exceed
business requirements.
Operating leases represent the total future minimum lease payments.
OFF-BALANCE SHEET TRANSACTIONS
We entered into no off-balance sheet financing transactions in 2003 and
2004. As of December 31, 2004, we have operating leases with future minimum
lease payments of $5.1 million, as disclosed in the preceding table.
SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES
Our significant accounting policies are more fully described in Footnote 2
to our consolidated financial statements. Certain of our accounting policies
require the application of significant judgment by management in selecting the
appropriate assumptions for calculating financial estimates. By their nature,
these judgments are subject to an inherent degree of uncertainty. These
judgments are based on our historical experience, terms of existing contracts,
our evaluation of trends in the industry, information provided by our customers
and information available from other outside sources, as appropriate.
We consider an accounting estimate to be critical if:
- it requires us to make assumptions about matters that were uncertain
at the time we were making the estimate; and
- changes in the estimate or different estimates that we could have
selected would have had a material impact on our financial or results
of operations.
21
The table below presents information about the nature and rationale for
Wabash's critical accounting estimates:
CRITICAL ESTIMATE NATURE OF ASSUMPTIONS/
BALANCE SHEET CAPTION ITEM ESTIMATES REQUIRED APPROACHES USED KEY FACTORS
--------------------- ----------------- ------------------ --------------- -----------
Accrued liabilities and Warranty Estimating warranty We base our estimate on Failure rates
other long-term requires us to historical trends of and estimated
liabilities forecast the units sold and payment repair costs
resolution of amounts, combined with
existing claims and our current understanding
expected future of the status of existing
claims on products claims, recall campaigns
sold. and discussions with our
customers.
Accounts Receivable - Allowance for Estimating the We base our estimates on Customer financial
allowance for doubtful doubtful accounts allowance for historical experience, condition
accounts doubtful accounts the time an account is
requires us to outstanding, customer's
estimate the financial condition and
financial capability information from credit
of customers to pay rating services.
for products.
Inventory Lower of cost or We evaluate future Estimates are based on Market conditions
market write-downs demand for products, recent sales data,
market conditions historical experience, Product type
and incentive external market analysis
programs. and third party
appraisal services.
Property, plant and Valuation of long- We are required from We estimate cash flows Future production
equipment, goodwill and lived assets time-to-time to using internal budgets estimates
other long-term assets and investments review the based on recent sales
recoverability of data, and independent Discount rate
certain of our trailer production
assets based on volume estimates.
projections of
anticipated future
cash flows,
including future
profitability
assessments of
various product
lines.
Deferred income taxes Recoverability of We are required to We use projected future Variances in future
deferred tax estimate whether operating results, based projected
assets - in recoverability of upon our business plans, profitability,
particular, net our deferred tax including a review of including by taxing
operating loss assets is more the eligible entity
carry-forwards likely than not carry-forward period,
based on forecasts tax planning Tax law changes
of taxable earnings. opportunities and other
relevant considerations.
In addition, there are other items within our financial statements that
require estimation, but are not as critical as those discussed above. Changes in
estimates used in these and other items could have a significant effect on our
consolidated financial statements. The determination of the fair market value of
new and used trailers is subject to variation particularly in times of rapidly
changing market conditions. A 5% change in the valuation of our inventories
would be approximately $5 million.
OTHER
INFLATION
We have historically been able to offset the impact of rising costs through
productivity improvements as well as selective price increases. As a result,
inflation has not had, and is not expected to have a significant impact on our
business.
CUSTOMER CREDIT RISK
We sublease certain highly specialized RoadRailer(R) equipment to Grupo
Transportation Marititma Mexicana SA (TMM), who is experiencing financial
difficulties. In August 2004, TMM completed the restructuring
22
of its debt agreements and is in the process of selling certain assets. Customer
payments, which have historically been timely, are behind schedule. The customer
owes us $7.3 million secured by highly specialized RoadRailer(R) equipment,
which due to the nature of the equipment, has a minimal recovery value.
NEW ACCOUNTING PRONOUNCEMENTS
INVENTORY COSTS
In November 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting (SFAS) No. 151, Inventory Costs - an amendment
of Accounting Research Bulletin (ARB) No. 43, Chapter 4. The Statement clarifies
that abnormal amounts of idle facility expense, freight, handling costs and
wasted materials should be recognized as current-period expenses regardless of
how abnormal the circumstances. In addition, this Statement requires that the
allocation of fixed overheads to the costs of conversion be based upon normal
production capacity levels. The Statement is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. We do not anticipate
that this Statement will have a material effect on our financial position,
results of operations and cash flows.
SHARE-BASED PAYMENTS
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment. SFAS No. 123(R), which is a revision of SFAS No. 123, Accounting for
Stock-Based Compensation, superceded APB Opinion No. 25, Accounting for Stock
Issued to Employees, and amends SFAS No. 95, Statements of Cash Flows. Statement
No. 123 (R) requires that all share-based payments to employees, including
grants of employee stock options, to be recognized in the financial statements
based upon their fair value. The current pro forma disclosure of the impact on
earnings is no longer allowed. The Statement is effective for the first interim
or annual reporting period beginning after June 15, 2005. Based upon currently
outstanding options expense calculated using the Black-Scholes model, the
impact, net of tax, could amount to approximately $1.1 million during the second
half of 2005 and $0.7 million in 2006.
ITEM 7A--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.
a. Commodity Price Risks
We are exposed to fluctuation in commodity prices through the purchase of
raw materials that are processed from commodities such as aluminum, steel, wood
and polyethylene. Given the historical volatility of certain commodity prices,
this exposure can significantly impact product costs. We may manage aluminum
price changes by entering into fixed price contracts with our suppliers. As of
December 31, 2004, we had outstanding purchase commitments of approximately
$33.3 million through December 2005 for materials that will be used in the
production process. Because we typically do not set prices for our products more
than 45-90 days in advance of our commodity purchases, we can take into account
the cost of the commodity in setting our prices for each order. To the extent
that we are unable to offset the increased commodity costs in our product
prices, our results would be materially and adversely affected.
b. Interest Rates
As of December 31, 2004, we had no floating rate debt outstanding.
c. Foreign Exchange Rates
We are subject to fluctuations in the Canadian dollar exchange rate that
impact intercompany transactions with our Canadian subsidiary, as well as U.S.
denominated transactions between the Canadian subsidiaries and unrelated
parties. A five cent change in the Canadian exchange rate would result in an
approximately $0.7 million impact on results of operations. We have purchased
Canadian dollar foreign currency forward contracts in an effort to mitigate
potential Canadian currency fluctuation impact on working capital requirements.
As of December 31, 2004, we had outstanding $0.8 million in forward contracts to
be settled in various increments over the next two
23
months. The contracts are marked-to-market and not subject to hedge accounting.
We do not hold or issue derivative financial instruments for speculative
purposes.
ITEM 7B - RISK FACTORS
You should carefully consider the risks described below in addition to
other information contained or incorporated by reference in this Report before
investing in our securities. Realization of any of the following risks could
have a material adverse effect on our business, financial condition, cash flows
and results of operations.
RISKS RELATED TO OUR BUSINESS, STRATEGY AND OPERATIONS
WE HAVE GENERATED SIGNIFICANT LOSSES IN RECENT PERIODS.
We incurred significant net losses during the three years prior to 2004. In
2004, we reported net income of $58.4 million, but we reported net losses of
$232.2 million, $56.2 million and $57.2 million for the years ended December 31,
2001, 2002 and 2003, respectively. Our ability to achieve and sustain
profitability in the future will depend on the successful continued
implementation of measures to reduce costs and achieve sales goals, as well as
the ability to pass on to customers increases in raw materials and components.
While we have taken steps to lower operating costs and reduce interest expense,
and have seen our sales improve in recent periods, we cannot assure you that our
cost-reduction measures will be successful, sales will be sustained or increased
or that we will achieve a sustained return to profitability.
OUR INVENTORIES ARE NOT MANAGED BY PERPETUAL INVENTORY CONTROL SYSTEMS.
The systems and processes we use to manage and value our inventories
require significant manual intervention and the verification of actual
quantities requires physical inventories, which we take several times a year.
Breakdowns of these systems and processes, and errors in inventory estimates
derived from these systems and processes, could go undetected until the next
physical inventory and adversely affect our operations and financial results.
AN ADVERSE CHANGE IN OUR CUSTOMER RELATIONSHIPS OR IN THE FINANCIAL CONDITION OF
OUR CUSTOMERS COULD ADVERSELY AFFECT OUR BUSINESS.
We have relationships with a number of customers where we supply the
requirements of these customers. We do not have binding agreements with these
customers. Our success is dependent, to a significant extent, upon the continued
strength of these relationships and the growth of our core customers. We often
are unable to predict the level of demand for our products from these customers,
or the timing of their orders. In addition, the same economic conditions that
adversely affect us also often adversely affect our customers. As some of our
customers are highly leveraged and have limited access to capital, their
continued existence may be uncertain. One of our customers, Grupo Transportation
Marititma Mexicana SA (TMM), which is located in Mexico, has been experiencing
financial difficulties even though it restructured its debt in August 2004, and
is in the process of selling certain of its assets. Payments from TMM to us are
currently behind schedule. The customer owes us $7.3 million as of December 31,
2004 secured by highly specialized RoadRailer(R) equipment, which due to the
nature of the equipment, has a minimal recovery value. The loss of a significant
customer or unexpected delays in product purchases could adversely affect our
business and results of operations.
OUR TECHNOLOGY AND PRODUCTS MAY NOT ACHIEVE MARKET ACCEPTANCE, WHICH COULD
ADVERSELY AFFECT OUR COMPETITIVE POSITION.
We continue to introduce new products, such as the DuraPlateHD(R) and the
Freight-Pro(R) trailer. We cannot assure you that these or other new products or
technologies will achieve sustained market acceptance. In addition, new
technologies or products that our competitors introduce may render our products
obsolete or uncompetitive. We have taken steps to protect our proprietary rights
in our new products. However, the steps we have taken to protect them may not be
sufficient or may not be enforced by a court of law. If we are unable to protect
our proprietary rights, other parties may attempt to copy or otherwise obtain or
use our products or technology. If competitors are able to use our technology,
our ability to compete effectively could be harmed.
24
WE HAVE A LIMITED NUMBER OF SUPPLIERS OF RAW MATERIALS; AN INCREASE IN THE PRICE
OF RAW MATERIALS OR THE INABILITY TO OBTAIN RAW MATERIALS COULD ADVERSELY AFFECT
OUR RESULTS OF OPERATIONS.
We currently rely on a limited number of suppliers for certain key
components in the manufacturing of truck trailers, such as tires, landing gear,
axles and specialty steel coil used in DuraPlate(R) panels. From time to time,
there have been and may in the future continue to be shortages of supplies of
raw materials or our suppliers may place us on allocation, which would have an
adverse impact on our ability to meet demand for our products. Raw material
shortages and allocations may result in inefficient operations and a build-up of
inventory, which can negatively affect our working capital position. In
addition, if the price of raw materials were to increase and we were unable to
increase our selling prices or reduce our operating costs to offset the price
increases, our operating margins would be adversely affected. The loss of any of
our suppliers or their inability to meet our price, quality, quantity and
delivery requirements could have a significant impact on our results of
operations.
DISRUPTION OF OUR MANUFACTURING OPERATIONS OR MANAGEMENT INFORMATION SYSTEMS
WOULD HAVE AN ADVERSE EFFECT ON OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
We manufacture our products at two trailer manufacturing facilities in
Lafayette, Indiana, and one hardwood floor facility in Harrison, Arkansas. Our
primary manufacturing facility accounts for approximately 85% of our
manufacturing output. An unexpected disruption in our production at either of
these facilities or in our management information systems for any length of time
would have an adverse effect on our business, financial condition and results of
operations.
THE LOSS OF KEY PERSONNEL COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
Many of our executive officers, including our CEO William P. Greubel and
COO Richard J. Giromini, are critical to the management and direction of our
business. Our future success depends, in large part, on our ability to retain
these officers and other capable management personnel. The unexpected loss of
the services of any of our key personnel could have an adverse effect on the
operation of our business, as we may be unable to find suitable management to
replace departing executives on a timely basis.
THE INABILITY TO REALIZE ADDITIONAL COSTS SAVINGS COULD WEAKEN OUR COMPETITIVE
POSITION.
If we are unable to continue to successfully implement our program of cost
reduction and continuous improvement, we may not realize additional anticipated
cost savings, which could weaken our competitive position.
WE ARE SUBJECT TO CURRENCY EXCHANGE RATE FLUCTUATIONS, WHICH COULD ADVERSELY
AFFECT OUR FINANCIAL PERFORMANCE.
We are subject to currency exchange rate risk related to sales through our
factory-owned retail distribution centers in Canada. For the years ended
December 31, 2004 and 2003, currency exchange rate fluctuations had a favorable
impact of $0.5 million and $5.3 million, respectively, on our results of
operations. We cannot assure you that future currency exchange rate fluctuations
will not have an adverse affect on our results of operations.
RESTRICTIVE COVENANTS IN OUR DEBT INSTRUMENTS COULD LIMIT OUR FINANCIAL AND
OPERATING FLEXIBILITY AND SUBJECT US TO OTHER RISKS.
The agreements governing our indebtedness include certain covenants that
restrict, among other things, our ability to:
- incur additional debt;
- pay dividends on our common stock in excess of $10 million per year;
- repurchase our common stock;
- consolidate, merge or transfer all or substantially all of our assets;
25
- make certain investments, mergers and acquisitions; and
- create certain liens.
Additionally, should our available borrowing capacity drop below $40
million, we would be subject to a minimum fixed charge coverage ratio which
could limit our ability to make capital expenditures and further limit the
amount of dividends we could pay.
Our ability to comply with such agreements may be affected by events beyond
our control, including prevailing economic, financial and industry conditions.
In addition, upon the occurrence of an event of default under our debt
agreements, the lenders could elect to declare all amounts outstanding under our
debt agreements, together with accrued interest, to be immediately due and
payable.
RISKS PARTICULAR TO THE INDUSTRY IN WHICH WE OPERATE
OUR BUSINESS IS HIGHLY CYCLICAL, WHICH COULD ADVERSELY AFFECT OUR SALES AND
RESULTS OF OPERATIONS.
The truck trailer manufacturing industry historically has been and is
expected to continue to be cyclical, as well as affected by overall economic
conditions. New trailer production for the trailer industry reached its most
recent peak of approximately 306,000 units in 1999, falling to approximately
140,000 by 2001 and rebounding to approximately 229,000 units in 2004. Customers
historically have replaced trailers in cycles that run from five to twelve
years, depending on service and trailer type. Poor economic conditions can
adversely affect demand for new trailers and in the past have led to an overall
aging of trailer fleets beyond this typical replacement cycle. Customers' buying
patterns can also reflect regulatory changes, such as the new federal
hours-of-service rules and anticipated 2007 federal emissions standards. Our
business is likely to continue to be highly cyclical based on current and
expected economic conditions and regulatory factors.
SIGNIFICANT COMPETITION IN THE INDUSTRY IN WHICH WE OPERATE MAY RESULT IN OUR
COMPETITORS OFFERING NEW OR BETTER PRODUCTS AND SERVICES OR LOWER PRICES, WHICH
COULD RESULT IN A LOSS OF CUSTOMERS AND A DECREASE IN OUR REVENUES.
The truck trailer manufacturing industry is highly competitive. We compete
with other manufacturers of varying sizes, some of which may have greater
financial resources than we do. Barriers to entry in the standard truck trailer
manufacturing industry are low. As a result, it is possible that additional
competitors could enter the market at any time. In the recent past, the
manufacturing over-capacity and high leverage of some of our competitors, along
with the bankruptcies and financial stresses that affected the industry,
contributed to significant pricing pressures.
If we are unable to compete successfully with other trailer manufacturers,
we could lose customers and our revenues may decline. In addition, competitive
pressures in the industry may affect the market prices of our new and used
equipment, which, in turn, may adversely affect our sales margins and results of
operations.
WE ARE SUBJECT TO EXTENSIVE GOVERNMENTAL LAWS AND REGULATIONS, AND OUR COSTS
RELATED TO COMPLIANCE WITH, OR OUR FAILURE TO COMPLY WITH, EXISTING OR FUTURE
LAWS AND REGULATIONS COULD ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF
OPERATIONS.
The length, height, width, maximum weight capacity and other specifications
of truck trailers are regulated by individual states. The Federal government
also regulates certain truck trailer safety features, such as lamps, reflective
devices, tires, air-brake systems and rear-impact guards. Changes or
anticipation of changes in these regulations can have a material impact on our
financial results, as our customers may defer purchasing decisions and we may
have to reengineer products. In addition, we are subject to various
environmental laws and regulations dealing with the transportation, storage,
presence, use, disposal and handling of hazardous materials, discharge of storm
water and underground fuel storage tanks and may be subject to liability
associated with operations of prior owners of acquired property. In 2004, we
paid $0.4 million and agreed to a compliance agreement with the EPA related to
violations of the federal Clean Water Act at our former Huntsville, Tennessee
manufacturing facility.
If we are found to be in violation of applicable laws or regulations in the
future, it could have an adverse effect on our business, financial condition and
results of operations. Our costs of complying with these or any other current or
future environmental regulations may be significant. In addition, if we fail to
comply with existing or future laws and regulations, we may be subject to
governmental or judicial fines or sanctions.
26
A DECLINE IN THE VALUE OF USED TRAILERS COULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS.
General economic and industry conditions, as well as the supply of used
trailers, influence the value of used trailers. As part of our normal business
practices, we maintain used trailer inventories and have entered into finance
contracts secured by used trailers, as well as residual guarantees and purchase
commitments for used trailers. Declines in the market value for used trailers or
the need to dispose of excess inventories has had, and could in the future have,
an adverse effect on our business, financial condition and results of
operations.
PRODUCT LIABILITY AND OTHER CLAIMS.
As a manufacturer of products widely used in commerce, we are subject to
regular product liability claims as well as warranty and similar claims alleging
defective products. From time to time claims may involve material amounts and
novel legal theories, and any insurance we carry may prove inadequate to
insulate us from material liabilities for these claims.
RISKS RELATED TO AN INVESTMENT IN OUR COMMON STOCK
OUR COMMON STOCK HAS EXPERIENCED, AND MAY CONTINUE TO EXPERIENCE, PRICE
VOLATILITY AND A LOW TRADING VOLUME.
The trading price of our common stock has been and may continue to be
subject to large fluctuations. Our common stock price may increase or decrease
in response to a number of events and factors, including:
- trends in our industry and the markets in which we operate;
- changes in the market price of the products we sell;
- the introduction of new technologies or products by us or our
competitors;
- changes in expectations as to our future financial performance,
including financial estimates by securities analysts and investors;
- operating results that vary from the expectations of securities
analysts and investors;
- announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures, financings or
capital commitments;
- changes in laws and regulations; and
- general economic and competitive conditions.
This volatility may adversely affect the prices of our common stock
regardless of our operating performance. The price of our common stock also may
be adversely affected by the amount of common stock issuable upon conversion of
our 3 1/4% convertible senior notes due 2008. Assuming $125 million in aggregate
principal amount of these notes are converted at a conversion price of $19.20,
the number of shares of our common stock outstanding would increase by 6.5
million, or approximately 21%. The conversion feature of our 3 1/4% convertible
senior notes is subject to adjustment in connection with the payment of cash
dividends. As a result of any future payment of a cash dividend, upon any
conversion of the notes we would be required to issue additional shares of
common stock.
In addition, our common stock has experienced low trading volume in the
past.
27
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGES
-----
Report of Independent Registered Public Accounting Firm................. 29
Consolidated Balance Sheets as of December 31, 2004 and 2003............ 30
Consolidated Statements of Operations for the years ended
December 31, 2004, 2003 and 2002..................................... 31
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2004, 2003 and 2002............................... 32
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002..................................... 33
Notes on Consolidated Financial Statements.............................. 34
28
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Wabash National Corporation
We have audited the accompanying consolidated balance sheets of Wabash National
Corporation as of December 31, 2004 and 2003, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 2004. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Wabash National
Corporation at December 31, 2004 and 2003, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2004, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Wabash National
Corporation's internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control--Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated February 28, 2005 expressed an unqualified opinion thereon.
ERNST & YOUNG LLP
Indianapolis, Indiana
February 28, 2005
29
WABASH NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31,
---------------------
2004 2003
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 41,928 $ 12,552
Accounts receivable, net 87,512 66,641
Current portion of finance contracts 2,185 4,727
Inventories 94,600 84,996
Prepaid expenses and other 16,313 10,249
--------- ---------
Total current assets 242,538 179,165
PROPERTY, PLANT AND EQUIPMENT, net 123,626 130,594
EQUIPMENT LEASED TO OTHERS, net 14,030 21,187
FINANCE CONTRACTS, net of current portion 3,319 6,155
GOODWILL, net 33,698 36,045
OTHER ASSETS 14,835 23,890
--------- ---------
$ 432,046 $ 397,036
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 2,000 $ 7,337
Accounts payable 78,107 68,437
Other accrued liabilities 52,442 61,421
--------- ---------
Total current liabilities 132,549 137,195
LONG-TERM DEBT, net of current maturities 125,500 219,979
OTHER NONCURRENT LIABILITIES AND CONTINGENCIES 9,423 17,700
STOCKHOLDERS' EQUITY:
Preferred stock, 300,000 shares authorized, 0 shares issued and outstanding -- --
Common stock 75,000,000 shares authorized, $0.01 par value, 30,807,370
and 26,849,257 shares issued and outstanding, respectively 309 269
Additional paid-in capital 325,512 242,682
Retained deficit (162,097) (220,502)
Accumulated other comprehensive income 2,129 992
Treasury stock at cost, 59,600 common shares (1,279) (1,279)
--------- ---------
Total stockholders' equity 164,574 22,162
--------- ---------
$ 432,046 $ 397,036
========= =========
The accompanying notes are an integral part of these Consolidated Statements.
30
WABASH NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
Years Ended December 31,
--------------------------------
2004 2003 2002
---------- -------- --------
NET SALES $1,041,096 $887,940 $819,568
COST OF SALES 915,310 806,963 773,756
LOSS ON ASSET IMPAIRMENT -- 28,500 2,000
---------- -------- --------
Gross profit 125,786 52,477 43,812
GENERAL AND ADMINISTRATIVE EXPENSES 41,600 41,635 57,625
SELLING EXPENSES 14,977 19,864 23,134
RESTRUCTURING CHARGE -- -- 1,813
---------- -------- --------
Income (loss) from operations 69,209 (9,022) (38,760)
OTHER INCOME (EXPENSE):
Interest expense (10,809) (31,184) (34,945)
Foreign exchange gains and losses, net 463 5,291 5
Loss on debt extinguishment (607) (19,840) (1,314)
Other, net 749 (2,472) 3,546
---------- -------- --------
Income (loss) before income taxes 59,005 (57,227) (71,468)
INCOME TAX EXPENSE (BENEFIT) 600 -- (15,278)
---------- -------- --------
Net income (loss) 58,405 (57,227) (56,190)
PREFERRED STOCK DIVIDENDS -- 1,053 1,563
---------- -------- --------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $ 58,405 $(58,280) $(57,753)
========== ======== ========
BASIC NET INCOME (LOSS) PER SHARE $ 2.10 $ (2.26) $ (2.43)
========== ======== ========
DILUTED NET INCOME (LOSS) PER SHARE $ 1.80 $ (2.26) $ (2.43)
========== ======== ========
COMPREHENSIVE INCOME (LOSS)
Net income (loss) $ 58,405 $(57,227) $(56,190)
Foreign currency translation adjustment 1,137 1,256 42
---------- -------- --------
NET COMPREHENSIVE INCOME (LOSS) $ 59,542 $(55,971) $(56,148)
========== ======== ========
The accompanying notes are an integral part of these Consolidated Statements.
31
WABASH NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
Preferred Stock Common Stock Additional Retained Other
---------------- ------------------ Paid-In Earnings Comprehensive Treasury
Shares Amount Capital Amount Capital (Deficit) Income (Loss) Stock Total
-------- ------ ---------- ------ ---------- --------- ------------- -------- --------
BALANCES, December 31, 2001 482,041 $ 5 23,013,847 $230 $236,804 $(104,469) $ (306) $(1,279) $130,985
Net loss for the year -- -- -- -- -- (56,190) -- -- (56,190)
Foreign currency translation -- -- -- -- -- -- 42 -- 42
Preferred stock dividends -- -- -- -- -- (1,563) -- -- (1,563)
Preferred stock conversion (130,041) (2) 2,589,687 26 334 -- -- -- 358
Common stock issued under:
Employee stock purchase plan -- -- 5,312 1 47 -- -- -- 48
Employee stock bonus plan -- -- 10,300 -- 89 -- -- -- 89
Stock option plan -- -- 11,168 -- 82 82
Outside directors' plan -- -- 16,746 -- 133 -- -- -- 133
-------- --- ---------- ---- -------- --------- ------ ------- --------
BALANCES, December 31, 2002 352,000 $ 3 25,647,060 $257 $237,489 $(162,222) $ (264) $(1,279) $ 73,984
Net loss for the year -- -- -- -- -- (57,227) -- -- (57,227)
Foreign currency translation -- -- -- -- -- -- 1,256 -- 1,256
Preferred stock dividends -- -- -- -- -- (1,053) -- -- (1,053)
Preferred stock conversion (352,000) (3) 823,256 8 (7) -- -- -- (2)
Restricted stock amortization -- -- -- -- 225 -- -- -- 225
Common stock issued under:
Employee stock bonus plan -- -- 6,370 -- 74 -- -- -- 74
Stock option plan -- -- 360,114 4 4,800 -- -- -- 4,804
Outside directors' plan -- -- 12,457 -- 101 -- -- -- 101
-------- --- ---------- ---- -------- --------- ------ ------- --------
BALANCES, December 31, 2003 -- $-- 26,849,257 $269 $242,682 $(220,502) $ 992 $(1,279) $ 22,162
Net income for the year -- -- -- -- -- 58,405 -- -- 58,405
Foreign currency translation -- -- -- -- -- -- 1,137 -- 1,137
Restricted stock amortization -- -- 20,242 -- 425 -- -- -- 425
Common stock issued under:
Equity offering -- -- 3,450,000 35 75,667 -- -- -- 75,702
Employee stock bonus plan -- -- 7,720 -- 224 -- -- -- 224
Stock option plan -- -- 476,498 4 6,407 -- -- -- 6,411
Outside directors' plan -- -- 3,653 1 107 -- -- -- 108
-------- --- ---------- ---- -------- --------- ------ ------- --------
BALANCES, December 31, 2004 -- $-- 30,807,370 $309 $325,512 $(162,097) $2,129 $(1,279) $164,574
======== === ========== ==== ======== ========= ====== ======= ========
The accompanying notes are an integral part of these Consolidated Statements.
32
WABASH NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years Ended December 31,
---------------------------------
2004 2003 2002
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 58,405 $ (57,227) (56,190)
Adjustments to reconcile net cash provided by (used in) operating
activities:
Depreciation and amortization 19,441 23,788 28,626
Net (gain) loss on the sale of assets (2,089) 723 (1,322)
Provision (credit) for losses on accounts receivable and
finance contracts (231) 474 9,773
Cash used for restructuring activities (3,007) (3,372) (373)
Restructuring and other related charges -- -- 1,813
Used trailer valuation charges 448 2,562 5,443
Loss contingencies -- -- 2,831
Loss on debt extinguishment 607 19,840 1,314
Loss on asset impairment -- 28,500 2,000
Changes in operating assets and liabilities:
Accounts receivable (20,640) (40,749) 19,695
Finance contracts 5,070 16,469 5,602
Inventories (8,485) 51,416 58,335
Refundable income taxes (258) 824 24,762
Prepaid expenses and other (458) 5,009 (4,016)
Accounts payable and accrued liabilities 5,081 11,286 9,776
Other, net 3,040 (1,280) 1,815
--------- --------- ---------
Net cash provided by operating activities 56,924 58,263 109,884
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (15,495) (6,518) (5,703)
Additions to equipment leased to others -- -- (9,792)
Proceeds from Asset Sales -- 53,479 --
Proceeds from sale of leased equipment -- 6,498 5,295
Proceeds from the sale of property, plant and equipment 6,800 6,861 16,617
--------- --------- ---------
Net cash (used in) provided by investing activities (8,695) 60,320 6,417
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of bank term loans and revolving credit facility -- 135,309 80,402
Proceeds from issuance of convertible senior notes -- 125,000 --
Proceeds from issuance of common stock 75,702 -- --
Proceeds from exercise of stock options 5,261 4,804 351
Borrowings under trade receivables and revolving credit facilities 667,522 197,650 56,798
Payments under trade receivables and revolving credit facilities (727,879) (225,501) (146,491)
Payments under long-term debt and capital lease obligations (39,459) (367,089) (78,589)
Preferred stock dividends paid -- (1,584) (443)
Debt issuance costs paid -- (10,279) (3,805)
--------- --------- ---------
Net cash used in financing activities (18,853) (141,690) (91,777)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 29,376 (23,107) 24,524
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 12,552 35,659 11,135
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 41,928 $ 12,552 $ 35,659
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 9,021 $ 21,774 $ 27,913
Income taxes paid (refunded), net $ 1,137 $ (832) $ (38,153)
Capital lease obligations incurred $ -- $ -- $ 14,731
The accompanying notes are an integral part of these Consolidated Statements.
33
WABASH NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS
Wabash National Corporation (the Company) designs, manufactures and markets
standard and customized truck trailers and intermodal equipment under the
Wabash(R), FreightPro(R), Articlite(R) and RoadRailer(R) trademarks. The
Company's wholly-owned subsidiary, Wabash National Trailer Centers, Inc. (WNTC),
sells new and used trailers through its retail network and provides aftermarket
parts and maintenance service for the Company's and competitors' trailers and
related equipment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Consolidation
The consolidated financial statements reflect the accounts of the Company
and its wholly-owned and majority-owned subsidiaries. All significant
intercompany profits, transactions and balances have been eliminated in
consolidation. Certain reclassifications have been made to prior periods to
conform to the current year presentation. These reclassifications had no effect
on net losses for the periods previously reported.
b. Use of Estimates
The preparation of consolidated financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that directly affect the amounts reported in its
consolidated financial statements and accompanying notes. Actual results could
differ from these estimates.
c. Foreign Currency Accounting
The financial statements of the Company's Canadian subsidiary have been
translated into U.S. dollars in accordance with Financial Accounting Standards
Board (FASB) Statement No. 52, Foreign Currency Translation. Assets and
liabilities have been translated using the exchange rate in effect at the
balance sheet date. Revenues and expenses have been translated using a
weighted-average exchange rate for the period. The resulting translation
adjustments are recorded as Accumulated Other Comprehensive Income (Loss) in
Stockholders' Equity. Gains or losses resulting from foreign currency
transactions are included in Foreign Exchange Gains and Losses, net on the
Company's Consolidated Statements of Operations. The Company recorded foreign
currency gains of $0.5 million in 2004, $5.3 million in 2003 and $0 million in
2002.
As a result of a reevaluation of the retail and distribution business in
2003, the Company concluded to close 12 locations, including two in Canada. In
addition, the review resulted in management designating $30 million CDN of
intercompany loans to its Canadian subsidiary as a permanent investment.
Accordingly, beginning July 1, 2003, gains and losses associated with the
permanent investment were charged to Accumulated Other Comprehensive Income
(Loss) on the Consolidated Balance Sheets. As of December 31, 2004 and 2003,
accumulated gains of $2.6 million and $0.9 million, respectively, have been
recorded related to this permanent investment.
d. Revenue Recognition
The Company recognizes revenue from the sale of trailers and aftermarket
parts when the customer has made a fixed commitment to purchase the trailers for
a fixed or determinable price, collection is reasonably assured under the
Company's billing and credit terms and ownership and all risk of loss has been
transferred to the buyer, which is normally upon shipment or pick up by the
customer.
The Company recognizes revenue from direct finance leases based upon a
constant rate of return while revenue from operating leases is recognized on a
straight-line basis in an amount equal to the invoiced rentals.
34
e. Used Trailer Trade Commitments
The Company has commitments with certain customers to accept used trailers
on trade for new trailer purchases. These commitments arise in the normal course
of business related to future new trailer orders. The Company has accepted
trade-ins from customers of approximately $37.9 million, $32.8 million and $40.5
million in 2004, 2003 and 2002, respectively. As of December 31, 2004 and 2003,
the Company had approximately $4.4 million and $6.1 million, respectively, of
outstanding trade commitments with customers, which approximates the net
realizable value. The Company's policy is to recognize losses related to these
commitments, if any, at the time the new trailer revenue is recognized.
f. Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments, which are readily
convertible into cash and have maturities of three months or less.
g. Accounts Receivable and Finance Contracts
Accounts receivable and finance contracts are shown net of allowance for
doubtful accounts. Accounts receivable primarily includes trade receivables. The
Company records and maintains a provision for doubtful accounts for customers
based upon a variety of factors including the Company's historical experience,
the length of time the account has been outstanding and the financial condition
of the customer. If the circumstances related to specific customers were to
change, the Company's estimates with respect to the collectibility of the
related accounts could be further adjusted. Provisions to the allowance for
doubtful accounts are charged to General and Administrative Expenses on the
Consolidated Statements of Operations. The activity in the allowance for
doubtful accounts was as follows (in thousands):
Years Ended December 31,
---------------------------
2004 2003 2002
------ -------- -------
Balance at beginning of year $4,160 $ 16,217 $14,481
Provision (credit) (231) 474 9,773
Write-offs, net (944) (12,531) (8,037)
------ -------- -------
Balance at end of year $2,985 $ 4,160 $16,217
====== ======== =======
h. Inventories
Inventories are primarily stated at the lower of cost, determined on the
first-in, first-out (FIFO) method, or market. The cost of manufactured inventory
includes raw material, labor and overhead. Inventories consist of the following
(in thousands):
December 31,
-----------------
2004 2003
------- -------
Raw materials and components $36,146 $24,189
Work in progress 4,653 4,364
Finished goods 35,017 38,198
Aftermarket parts 6,115 5,953
Used trailers 12,669 12,292
------- -------
$94,600 $84,996
======= =======
The Company continually reviews the valuation of the used trailer inventory
and writes down the value of individual units when the carrying value exceeds
the estimated market value. Write downs amounting to $0.4 million, $2.6 million
and $5.4 million were charged to Cost of Sales on the Consolidated Statement of
Operations for 2004, 2003 and 2002, respectively.
i. Prepaid Expenses and Other
Prepaid expenses and other at December 31, 2004 and 2003 were $16.3 million
and $10.2 million, respectively. Prepaid expenses and other primarily includes
prepaid expenses and assets held for sale. Prepaid expenses include insurance
premiums and computer software maintenance which are generally amortized over
one
35
year periods. Assets held for sale, which include closed manufacturing
facilities and branch locations, were $12.3 million and $7.0 million at December
31, 2004 and 2003, respectively. At December 31, 2004 and 2003, assets held for
sale included $1.7 million for a closed manufacturing facility, that was closed
as part of the Company's 2001 restructuring. In accordance with Statement of
Financial Accounting Standard (SFAS) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, the Company continues to review the assets for
potential impairment and appropriate classification as assets held for sale.
During the fourth quarter of 2004, the Company committed to a plan to
dispose of certain branch locations. In accordance with SFAS No. 144, $8.3
million of property, plant and equipment and, in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets, $3.2 million of goodwill allocated from
the retail and distribution segment were reclassified to assets held for sale
(see Footnote 2(l) for further discussion). Additionally, the carrying value of
these assets was reviewed for recoverability resulting in a write-down of $1.2
million charged to Other, net in the Consolidated Statement of Operations.
j. Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Maintenance and repairs
are charged to expense as incurred, and expenditures that extend the useful life
of the asset are capitalized. Depreciation is recorded using the straight-line
method over the estimated useful lives of the depreciable assets. Estimated
useful lives are 33 years for buildings and building improvements and range from
three to 10 years for machinery and equipment. Depreciation expense on property,
plant and equipment was $13.0 million, $13.4 million and $14.7 million for 2004,
2003 and 2002, respectively.
Property, plant and equipment consist of the following (in thousands):
December 31,
--------------------
2004 2003
--------- --------
Land $ 19,226 $ 23,376
Buildings and building improvements 84,228 86,193
Machinery and equipment 124,123 114,498
Construction in progress 2,433 3,059
--------- --------
230,010 227,126
Less--accumulated depreciation (106,384) (96,532)
--------- --------
$ 123,626 $130,594
========= ========
In the second quarter of 2003, as part of an evaluation of certain assets
of its aftermarket parts business, the Company recorded a loss on asset
impairment, which included $5.1 million for property, plant and equipment. See
Footnote 5 for further discussion of this impairment.
In the fourth quarter of 2004, $8.3 million of property, plant and
equipment was reclassified to Prepaid Expenses and Other as assets held for
sale. See Footnote 2(i) for further discussion.
k. Equipment Leased to Others
Equipment leased to others at December 31, 2004 and 2003 was $14.0 million
and $21.2 million, net of accumulated depreciation of $9.3 million and $8.9
million, respectively. Additions to equipment leased to others are classified as
investing activities on the Consolidated Statements of Cash Flows. Equipment
leased to others is depreciated over the estimated life of the equipment or the
term of the underlying lease arrangement, not to exceed 15 years, with a 20%
residual value or a residual value equal to the estimated market value of the
equipment at lease termination. Depreciation expense on equipment leased to
others, including capital lease assets, was $3.1 million, $6.4 million and $9.3
million for 2004, 2003 and 2002, respectively. The future minimum lease payments
to be received under the lease arrangement are $1.1 million per year for
2005-2009 and $1.5 million thereafter.
During the second quarter of 2003, the Company recorded an asset impairment
charge of approximately $22 million on certain assets of its trailer leasing and
rental business and later on September 19, 2003, completed the sale of these
assets, which were included in Equipment Leased to Others on the Consolidated
Balance Sheets. See Footnote 5 for further discussion of this transaction.
36
l. Goodwill
The changes in the carrying amount of goodwill, net of accumulated
amortization of $1.9 million and $1.6 million, respectively, for the years ended
December 31, 2003 and 2004 are as follows (in thousands):
Retail and
Manufacturing Distribution Total
------------- ------------- -------
Balance as of January 1, 2003 $18,357 $16,295 $34,652
Effects of foreign currency -- 2,743 2,743
Asset Impairment -- (1,350) (1,350)
------- ------- -------
Balance as of December 31, 2003 18,357 17,688 36,045
Effects of foreign currency -- 862 862
Allocated to disposals -- (3,209) (3,209)
------- ------- -------
Balance as of December 31, 2004 $18,357 $15,341 $33,698
======= ======= =======
In accordance with SFAS No. 142, the Company tests goodwill for impairment
on an annual basis or more frequently if an event occurs or circumstances change
that could more likely than not reduce the fair value of a reporting unit below
its carrying amount. The Company estimates fair value based upon the present
value of future cash flows. In estimating the future cash flows, the Company
takes into consideration the overall and industry economic conditions and
trends, market risk of the Company and historical information. The Company has
conducted annual impairment tests as of October 1, 2002, 2003 and 2004 and
determined that no impairment of goodwill existed.
In the second quarter of 2003, as part of an evaluation of certain assets
of its aftermarket parts business, the Company recorded a loss on asset
impairment, which included $1.4 million of goodwill related to its aftermarket
parts business. See Footnote 5 for further discussion of this impairment.
During the fourth quarter of 2004, as part of a plan to dispose of certain
branch locations, $3.2 million of goodwill in retail and distribution was
allocated to the disposed locations and reclassified to Prepaid Expenses and
Other as assets held for sale. The allocation was based on the relative fair
values of the retained and to be disposed of businesses.
m. Other Assets
The Company has other intangible assets including patents and licenses,
non-compete agreements and technology costs which are being amortized on a
straight-line basis over periods ranging from two to 12 years. As of December
31, 2004 and 2003, the Company had gross intangible assets of $15.5 million
($3.0 million net of amortization) and $17.3 million ($4.3 million net of
amortization), respectively. Amortization expense for 2004, 2003 and 2002 was
$1.3 million, $1.8 million and $2.4 million, respectively, and is estimated to
be $0.9 million, $0.7 million, $0.5 million, $0.4 million and $0.2 million for
2005, 2006, 2007, 2008 and 2009, respectively.
The Company capitalizes the cost of computer software developed or obtained
for internal use in accordance with Statement of Position No. 98-1, Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use.
Capitalized software is amortized using the straight-line method over three to
five years. As of December 31, 2004 and 2003, the Company had software costs,
net of amortization of $0.2 million and $2.1 million, respectively. Amortization
expense for 2004, 2003 and 2002 was $2.0 million, $2.1 million and $2.2 million,
respectively.
n. Long-Lived Assets
Long-lived assets are reviewed for impairment in accordance with SFAS No.
144, whenever facts and circumstances indicate that the carrying amount may not
be recoverable. Specifically, this process involves comparing an asset's
carrying value to the estimated undiscounted future cash flows the asset is
expected to generate over its remaining life. If this process were to result in
the conclusion that the carrying value of a long-lived asset would not be
recoverable, a write-down of the asset to fair value would be recorded through a
charge to operations. Fair value is determined based upon discounted cash flows
or appraisals as appropriate.
37
o. Other Accrued Liabilities
The following table presents the major components of Other Accrued
Liabilities (in thousands):
Years Ended December 31,
-------------------------
2004 2003
------- -------
Payroll and related taxes $12,716 $12,980
Warranty accruals 8,399 10,614
Accrued taxes 4,525 8,131
Self-insurance accruals 8,159 7,446
All other 18,643 22,250
------- -------
$52,442 $61,421
======= =======
The following table presents the changes in certain significant accruals
included in Other Accrued Liabilities as follows (in thousands):
Warranty Accruals Self-Insurance Accruals
----------------- -----------------------
Balance as of January 1, 2003 $12,587 $ 6,738
Accruals 6,310 23,728
Payments (8,283) (23,020)
------- --------
Balance as of December 31, 2003 $10,614 $ 7,446
Accruals 4,897 23,413
Payments (7,112) (22,700)
------- --------
Balance as of December 31, 2004 $ 8,399 $ 8,159
======= ========
The Company's warranty policy generally provides coverage for components of
the trailer the Company produces or assembles. Typically, the coverage period is
five years. The Company's policy is to accrue the estimated cost of warranty
coverage at the time of the sale.
The Company is self-insured up to specified limits for medical and workers'
compensation coverage. The self-insurance reserves have been recorded to reflect
the undiscounted estimated liabilities, including claims incurred but not
reported, as well as catastrophic claims as appropriate.
The Company recognizes a loss contingency for used trailer residual
commitments for the difference between the equipment's purchase price and its
fair market value when it becomes probable that the purchase price at the
guarantee date will exceed the equipment's fair market value at that date.
p. Income Taxes
The Company determines its provision or benefit for income taxes under the
asset and liability method. The asset and liability method measures the expected
tax impact at current enacted rates of future taxable income or deductions
resulting from differences in the tax and financial reporting basis of assets
and liabilities reflected in the Consolidated Balance Sheets. Future tax
benefits of tax losses and credit carryforwards are recognized as deferred tax
assets. Deferred tax assets are reduced by a valuation allowance to the extent
the Company concludes there is uncertainty as to their realization.
q. Stock-Based Compensation
The Company follows APB No. 25, Accounting for Stock Issued to Employees,
in accounting for its stock options and, accordingly, no compensation cost has
been recognized for stock options in the consolidated financial statements.
However, SFAS No. 123, Accounting for Stock-Based Compensation, as amended
requires pro forma presentation as if compensation costs had been expensed under
the fair value method. For purposes of pro forma disclosure, the estimated fair
value of the options at the date of grant is amortized to expense over the
vesting period. Additional information regarding stock-based compensation is
included in Footnote 11. The following table illustrates the effect on net loss
and loss per share as if compensation expense had been recognized (in thousands,
except for loss-per-share amounts):
38
Years Ended December 31,
-----------------------------
2004 2003 2002
------- -------- --------
Report net (income) loss $58,405 $(57,227) $(56,190)
Pro forma stock-based compensation expense
(net of tax) (2,613) (2,670) (1,671)
Stock-based employee compensation expense
recorded (net of tax) 417 225 --
------- -------- --------
Pro forma net income (loss) $56,209 $(59,672) $(57,861)
======= ======== ========
Basic earnings per share:
Reported net income (loss) per share $ 2.10 $ (2.26) $ (2.43)
======= ======== ========
Pro forma net income (loss) per share $ 2.02 $ (2.36) $ (2.50)
======= ======== ========
Diluted earnings per share:
Reported net income (loss) per share $ 1.80 $ (2.26) $ (2.43)
======= ======== ========
Pro forma net income (loss) per share $ 1.74 $ (2.36) $ (2.50)
======= ======== ========
r. New Accounting Pronouncements
Inventory Costs. In November 2004, the FASB issued SFAS No. 151, Inventory
Costs - an amendment of Accounting Research Bulletin (ARB) No. 43, Chapter 4.
The statement clarifies that abnormal amounts of idle facility expense, freight,
handling costs and wasted materials should be recognized as current-period
expenses regardless of how abnormal the circumstances. In addition, this
Statement requires that the allocation of fixed overheads to the costs of
conversion be based upon normal production capacity levels. The Statement is
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. The Company does not anticipate that this statement will have a
material effect on financial position, results of operations and cash flows.
Share-Based Payments. In December 2004, the FASB issued SFAS No. 123
(revised 2004), Share-Based Payment. SFAS No. 123R, which is a revision of SFAS
No. 123, Accounting for Stock-Based Compensation, superceded APB Opinion No. 25,
Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statements of
Cash Flows. Statement No. 123R requires that all share-based payments to
employees, including grants of employee stock options, to be recognized in the
financial statements based upon their fair value. The current pro forma
disclosure of the impact on earnings is no longer allowed. The Statement is
effective for the first interim or annual reporting period beginning after June
15, 2005. Based upon currently outstanding options, expense, net of tax,
calculated using the Black-Scholes model would amount to approximately $1.1
million during the second half of 2005 and $0.7 million in 2006.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure of fair value information for certain financial instruments.
The differences between the carrying amounts and the estimated fair values,
using the methods and assumptions listed below, of the Company's financial
instruments at December 31, 2004, and 2003 were immaterial, with the exception
of the Senior Convertible Notes.
Cash and Cash Equivalents, Accounts Receivable and Accounts Payable. The
carrying amounts reported in the Consolidated Balance Sheets approximate fair
value.
Long-Term Debt. The fair value of long-term debt, including the current
portion, is estimated based on current quoted market prices for similar issues
or debt with the same maturities. The interest rates on the Company's bank
borrowings under its Bank Facility are adjusted regularly to reflect current
market rates. The estimated fair value of the Company's Senior Convertible
Notes, based on market quotes, is approximately $187 million and $214 million,
compared to a carrying value of $125 million, as of December 31, 2004 and 2003,
respectively. The carrying values of the remainder of the Company's long-term
borrowings approximate fair value.
39
Foreign Currency Forward Contracts. As of December 31, 2004 and 2003, the
Company has $0.8 million and $3.9 million, respectively, in outstanding foreign
currency forward contracts included in Other Accrued Liabilities that are not in
a material gain or loss position.
4. RESTRUCTURING AND OTHER RELATED CHARGES
In December 2000, the Company recorded restructuring and other related
charges totaling $46.6 million, primarily related to the Company's exit from
manufacturing products for export to markets outside of North America,
international leasing and financing activities and the consolidation of certain
domestic operations. An additional $1.6 million was subsequently provided
primarily to recognize the assumption of financial guarantees.
The Company continues to pursue the sale of a facility, which had a fair
market value of $0.8 million at December 31, 2004 and 2003, and is classified in
Prepaid Expenses and Other on the Consolidated Balance Sheets.
Details of the restructuring charges and reserve for the 2000 Restructuring
Plan are as follows (in thousands):
Utilized
Original Additional ------------------ Balance
Provision Provision 2000-2003 2004 12/31/04
--------- ---------- --------- ------- ----------
Restructuring of majority-owned
operations $36,338 $ 227 $(33,629) $(2,936) $--
Restructuring of minority
interest operations 5,832 1,381 (5,980) (1,233) --
Inventory write-down and
other charges 4,480 -- (4,480) -- --
------- ------ -------- ------- ---
Total restructuring and other
related charges $46,650 $1,608 $(44,089) $(4,169) $--
======= ====== ======== ======= ===
The restructuring reserve of $4.2 million at December 31, 2003 was included
in Other Accrued Liabilities on the Consolidated Balance Sheets. The Company
paid $2.6 million and $3.1 million to settle financial and equipment guarantees
during 2004 and 2003, respectively.
5. DIVESTITURES
a. Asset Sale
In September 2003, the Company completed the sale of a portion of its
trailer leasing and finance operations and a portion of its aftermarket parts
distribution operations for approximately $53.5 million in cash. The principal
assets sold consisted of tangible assets (i.e., accounts receivable, inventory
and equipment held for lease), relationships with a specific subset of the
Company's customers and a portion of the Company's Retail and Distribution
business. In accordance with SFAS No. 144, the Company has not reflected these
sales as discontinued operations as only a portion of a component was sold, the
Company will continue to generate cash flows from these components and the
Company will continue to be involved in the operations of the disposed assets
through, among other things, purchase and supply agreements. Net proceeds from
the sale were used to repay a portion of the Company's outstanding indebtedness.
Loss on the disposition amounted to $29.3 million, including a $28.5 million
asset impairment charge recorded in the second quarter of 2003 to recognize that
estimated cash flows were insufficient to support the carrying value. The
additional $0.8 million loss was derived as follows (in thousands):
Assets sold $52,801
Transaction costs 1,503
Less proceeds 53,479
-------
$ 825
=======
b. Finance Portfolio Sale
In the fourth quarter of 2003, the Company completed the sale of a large
portion of the remaining finance contracts in its finance portfolio. Proceeds
were $12.2 million and resulted in a charge of $4.1 million, reflecting the
Company's loss on the sale, including $0.9 million for debt extinguishment
charges.
40
6. PER SHARE OF COMMON STOCK
Per share results have been computed based on the average number of common
shares outstanding. The computation of basic and diluted 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 follows (in
thousands):
Years Ended December 31,
-----------------------------
2004 2003 2002
------- -------- --------
Basic earnings (loss) per share:
Net income (loss) applicable to common
stockholders $58,405 $(58,280) $(57,753)
======= ======== ========
Weighted average common shares outstanding 27,748 25,778 23,791
======= ======== ========
Basic income (loss) per share $ 2.10 $ (2.26) $ (2.43)
======= ======== ========
Diluted earnings (loss) per share:
Net income (loss) applicable to common
stockholders $58,405 $(58,280) $(57,753)
After-tax equivalent of interest on
convertible notes 4,828 -- --
------- -------- --------
Diluted net income (loss) applicable to common
stockholders $63,233 $(58,280) $(57,753)
======= ======== ========
Weighted average common shares outstanding 27,748 25,778 23,791
Dilutive stock options/shares 832 -- --
Convertible notes equivalent shares 6,510 -- --
------- -------- --------
Diluted weighted average common shares outstanding 35,090 25,778 23,791
======= ======== ========
Diluted income (loss) per share $ 1.80 $ (2.26) $ (2.43)
======= ======== ========
Average shares outstanding diluted exclude the antidilutive effects of
convertible preferred stock and redeemable stock options totaling approximately
1.1 million shares and 0.9 million shares in 2003 and 2002, respectively.
7. OTHER LEASE ARRANGEMENTS
a. Equipment Financing
The Company has entered into agreements for the sale and leaseback of
certain production equipment at its manufacturing locations. During 2004, the
Company purchased the equipment under two of the agreements for $7.1 million. As
of December 31, 2004, the unamortized lease values related to the remaining
agreements are approximately $1.8 million. Future minimum lease payments related
to these arrangements are $1.0 million and $0.8 million for 2005 and 2006,
respectively. The end of term residual guarantees and purchase options are
minimal. These agreements contain no financial covenants; however, they do
contain non-financial covenants including cross default provisions which could
be triggered if the Company is not in compliance with covenants in other debt or
leasing arrangements.
Total rent expense for these leases in 2004, 2003 and 2002 were $3.9
million, $4.2 million and $4.4 million, respectively.
b. Other Lease Commitments
The Company leases office space, manufacturing, warehouse and service
facilities and equipment under operating leases, the majority of which expire
through 2009. Future minimum lease payments required under these other lease
commitments as of December 31, 2004 are as follows (in thousands):
Payments
--------
2005 $1,394
2006 722
2007 401
2008 236
2009 140
Thereafter 394
------
$3,287
======
41
Total rental expense under operating leases was $2.3 million, $4.0 million
and $5.4 million for 2004, 2003 and 2002, respectively.
8. FINANCE CONTRACTS
The Company previously provided financing for the sale of new and used
trailers to its customers. The Company no longer originates finance contracts.
The financing is principally structured in the form of finance leases, typically
for a five-year term.
Finance Contracts, as shown on the accompanying Consolidated Balance
Sheets, are as follows (in thousands):
December 31,
-----------------
2004 2003
------- -------
Lease payments receivable $ 5,242 $11,439
Estimated residual value 688 801
------- -------
5,930 12,240
Unearned finance charges (548) (1,479)
------- -------
5,382 10,761
Other, net 122 121
------- -------
5,504 10,882
Less: current portion (2,185) (4,727)
------- -------
$ 3,319 $ 6,155
======= =======
The future minimum lease payments to be received from finance contracts as
of December 31, 2004 are as follows (in thousands):
Amounts
-------
2005 2,558
2006 2,453
2007 205
2008 26
-----
5,242
=====
9. DEBT
a. Long-term debt consists of the following (in thousands):
December 31,
-------------------
2004 2003
-------- --------
Bank Revolver (due 2007) $ -- $ 60,358
Bank Term Loan -- 36,766
Senior Convertible Notes (due 2008) 125,000 125,000
Other Notes Payable (7.25% due 2006) 2,500 5,192
-------- --------
127,500 227,316
Less: Current maturities (2,000) (7,337)
-------- --------
$125,500 $219,979
======== ========
b. Maturities of long-term debt at December 31, 2004, are as follows (in
thousands):
Amounts
--------
2005 $ 2,000
2006 500
2007 --
2008 125,000
Thereafter --
-------
$127,500
========
42
c. Senior Convertible Notes
The Company has $125 million of 3.25% five-year senior unsecured
convertible notes (convertible notes), which are currently convertible into 6.5
million shares of the Company's common stock. The convertible notes have a
conversion price of $19.20 or a rate of 52.0833 shares per $1,000 principal
amount of note. The convertible notes bear interest at 3.25% per annum payable
semi-annually on February 1 and August 1. If not converted, the balance is due
on August 1, 2008.
d. Bank Facility
In 2004, the Company paid off the $25.8 million remaining balance on its
bank term loan with a portion of the proceeds from an equity offering. As a
result, the Company wrote-off $0.6 million in unamortized deferred debt costs of
the bank term loan as a loss on debt extinguishment.
On December 30, 2004, the Company amended and restated its asset-based loan
agreement (ABL Facility). The most notable amendments to the facility included:
- Reducing the capacity under the ABL Facility from $175 million to $125
million;
- Extending the maturity date of the facility from September 30, 2006 to
September 30, 2007;
- Eliminating financial covenants and certain other restrictions so long
as unused availability remains above $40 million;
- Allowing the Company to pay cash dividends up to $10 million; and
- Reducing the borrowing rates and fees
The amended facility is secured by the Company's property, plant and
equipment, inventory and accounts receivable and the amount available to borrow
varies in relation to the balances of those accounts among other things, as
defined in the agreements. As of December 31, 2004, borrowing capacity under the
revolver was $117.6 million.
Interest on the ABL Facility revolver is variable, based on the London
Interbank Offer Rate (LIBOR) plus 150 basis points or the bank's alternative
rate, as defined in the agreement. At December 31, 2004, the 30-day LIBOR was
2.4%. The Company pays a commitment fee on the unused portion of the facility at
a rate of 25 points per annum. All interest and fees are paid monthly. For the
quarter ended December 31, 2004, the weighted average interest rate was 4.56%.
e. Covenants
The Company is in compliance with all covenants of the ABL Facility as of
December 31, 2004.
10. STOCKHOLDERS' EQUITY
a. Common Stock
On November 3, 2004, the Company completed the sale of 3,450,000 shares of
its common stock at a public offering price of $23.25. The sale generated net
proceeds of $75.7 million which was used to pay down its bank indebtedness.
b. Preferred Stock
On December 29, 2003, the Company converted its issued and outstanding
shares of Series B 6% Cumulative Convertible Exchangeable Preferred Stock
(Series B Stock) into approximately 823,300 shares, including 1,916 from accrued
and unpaid dividends, of the Company's common stock. The Series B Stock
converted into common stock at the rate of approximately 2.3 shares of common
stock for each full share of Series B Stock based on the conversion price of
$21.375.
As of December 31, 2004 and 2003, the Company had 300,000 shares of Series
A Junior Participating Preferred Shares authorized with no shares issued and
outstanding.
43
The Board of Directors has the authority to issue up to 25 million shares
of unclassified preferred stock and to fix dividends, voting and conversion
rights, redemption provisions, liquidation preferences and other rights and
restrictions.
c. Stockholders' Rights Plan
In November 1995, the Company's Board of Directors adopted a Stockholders'
Rights Plan (the "Rights Plan"). The Rights Plan is designed to deter coercive
or unfair takeover tactics in the event of an unsolicited takeover attempt. It
is not intended to prevent a takeover of Wabash on terms that are favorable and
fair to all stockholders and will not interfere with a merger approved by the
Board of Directors. Each right entitles stockholders to buy one one-thousandth
of a share of Series A Junior Participating Preferred Stock at an exercise price
of $120. The rights will be exercisable only if a person or a group acquires or
announces a tender or exchange offer to acquire 20% or more of the Company's
Common Stock or if the Company enters into other business combination
transactions not approved by the Board of Directors. In the event the rights
become exercisable, the rights plan allows for the Company's stockholders to
acquire stock of Wabash or the surviving corporation, whether or not Wabash is
the surviving corporation having a value twice that of the exercise price of the
rights. The rights will expire December 28, 2005 or are redeemable for $0.01 per
right by our Board under certain circumstances.
11. STOCK-BASED INCENTIVE PLANS
a. Stock Option and Stock Related Plans
The Company has stock incentive plans that provide for the issuance of
stock appreciation rights (SAR) and the granting of common stock options to
officers and other eligible employees.
Restricted Stock. From time-to-time, the Company has granted to certain key
employees and outside directors shares of the Company's stock to be earned over
time. These shares are granted at par value and recorded at the market price on
the date of grant with an offsetting balance representing the unearned portion.
These grants have been made under the 2000 Stock Option Plan and 2004 Stock
Incentive Plan. The grants generally vest over periods ranging from two to five
years. As of December 31, 2004 and 2003, there were 117,627 shares and 55,467
shares, respectively, of restricted stock grants outstanding and not fully
vested with an unearned balance of $1.5 million and $0.3 million, respectively,
included in additional paid-in-capital. In 2004 and 2003, the Company recorded
amortization expense of $0.4 million and $0.2 million, respectively, related to
restricted stock.
Stock Options. At the Annual Meeting of Stockholders in May of 2004, the
2004 Stock Incentive Plan was approved making available 1,100,000 shares for
issuance, as well as a reduction of shares available for granting under the 2000
Stock Option Plan to 100,000 shares. The Company has three non-qualified stock
option plans (the 1992, 2000 and 2004 Stock Option Plans) which allow eligible
employees to purchase shares of common stock at a price not less than market
price at the date of grant. Under the terms of the Stock Option Plans, up to an
aggregate of approximately 3,850,000 shares are reserved for issuance, subject
to adjustment for stock dividends, recapitalizations and the like. Options
granted to employees under the Stock Option Plans generally become exercisable
in annual installments over three to five years depending upon the grant.
Options granted to non-employee directors of the Company are fully vested and
exercisable six months after the date of grant. All options granted expire 10
years after the date of grant.
The Company has issued non-qualified stock options in connection with
inducing certain individuals to commence employment with the Company. In the
aggregate, the Company has issued options to purchase 385,000 shares of common
stock to three individuals. The exercise price for each option granted was set
by the Compensation Committee at the fair market value of the shares subject to
that option. The Compensation Committee set vesting schedules that vest over
three years. Upon a change in control of the Company, all outstanding shares
subject to options vest. The term of each option is 10 years.
44
A summary of stock option activity and weighted-average exercise prices for
the periods indicated are as follows:
Number of Weighted-Average
Options Exercise Price
--------- ----------------
Outstanding at December 31, 2001 1,777,725 19.39
Granted 375,000 10.01
Exercised (11,168) 7.38
Cancelled (294,981) 17.37
---------
Outstanding at December 31, 2002 1,846,576 17.93
Granted 953,250 8.46
Exercised (360,114) 13.34
Cancelled (563,360) 25.16
---------
Outstanding at December 31, 2003 1,876,352 11.83
Granted 241,055 25.12
Exercised (476,498) 13.35
Cancelled (281,374) 13.47
---------
Outstanding at December 31, 2004 1,359,535 13.31
=========
The following table summarizes information about stock options outstanding
at December 31, 2004:
Weighted Weighted Weighted
Range of Average Average Number Average
Exercise Number Remaining Exercise Exercisable Exercise
Prices Outstanding Life Price at 12/31/04 Price
-------- ----------- --------- -------- ----------- --------
$ 6.68 - $10.01 928,050 7.9 $ 8.61 155,397 $ 8.76
$10.02 - $13.35 3,000 6.4 $12.95 3,000 $12.95
$13.36 - $16.69 32,000 3.9 $15.36 32,000 $15.36
$16.70 - $20.03 18,750 2.0 $18.90 18,750 $18.90
$20.04 - $23.36 112,575 4.6 $21.52 105,909 $21.61
$23.37 - $26.70 187,660 9.4 $23.92 -- $ 0.00
$26.71 - $30.04 61,000 2.7 $28.75 61,000 $28.75
$30.05 - $33.38 16,500 0.7 $33.38 16,500 $33.38
Using the Black-Scholes option valuation model, the estimated fair values
of options granted during 2004, 2003 and 2002 were $15.35, $4.61 and $5.67 per
option, respectively. Principal assumptions used in applying the Black-Scholes
model were as follows:
Black-Scholes Model Assumptions 2004 2003 2002
- ------------------------------- ---- ---- ----
Risk-free interest rate 4.7% 4.0% 5.1%
Expected volatility 52.1% 53.5% 49.4%
Expected dividend yield 0.5% 1.3% 1.3%
Expected term 10 yrs. 10 yrs. 10 yrs.
b. Other Stock Plans
The Company has a Stock Bonus Plan (the "Bonus Plan"). Under the terms of
the Bonus Plan, common stock may be granted to employees under terms and
conditions as determined by the Board of Directors. During 2004, 2003 and 2002,
7,720, 6,370 and 10,300 shares, respectively, were issued to employees at an
average price of $28.95, $11.58 and $8.64, respectively. The expense associated
with the grants is recognized when the shares are granted and amounted to
$224,000, $74,000 and $89,000 in 2004, 2003 and 2002, respectively. At December
31, 2004 and 2003, there were 452,290 and 460,010 shares, respectively,
available for offering under the Bonus Plan.
45
12. EMPLOYEE 401(K) SAVINGS PLAN
Substantially all of the Company's employees are eligible to participate in
a defined contribution plan that qualifies as a safe harbor plan under Section
401(k) of the Internal Revenue Code. The Plan provides for the Company to match,
in cash, a percentage of each employee's contributions up to certain limits. The
Company's matching contribution and related expense for the plan was
approximately $2.8 million, $2.6 million and $1.0 million for 2004, 2003 and
2002, respectively.
13. INCOME TAXES
a. Income Tax Expense (Benefit)
The consolidated income tax expense (benefit) for 2004, 2003 and 2002
consists of the following components (in thousands):
2004 2003 2002
---- ---- --------
Current:
U.S. Federal $102 $-- $(13,789)
Foreign -- -- 979
State 498 -- (2,468)
Deferred -- -- --
---- --- --------
Total consolidated expense (benefit) $600 $-- $(15,278)
==== === ========
The Company's effective tax rate differed from the U.S. Federal statutory
rate of 35% as follows:
2004 2003 2002
-------- -------- --------
Pretax book income (loss) $ 59,005 $(57,227) $(71,468)
Federal tax expense (benefit) at 35% statutory rate 20,652 (20,029) (25,014)
State and local income taxes 498 -- (1,604)
U.S. federal alternative minimum tax 400 -- --
Valuation allowance (20,317) 18,857 12,706
Other (633) 1,172 (1,366)
-------- -------- --------
Total income tax expense (benefit) $ 600 $ -- $(15,278)
======== ======== ========
b. Deferred Taxes
The Company's deferred income taxes are primarily due to temporary
differences between financial and income tax reporting for the depreciation of
property, plant and equipment and tax credits and losses carried forward.
The Company has a U.S. federal tax net operating loss carryforward of
approximately $174 million, which will expire beginning in 2022, if unused, and
which may be subject to other limitations under IRS rules. The Company has
various, multistate income tax net operating loss carryforwards which have been
recorded as a deferred income tax asset of approximately $20 million, before
allowances for impairment due to potential unrealizability. The Company has
various U.S. federal income tax credit carryforwards which will expire beginning
in 2013, if unused. Under SFAS No. 109, Accounting for Income Taxes, deferred
tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The Company has determined that a valuation
allowance is necessary and, accordingly, has recorded a valuation allowance for
all deferred tax assets as of December 31, 2004 and 2003, respectively. In
future periods, the Company will evaluate the deferred income tax asset
valuation allowance and adjust (reduce) the allowance when management has
determined that impairment to future realizability of the related deferred tax
assets, or a portion thereof, has been removed as provided in the criteria set
forth in SFAS No. 109.
46
The components of deferred tax assets and deferred tax liabilities as of
December 31, 2004 and 2003 were as follows (in thousands):
2004 2003
-------- ---------
Deferred tax (assets):
Tax credits and loss carryforwards $(85,453) $(104,814)
Operations restructuring -- (22,852)
Other (11,828) (52,328)
Deferred tax liabilities:
Property, plant and equipment 6,048 68,979
Intangibles 2,457 2,403
Other 1,947 21,744
-------- ---------
Net deferred tax asset before valuation allowance (86,829) $ (86,868)
-------- ---------
Valuation allowance 86,829 $ 86,868
-------- ---------
Net deferred tax asset $ -- $ --
======== =========
14. COMMITMENTS AND CONTINGENCIES
a. Litigation
Various lawsuits, claims and proceedings have been or may be instituted or
asserted against the Company arising in the ordinary course of business,
including those pertaining to product liability, labor and health related
matters, successor liability, environmental and possible tax assessments. While
the amounts claimed could be substantial, the ultimate liability cannot now be
determined because of the considerable uncertainties that exist. Therefore, it
is possible that results of operations or liquidity in a particular period could
be materially affected by certain contingencies. However, based on facts
currently available, management believes that the disposition of matters that
are currently pending or asserted will not have a material adverse effect on the
Company's financial position, liquidity or results of operations.
Brazil Joint Venture
In March 2001, Bernard Krone Industria e Comercio de Maquinas Agricolas
Ltda. ("BK") filed suit against the Company in the Fourth Civil Court of
Curitiba in the State of Parana, Brazil. This action seeks recovery of damages
plus pain and suffering. Because of the bankruptcy of BK, this proceeding is now
pending before the Second Civil Court of Bankruptcies and Creditors
Reorganization of Curitiba, State of Parana (No.232/99).
This case grows out of a joint venture agreement between BK and the
Company, which was generally intended to permit BK and the Company to market the
RoadRailer(R) trailer in Brazil and other areas of South America. When BK was
placed into the Brazilian equivalent of bankruptcy late in 2000, the joint
venture was dissolved. BK subsequently filed its lawsuit against the Company
alleging among other things that it was forced to terminate business with other
companies because of the exclusivity and non-compete clauses purportedly found
in the joint venture agreement. In its complaint, BK asserts that it has been
damaged by these alleged wrongs by the Company in the approximate amount of $8.4
million.
The Company answered the complaint in May 2001, denying any wrongdoing. The
Company believes that the claims asserted against it by BK are without merit and
intends to defend itself vigorously against those claims. The Company believes
that the resolution of this lawsuit will not have a material adverse effect on
its financial position, liquidity or future results of operations; however, at
this early stage of the proceeding, no assurance can be given as to the ultimate
outcome of the case.
Environmental
In September 2003, the Company was noticed as a potentially responsible
party (PRP) by the United States Environmental Protection Agency pertaining to
the Motorola 52nd Street, Phoenix, Arizona Superfund Site pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act. PRPs
include current and former owners and operators of facilities at which hazardous
substances were disposed of. EPA's allegation that the Company was a PRP arises
out of the operation of a former branch facility located approximately five
miles from
47
the original site. The Company does not expect that these proceedings will have
a material adverse effect on the Company's financial condition or results of
operations.
In connection with a federal environmental investigation into the Company's
former Huntsville, Tennessee manufacturing facility, the Company paid a $0.4
million fine related to two misdemeanor violations of the Clean Water Act, and
entered into a compliance agreement with the United States Environmental
Protection Agency (EPA), which was finalized in November 2004. We do not believe
that the entering into of the compliance agreement will have a material adverse
impact on the results or operations of the Company.
b. Environmental
The Company generates and handles certain material, wastes and emissions in
the normal course of operations that are subject to various and evolving
federal, state and local environmental laws and regulations.
The Company assesses its environmental liabilities on an on-going basis by
evaluating currently available facts, existing technology, presently enacted
laws and regulations as well as experience in past treatment and remediation
efforts. Based on these evaluations, the Company estimates a lower and upper
range for the treatment and remediation efforts and recognizes a liability for
such probable costs based on the information available at the time. As of
December 31, 2004, the Company had an estimated reserve of $0.5 million for
remediation activities at a branch property which is held for sale.
c. Used Trailer Restoration Program
During 1999, the Company reached a settlement with the IRS related to
federal excise tax on certain used trailers restored by the Company during 1996
and 1997. The Company has continued the restoration program with the same
customer since 1997. The customer has indemnified the Company for any potential
excise tax assessed by the IRS for years subsequent to 1997. As a result, the
Company has recorded a liability and a corresponding receivable of approximately
$6.1 and $9.0 million in the accompanying Consolidated Balance Sheets at
December 31, 2004 and 2003, respectively. During 2001, the IRS completed its
federal excise tax audit of 1999 and 1998 resulting in an assessment of
approximately $5.4 million. The Company believes it is fully indemnified for
this liability and that the related receivable is fully collectible.
d. Letters of Credit
As of December 31, 2004, the Company had standby letters of credit totaling
approximately $7.4 million issued in connection with workers compensation claims
and surety bonds.
e. Royalty Payments
The Company is obligated to make quarterly royalty payments through 2007 in
accordance with a licensing agreement related to the development of the
Company's composite plate material used on its proprietary DuraPlate(R) trailer.
The amount of the payments varies with the production volume of usable material,
but requires minimum royalties of $0.5 million annually through 2005. Annual
payments were $0.7 million, $1.1 million and $1.0 million in 2004, 2003 and
2002, respectively.
f. Used Trailer Residual Guarantees and Purchase Commitments
In connection with certain historical new trailer sale transactions, the
Company had entered into agreements to guarantee end-of-term residual value,
which contain an option to purchase the used equipment at a pre-determined
price. By policy, the Company no longer provides used trailer residual
guarantees.
48
Under these agreements, future payments which may be required as of
December 31, 2004 are as follows (in thousands):
Purchase Option Guarantee Amount
--------------- ----------------
2005 $52,464 $ 2,991
2006 -- 9,807
2007 -- 3,527
------- -------
$52,464 $16,325
======= =======
In relation to the guarantees, as of December 31, 2004 and 2003, the
Company recorded loss contingencies of $0.1 million and $1.4 million,
respectively.
g. Purchase Commitments
As part of the sale of certain assets of our aftermarket parts business, as
discussed in Footnote 5, the Company entered into a parts purchase agreement
with the buyer. As amended, the Company is required to purchase $24 million in
parts from the buyer between October 2004 and September 2006. The Company does
not believe the purchase commitment will exceed business requirements. The buyer
is subject to certain performance requirements. The Company also has $33.3
million in purchase commitments through December 2005 for aluminum to meet
production requirements.
15. SEGMENTS AND RELATED INFORMATION
a. Segment Reporting
Under the provisions of SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, the Company has two reportable segments:
manufacturing and retail and distribution. The manufacturing segment produces
and sells new trailers to the retail and distribution segment or to customers
who purchase trailers direct or through independent dealers. The retail and
distribution segment includes the sale, leasing and financing of new and used
trailers, as well as the sale of aftermarket parts and service through its
retail branch network. In addition, the retail and distribution segment includes
the sale of aftermarket parts through Wabash National Parts.
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 from operations. The Company has not
allocated certain corporate related charges such as administrative costs,
interest and income taxes from the manufacturing segment to the Company's other
reportable segment. The Company accounts for intersegment sales and transfers at
cost plus a specified mark-up. Reportable segment information is as follows (in
thousands):
49
Retail and Combined Consolidated
Manufacturing Distribution Segments Eliminations Total
------------- ------------ ---------- ------------ ------------
2004
Net sales
External customers $805,993 $235,103 $1,041,096 $ -- $1,041,096
Intersegment sales 107,685 1,975 109,660 (109,660) --
-------- -------- ---------- --------- ----------
Total net sales $913,678 $237,078 $1,150,756 $(109,660) $1,041,096
======== ======== ========== ========= ==========
Depreciation and amortization 13,357 6,084 19,441 -- 19,441
Income (loss) from operations 73,898 (2,879) 71,019 (1,810) 69,209
Reconciling items to net loss:
Interest income (129)
Interest expense 10,809
Foreign exchange gains and losses, net (463)
Loss on debt extinguishment 607
Other (income) expense (620)
Income tax expense 600
----------
Net loss 58,405
==========
Capital expenditures $ 14,240 $ 1,255 $ 15,495 $ -- $ 15,495
Assets $410,087 $185,479 $ 595,566 $(163,520) $ 432,046
2003
Net sales
External customers $620,120 $267,820 $ 887,940 $ -- $ 887,940
Intersegment sales 52,172 878 53,050 (53,050) --
-------- -------- ---------- --------- ----------
Total net sales $672,292 $268,698 $ 940,990 $ (53,050) $ 887,940
======== ======== ========== ========= ==========
Depreciation and amortization 13,843 9,945 23,788 -- 23,788
Loss from operations 27,828 (37,283) (9,455) 433 (9,022)
Reconciling items to net loss:
Interest income (406)
Interest expense 31,184
Foreign exchange gains and losses, net (5,291)
Loss on debt extinguishment 19,840
Other (income) expense 2,878
----------
Net loss (57,227)
==========
Capital expenditures $ 5,672 $ 846 $ 6,518 $ -- $ 6,518
Assets $370,325 $188,477 $ 558,802 $(161,766) $ 397,036
2002
Net sales
External customers $492,267 $327,301 $ 819,568 $ -- $ 819,568
Intersegment sales 37,793 4,188 41,981 (41,981) --
-------- -------- ---------- --------- ----------
Total net sales $530,060 $331,489 $ 861,549 $ (41,981) $ 819,568
======== ======== ========== ========= ==========
Depreciation and amortization 15,152 13,474 28,626 -- 28,626
Restructuring charge from operations 1,813 -- 1,813 -- 1,813
Loss from operations (16,566) (22,287) (38,853) 93 (38,760)
Reconciling items to net loss:
Interest income (282)
Interest expense 34,945
Foreign exchange gains and losses, net (5)
Loss on debt extinguishment 1,314
Other (income) expense (3,264)
Income tax benefit (15,278)
----------
Net loss (56,190)
==========
Capital expenditures $ 4,514 $ 1,189 $ 5,703 $ -- $ 5,703
Assets $387,263 $340,505 $ 727,768 $(162,199) $ 565,569
50
b. Geographic Information
International sales, primarily to Canadian customers, accounted for less
than 10% in each of the last three years.
At December 31, 2004 and 2003, the amount reflected in property, plant and
equipment, net of accumulated depreciation related to the Company's Canadian
subsidiary was approximately $2.0 million.
c. Product Information
The Company offers products primarily in three general categories of new
trailers, used trailers and parts and service. Other sales include leasing
revenues, interest income from finance contracts and freight. The following
table sets forth the major product category sales and their percentage of
consolidated net sales (dollars in thousands):
2004 2003 2002
------------------ ---------------- ----------------
New Trailers $ 914,468 87.8% $690,465 77.8% $563,496 68.8%
Used Trailers 52,960 5.1 64,843 7.3 92,317 11.3
Parts and Service 58,246 5.6 98,789 11.1 119,627 14.6
Other 15,422 1.5 33,843 3.8 44,128 5.3
---------- ----- -------- ----- -------- -----
Total Sales $1,041,096 100.0% $887,940 100.0% $819,568 100.0%
========== ===== ======== ===== ======== =====
d. Major Customers
In 2004, no customer represented 10% or greater of consolidated net sales.
The Company had one customer that represented 14% of consolidated net sales in
2003, and another customer that represented 11% of consolidated net sales in
2002. The Company's consolidated net sales in the aggregate to its five largest
customers were 23%, 27% and 30% of its consolidated net sales in 2004, 2003 and
2002, respectively.
16. CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for fiscal years 2004, 2003 and 2002 (dollars in thousands except per share
amounts).
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
2004
Net sales $221,597 $254,899 $277,243 $287,357
Gross profit $ 23,122 $ 36,635 $ 36,922 $ 29,107
Net income $ 6,859 $ 18,262 $ 20,294 $ 12,990
Basic earnings per share(1) $ 0.25 $ 0.67 $ 0.74 $ 0.44
Diluted earnings per share(1) $ 0.23 $ 0.56 $ 0.62 $ 0.39
2003
Net sales $222,508 $230,231 $215,450 $219,751
Gross profit (loss) $ 23,166 $ (3,855) $ 17,012 $ 16,154
Net income (loss) $ 1,430 $(27,268)(2) $(29,641)(3) $ (1,748)(4)
Basic and diluted loss per
share(1) $ 0.05 $ (1.07) $ (1.16) $ (0.08)
2002
Net sales $161,952 $210,251 $241,474 $205,891
Gross profit $ 519 $ 7,310 $ 22,684 $ 13,299
Net loss $(14,589) $(21,677) $ (8,319) $(11,605)
Basic and diluted loss per
share(1) $ (0.65) $ (0.96) $ (0.37) $ (0.46)
(1) Earnings (loss) per share are computed independently for each of the
quarters presented. Therefore, the sum of the quarterly earnings per share
may differ from annual earnings per share due to rounding.
(2) The second quarter 2003 results include a $28.5 million loss on asset
impairment, as discussed in Footnote 5.
(3) The third quarter 2003 results include an $18.9 million loss on debt
extinguishment, related to its debt refinancing.
(4) The fourth quarter 2003 results include a $4.1 million loss on the sale of
a large portion of the Company's finance contracts.
51
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A--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 (Exchange Act)) were effective as of
December 31, 2004.
Changes in Internal Controls
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 fourth quarter of fiscal 2004 that have materially affected or are
reasonably likely to materially affect the Company's internal control over
financial reporting.
Report of Management on Internal Control Over Financial Reporting
The management of Wabash National Corporation (the Company), is responsible
for establishing and maintaining adequate internal control over financial
reporting. The Company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with U.S. generally accepted accounting principles. Internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of the financial statements in accordance with U.S. generally
accepted accounting principles, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of management and
directors of the Company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of the Company's assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies and procedures may deteriorate.
Management assessed the effectiveness of the Company's internal control
over financial reporting as of December 31, 2004, based on criteria for
effective internal control over financial reporting described in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on this assessment, we
have concluded that internal control over financial reporting is effective as of
December 31, 2004.
Ernst & Young LLP, an Independent Registered Public Accounting Firm, has
audited the Company's consolidated financial statements and has issued an
attestation report on management's assessment of the Company's internal control
over financial reporting which appears on the following page.
William P. Greubel President and Chief Executive Officer
Robert J. Smith Senior Vice President and Chief Financial Officer
February 28, 2005
52
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Wabash National Corporation
We have audited management's assessment, included in the accompanying
Report of Management on Internal Control over Financial Reporting, that Wabash
National Corporation maintained effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Wabash National
Corporation's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Wabash National Corporation
maintained effective internal control over financial reporting as of December
31, 2004, is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, Wabash National Corporation maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2004, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of Wabash National Corporation as of December 31, 2004 and 2003, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2004 of
Wabash National Corporation and our report dated February 28, 2005 expressed an
unqualified opinion thereon.
ERNST & YOUNG LLP
Indianapolis, Indiana
February 28, 2005
53
PART III
ITEM 10--EXECUTIVE OFFICERS OF THE REGISTRANT
The Company hereby incorporates by reference the information contained
under the heading "Election of Directors" from its definitive Proxy Statement to
be delivered to stockholders of the Company in connection with the 2004 Annual
Meeting of Stockholders to be held May 12, 2005.
The following are the executive officers of the Company:
NAME AGE POSITION
---- --- --------
William P. Greubel 53 President, Chief Executive Officer and Director
Richard J. Giromini 51 Executive Vice President and Chief Operating Officer
Rodney P. Ehrlich 59 Senior Vice President - Chief Technology Officer
Brent A. Larson 39 Senior Vice President - Sales and Marketing
Timothy J. Monahan 52 Senior Vice President - Human Resources
Robert J. Smith 58 Senior Vice President - Chief Financial Officer
Jerry R. Linzey 41 Senior Vice President - Manufacturing
William P. Greubel. Mr. Greubel has been President, Chief Executive Officer
and Director of the Company since May 2002. As a Director he also serves on the
Executive Committee of the Board. Mr. Greubel was a Director and Chief Executive
Officer of Accuride Corporation, a manufacturer of wheels for trucks and
trailers, from 1998 until May 2002 and served as President of Accuride
Corporation from 1994 to 1998. Previously, Mr. Greubel was employed by
AlliedSignal Corporation from 1974 to 1994 in a variety of positions of
increasing responsibility, most recently as Vice President and General Manager
of the Environmental Catalysts and Engineering Plastics business units.
Richard J. Giromini. Mr. Giromini was promoted to Executive Vice President
and Chief Operation Officer on February 28, 2005. He had been Senior Vice
President - Chief Operating Officer since joining the Company on July 15, 2002.
He has also served as President and a Director of Wabash National Trailer
Centers, Inc. since January 2004. Prior to joining Wabash, Mr. Giromini spent
his entire career in the automotive industry. Most recently, Mr. Giromini was
with Accuride Corporation from April 1998 to July 2002, where he served in
capacities as Senior Vice President - Technology and Continuous Improvement;
Senior Vice President and General Manager - Light Vehicle Operations; and
President and CEO of AKW LP. Previously, Mr. Giromini was employed by ITT
Automotive, Inc. from 1996 to 1998 serving as the Director of Manufacturing.
Rodney P. Ehrlich. Mr. Ehrlich has been Senior Vice President - Chief
Technology Officer of the Company since January 2004. From 2001-2003, Mr.
Ehrlich was Senior Vice President of Product Development. Mr. Ehrlich has been
in charge of the Company's engineering operations since the Company's founding.
Brent A. Larson. Mr. Larson has been Senior Vice President - Sales since
March 2003. From December 2001 until February 2003, Mr. Larson was our Vice
President - Sales. Prior to that, Mr. Larson was Senior Vice President and owner
of a Canadian trailer distributorship, Breadner Trailers Ltd., for over seven
years. Prior to that, Mr. Larson was Account Executive, Large Accounts for IBM
Corporation for over eight years.
Timothy J. Monahan. Mr. Monahan has been Senior Vice President - Human
Resources since joining the Company on October 15, 2003. Prior to that, Mr.
Monahan was with Textron Fastening Systems from 1999 to October 2003 where he
served as Vice President - Human Resources. Previously, Mr. Monahan served as
Vice President - Human Resources at Beloit Corporation. Mr. Monahan serves on
the board of directors of North American Tool Corporation.
Robert J. Smith. Mr. Smith was appointed Senior Vice President - Chief
Financial Officer in October 2004, after serving as our Acting Chief Financial
Officer since June 2004, and our Vice President and Controller since joining us
in March 2003. Before joining us, Mr. Smith served from 2000 to 2001 as Director
of Finance for KPMG Consulting, Inc., now BearingPoint, Inc.; from 1993 to 2000
with Great Lakes Chemical Corp. (serving from 1998 to 2000 as vice president and
controller) and from 1983 to 1993 with Olin Corporation, including as chief
financial officer for several of its divisions.
Jerry R. Linzey. Mr. Linzey was promoted to Senior Vice President -
Manufacturing on March 1, 2005. He had been Vice President, Manufacturing since
September 2002. Mr. Linzey has been Vice President, Continuous Improvement
since joining us on June 6, 2002. Prior to that, Mr. Linzey was Director, North
American Operations, for Stanley Fastening Systems. Previously, Mr. Linzey was
employed by Delphi Automotive Systems from 1985 to 2000 in manufacturing,
engineering and quality positions of increasing responsibility.
54
Code of Ethics
As part of our system of corporate governance, our Board of Directors has
adopted a code of ethics that is specifically applicable to our Chief Executive
Officer and Senior Financial Officers. This code of ethics is available on our
website at www.wabashnational.com/about.
ITEM 11--EXECUTIVE COMPENSATION
The Company hereby incorporates by reference the information contained
under the heading "Compensation" from its definitive Proxy Statement to be
delivered to the stockholders of the Company in connection with the 2005 Annual
Meeting of Stockholders to be held May 12, 2005.
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company hereby incorporates by reference the information contained
under the heading "Beneficial Ownership of Common Stock" from its definitive
Proxy Statement to be delivered to the stockholders of the Company in connection
with the 2005 Annual Meeting of Stockholders to be held on May 12, 2005.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company hereby incorporates by reference the information contained
under the headings "Related Party Transactions" and "Equity Compensation Plan
Information" from its definitive Proxy Statement to be delivered to the
stockholders of the Company in connection with the 2005 Annual Meeting of
Stockholders to be held on May 12, 2005.
ITEM 14--PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by Item 14 of this form and the audit committee's
pre-approval policies and procedures regarding the engagement of the principal
accountant are incorporated herein by reference from its definitive Proxy
Statement to be delivered to the stockholders of the Company in connection with
the 2005 Annual Meeting of Stockholders to be held on May 12, 2005 under the
caption "Audit Committee Report - Independent Auditor Fees."
PART IV
ITEM 15--EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements: The Company has included all required financial
statements in Item 8 of this Form 10-K. The financial statement schedules
have been omitted as they are not applicable or the required information is
included in the Notes to the consolidated financial statements.
(b) Exhibits: The following exhibits are filed with this Form 10-K or
incorporated herein by reference to the document set forth next to the
exhibit listed below:
2.01 Purchase Agreement dated March 31, 1997, as amended (1)
2.02 Asset Purchase Agreement dated July 22, 2003 (14)
2.03 Amendment No. 1 to the Asset Purchase Agreement dated
September 19, 2003 (14)
3.01 Certificate of Incorporation of the Company (2)
3.02 Certificate of Designations of Series A Junior Participating Preferred
Stock (2)
3.03 Amended and Restated By-laws of the Company (9)
4.01 Specimen Stock Certificate (7)
4.02 Rights Agreement between the Company and Harris Trust and Savings Bank
as Rights Agent dated December 4, 1995 (2)
4.03 First Amendment to Shareholder Rights Agreement dated October 21, 1998
(3)
4.04 Second Amendment to Shareholder Rights Agreement dated December 18,
2000 (5)
4.05 Indenture for the 3.25% Convertible Senior Notes due August 1, 2008,
between the registrant, as issuer, and Wachovia Bank, National
Association, as Trustee, dated as of August 1, 2003 (13)
4.06 Registration Rights Agreement for 3.25% Convertible Senior Notes due
August 1, 2008, dated August 1, 2003 (13)
10.01# 1992 Stock Option Plan (2)
55
10.02 Indemnification Agreement between the Company and Roadway Express, Inc.
(4)
10.03# 2000 Stock Option Plan (6)
10.04# Consulting and Non-Competition Agreement dated July 16, 2001 between
Donald J. Ehrlich and Wabash National Corporation (7)
10.05# 2001 Stock Appreciation Rights Plan (8)
10.06# Executive Employment Agreement dated April 2002 between the Company and
William P. Greubel (9)
10.07# Executive Employment Agreement dated June 28, 2002 between the Company
and Richard J. Giromini (10)
10.08# Nonqualified Stock Option Agreement dated July 15, 2002 between the
Company and Richard J. Giromini (10)
10.09# Restricted Stock Agreement between the Company and Richard J. Giromini
(10)
10.10# Executive Employment Agreement dated June 14, 2002 between the Company
and Mark R. Holden (10)
10.11# Nonqualified Stock Option Agreement dated May 6, 2002 between the
Company and Mark R. Holden (10)
10.12# Non-qualified Stock Option Agreement between the Company and William P.
Greubel (10)
10.13# First Amendment to Executive Employment Agreement dated December 4,
2002 between the Company and William P. Greubel (11)
10.14# Restricted Stock Agreement between the Company and William P. Greubel
(11)
10.15# Second Amendment to Executive Employment Agreement dated June 2, 2003
between the Company and William P. Greubel (12)
10.16 Loan and Security Agreement dated September 23, 2003 (15)
10.17 Amendment No. 1 to Loan and Security Agreement dated October 23, 2003
(15)
10.18 Amendment No. 3 to Loan and Security Agreement dated December 11, 2003
(15)
10.19# 2004 Stock Incentive Plan (16)
10.20 Waiver and Amendment No. 4 to Loan and Security Agreement dated
September 9, 2004 (17)
10.21# Form of Associate Stock Option Agreements under the 2004 Stock
Incentive Plan (17)
10.22# Form of Associate Restricted Stock Agreements under the 2004 Stock
Incentive Plan (17)
10.23# Form of Executive Stock Option Agreements under the 2004 Stock
Incentive Plan (17)
10.24# Form of Executive Restricted Stock Agreements under the 2004 Stock
Incentive Plan (17)
10.25 Amended and Restated Loan and Security Agreement dated December 30,
2004 (18)
21.00 List of Significant Subsidiaries (19)
23.01 Consent of Ernst & Young LLP (19)
31.01 Certification of Principal Executive Officer (19)
31.02 Certification of Principal Financial Officer (19)
32.01 Written Statement of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. Section 1350) (19)
# Management contract or compensatory plan.
(1) Incorporated by reference to the Registrant's Form 8-K filed on May 1,
1997
(2) Incorporated by reference to the Registrant's Registration Statement
on Form S-1 (No. 33-42810) or the Registrant's Registration Statement
on Form 8-A filed December 6, 1995 (item 3.02 and 4.02)
(3) Incorporated by reference to the Registrant's Form 8-K filed on
October 26, 1998
(4) Incorporated by reference to the Registrant's Form 10-K for the year
ended December 31, 1999
(5) Incorporated by reference to the Registrant's Amended Form 8-A filed
January 18, 2001
(6) Incorporated by reference to the Registrant's Form 10-Q for the
quarter ended March 31, 2001
(7) Incorporated by reference to the Registrant's Form 10-Q for the
quarter ended June 30, 2001
(8) Incorporated by reference to the Registrant's Form 10-Q for the
quarter ended September 30, 2001
(9) Incorporated by reference to the Registrant's Form 10-Q for the
quarter ended March 31, 2002
(10) Incorporated by reference to the Registrant's Form 10-Q for the
quarter ended June 30, 2002
(11) Incorporated by reference to the Registrant's Form 10-K for the year
ended December 31, 2002
(12) Incorporated by reference to the Registrant's Form 10-Q for the
quarter ended June 30, 2003
(13) Incorporated by reference to the Registrant's registration statement
Form S-3 (Registration No. 333-109375) filed on October 1, 2003
(14) Incorporated by reference to the Registrant's Form 8-K filed on
September 29, 2003
(15) Incorporated by reference to the Registrant's Form 10-K/A Amendment
No. 3 for the year ended December 31, 2003
(16) Incorporated by reference to the Registrant's Form 10-Q filed on
August 9, 2004
(17) Incorporated by reference to the Registrant's Form 10-Q filed on
October 27, 2004
(18) Incorporated by reference to the Registrant's Form 8-K filed on
January 5, 2005
(19) Filed herewith
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
March 3, 2005 By: /s/ Robert J. Smith
------------------------------------------
Robert J. Smith
Senior Vice President and Chief Financial
Officer
(Principal Financial Officer and Principal
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the date indicated.
Date Signature and Title
- ---- -------------------
March 3, 2005 By: /s/ William P. Greubel
------------------------------------------
William P. Greubel
President and Chief Executive Officer and
Director
(Principal Executive Officer)
March 3, 2005 By: /s/ Robert J. Smith
------------------------------------------
Robert J. Smith
Senior Vice President and Chief Financial
Officer
(Principal Financial Officer and Principal
Accounting Officer)
March 3, 2005 By: /s/ John T. Hackett
------------------------------------------
John T. Hackett
Chairman of the Board of Directors
March 3, 2005 By: /s/ David C. Burdakin
------------------------------------------
David C. Burdakin
Director
March 3, 2005 By: /s/ Ludvik F. Koci
------------------------------------------
Ludvik F. Koci
Director
March 3, 2005 By: /s/ Martin C. Jischke
------------------------------------------
Dr. Martin C. Jischke
Director
March 3, 2005 By: /s/ Stephanie K. Kushner
------------------------------------------
Stephanie K. Kushner
Director
March 3, 2005 By: /s/ Ronald L. Stewart
------------------------------------------
Ronald L. Stewart
Director
March 3, 2005 By: /s/ Larry J. Magee
------------------------------------------
Larry J. Magee
Director
57