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MarketScreener Homepage  >  Equities  >  Nyse  >  Wabash National Corporation    WNC

WABASH NATIONAL CORPORATION

(WNC)
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WABASH NATIONAL : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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07/29/2020 | 05:06pm EDT
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report of Wabash National Corporation (together with its
subsidiaries, the "Company," "Wabash," "we," "our," or "us") contains
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934 (the "Exchange Act"). Forward-looking statements
may include the words "may," "will," "estimate," "intend," "continue,"
"believe," "expect," "plan" or "anticipate" and other similar words. Our
"forward-looking statements" include, but are not limited to, statements
regarding:
?our business plan;
?our ability to effectively manage and operate our business given the ongoing
uncertainty caused by the COVID-19 pandemic;
?our ability to effectively integrate Supreme and realize expected synergies and
benefits from the Supreme acquisition;
?our expected revenues, income or loss;
?our ability to manage our indebtedness;
?our strategic plan and plans for future operations;
?financing needs, plans and liquidity, including for working capital and capital
expenditures;
?our ability to achieve sustained profitability;
?reliance on certain customers and corporate relationships;
?availability and pricing of raw materials, including the impact of tariffs or
other international trade developments;
?availability of capital and financing;
?dependence on industry trends;
?the outcome of any pending litigation or notice of environmental dispute;
?export sales and new markets;
?engineering and manufacturing capabilities and capacity, including our ability
to attract and retain qualified personnel;
?our ability to develop and commercialize new products;
?acceptance of new technologies 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 Quarterly Report. Important risks and factors that
could cause our actual results to be materially different from our expectations
include the factors that are disclosed in "Part II, Item 1A-Risk Factors"
included herein and in "Item 1A-Risk Factors" in our Annual Report on Form 10-K
for the year ended December 31, 2019. Each forward-looking statement contained
in this Quarterly Report reflects our management's view only as of the date on
which that forward-looking statement was made. We are not obligated to update
forward-looking statements or publicly release the result of any revisions to
them to reflect events or circumstances after the date of this Quarterly Report
or to reflect the occurrence of unanticipated events, except as required by law.
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COVID-19 Update
In March 2020, a global pandemic was declared by the World Health Organization
("WHO") related to COVID-19. This pandemic continues to create significant
uncertainties and disruption in the global economy. We are closely monitoring
the most recent developments regarding the pandemic, and we continue to remain
focused on the health and safety of our employees, as well as the health of our
business, both in the short and long-term. We monitor, evaluate, and manage our
operating plans in light of the most recent developments on an ongoing basis.
Further, we are adhering to best-practice safe hygiene guidelines by recognized
health experts, like the WHO, as well as any applicable government mandates
related to the COVID-19 pandemic. We remain focused on business continuity and
ensuring our facilities remain operational where safe and appropriate to do so.
The safety and well-being of our employees has, and will remain, our highest
priority. In early March, we assembled a pandemic response team to manage the
changes necessary to adapt to the rapidly-changing environment. This response
team continues to meet regularly with our senior leadership team to provide
updates and continuously monitor the most recent developments. Actions we have
taken to protect our employees include, but are not limited to:
?Within our factories, we are providing personal protective equipment for our
employees, conducting daily health monitoring, cleaning more frequently, and
have modified our operations to embrace social distancing where possible.
?Within our office environments, a large number of our employees remain working
remotely. This allows ample space for those coming in to the office to spread
out and distance effectively.
?We are utilizing daily health screenings and self-declaration for employees,
contractors, and visitors, and we are encouraging employees with symptoms to
stay home. In addition, senior leadership approval is required for all travel as
we are making concerted efforts to avoid "hotspots" throughout the country.
?Suspended all Company-sponsored large events, community use of our facilities,
and other forms of group gatherings involving external visitors.
?Implemented pandemic continuity plans.
We have also extended several actions implemented to address the COVID-19 impact
to our business, including a temporary freeze on share repurchases, reductions
to discretionary spending, business-related travel restrictions, elimination of
non-essential investments, and re-prioritization of capital expenditures
(including maintaining our assets to capitalize on any economic and/or industry
upswings). In addition, on May 3, 2020, we completed a two-week idling of
operations and Company-wide furlough that began on April 20, 2020. We completed
an additional furlough during the second quarter of 2020, which included an
idling of operations from June 29, 2020 through July 3, 2020. We continue to
monitor the rapidly evolving situation and guidance from international and
domestic authorities, including federal, state and local public health
authorities, and may take additional actions based on their requirements and
recommendations.
While the global market downturn and overall impacts on our operations are
expected to be temporary, the duration of the impacts cannot be estimated at
this time. Should the disruptions continue for an extended period of time or
worsen, the impact on our production, supply chain, and overall business could
have a material adverse effect on our results of operations, financial
condition, and cash flows. In addition, see "Part II, Item 1A - Risk Factors,"
included herein for an update to our risk factors regarding risks associated
with the COVID-19 pandemic.
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Results of Operations
The following table sets forth certain operating data as a percentage of net
sales for the three and six months ended June 30, 2020 and 2019:
                                                                                                                      Six Months Ended June
                                                   Three Months Ended June 30,                                                 30,
                                                  2020                     2019                    2020                    2019
Net sales                                           100.0  %                 100.0  %                 100.0  %                100.0  %
Cost of sales                                        89.9  %                  86.0  %                  90.2  %                 86.5  %
Gross profit                                         10.1  %                  14.0  %                   9.8  %                 13.5  %

General and administrative expenses                   5.8  %                   4.2  %                   6.3  %                  4.9  %
Selling expenses                                      1.4  %                   1.4  %                   1.8  %                  1.4  %
Amortization of intangibles                           1.6  %                   0.8  %                   1.5  %                  0.9  %
Other operating expenses                             (0.5  %)                    -  %                  14.5  %                    -  %
Income (loss) from operations                         1.8  %                   7.6  %                 (14.3) %                  6.3  %

Interest expense                                     (1.7  %)                 (1.1  %)                 (1.7) %                 (1.2) %
Other, net                                            0.1  %                   0.2  %                   0.1  %                  0.1  %
Income (loss) before income tax expense
(benefit)                                             0.2  %                   6.7  %                 (15.9) %                  5.2  %

Income tax expense (benefit)                          0.2  %                   1.7  %                  (1.2) %                  1.2  %
Net (loss) income                                     0.0  %                   5.0  %                 (14.7) %                  4.0  %


For the three-month period ended June 30, 2020, we recorded net sales of $339.2
million compared to $626.1 million in the prior year period. Net sales for the
three-month period ended June 30, 2020 decreased $286.9 million, or 45.8%,
compared to the prior year period, due primarily to 43.7% and 62.4% decreases in
new trailer unit and truck body unit shipments, respectively, which contributed
to decreases in sales within each of our reportable segments. The decreases in
sales and shipments compared to the prior year period are primarily attributable
to overall softer demand in the industry, which was worsened by the ongoing
impacts of COVID-19, and has reduced demand for our products. Gross profit
margin decreased to 10.1% in the second quarter of 2020 compared to 14.0% in the
prior year period driven by fixed costs as a percentage of sales increasing
year-over-year. While overall industry demand during the second quarter of 2020
was softer than anticipated and expected shipment and production levels for the
remainder of 2020 have decreased from 2019 estimates, we continue to believe we
are well-positioned to navigate this uncertain environment as we have prepared
for an eventual downturn in the industry over the last two years. We are focused
on the continued pursuit to implement changes to our processes and cost
structure given the current environment and have taken actions at all levels of
the Company to contain cost and preserve the strength of our balance sheet.
For the three-month period ended June 30, 2020, selling, general and
administrative expenses declined $10.5 million as compared to the same period in
2019. The decrease compared to the same period in the prior year was primarily
attributable to lower employee-related costs, including employee incentive
programs, partially offset by severance-related expenses, as well as lower
travel and marketing-related expenses. This decrease was due, in part, to
COVID-19 related items that impacted our employee incentive programs, as well as
the cost containment measures we have implemented. As a percentage of net sales,
selling, general and administrative expenses increased to 7.2% in the second
quarter of 2020 as compared to 5.6% in the prior year period.
Our management team continues to be focused on increasing overall stockholder
value by optimizing our manufacturing operations to match the current demand
environment, implementing cost savings initiatives and lean manufacturing
techniques, strengthening our capital structure, developing innovative products
that enable our customers to succeed, improving earnings, and continuing
diversification of the business into higher margin opportunities that leverage
our intellectual and process capabilities.
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Three Months Ended June 30, 2020 Compared with the Three Months Ended June 30,
2019
Net Sales
Net sales in the second quarter of 2020 decreased $286.9 million, or 45.8%,
compared to the second quarter of 2019. By business segment, prior to the
elimination of intercompany sales, sales and related units sold were as follows
(dollars in thousands):
                                    Three Months Ended June 30,                                 Change
                                    2020                      2019           Amount            %
                                           (prior to elimination of intersegment sales)
Sales by Segment
Commercial Trailer Products   $     232,254$ 400,864$ (168,610)       (42.1  %)
Diversified Products                 63,951                  97,026          (33,075)       (34.1  %)
Final Mile Products                  50,832                 134,817          (83,985)       (62.3  %)
Eliminations                         (7,884)                 (6,654)          (1,230)
Total                         $     339,153$ 626,053$ (286,900)       (45.8  %)

New Trailers                                  (units)
Commercial Trailer Products           8,000                  14,250           (6,250)       (43.9  %)
Diversified Products                    400                     750             (350)       (46.7  %)
Total                                 8,400                  15,000           (6,600)       (44.0  %)

Used Trailers                                 (units)
Commercial Trailer Products             185                       -              185        100.0  %
Diversified Products                     35                      25               10         40.0  %
Total                                   220                      25              195        780.0  %


Commercial Trailer Products segment sales, prior to the elimination of
intersegment sales, were $232.3 million for the second quarter of 2020, a
decrease of $168.6 million, or 42.1%, compared to the second quarter of 2019.
New trailers shipped during the second quarter of 2020 totaled 8,000 trailers
compared to 14,250 trailers in the prior year period, a decrease of 43.9%. The
decrease in net sales is partially attributable to the continuing impacts of
COVID-19, which have reduced demand for our products. Used trailer sales
increased $2.3 million compared to the prior year period primarily due to a 185
unit increase in used trailer shipments compared to the prior year period.
Diversified Products segment sales, prior to the elimination of intersegment
sales, were $64.0 million for the second quarter of 2020, a decrease of $33.1
million, or 34.1%, compared to the second quarter of 2019. Equipment sales
decreased $5.7 million, or 31.6%, compared to the prior year period. New trailer
shipments for the second quarter of 2020 totaled 400 units compared to 750 units
in the prior year period. While new trailer sales decreased $21.1 million, or
42.9%, from the prior year period, revenue per new trailer unit increased
approximately 2.6%. Sales of our parts and service product offerings totaled
$14.3 million for the second quarter of 2020, a decrease of $8.5 million or
37.4% as compared to the prior year period. The decreases in our equipment sales
and sales from our parts and service offerings are in part attributable to the
impacts of COVID-19, which have caused reduced demand for our products.
Final Mile Products segment sales, prior to the elimination of intersegment
sales, were $50.8 million in the second quarter of 2020, a decrease of $84.0
million, or 62.3%, compared to the second quarter of 2019. New truck body sales
decreased $80.2 million, or 62.7%, and parts and service revenue decreased $3.8
million, or 54.5%, compared to the prior year period. The decrease in truck body
sales is primarily due to a 62.5% decrease in truck body unit shipments in the
second quarter of 2020 compared to the prior year period. The overall decrease
in net sales compared to the prior year period is attributable to softer demand
in this market segment and decreased chassis availability from our suppliers,
both of which were worsened by the impacts of the ongoing COVID-19 pandemic.
Cost of Sales
Cost of sales was $304.8 million in the second quarter of 2020, a decrease of
$233.6 million, or 43.4%, compared to the prior year period. Cost of sales is
comprised of material costs, a variable expense, and other manufacturing costs,
comprised of both fixed and variable expenses, including direct and indirect
labor, outbound freight, and overhead expenses.
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Commercial Trailer Products segment cost of sales was $209.9 million in the
second quarter of 2020, a decrease of $144.1 million, or 40.7%, compared to the
prior year period. The decrease was primarily driven by an overall decrease in
manufacturing costs as a result of lower sales volumes, including a $113.4
million decrease in materials costs and a $30.7 million decrease in other
manufacturing costs. The lower sales volumes were due in part to the ongoing
COVID-19 pandemic.
Diversified Products segment cost of sales was $53.2 million in the second
quarter of 2020, a decrease of $23.7 million, or 30.8%, compared to the prior
period. The decrease in cost of sales was primarily due to lower sales volumes,
which resulted in lower materials costs of $15.5 million and other manufacturing
costs of $8.2 million. The lower sales volumes were partially driven by the
ongoing COVID-19 pandemic.
Final Mile Product segment cost of sales was $48.9 million in the second quarter
of 2020, a decrease of $64.7 million, or 57.0%, compared to the prior period.
The decrease was primarily driven by a $48.1 million decrease in materials costs
and a $16.6 million decrease in other manufacturing costs related to decreased
sales volumes. The lower sales volumes were partially attributable to the
ongoing COVID-19 pandemic.
Gross Profit
Gross profit was $34.3 million in the second quarter of 2020, a decrease of
$53.3 million from the prior year period. Gross profit as a percentage of net
sales was 10.1% for the second quarter of 2020, compared to 14.0% for the same
period in 2019. Gross profit by segment was as follows (dollars in thousands):
                                     Three Months Ended June 30,                                Change
                                    2020                       2019           Amount           %
Gross Profit by Segment
Commercial Trailer Products   $      22,392$ 46,906$ (24,514)       (52.3  %)
Diversified Products                 10,761                   20,123          (9,362)       (46.5  %)
Final Mile Products                   1,963                   21,289         (19,326)       (90.8  %)
Corporate and Eliminations             (795)                    (668)           (127)
Total                         $      34,321$ 87,650$ (53,329)       (60.8  %)


Commercial Trailer Products segment gross profit was $22.4 million for the
second quarter of 2020 compared to $46.9 million for the second quarter of 2019.
Gross profit, prior to the elimination of intersegment sales, as a percentage of
net sales, was 9.6% in the second quarter of 2020 compared to 11.7% in the
comparative 2019 period. We made purposeful efforts to mitigate lower sales
volumes due to the ongoing COVID-19 pandemic by decreasing our fixed costs,
including Company-wide furloughs, headcount reductions, and other cost
containment measures. However, fixed costs did not proportionately decrease with
the lower sales volumes experienced during the second quarter of 2020.
Diversified Products segment gross profit was $10.8 million for the second
quarter of 2020 compared to $20.1 million in the same quarter of 2019. Gross
profit, prior to the elimination of intersegment sales, as a percentage of net
sales, was 16.8% in the second quarter of 2020 compared to 20.7% in the 2019
period. While fixed costs decreased between periods as a result of our cost
containment initiatives in response to COVID-19 impacts, the decreases in gross
profit and gross profit as a percentage of net sales compared to the prior year
period were primarily driven by certain fixed manufacturing costs that did not
decrease at the same rate as the decrease in sales volumes.
Final Mile Products segment gross profit was $2.0 million for the second quarter
of 2020 compared to $21.3 million in the same quarter of 2019. Gross profit,
prior to the elimination of intersegment sales, as a percentage of net sales,
was 3.9% in the second quarter of 2020 compared to 15.8% in the 2019 period.
Similar to the two segments above, the decreases in gross profit and gross
profit as a percentage of net sales were primarily attributable to manufacturing
costs not proportionately decreasing with the decrease in sales volumes.
General and Administrative Expenses
General and administrative expenses for the second quarter of 2020 decreased
$6.9 million, or 25.9%, from the prior year period. The decrease from the prior
year period was largely due to a decrease of approximately $5.2 million in
employee-related costs, including benefits and incentive programs, partially
offset by an increase in severance-related expense. Additional decreases were
attributable to lower professional service expenses and travel-related costs.
These overall decreases were due in part to the impacts of the ongoing COVID-19
pandemic and our implementation of cost containment measures. As a percentage of
net sales, general and administrative expenses were 5.8% for the second quarter
of 2020 compared to 4.2% for the second quarter of 2019.
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Selling Expenses
Selling expenses were $4.9 million in the second quarter of 2020, a decrease of
$3.6 million, or 42.5%, compared to the prior year period. The decrease was due
to a decrease of approximately $2.3 million in employee-related costs, including
benefits and incentive programs. Additional decreases relate to lower
travel-related costs and advertising and promotion expenses. These overall
decreases were due in part to the impacts of the continuing COVID-19 pandemic
and our implementation of cost containment measures. As a percentage of net
sales, selling expenses were 1.4% for both the second quarter of 2020 and the
second quarter of 2019.
Amortization of Intangibles
Amortization of intangibles was $5.5 million for the second quarter of 2020
compared to $5.1 million in the prior year period. Amortization of intangibles
for both periods was the result of expenses recognized for intangible assets
recorded from the acquisitions of Walker in May 2012, certain assets of Beall in
February 2013, and Supreme in September 2017.
Impairment and Other, Net
Impairment and other, net of $(1.7) million in the second quarter of 2020
compared to $0.0 million in the second quarter of 2019 relates to the net gain
on sale of property, plant, and equipment assets for proceeds totaling
$2.7 million. We recognized a net gain on sale of approximately $1.7 million,
which is included in Impairment and other, net in the Condensed Consolidated
Statements of Operations.
Other Income (Expense)
Interest expense for the second quarter of 2020 totaled $5.9 million compared to
$7.0 million in the second quarter of 2019. Interest expense relates to interest
and non-cash accretion charges on our Term Loan Credit Agreement, Senior Notes,
and Revolving Credit Agreement. The decrease from the prior year period is
primarily due to our voluntary prepayments totaling approximately $50.0 million
against our Term Loan Credit Agreement throughout 2019 and the significant
decrease in LIBOR between periods.
Other, net for the second quarter of 2020 represented income of $0.3 million as
compared to income of $1.1 million for the prior year period. Income for the
current year and prior year period is primarily related to interest income.
Income Taxes
We recognized income tax expense of $0.5 million in the second quarter of 2020
compared to $10.6 million for the same period in the prior year. The effective
tax rate for this period was 136.3% compared to 25.6% for the same period in the
prior year. Certain provisions of the CARES Act had a significant impact on the
expected annual effective tax rate, income tax payable, and deferred income tax
positions of the Company for the three months ended June 30, 2020. For the
second quarter of 2020, these effective tax rates differ from the US Federal
statutory rate of 21% primarily due to the impact of state and local taxes,
provisions related to the CARES Act, and discrete items incurred related to
stock-based compensation. For the second quarter of 2019, these effective tax
rates differ from the US Federal statutory rate of 21% primarily due to the
impact of state and local taxes and recognition of excess tax benefits on
share-based compensation.
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Six Months Ended June 30, 2020 Compared with the Six Months Ended June 30, 2019Net Sales
Net sales in the first six months of 2020 decreased $433.0 million, or 37.4%,
compared to the first six months of 2019. By business segment, prior to the
elimination of intercompany sales, sales and related units sold were as follows
(dollars in thousands):
                                   Six Months Ended June 30,                              Change
                                    2020                2019            Amount            %
                                        (prior to elimination of intersegment sales)
Sales by Segment
Commercial Trailer Products   $      483,229$   741,909$ (258,680)       (34.9) %
Diversified Products                 146,909           196,674          (49,765)       (25.3) %
Final Mile Products                  111,102           235,666         (124,564)       (52.9) %
Eliminations                         (15,013)          (15,022)               9
Total                         $      726,227$ 1,159,227$ (433,000)       (37.4) %

New Trailer Shipments                       (units)
Commercial Trailer Products           16,525            26,650          (10,125)       (38.0) %
Diversified Products                   1,050             1,450             (400)       (27.6) %
Total                                 17,575            28,100          (10,525)       (37.5) %

Used Trailer Shipments                      (units)
Commercial Trailer Products              220                50              170        340.0  %
Diversified Products                      70                50               20         40.0  %
Total                                    290               100              190        190.0  %


Commercial Trailer Products segment sales prior to the elimination of
intersegment sales were $483.2 million for the first six months of 2020, a
decrease of $258.7 million, or 34.9%, compared to the first six months of 2019.
Trailers shipped during the first six months of 2020 totaled 16,525 trailers
compared to 26,650 trailers in the prior year period, a 38.0% decrease. The
decrease in net sales is partially attributable to the ongoing impacts of
COVID-19, which have reduced demand for our products. Despite these headwinds,
revenue per new trailer unit increased approximately 3.4% compared to the prior
year period. Parts and service revenue for the six-month period of 2020 totaled
$18.8 million, a decrease of $1.3 million, or 6.4%, from the prior year period.
Used trailer sales increased $2.4 million compared to the prior year period
primarily due to a 170 unit increase in used trailer shipments in the first six
months of 2020 compared to the prior year period.
Diversified Products segment sales prior to the elimination of intersegment
sales were $146.9 million for the first six months of 2020, a decrease of $49.8
million, or 25.3%, compared to the same period of 2019. Trailers shipped during
the first six months of 2020 totaled 1,050 trailers compared to 1,450 trailers
in the prior year period, a 27.6% decrease. The decrease in new trailer
shipments compared to the prior year period resulted in a $23.6 million decrease
in sales. However, revenue per new trailer unit in the current year period
increased approximately 6.4%. Compared to the prior year period, equipment sales
decreased $10.7 million, or 30.3%, while parts and service sales decreased $18.0
million, or 35.1%. The decreases in sales in this market segment are in part
attributable to the ongoing impacts of COVID-19, which have caused reduced
demand for our products.
Final Mile Products segment sales, prior to the elimination of intersegment
sales, were $111.1 million for the first six months of 2020, a decrease of
$124.6 million, or 52.9% from the first six months of 2019. Decreased truck body
unit shipments of 54.3% drove a $120.0 million decrease in new truck body sales
compared to the prior year period. The overall decrease in net sales compared to
the prior year period is attributable to softer demand in this market segment
and decreased chassis availability from our suppliers, both of which were
worsened by the impacts of the ongoing COVID-19 pandemic.
Cost of Sales
Cost of sales was $655.2 million in the first six months of 2020, a decrease of
$347.7 million, or 34.7%, compared to the prior year period. Cost of sales is
comprised of material costs, a variable expense, and other manufacturing costs,
comprised of both fixed and variable expenses, including direct and indirect
labor, outbound freight, and overhead expenses.
Commercial Trailer Products segment cost of sales was $437.0 million in the
first six months of 2020, a decrease of $222.0 million, or 33.7%, compared to
the prior year period. The decrease was primarily driven by an overall decrease
in
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manufacturing costs as a result of lower sales volumes, including a $177.6
million decrease in materials costs and a $44.5 million decrease in other
manufacturing costs. The lower sales volumes were due in part to the ongoing
COVID-19 pandemic.
Diversified Products segment cost of sales was $121.0 million in the first six
months of 2020, a decrease of $35.4 million, or 22.7%, compared to the prior
period. Driven by lower sales volumes partially attributable to the ongoing
impacts of the COVID-19 pandemic, the decrease in cost of sales from the prior
year period was primarily due to a decrease in materials costs of $23.6 million
and a decrease in other manufacturing costs totaling $11.9 million.
Final Mile Product segment cost of sales was $109.4 million in the first six
months of 2020, a decrease of $91.5 million, or 45.5%, compared to the prior
year period. The decrease was driven by a $68.5 million decrease in materials
costs and a $23.0 million decrease in other manufacturing costs related to
decreased sales volumes; however, the decrease in cost of sales was not
proportionate to the decrease in sales volumes. The lower sales volumes were due
in part to the ongoing COVID-19 pandemic.
Gross Profit
Gross profit was $71.1 million in the first six months of 2020, a decrease of
$85.3 million from the prior year period. Gross profit as a percentage of sales
was 9.8% for the first six months, compared to 13.5% during the same period in
2019. Gross profit by segment was as follows (dollars in thousands):
                                    Six Months Ended June 30,                               Change
                                    2020                    2019             $              %
Gross Profit by Segment
Commercial Trailer Products   $     46,235$  82,846$ (36,611)       (44.2) %
Diversified Products                25,902                 40,222         (14,320)       (35.6) %
Final Mile Products                  1,719                 34,813         (33,094)       (95.1) %
Corporate                           (2,792)                (1,541)         (1,251)
Total                         $     71,064$ 156,340$ (85,276)       (54.5) %


Commercial Trailer Products segment gross profit was $46.2 million for the first
six months of 2020 compared to $82.8 million for the prior year period. Gross
profit prior to the elimination of intersegment sales, as a percentage of net
sales, was 9.6% in 2020 compared to 11.2% in the prior period. We made
purposeful efforts to mitigate lower sales volumes due to the ongoing COVID-19
pandemic by decreasing our fixed costs, including Company-wide furloughs,
headcount reductions, and other cost containment measures. However, fixed costs
did not proportionately decrease with the lower sales volumes experienced during
the first six months of 2020 compared to the prior year period.
Diversified Products segment gross profit was $25.9 million for the first six
months of 2020 compared to $40.2 million in the same period of 2019. Gross
profit prior to the elimination of intersegment sales, as a percentage of net
sales, was 17.6% in the 2020 period compared to 20.5% in the prior period. While
fixed costs decreased between periods as a result of our cost containment
initiatives in response to COVID-19 impacts, the decreases in gross profit and
gross profit as a percentage of net sales compared to the prior year period were
primarily driven by certain fixed manufacturing costs that did not decrease at
the same rate as the decrease in sales volumes.
Final Mile Products segment gross profit was $1.7 million for the first six
months of 2020 compared to $34.8 million in the same period of 2019. Gross
profit, as a percentage of sales, was 1.5% in the first six months of 2020,
compared to 14.8% in the prior year period. Similar to the two segments above,
the decreases in gross profit and gross profit as a percentage of net sales were
primarily attributable to manufacturing costs not proportionately decreasing
with the decrease in sales volumes.
General and Administrative Expenses
General and administrative expenses for the first six months of 2020 decreased
$10.8 million, or 19.1%, from the prior year period. The decrease from the prior
year period was largely due to a decrease of approximately $6.3 million in
employee-related costs, including benefits and incentive programs, partially
offset by an increase in severance-related expense. Additional decreases were
attributable to lower professional service expenses and travel-related costs.
These overall decreases were due in part to the impacts of the ongoing COVID-19
pandemic and our implementation of cost containment measures. As a percentage of
sales, general and administrative expenses were 6.3% for the 2020 period as
compared to 4.9% for the same period of 2019.
Selling Expenses
Selling expenses were $12.9 million in the first six months of 2020, a decrease
of $3.8 million, or 22.9%, compared to the prior year period. The decrease was
due to a decrease of approximately $2.9 million in employee-related costs,
including benefits and incentive programs, and a decrease in travel-related
costs. These overall decreases were due in part to the impacts of the
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ongoing COVID-19 pandemic and our implementation of cost containment measures.
As a percentage of net sales, selling expenses were 1.8% for the 2020 period
which is consistent with the same period of 2019.
Amortization of Intangibles
Amortization of intangibles was $11.0 million for the first six months of 2020
compared to $10.2 million in the prior year period. Amortization of intangibles
for both periods was the result of expenses recognized for intangible assets
recorded from the acquisitions of Walker in May 2012, certain assets of Beall in
February 2013, and Supreme in September 2017.
Impairment and Other, Net
Impairment and other, net of $105.4 million during the first six months of 2020
compared to $0.0 million in the same period in 2019 was primarily the result of
impairment charges related to goodwill within the Final Mile Products and
Diversified Products segments totaling $106.8 million during the first quarter
of 2020. These impairment charges were partially offset by the net gain on sale
of property, plant, and equipment assets during the second quarter of 2020.
Other Income (Expense)
Interest expense for the first six months of 2020 totaled $12.2 million compared
to $14.1 million in the prior year period. Interest expense relates to interest
and non-cash accretion charges on our Term Loan Credit Agreement, Senior Notes,
and Revolving Credit Agreement. The decrease from the previous year period is
primarily due to our voluntary prepayments totaling approximately $50.0 million
against our Term Loan Credit Agreement throughout 2019 and the significant
decrease in LIBOR between periods.
Other, net for the first six months of 2020 represented income of $0.4 million
as compared to income of $0.9 million for the prior year period. Income for both
the current and prior year is primarily related to interest income.
Income Taxes
The Company recognized an income tax benefit of $9.0 million in the first six
months of 2020 compared to expense of $13.8 million for the same period in the
prior year. The effective tax rate for the first six months of 2020 and 2019
were 7.8% and 23.2%, respectively. Certain provisions of the CARES Act had a
significant impact on the expected annual effective tax rate, income tax
payable, and deferred income tax positions of the Company for the six months
ended June 30, 2020. For the first first six months of 2020, these effective tax
rates differ from the US Federal statutory rate of 21% primarily due to the
impact of state and local taxes, impairment of non-deductible goodwill,
provisions related to the CARES Act, and discrete items incurred related to
stock-based compensation. For the first six months of 2019, these effective tax
rates differ from the US Federal statutory rate of 21% primarily due to the
impact of state and local taxes and recognition of excess tax benefits on
share-based compensation.
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Liquidity and Capital Resources
Capital Structure
Our capital structure is comprised of a mix of debt and equity. As of June 30,
2020, our debt to equity ratio, including our finance lease obligations, was
approximately 1.2:1.0. Our long-term objective is to generate operating cash
flows sufficient to support the growth within our businesses and increase
shareholder value. This objective will be achieved through a balanced capital
allocation strategy of maintaining strong liquidity, deleveraging our balance
sheet, investing in the business, both organically and strategically, and
returning capital to our shareholders.
During the first six months of 2020, we paid dividends of approximately $8.7
million, and during the first quarter of 2020, we repurchased shares under our
share repurchase program totaling $8.9 million. In addition, as a result of
uncertainty caused by the COVID-19 pandemic, we drew $45.0 million under the
Revolving Credit Facility during the first quarter of 2020. During the second
quarter of 2020, we repaid the $45.0 million in outstanding borrowings, and as
of June 30, 2020 we had no amounts outstanding under our Revolving Credit
Facility.
Despite the uncertainty caused by the ongoing COVID-19 pandemic, we believe we
are well-positioned from a liquidity perspective as we have prepared for an
eventual downturn in our industry over the last two years, and we believe we
have sufficient liquidity to meet our cash obligations for at least the next 12
months. Our liquidity position, defined as cash on hand and available borrowing
capacity on the Revolving Credit Facility, amounted to $303.6 million as of
June 30, 2020, an increase of 9.5% compared to $277.2 million as of March 31,
2020 and a slight decrease from $308.1 million as of December 31, 2019. In
addition, the nearest debt maturity we have is not until 2022. While the
severity and duration of the impacts of COVID-19 remain unknown, we expect to
continue our commitment to fund our working capital requirements and capital
expenditures, including maintaining our assets to capitalize on any economic
and/or industry upswings, while also responsibly returning capital to our
shareholders. For the remainder of 2020, we will continue to move rapidly to
adjust to the current environment to contain cost and preserve the strength of
our balance sheet while prioritizing the safety of our employees and ensuring
the liquidity and financial well-being of the Company.
Debt Agreements and Related Amendments
Senior Notes
On September 26, 2017, we issued Senior Notes due 2025 (the "Senior Notes") with
an aggregate principal amount of $325 million. The Senior Notes bear interest at
the rate of 5.50% per annum from the date of issuance, and will pay interest
semi-annually in cash on April 1 and October 1 of each year. We used the net
proceeds of $318.9 million from the sale of the Senior Notes to finance a
portion of the acquisition of Supreme and to pay related fees and expenses. The
Senior Notes are guaranteed on a senior unsecured basis by all of our direct and
indirect existing and future domestic restricted subsidiaries, subject to
certain restrictions. The Senior Notes and related guarantees are our and our
guarantors' general unsecured senior obligations and are subordinate to all of
our and our guarantors' existing and future secured debt to the extent of the
assets securing that secured obligation. In addition, the Senior Notes are
structurally subordinate to any of existing and future debt of any of our
subsidiaries that are not guarantors, to the extent of the assets of those
subsidiaries. The Senior Notes will mature on October 1, 2025.
The indenture for the Senior Notes restricts our ability and the ability of
certain of our subsidiaries, subject to certain exceptions and qualifications,
to: (i) incur additional indebtedness; (ii) pay dividends or make other
distributions in respect of, or repurchase or redeem, our capital stock or with
respect to any other interest or participation in, or measured by, our profits;
(iii) make loans and certain investments; (iv) sell assets; (v) create or incur
liens; (vi) enter into transactions with affiliates; and (vii) consolidate,
merge or sell all or substantially all of our assets.
The indenture for the Senior Notes contains customary events of default,
including payment defaults, breaches of covenants, failure to pay certain
judgments and certain events of bankruptcy, insolvency and reorganization. As of
June 30, 2020, we were in compliance with all covenants, and while the duration
and severity of the COVID-19 pandemic are unknown at this time, we do not
anticipate that the pandemic will impact our ability to remain in compliance
with these covenants.
Contractual coupon interest expense and accretion of discount and fees for the
Senior Notes was $4.6 million for each of the three-month periods ended June 30,
2020 and 2019. Contractual coupon interest expense and accretion of discount and
fees for the Senior Notes was $9.3 million and $9.2 million for the six-month
periods ended June 30, 2020 and 2019, respectively. Contractual coupon interest
expense and accretion of discount and fees are included in Interest expense on
the Company's Condensed Consolidated Statements of Operations.
Revolving Credit Agreement
On December 21, 2018, we entered into the Second Amended and Restated Credit
Agreement (the "Revolving Credit Agreement"), among us, certain of our
subsidiaries as borrowers (together with us, the "Borrowers"), the lenders from
time to
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time party thereto, Wells Fargo Capital Finance, LLC and Citizens Business
Capital, which amended and restated our existing amended and restated revolving
credit agreement, dated as of May 8, 2012.
The Revolving Credit Agreement is guaranteed by certain of our subsidiaries (the
"Revolver Guarantors") and is secured by (i) first priority security interests
in substantially all personal property of the Borrowers and the Revolver
Guarantors, consisting of accounts receivable, inventory, cash, deposit and
securities accounts and any cash or other assets in such accounts and, to the
extent evidencing or otherwise related to such property, all general
intangibles, licenses, intercompany debt, letter of credit rights, commercial
tort claims, chattel paper, instruments, supporting obligations, documents and
payment intangibles (collectively, the "Revolver Priority Collateral"), and (ii)
second-priority liens on and security interests in (A) equity interests of each
direct subsidiary held by the Borrowers and each Revolver Guarantors, and (B)
substantially all other tangible and intangible assets of the Borrowers and the
Revolver Guarantors, excluding real property (the "Term Priority Collateral").
The Revolving Credit Agreement has a scheduled maturity date of December 21,
2023, subject to certain springing maturity events.
Under the Revolving Credit Agreement, the lenders agree to make available to us
a $175 million revolving credit facility. We have the option to increase the
total commitment under the facility to up to $275 million, subject to certain
conditions. Subject to availability, the Revolving Credit Agreement provides for
a letter of credit subfacility in an amount not in excess of $15 million, and
allows for swingline loans in an amount not in excess of $17.5 million.
Outstanding borrowings under the Revolving Credit agreement bear interest at an
annual rate, at the Borrowers' election, equal to (i) LIBOR plus a margin
ranging from 1.25% to 1.75% or (ii) a base rate plus a margin ranging
from 0.25% to 0.75%, in each case depending upon the monthly average excess
availability under the revolving loan facility. The Borrowers are required to
pay a monthly unused line fee equal to 0.20% times the average daily unused
availability along with other customary fees and expenses thereunder.
The Revolving Credit Agreement contains customary covenants limiting our ability
and certain of our affiliates to, among other things, pay cash dividends, incur
debt or liens, redeem or repurchase stock, enter into transactions with
affiliates, merge, dissolve, repay subordinated indebtedness, make investments
and dispose of assets. In addition, we will be required to maintain a minimum
fixed charge coverage ratio of not less than 1.0 to 1.0 as of the end of any
period of 12 fiscal months (commencing with the month ending December 31, 2018)
when excess availability under the Revolving Credit Agreement is less than 10%
of the total revolving commitment.
During the three-month period ended March 31, 2020, we drew $45.0 million under
the Revolving Credit Agreement in response to the uncertainty caused by the
COVID-19 pandemic as a precautionary measure. During the second quarter of 2020,
we repaid the $45.0 million in outstanding borrowings, and as of June 30, 2020,
there were no amounts outstanding under the Revolving Credit Facility. We were
in compliance with all covenants as of June 30, 2020, and while the duration and
severity of the COVID-19 pandemic are unknown at this time, we do not anticipate
that the pandemic will impact our ability to remain in compliance with these
covenants. For the three- and six-month periods ended June 30, 2020, under the
Revolving Credit Agreement, we paid approximately $0.2 million of interest.
During the three- and six-month periods ended June 30, 2019, we had no
outstanding borrowings under the Revolving Credit Agreement and paid no
interest. Our liquidity position, defined as cash on hand and available
borrowing capacity on the Revolving Credit Facility, amounted to $303.6 million
as of June 30, 2020, and $308.1 million as of December 31, 2019.
Term Loan Credit Agreement
In May 2012, we entered into the Term Loan Credit Agreement (as amended, the
"Term Loan Credit Agreement"), which provides for, among other things, (x) a
senior secured term loan of $188.0 million that matures on March 19, 2022,
subject to certain springing maturity events (the "Term Loans"), and (y) an
uncommitted accordion feature to provide for additional senior secured term
loans of up to $75 million plus an unlimited amount provided that the senior
secured leverage ratio would not exceed 3.00 to 1.00, subject to certain
conditions (the "Term Loan Facility").
On November 17, 2017, we entered into Amendment No. 5 to the Term Loan Credit
Agreement ("Amendment No. 5"). As of the Amendment No. 5 date, $188.0 million of
the Term Loans were outstanding. Under Amendment No. 5, the lenders agreed to
provide us term loans in the same aggregate principal amount of the outstanding
Term Loans, which were used to refinance the outstanding Term Loans.
The Term Loan Credit Agreement is guaranteed by certain of our subsidiaries, and
is secured by (i) first-priority liens on, and security interests in, the Term
Priority Collateral and (ii) second-priority security interests in the Revolver
Priority Collateral.
The Term Loan Credit Agreement contains customary covenants limiting our ability
to, among other things, pay cash dividends, incur debt or liens, redeem or
repurchase stock, enter into transactions with affiliates, merge, dissolve, pay
off subordinated indebtedness, make investments and dispose of assets. As of
June 30, 2020, we were in compliance with all covenants, and while the duration
and severity of the COVID-19 pandemic are unknown at this time, we do not
anticipate that the pandemic will impact our ability to remain in compliance
with these covenants.
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For the three-month period ended June 30, 2020, under the Term Loan Credit
Agreement we paid interest of $1.0 million and made no principal payments. For
the three-month period ended June 30, 2019, we paid interest of $2.2 million and
made principal payments of $15.0 million. For the six-month period ended
June 30, 2020, we paid interest of $2.4 million and made no principal payments.
For the six-month period ended June 30, 2019, we paid interest of $4.4 million
and made principal payments of $15.5 million. As of June 30, 2020, we had $135.2
million outstanding under the Term Loan Credit Agreement, of which none was
classified as current on our Condensed Consolidated Balance Sheets.
For each three-month period ended June 30, 2020 and 2019, we incurred charges of
less than $0.1 million, and $0.1 million for each six-month period ended
June 30, 2020 and 2019, for amortization of fees and original issuance discount,
which is included in Interest expense in the Condensed Consolidated Statements
of Operations.
Cash Flows
Cash provided by operating activities for the first six months of 2020 totaled
$22.7 million, compared to $61.0 million during the same period in 2019. Cash
provided by operations during the current year period was the result of net loss
adjusted for various non-cash activities including depreciation, amortization,
net gain on the sale of assets, deferred taxes, stock-based compensation,
impairment, accretion of debt discount, and a $4.3 million decrease in working
capital. Changes in key working capital accounts for 2020 and 2019 are
summarized below (in thousands):
                                                            Six Months Ended June 30,
                                                          2020                      2019               Change
Source (Use) of cash:
Accounts receivable                                 $     48,785$   10,886$  37,899
Inventories                                              (14,154)                  (80,163)            66,009
Accounts payable and accrued liabilities                 (22,126)                   58,210            (80,336)
Net source (use) of cash                            $     12,505

$ (11,067)$ 23,572



Accounts receivable decreased $48.8 million in the first six months of 2020 as
compared to a $10.9 million decrease in the prior year period. Days sales
outstanding, a measure of working capital efficiency that measures the amount of
time a receivable is outstanding, was 33 days in 2020 as compared to 25 days in
the same period in 2019. The decrease in accounts receivable during the first
six months of 2020 was primarily due to the decrease in shipments from the prior
year period, which is partially attributable to impacts of the ongoing COVID-19
pandemic. Inventory increased by $14.2 million during the first six months of
2020 as compared to an increase of $80.2 million in the 2019 period. Our
inventory turns, a commonly used measure of working capital efficiency that
measures how quickly inventory turns per year, was approximately 7 times in the
2020 period and 8 times in the 2019 period. The increase in inventory for the
2020 period was primarily attributable to higher finished goods inventory due to
slower customer pick-ups and higher raw materials inventory to adjust to
anticipated production. Both of these increases are partially attributable to
the ongoing COVID-19 pandemic. Accounts payable and accrued liabilities
decreased by $22.1 million in 2020 compared to an increase of $58.2 million for
the same period in 2019. Days payable outstanding, a measure of working capital
efficiency that measures the amount of time a payable is outstanding, was 37
days in the 2020 period compared to 34 days during the same period in 2019.
Investing activities used $8.2 million during the first six months of 2020, as
compared to $15.0 million during the same period in 2019. Investing activities
for the first six months of 2020 include capital expenditures of $10.9 million,
which was a decrease compared to $15.0 million during the same period in 2019.
For the first six months of 2020, investing activities also includes proceeds
from the sale of property, plant, and equipment of $2.7 million.
Financing activities used $19.0 million during the first six months of 2020 as
compared to using $38.6 million during the same period in 2019. Cash used by
financing activities during the current year period primarily relates to common
stock repurchases and withholdings of $10.1 million and cash dividends paid to
our shareholders of $8.7 million. Cash used in financing activities in the first
six months of 2019 primarily relates to principal payments under the term loan
credit facility of $15.5 million, common stock repurchases and withholdings of
$13.9 million, and cash dividends paid to our shareholders of $9.1 million.
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As of June 30, 2020, our liquidity position, defined as cash on hand and
available borrowing capacity, amounted to $303.6 million, representing a
decrease of $3.8 million compared to June 30, 2019 and a decrease of
$4.5 million compared to December 31, 2019. Total debt and finance lease
obligations amounted to $460.8 million as of June 30, 2020. While we believe
there is continued uncertainty in the industry due in part to the ongoing
COVID-19 pandemic, we believe we are well-positioned from a liquidity
perspective as we have prepared for an eventual downturn in our industry over
the last two years, and we believe we have sufficient liquidity to meet our cash
obligations for at least the next 12 months. While the severity and duration of
the impacts of COVID-19 remain unknown, we expect to continue our commitment to
fund our working capital requirements and capital expenditures, including
maintaining our assets to capitalize on any economic and/or industry upswings,
while also responsibly returning capital to our shareholders. For the remainder
of 2020, we will continue to move rapidly to adjust to the current environment
to contain cost and preserve the strength of our balance sheet while
prioritizing the safety of our employees and ensuring the liquidity and
financial well-being of the Company.
Capital Expenditures
Capital spending amounted to approximately $10.9 million for the first six
months of 2020 and, depending upon the duration and severity of COVID-19
impacts, is anticipated to be approximately $20 million for 2020. Capital
spending for 2020 has been and is expected to continue to be primarily utilized
to support maintenance, growth, and productivity improvement initiatives within
our facilities.
Goodwill Impairment
We assess goodwill for impairment at the reporting unit level on an annual basis
as of October 1 and whenever events or changes in circumstances indicate a
possible impairment. Subsequent to December 31, 2019, our share price and market
capitalization declined. In addition, as a result of the ongoing COVID-19
pandemic and related impact on our results of operations, the Company did not
perform in-line with expectations. As a result, indicators of impairment were
identified and we performed an interim quantitative assessment as of March 31,
2020, utilizing a combination of the income and market approaches, which were
weighted evenly. Key assumptions used in the analysis were discount rates of
17.0% and 13.5% for FMP and Tank Trailers, respectively, EBITDA margins, and a
terminal growth rate of 3.0%. The results of the quantitative analysis indicated
the carrying value of the FMP and Tank Trailers reporting units exceeded their
fair values and, accordingly, goodwill impairment charges of $95.8 million and
$11.0 million, respectively, were recorded during the first quarter of 2020. The
goodwill impairment charges, which are based on Level 3 fair value measurements,
are included in Impairment and other, net in the Condensed Consolidated
Statements of Operations.
In addition, the results of the quantitative analysis performed as of March 31,
2020 indicated the fair value of the Process Systems reporting unit exceeded the
carrying value by approximately 3%. Key assumptions used in the analysis were a
discount rate of 14.5%, EBITDA margin, and a terminal growth rate of 3.0%. The
Process Systems reporting unit designs and manufactures a broad range of
products, such as isolators, stationary silos, and downflow booths used in a
number of unique markets, including the chemical, dairy, food and beverage,
pharmaceutical and nuclear markets. We believe this reporting unit's broad range
of innovative products in unique industries will result in sufficient future
earnings. Based on the results of the interim quantitative test, we performed
sensitivity analyses around the key assumptions used in the analysis, the
results of which were: (a) a 100 basis point decrease in the EBITDA margin used
to determine expected future cash flows would have resulted in an impairment of
approximately $4.6 million, (b) a 100 basis point increase in the discount rate
would have resulted in an impairment of approximately $4.5 million, and (c) a
100 basis point decrease in the terminal growth rate would have resulted in an
impairment of approximately $1.2 million.
Future events and changing market conditions may require a re-evaluation of the
assumptions used in the determination of fair value for each of our reporting
units, including key assumptions used in the expected EBITDA margins and cash
flows, as well as other key assumptions with respect to matters out of our
control, such as discount rates and market multiple comparables.
We considered whether there were any indicators of impairment during the three
months ended June 30, 2020 and concluded there were none.
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Contractual Obligations and Commercial Commitments
A summary of payments of our contractual obligations and commercial commitments,
both on and off balance sheet, as of June 30, 2020 are as follows (in
thousands):
                                        2020              2021              2022              2023             2024           Thereafter           Total
Debt:
Term Loan Credit Facility (due
2022)                                $      -          $     -          $ 

135,228 $ - $ - $ - $ 135,228 Revolving Facility (due 2023)

               -                -                  -                -                -                  -                  -
Senior Notes (due 2025)                     -                -                  -                -                -            325,000            325,000
Finance Leases (including
principal and interest)                   180              361                 30                -                -                  -                571
Total debt                                180              361            135,258                -                -            325,000            460,799
Other:
Operating Leases                        2,476            4,661              3,020            2,102            1,007              1,251             14,517
Total other                             2,476            4,661              3,020            2,102            1,007              1,251             14,517
Other commercial commitments:
Letters of Credit                       7,436                -                  -                -                -                  -              7,436
Raw Material Purchase
Commitments                            40,185                -                  -                -                -                  -             40,185
Chassis Converter Pool
Agreements                              5,427                -                  -                -                -                  -              5,427
Total other commercial
commitments                            53,048                -                  -                -                -                  -             53,048
Total obligations                    $ 55,704$ 5,022$ 138,278$ 2,102$ 1,007$ 326,251$ 528,364


Scheduled payments for our Term Loan Credit Agreement, as amended, exclude
interest payments as rates are variable. Borrowings under the Term Loan Credit
Agreement, as amended, bear interest at a variable rate, at our election, equal
to (i) LIBOR (subject to a floor of 0.00%) plus a margin of 2.25% or (ii) a base
rate plus a margin of 1.25%. The Term Loan Credit Agreement matures in March
2022, subject to certain springing maturity events.
Scheduled payments for our Revolving Facility exclude interest payments as rates
are variable. Borrowings under the Revolving Facility bear interest at a
variable rate based on the London Interbank Offer Rate (LIBOR) or a base rate
determined by the lender's prime rate plus an applicable margin, as defined in
the agreement. Outstanding borrowings under the Revolving Facility bear interest
at a rate, at our election, equal to (i) LIBOR plus a margin ranging from 1.25%
to 1.75% or (ii) a base rate plus a margin ranging from 0.25% to 0.75%, in each
case depending upon the monthly average excess availability under the Revolving
Facility. We are required to pay a monthly unused line fee equal to 0.20% times
the average daily unused availability along with other customary fees and
expenses of our agent and lenders. As a result of uncertainty caused by the
COVID-19 pandemic, we drew $45.0 million under the Revolving Credit Facility
during the first quarter of 2020. During the second quarter of 2020, we repaid
the $45.0 million in outstanding borrowings, and as of June 30, 2020 we had no
amounts outstanding under our Revolving Credit Facility.
Scheduled payments for our Senior Notes exclude interest payments. The Notes
bear interest at the rate of 5.5% per annum from the date of issuance, payable
semi-annually on April 1 and October 1.
Finance leases represent future minimum lease payments including interest.
Operating leases represent the total future minimum lease payments.
We have standby letters of credit totaling $7.4 million issued in connection
with workers compensation claims and surety bonds.
We have $40.2 million in purchase commitments with our suppliers and through
financial derivatives through December 2020 for various raw material
commodities, including aluminum, steel, nickel and polyethylene as well as other
raw material components which are within normal production requirements.
We, through our subsidiary Supreme, obtain most vehicle chassis for our
specialized vehicle products directly from the chassis manufacturers under
converter pool agreements. Chassis are obtained from the manufacturers based on
orders from customers, and to a lesser extent, for unallocated orders. Although
each manufacturer's agreement has different terms and conditions, the agreements
generally state that the manufacturer will provide a supply of chassis to be
maintained from time to time at our various facilities with the condition that
we will store such chassis and will not move, sell, or otherwise dispose of such
chassis except under the terms of the agreement. The manufacturer transfers the
chassis to us on a "restricted basis," retaining the sole authority to authorize
commencement of work on the chassis and to make certain other decisions with
respect to the chassis including the terms and pricing of sales of the chassis
to the manufacturer's dealers. The manufacturer also does not transfer the
certificate of origin to us nor permit us to sell or transfer the chassis to
anyone other than the manufacturer (for ultimate resale to a dealer). Although
we are party to related finance agreements with manufacturers, we have not
historically settled, nor expect to in the future settle, any related
obligations in cash. Instead, the obligation is settled by the manufacturer upon
reassignment of the chassis to an accepted dealer, and the dealer is invoiced
for the chassis by the manufacturer. Accordingly, as of June 30, 2020 our
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outstanding chassis converter pool with the manufacturer totaled $3.5 million
and we have included this financing agreement on our consolidated balance sheets
within Prepaid expenses and other and Other accrued liabilities. All other
chassis programs through our Supreme subsidiary are handled as consigned
inventory belonging to the manufacturer and totaled approximately $1.9
million. Under these agreements, if the chassis is not delivered to a customer
within a specified time frame we are required to pay a finance or storage charge
on the chassis. Additionally, we receive finance support funds from the
manufacturer when the chassis are assigned into our chassis pool. Typically,
chassis are converted and delivered to customers within 90 days of the receipt
of the chassis.
Backlog
Orders that have been confirmed by customers in writing, have defined delivery
time frames, and can be produced during the next 18 months are included in our
backlog. Orders that comprise our backlog may be subject to changes in
quantities, delivery, specifications, terms or cancellation. Our backlog of
orders was approximately $0.8 billion at June 30, 2020 compared to approximately
$1.1 billion at December 31, 2019 and $1.2 billion at June 30, 2019. As we
disclosed in our Annual Report on Form 10-K for the year ended December 31,
2019, the order season for 2020 materialized in a manner more consistent with
historical periods, excluding 2018. In addition, while we have observed softer
demand thus far in 2020 compared to 2018 and 2019 partially due to the impacts
and uncertainty caused by the COVID-19 pandemic, we believe our backlog of
orders remains strong. We expect to complete the majority of our backlog orders
as of June 30, 2020 within 12 months of this date.
Outlook
The trailer industry generally follows the transportation industry's cycles.
After three consecutive years with total trailer demand well below normal
replacement demand levels estimated to be approximately 220,000 trailers, the
five year period ending December 2015 demonstrated consecutive years of
significant improvement in which the total U.S. trailer market increased
year-over-year. In 2016, trailer shipments decreased but rebounded in 2017 and
2018, with 2018 representing an all-time industry record. This all-time industry
record set in 2018 was surpassed during 2019 with trailer shipments totaling
approximately 328,000. According to ACT Research Company ("ACT"), total trailer
production in the United States was approximately 333,000 during 2019. As
reported in our Annual Report on Form 10-K for the year ended December 31, 2019,
ACT estimated for decreased 2020 production to approximately 239,000 trailers
due to softened demand. This expected production level is at more historically
consistent levels within the trailer industry.
As a result of overall industry and economic uncertainty worsened by the ongoing
COVID-19 pandemic, in April 2020 ACT issued a revised estimate for 2020 trailer
production in the United States of approximately 146,000 trailers, representing
a decrease of 56% from 2019. As of July 2020, the latest estimate from ACT for
2020 trailer production is 177,050, which is a 21.3% increase from the April
2020 estimate. ACT estimates production levels for 2021, 2022, 2023, and 2024 to
increase from 2020 levels to 210,600, 253,000, 288,400, and 281,300,
respectively. In April 2020, FTR Associates ("FTR") anticipated new trailer
production to be approximately 155,000 new trailers in 2020, representing a
decrease of 53% compared to 2019, with projected production levels to increase
to 260,000 and 265,000 in 2021 and 2022, respectively. In July 2020, FTR revised
these estimates to be approximately 189,000 new trailers in 2020, a 21.9%
increase from the April 2020 estimate, with projected production levels to
increase to 210,000 and 270,000 in 2021 and 2022, respectively.
These estimates from ACT and FTR for the next several years are generally
expected to be above replacement demand. While we believe these estimates to
generally be reasonable, the unknown duration and severity of the ongoing
COVID-19 pandemic creates further uncertainty in the industry and actual
production and/or demand could vary significantly from these estimates.
Other potential risks we face for the remainder of 2020 will primarily relate to
our ability to effectively manage our manufacturing operations and overall
business given the ongoing COVID-19 pandemic as well as the cost and supply of
raw materials, commodities, and components. Significant increases in the cost of
certain commodities, raw materials or components have had and may continue to
have an adverse effect on our results of operations. As has been our practice,
we will endeavor to pass raw material and component price increases to our
customers in addition to continuing our cost management and hedging activities
in an effort to minimize the risk changes in material costs could have on our
operating results. In addition, we rely on a limited number of suppliers for
certain key components and raw materials in the manufacturing of our products,
including tires, axles, suspensions, aluminum extrusions, specialty steel coil,
and chassis. At the current and expected demand levels, there may be shortages
of supplies of raw materials or components which would have an adverse impact on
our ability to meet demand for our products.
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For the remainder of 2020, we will continue to move rapidly to adjust to the
current environment to contain cost and preserve the strength of our balance
sheet while prioritizing the safety of our employees and ensuring the liquidity
and financial well-being of the Company. We believe we remain well-positioned
for long-term success in the trailer industry because: (1) our core customers
are among the major participants in the trucking industry; (2) our DuraPlate®
and other industry leading brand trailers continue to have a strong market
acceptance; (3) our focus is on developing solutions that reduce our customers'
trailer maintenance and operating costs providing the best overall value; and
(4) our presence throughout North America utilizing our extensive dealer network
to market and sell our products. Continuing to identify attractive opportunities
to leverage our core competencies, proprietary technology, and core
manufacturing expertise into new applications and end markets enables us to
deliver greater value to our customers and stakeholders.
Critical Accounting Policies and Estimates
We have included a summary of our Critical Accounting Policies and Estimates in
our Annual Report on Form 10-K for the year ended December 31, 2019. There have
been no material changes to the summary provided in that report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In addition to the risks inherent in our operations, we have exposure to
financial and market risk resulting from volatility in commodity prices,
interest rates and foreign exchange rates. The following discussion provides
additional detail regarding our exposure to these risks.
Commodity Prices
We are exposed to fluctuation in commodity prices through the purchase of
various raw materials that are processed from commodities such as aluminum,
steel, lumber, nickel, copper and polyethylene. Given the volatility of certain
commodity prices, this exposure can significantly impact product costs. We
manage some of our commodity price changes by entering into fixed price
contracts with our suppliers and through financial derivatives. As of June 30,
2020, we had $40.2 million in raw material purchase commitments through December
2020 for materials that will be used in the production process, as compared to
$83.9 million as of December 31, 2019. We typically do not set prices for our
products more than 45-90 days in advance of our commodity purchases and can,
subject to competitive market conditions, take into account the cost of the
commodity in setting our prices for each order. To the extent that we are unable
to offset the increased commodity costs in our product prices, our results would
be materially and adversely affected.
Interest Rates
As a result of uncertainty caused by the COVID-19 pandemic, we drew $45.0
million under the Revolving Credit Facility during the first quarter of 2020.
During the second quarter of 2020, we repaid the $45.0 million in outstanding
borrowings, and as of June 30, 2020 we had no floating rate debt outstanding
under our Revolving Credit Facility. In addition, as of June 30, 2020, we had
outstanding borrowings under our Term Loan Credit Agreement, as amended,
totaling approximately $135.2 million that bears interest at a floating rate,
subject to a minimum interest rate. Based on any current borrowings under our
Revolving Credit Facility and the outstanding indebtedness under our Term Loan
Credit Agreement, a hypothetical 100 basis-point change in the floating interest
rate would result in a corresponding change in interest expense over a one-year
period of approximately $1.4 million. This sensitivity analysis does not account
for the change in the competitive environment indirectly related to the change
in interest rates and the potential managerial action taken in response to these
changes.
Foreign Exchange Rates
We are subject to fluctuations in the British pound sterling and Mexican peso
exchange rates that impact transactions with our foreign subsidiaries, as well
as U.S. denominated transactions between these foreign subsidiaries and
unrelated parties. A ten percent change in the British pound sterling or Mexican
peso exchange rates would have an immaterial impact on results of operations. We
do not hold or issue derivative financial instruments for speculative purposes.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Based on an evaluation under the supervision and with the participation of the
Company's management, the Company's principal executive officer and principal
financial officer have concluded that the Company's disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) were effective as of
June 30, 2020.
Changes in Internal Controls over Financial Reporting
There were no changes in the Company's internal control over financial
reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act,
during the second quarter of fiscal year 2020 that have materially affected or
are reasonably likely to materially affect the Company's internal control over
financial reporting.
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