News Column

WABASH NATIONAL CORP /DE - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

July 29, 2014

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report of Wabash National Corporation (the "Company", "Wabash" or "we") contains "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 "forward-looking statements" include, but are not limited to, statements regarding:

• our business plan;



• the benefits of, and our plans relating to the acquisitions of Walker Group

Holdings ("Walker") and certain assets of Beall Corporation ("Beall"), the amount of transaction costs associated with the acquisitions and our ability to effectively integrate Walker and the Beall assets and realize the expected synergies and benefits;



• the benefits of, and our plans relating to the transitioning of our three

former West Coast retail branch locations to independent dealer facilities and our ability to realize the expected benefits of expanding our dealer network and continuing to grow and diversify our Retail operations;



• our expected revenues, income or loss and capital expenditures;

• 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;

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• our ability to diversify the product offerings of non-trailer businesses and

opportunities to leverage the acquired Walker and Beall businesses to grow sales in our existing products;



• availability and pricing of raw materials;

• availability of capital and financing;

• dependence on industry trends;

• the outcome of any pending litigation;

• export sales and new markets;

• engineering and manufacturing capabilities and capacity;

• 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 Quarterly Report. Important risks and factors that could cause our actual results to be materially different from our expectations include the factors that are disclosed in "Item 1A. Risk Factors" in our Form 10-K for the year ended December 31, 2013. 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.

25 RESULTS OF OPERATIONS



The following table sets forth certain operating data as a percentage of net sales for the periods indicated:

Percentage of Net Sales Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 87.3 85.8 87.2 86.3 Gross profit 12.7 14.2 12.8 13.7 General and administrative expenses 3.2 3.5 3.5 3.9 Selling expenses 1.4 1.9 1.7 2.1 Amortization of intangibles 1.1 1.3 1.3 1.5 Acquisition expenses - 0.1 - 0.1 Income from operations 7.0 7.4 6.3 6.1 Interest expense (1.2 ) (1.6 ) (1.4 ) (1.9 ) Other, net (0.2 ) (0.1 ) (0.1 ) 0.3 Income before income taxes 5.6 5.7 4.8 4.5 Income tax expense 2.3 2.3 2.0 1.8 Net income 3.3 % 3.4 % 2.8 % 2.7 %



For the three and six month periods ended June 30, 2014, we recorded net sales of $486.0 million and $844.1 million, respectively, compared to $413.1 million and $737.4 million, respectively, in the prior year periods. Net sales for the three month period ended June 30, 2014 increased $72.9 million, or 17.6%, compared to the prior year period due to an increase in new trailer shipments of approximately 3,550 units, or 31.1%. Gross profit margin declined to 12.7% in the second quarter of 2014 compared to 14.2% in the prior year period due to a higher percentage of our consolidated net sales within our lower-margin Commercial Trailer Products segment, increases in raw material costs associated with our wood flooring business and higher operating related costs incurred to support our continued diversification and new product development efforts. We continue to be encouraged by the overall trailer market throughout the first six months of 2014, and our expectation is that overall industry shipment and production levels will remain above replacement demand for the remainder of 2014 as many key structural and market drivers continue to support healthy demand for new trailers. In addition, we expect to continue to deliver improvements in our financial and operational results as we further optimize our production facilities and continue to expand our Diversified Products segment customer base and focus on developing innovative new products that both add value to our customers' operations and allow us to continue to differentiate our products from the competition.

Selling, general and administrative expenses decreased $0.4 million in the second quarter of 2014 as compared to the same period in 2013. This decrease is primarily due to lower outside professional services and technology costs of $0.5 million and bad debt expense of $0.3 million partially offset by higher salaries and employee related costs, including employee incentive programs, of $0.6 million. As a percentage of net sales, selling, general and administrative expenses decreased to 4.6% as compared to 5.4% in the prior year period.

Our management team continues to be focused on positioning the Company to optimize profits as the industry continues to improve, maintaining our cost savings initiatives, strengthening our capital structure, developing innovative products that meet the needs of our customers and diversifying our product offering through growth in non-trailer products. As a recognized industry leader, we continue to focus on product innovation, lean manufacturing, strategic sourcing and workforce optimization in order to strengthen our industry position and improve operating results.

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Three Months Ended June 30, 2014

Net Sales



Net sales in the second quarter of 2014 increased $72.9 million, or 17.6%, compared to the second quarter of 2013. By business segment, net external sales and related units sold were as follows (dollars in millions):

Three Months Ended June 30, Change 2014 2013 $ % Sales by Segment Commercial Trailer Products $ 319.0$ 244.1$ 74.9 30.7 Diversified Products 115.7 121.4 (5.7 ) (4.7 ) Retail 51.3 47.6 3.7 7.8 Total $ 486.0$ 413.1$ 72.9 17.6 New Trailers (units) Commercial Trailer Products 13,150 9,800 3,350 34.2 Diversified Products 850 750 100 13.3 Retail 950 850 100 11.8 Total 14,950 11,400 3,550 31.1 Used Trailers (units) Commercial Trailer Products 1,150 750 400 53.3 Diversified Products 50 50 - - Retail 550 300 250 83.3 Total 1,750 1,100 650 59.1



Commercial Trailer Products segment sales were $319.0 million for the second quarter of 2014, an increase of $74.9 million, or 30.7%, compared to the second quarter of 2013. The increase in sales was primarily due to a 34.2% increase in new trailer shipments as approximately 13,150 trailers were shipped in the second quarter of 2014 compared to 9,800 trailers shipped in the prior year period. The increase in trailer shipments was offset by an unfavorable customer and product mix which lowered average selling prices by 2.2% as compared to the prior year period. Used trailer sales increased $2.3 million, or 37.0%, compared to the previous year period primarily due to strong demand and increased availability of product through fleet trade packages as approximately 400 more used trailers shipped in the second quarter of 2014 compared to the prior year period.

Diversified Products segment sales were $115.7 million for the second quarter of 2014, down $5.7 million, or 4.7%, compared to the second quarter of 2013. New trailer sales increased $2.9 million, or 5.6%, as approximately 100 more trailers were shipped in the current year as compared to the prior year period. The increase in trailer shipments was offset by an unfavorable customer and product mix which lowered average selling prices by 5.3% as compared to the prior year period. In addition, our continued efforts to diversify organically and increase market penetration and acceptance of our composite product offerings remained healthy as net sales increased $0.7 million, or 3.0%, as compared to the previous year period. The increases in new trailer sales and composite product offerings were more than offset by an $8.8 million, or 22.7%, reduction in equipment sales as compared to the prior year period due to the timing of shipments and customer acceptance for our non-trailer truck mounted equipment and other engineered products.

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Retail segment sales were $51.3 million in the second quarter of 2014, up $3.7 million, or 7.8%, compared to the prior year period. New trailer sales increased $1.4 million, or 6.3%, as approximately 100 more trailers were shipped in the current year as compared to the prior year period. As compared to the prior year period, new trailer average selling prices decreased 2.8% primarily due to customer and product mix. Used trailer sales increased $1.5 million, or 41.3%, primarily due to an increase in demand as approximately 250 more used trailers were shipped in the second quarter of 2014 as compared to the prior year period. Parts and service sales were up $1.1 million, or 5.8%.

Cost of Sales



Cost of sales for the second quarter of 2014 was $424.4 million, an increase of $70.1 million, or 19.8%, compared to the second quarter of 2013. As a percentage of net sales, cost of sales was 87.3% in the second quarter of 2014 compared to 85.8% in the second quarter of 2013.

Commercial Trailer Products segment cost of sales, as detailed in the following table, was $290.2 million for the second quarter of 2014, an increase of $67.3 million, or 30.2%, compared to the second quarter of 2013. As a percentage of net sales, cost of sales was 91.0% for the current quarter compared to 91.3% in the prior year period.

Three Months Ended June 30, Commercial Trailer Products Segment 2014 2013 (dollars in millions) % of Net % of Net Sales Sales Material Costs $ 234.0 73.4 % $ 175.8 72.0 % Other Manufacturing Costs 56.2 17.6 % 47.1 19.3 % $ 290.2 91.0 % $ 222.9 91.3 %



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. Material costs were 73.4% of net sales in the second quarter of 2014 compared to 72.0% for the same period in 2013. The 1.4% increase was primarily driven by customer and product mix as well as an increase in the cost of wood as other raw material, commodity, and component costs remained relatively consistent compared to the prior year period. Other manufacturing costs increased $9.1 million in the current year period as compared to the prior year period, resulting from increased variable costs related to increases in new trailer production volumes. As a percentage of sales, other manufacturing costs decreased from 19.3% in the second quarter of 2013 to 17.6% in the 2014 period due to increased leverage of fixed costs from higher production.

Diversified Products segment cost of sales was $90.5 million in the second quarter of 2014, an increase of $0.9 million, or 1.0%, compared to the same period in 2013. As a percentage of net sales prior to the elimination of intersegment sales, cost of sales was 81.4% in the second quarter of 2014 compared to 76.6% in the second quarter of 2013. The 4.8% increase as a percentage of net sales was primarily the result of higher raw material and operating costs attributable to our wood flooring manufacturing activities and a reduction in average selling prices for tank trailers due to customer and product mix as compared to the prior year period.

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Retail segment cost of sales was $45.6 million in the second quarter of 2014, an increase of $3.4 million, or 8.1%, compared to the same 2013 period. As a percentage of net sales, cost of sales was 88.8% for the second quarter of 2014 compared to 88.4% for the same period in 2013. Cost of sales as a percentage of net sales was consistent with the prior year period as a result of comparable product mix.

Gross Profit



Gross profit was $61.6 million in the second quarter of 2014, an improvement of $2.7 million from the prior year period. Gross profit as a percentage of sales was 12.7% for the current quarter and 14.2% for the same period in 2013. Gross profit by segment was as follows (in millions):

Three Months Ended June 30, Change 2014 2013 $ % Gross Profit by Segment: Commercial Trailer Products $ 28.8$ 21.2$ 7.6 35.8 Diversified Products 25.2 31.7 (6.5 ) (20.5 ) Retail 5.7 5.5 0.2 3.6 Corporate and Eliminations 1.9 0.5 1.4 Total $ 61.6$ 58.9$ 2.7 4.6



Commercial Trailer Products segment gross profit was $28.8 million for the second quarter of 2014 compared to $21.2 million for the second quarter of 2013. Gross profit, prior to the elimination of intersegment sales, as a percentage of net sales was 8.6% in the second quarter of 2014 as compared to 7.9% in the 2013 period. The increase in gross profit margin as compared to the prior year period was primarily driven by the increase in new trailer volumes and improved pricing offset by customer and product mix.

Diversified Products segment gross profit was $25.2 million for the second quarter of 2014 compared to $31.7 million in the second quarter of 2013. Gross profit, prior to the elimination of intersegment sales, as a percentage of sales, was 18.6% in the second quarter of 2014 compared to 23.4% in the second quarter of 2013. The decreases in gross profit and gross profit as a percentage of net sales are due primarily to the higher raw material and operating related costs associated with our wood flooring operations and a reduction in average selling prices for tank trailers due to product and customer mix as compared to the prior year period.

Retail segment gross profit was $5.7 million for the second quarter of 2014 compared to $5.5 million in the second quarter of 2013. Gross profit, prior to the elimination of intersegment sales, as a percentage of sales for the second quarter of 2014 was 11.1% compared to 11.5% for the prior year period. Gross profit margin was relatively consistent with the prior year period as the increased demand for products and services were offset by higher costs to support growth initiatives.

General and Administrative Expenses

General and administrative expenses for the second quarter of 2014 increased $0.5 million, or 3.3%, from the prior year period as a result of a $1.4 million increase in salaries and employee related costs, including employee incentive programs, partially offset by a $0.5 million decrease in outside professional fees and technology costs and a $0.3 million decrease in bad debt expense due to certain uncollectable accounts receivable identified in the prior year period. As a percentage of sales, general and administrative expenses were 3.2% for the current quarter as compared to 3.5% for the second quarter of 2013.

29 Selling Expenses



Selling expenses were $6.8 million in the second quarter of 2014, a decrease of $0.9 million, or 11.7%, compared to the prior year period primarily due to a $0.8 million decrease in salaries and employee related costs, including employee incentive programs. As a percentage of net sales, selling expenses were 1.4% for the second quarter of 2014 compared to 1.9% for the prior year period.

Amortization of Intangibles



Amortization of intangibles was $5.5 million for the second quarters of both 2014 and 2013. Amortization of intangibles for both periods primarily includes amortization expense recognized for intangible assets recorded from the acquisition of Walker in May 2012 and certain assets of Beall in February 2013.

Other Income (Expense)



Interest expense for the second quarter of 2014 totaled $5.7 million compared to $6.6 million in the second quarter of 2013. Interest expense for both periods is primarily related to interest and non-cash accretion charges on our Convertible Senior Notes and Term Loan Credit Agreement. The decrease from the previous year period is due to lower outstanding loan commitments through voluntary debt payments made over the previous year.

Other, netfor the second quarter of 2014 includes a loss on early extinguishment of debt of $0.5 million representing the write-off of debt issuance costs recognized on $20 million of voluntary principal payments made on our Term Loan Credit Agreement as well as a $0.6 million loss on the transition of three of our Retail branch locations to independent dealer facilities.

Income Taxes



We recognized income tax expense of $10.8 million in the second quarter of 2014 compared to expense of $9.4 million in the second quarter of 2013. The effective tax rate for the second quarter of 2014 was 40.0%, which differs from the U.S. Federal statutory rate of 35% primarily due to the impact of state and local taxes. As of June 30, 2014, we had fully utilized our remaining U.S. Federal income tax net operating loss carryforwards. We do have various multi-state income tax net operating loss carryforwards, which have been recorded as a deferred income tax asset, of approximately $6 million, before valuation allowances. We also have various U.S. Federal income tax credit carryforwards which will expire beginning in 2023, if unused. For 2014, as we have fully utilized all of our remaining U.S. Federal income tax net operating loss carryforwards and expect to utilize our remaining credit carryforwards, we anticipate an increase in our cash tax payments in 2014 as compared to the previous years which could limit the amount of liquidity available to fund working capital requirements and capital expenditure needs throughout 2014.

Six Months Ended June 30, 2014

Net Sales



Net sales for the first six months of 2014 increased $106.7 million, or 14.5%, compared to the 2013 period. By business segment, net external sales and related units sold were as follows (dollars in millions):

30 Six Months Ended June 30, Change 2014 2013 $ % Sales by Segment Commercial Trailer Products $ 526.0$ 428.1$ 97.9 22.9 Diversified Products 221.4 220.9 0.5 0.2 Retail 96.7 88.4 8.3 9.4 Total $ 844.1$ 737.4$ 106.7 14.5 New Trailers (units) Commercial Trailer Products 21,500 17,150 4,350 25.4 Diversified Products 1,700 1,400 300 21.4 Retail 1,700 1,450 250 17.2 Total 24,900 20,000 4,900 24.5 Used Trailers (units) Commercial Trailer Products 2,850 1,400 1,450 103.6 Diversified Products 100 100 - - Retail 900 600 300 50.0 Total 3,850 2,100 1,750 83.3



Commercial Trailer Products segment sales were $526.0 million for the first six months of 2014, an increase of $97.9 million, or 22.9%, compared to the first six months of 2013. The increase in sales was primarily due to a 25.4% increase in new trailer shipments as approximately 21,500 trailers were shipped in the first six months of 2014 compared to 17,150 trailers shipped in the prior year period. The increase in trailer shipments was offset by an unfavorable customer and product mix which lowered average selling prices by 2.4% as compared to the prior year period. Used trailer sales increased $8.5 million, or 75.3%, compared to the previous year period primarily due to strong demand and increased availability of product through fleet trade packages as approximately 1,450 more used trailers shipped in the first six months of 2014 compared to the prior year period.

Diversified Products segment sales were $221.4 million for the first six months of 2014, up $0.5 million, or 0.2%, compared to the prior year period. New trailer sales increased $14.2 million, or 15.0% due to a 21.4% increase in new trailer shipments as approximately 1,700 trailers were shipped in the first six months of 2014 compared to 1,400 trailers shipped in the prior year period. In addition, our continued efforts to diversify our business organically and increase our market penetration and acceptance of our product offerings has continued to gain momentum as demand for our composite product offerings increased $3.6 million, or 10.3%, as compared to the prior year period. The increases in new trailer and component sales were offset by a $15.8 million, or 21.0%, decrease in equipment and other sales due to the timing of shipments and customer acceptance for our non-trailer truck mounted equipment and other engineered products.

Retail segment sales were $96.7 million in the first six months of 2014, up $8.3 million, or 9.4%, compared to the prior year period. New trailer sales increased $4.8 million, or 12.0%, as approximately 250 more trailers were shipped in the current year as compared to the prior year period. As compared to the prior year period, new trailer average selling prices decreased 4.3% primarily due to customer and product mix. Used trailer sales increased $2.5 million, or 39.7%, primarily due to an increase in volume demand as approximately 300 more used trailers were shipped in the first six months of 2014 as compared to the prior year period. Parts and service sales were up $2.2 million, or 5.5%.

31 Cost of Sales



Cost of sales for the first six months of 2014 was $735.9 million, an increase of $99.5 million, or 15.6%, compared to the first six months of 2013. As a percentage of net sales, cost of sales was 87.2% in the first six months of 2014 compared to 86.3% in the prior year period.

Commercial Trailer Products segment cost of sales, as detailed in the following table, was $482.3 million for the first six months of 2014, an increase of $86.9 million, or 22.0%, compared to the prior year period. As a percentage of net sales, cost of sales was 91.7% for the current year period compared to 92.4% in the prior year period.

Six Months Ended June 30, Commercial Trailer Products Segment 2014 2013 (dollars in millions) % of Net % of Net Sales Sales Material Costs $ 386.2 73.4 % $ 311.3 72.7 % Other Manufacturing Costs 96.1 18.3 % 84.1 19.7 % $ 482.3 91.7 % $ 395.4 92.4 %



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. Material costs were 73.4% of net sales in the first six months of 2014 compared to 72.7% for the same period in 2013. The 0.7% increase was primarily driven by customer and product mix and an increase in the cost of wood as other raw material, commodity, and component costs have remained relatively consistent as compared to the prior year period. Other manufacturing costs increased $12.0 million in the current year period as compared to the prior year period, resulting from increased variable costs related to increases in new trailer production volumes. As a percentage of sales, other manufacturing costs decreased from 19.7% in the first six months of 2013 to 18.3% in the 2014 period due to increased leverage of fixed costs from higher production.

Diversified Products segment cost of sales was $170.8 million in the first six months of 2014, an increase of $7.5 million, or 4.6%, compared to the same period in 2013. As a percentage of net sales prior to the elimination of intersegment sales, cost of sales was 80.2% in the first six months of 2014, compared to 76.7% in the same 2013 period. The 3.5% increase as a percentage of net sales was primarily the result of higher raw material and operating costs attributable to our wood flooring manufacturing activities.

Retail segment cost of sales was $85.6 million in the first six months of 2014, an increase of $7.7 million, or 9.9%, compared to the same 2013 period. As a percentage of net sales, cost of sales was 88.5% for the first six months of 2014 compared to 88.2% for the same period in 2013. Cost of sales as a percentage of net sales was consistent with the prior year period as a result of comparable product mix.

Gross Profit



Gross profit was $108.3 million in the first six months of 2014, an improvement of $7.3 million from the prior year period. Gross profit as a percentage of sales was 12.8% for the first six months of 2014 as compared to 13.7% for the same period in 2013. Gross profit by segment was as follows (in millions):

32 Six Months Ended June 30, Change 2014 2013 $ % Gross Profit by Segment: Commercial Trailer Products $ 43.8$ 32.7$ 11.1 33.9 Diversified Products 50.6 57.7 (7.1 ) (12.3 ) Retail 11.1 10.4 0.7 6.7 Corporate and Eliminations 2.8 0.2 2.6 Total $ 108.3$ 101.0$ 7.3 7.2



Commercial Trailer Products segment gross profit was $43.8 million for the first six months of 2014 compared to $32.7 million for the prior year period. Gross profit, prior to the elimination of intersegment sales, as a percentage of net sales was 7.8% in the first six months of 2014 as compared to 7.1% in the same 2013 period. The increase in gross profit and profit margin as compared to the prior year period was primarily driven by the increase in new trailer volumes and improved pricing offset by customer and product mix.

Diversified Products segment gross profit was $50.6 million for the first six months of 2014 compared to $57.7 million in the same 2013 period. Gross profit, prior to the elimination of intersegment sales, as a percentage of sales, was 19.8% in the first six months of 2014 compared to 23.3% in the first six months of 2013. The decreases in gross profit and gross profit as a percentage of net sales are due primarily to the higher raw material and operating related costs associated with our wood flooring operations and a reduction in average selling prices for tank trailers due to product mix as compared to the prior year period.

Retail segment gross profit was $11.1 million for the first six months of 2014 compared to $10.4 million in the same 2013 period. Gross profit, prior to the elimination of intersegment sales, as a percentage of sales for the first six months of 2014 was 11.4% compared to 11.7% for the prior year period. Gross profit margin was relatively consistent with the prior year period as the increased demand for products and services were offset by higher costs to support growth initiatives.

General and Administrative Expenses

General and administrative expenses for the first six months of 2014 increased $1.3 million, or 4.5%, from the prior year period as a result of a $2.6 million increase in salaries and employee related costs, including employee incentive programs, partially offset by decreases in depreciation expense of $0.4 million due to the timing of certain assets becoming fully depreciated, outside professional fees and technology costs of $0.4 million, and bad debt expense of $0.2 million due to certain uncollectable accounts receivable identified in the prior year period. As a percentage of sales, general and administrative expenses were 3.5% for the first six months of 2014 as compared to 3.9% for the same 2013 period.

Selling Expenses



Selling expenses were $14.1 million in the first six months of 2014, a decrease of $1.3 million, or 8.5%, compared to the prior year period primarily due to a $1.0 million decrease in salaries and employee related costs, including employee incentive programs. The remainder of the decrease is attributable to lower advertising and promotional costs. As a percentage of net sales, selling expenses were 1.7% for the first six months of 2014 compared to 2.1% for the prior year period.

33 Amortization of Intangibles



Amortization of intangibles was $10.9 million for the first six months of both 2014 and 2013. Amortization of intangibles for both periods primarily includes amortization expense recognized for intangible assets recorded from the acquisition of Walker in May 2012 and certain assets of Beall in February 2013.

Other Income (Expense)



Interest expense for the first six months of 2014 totaled $11.5 million compared to $14.1 million in the prior year period. Interest expense for both periods primarily related to interest and non-cash accretion charges on our Convertible Senior Notes and Term Loan Credit Agreement. The decrease from the previous year period is due to lower outstanding loan commitments through voluntary debt payments made over the previous year as well as reduced interest rates achieved as a result of repricing the Term Loan Credit Agreement in April 2013.

Other, netfor the first six months of 2014 includes a loss on early extinguishment of debt of $0.5 million representing the write-off of debt issuance costs recognized on $20 million of voluntary principal payments made on our Term Loan Credit agreement as well as a $0.6 million loss on the transition of three of our Retail branch locations to independent dealer facilities.

Income Taxes



We recognized income tax expense of $17.3 million in the first six months of 2014 compared to expense of $13.2 million in the first six months of 2013. The effective tax rate for the first six months of 2014 was 42.4%, which differs from the U.S. Federal statutory rate of 35% primarily due to the impact of state and local taxes and the revaluation of our net deferred tax assets due to a reduction in state and local statutory income tax rates. The combined U.S. Federal, state and local effective tax rate on a current and prospective basis, excluding the effects of the revaluation of the net deferred tax assets, is estimated to be 39.5%. As of June 30, 2014, we had fully utilized our remaining U.S. Federal income tax net operating loss carryforwards. We do have various multi-state income tax net operating loss carryforwards, which have been recorded as a deferred income tax asset, of approximately $6 million, before valuation allowances. We also have various U.S. Federal income tax credit carryforwards which will expire beginning in 2023, if unused. For 2014, as we have fully utilized all of our remaining U.S. Federal income tax net operating loss carryforwards and expect to utilize our remaining credit carryforwards, we anticipate an increase in our cash tax payments in 2014 as compared to the previous years which could limit the amount of liquidity available to fund working capital requirements and capital expenditure needs throughout 2014.

Liquidity and Capital Resources

Capital Structure



Our capital structure is comprised of a mix of debt and equity. As of June 30, 2014 our debt to equity ratio was approximately 1.0:1.0. Our long-term objective is to generate operating cash flows sufficient to fund normal working capital requirements, to fund capital expenditures and to be positioned to take advantage of market opportunities, including the ability to improve our capital structure through debt repayments. For the remainder of 2014, we expect to fund operations, working capital requirements and capital expenditures through cash flows from operations as well as from available borrowings under our Amended and Restated Revolving Credit Agreement (as described below in "Debt Agreements and Related Amendments" section).

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Debt Agreements and Related Amendments

Convertible Senior Notes



In April 2012, we issued Convertible Senior Notes due 2018 (the "Notes") with an aggregate principal amount of $150 million in a public offering. The Notes bear interest at the rate of 3.375% per annum from the date of issuance, payable semi-annually on May 1 and November 1. The Notes are senior unsecured obligations and rank equally with our existing and future senior unsecured debt.

The Notes are convertible by their holders into cash, shares of our common stock or any combination thereof at our election, at an initial conversion rate of 85.4372 shares of our common stock per $1,000 in principal amount of Notes, which is equal to an initial conversion price of approximately $11.70 per share, only under the following circumstances: (A) before November 1, 2017 (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2012 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the "measurement period") in which the trading price (as defined in the indenture for the Notes) per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; and (3) upon the occurrence of specified corporate events as described in the indenture for the Notes; and (B) at any time on or after November 1, 2017 until the close of business on the second business day immediately preceding the maturity date. As of June 30, 2014, the Notes were not convertible based on the above criteria.

It is our intent to settle conversions through a net share settlement, which involves repayment of cash for the principal portion and delivery of shares of common stock for the excess of the conversion value over the principal portion. We used the net proceeds of approximately $145.1 million from the sale of the Notes to fund a portion of the purchase price of the Walker acquisition.

We account separately for the liability and equity components of the Notes in accordance with authoritative guidance for convertible debt instruments that may be settled in cash upon conversion. The guidance required the carrying amount of the liability component to be estimated by measuring the fair value of a similar liability that does not have an associated conversion feature. We determined that senior, unsecured corporate bonds traded on the market represent a similar liability to the Notes without the conversion option. Based on market data available for publicly traded, senior, unsecured corporate bonds issued by companies in the same industry and with similar maturity, we estimated the implied interest rate of the Notes to be 7.0%, assuming no conversion option. Assumptions used in the estimate represent what market participants would use in pricing the liability component, including market interest rates, credit standing, and yield curves, all of which are defined as Level 2 observable inputs. The estimated implied interest rate was applied to the Notes, which resulted in a fair value of the liability component of $123.8 million upon issuance, calculated as the present value of implied future payments based on the $150.0 million aggregate principal amount. The $21.7 million difference between the cash proceeds before offering expenses of $145.5 million and the estimated fair value of the liability component was recorded in additional paid-in capital. The discount on the liability portion of the Notes is being amortized.

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Revolving Credit Agreement

In May 2012 we entered into an amendment and restatement of our then-existing senior secured revolving credit facility among us, certain of our subsidiaries (collectively, the "Borrowers"), Wells Fargo Capital Finance, LLC, as joint lead arranger, joint bookrunner and administrative agent (the "Revolver Agent"), RBS Citizens Business Capital, a division of RBS Citizens, N.A., as joint lead arranger, joint bookrunner and syndication agent, and the other lenders named therein, as amended (the "Amended and Restated Revolving Credit Agreement"). Also in May 2012, certain of our subsidiaries (the "Revolver Guarantors") entered into a general continuing guarantee of the Borrowers' obligations under the Amended and Restated Revolving Credit Agreement in favor of the lenders (the "Revolver Guarantee").

The Amended and Restated Revolving Credit Agreement is guaranteed by the Revolver Guarantors and is secured by (i) first priority security interests (subject only to customary permitted liens and certain other permitted liens) 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 (subject only to the liens securing the Term Loan Credit Agreement customary permitted liens and certain other permitted liens) (A) equity interests of each direct subsidiary held by the Borrower and each Revolving Guarantor (subject to customary limitations in the case of the equity of foreign subsidiaries), and (B) substantially all other tangible and intangible assets of the Borrowers and the Revolving Guarantors including equipment, general intangibles, intercompany notes, insurance policies, investment property, intellectual property and material owned real property (in each case, except to the extent constituting Revolver Priority Collateral) (collectively, the "Term Priority Collateral"). The respective priorities of the security interests securing the Amended and Restated Revolving Credit Agreement and the Term Loan Credit Agreement are governed by an Intercreditor Agreement between the Revolver Agent and the Term Agent (as defined below) (the "Intercreditor Agreement"). The Amended and Restated Revolving Credit Agreement has a scheduled maturity date of May 8, 2017.

Under the Amended and Restated Revolving Credit Agreement, the lenders agree to make available to us a $150 million revolving credit facility. We have the option to increase the total commitment under the facility to $200 million, subject to certain conditions, including (i) obtaining commitments from any one or more lenders, whether or not currently party to the Amended and Restated Revolving Credit Agreement, to provide such increased amounts and (ii) the available amount of increases to the facility being reduced by the amount of any incremental loans advanced under the Term Loan Credit Agreement in excess of $25 million. Availability under the Amended and Restated Revolving Credit Agreement will be based upon monthly (or more frequent under certain circumstances) borrowing base certifications of the Borrowers' eligible inventory and eligible accounts receivable, and will be reduced by certain reserves in effect from time to time. Subject to availability, the Amended and Restated 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 $10 million. Outstanding borrowings under the Amended and Restated Revolving Credit Agreement will bear interest at a rate, at the Borrowers' election, equal to (i) LIBOR plus a margin ranging from 1.75% to 2.25% or (ii) a base rate plus a margin ranging from 0.75% to 1.25%, 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 0.375% times the average daily unused availability along with other customary fees and expenses of the Revolver Agent and the lenders.

36



The Amended and Restated Revolving 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, repay subordinated indebtedness, make investments and dispose of assets. In addition, we are required to maintain a minimum fixed charge coverage ratio of not less than 1.1 to 1.0 as of the end of any period of 12 fiscal months when excess availability under the Amended and Restated Revolving Credit Agreement is less than 12.5% of the total revolving commitment.

If availability under the Amended and Restated Revolving Credit Agreement is less than 15% of the total revolving commitment or if there exists an event of default, amounts in any of the Borrowers' and the Revolver Guarantors' deposit accounts (other than certain excluded accounts) will be transferred daily into a blocked account held by the Revolver Agent and applied to reduce the outstanding amounts under the facility.

Subject to the terms of the Intercreditor Agreement, if the covenants under the Amended and Restated Revolving Credit Agreement are breached, the lenders may, subject to various customary cure rights, require the immediate payment of all amounts outstanding and foreclose on collateral. Other customary events of default in the Amended and Restated Revolving Credit Agreement include, without limitation, failure to pay obligations when due, initiation of insolvency proceedings, defaults on certain other indebtedness, and the incurrence of certain judgments that are not stayed, satisfied, bonded or discharged within 30 days.

As of June 30, 2014, we were in compliance with all covenants of the Amended and Restated Revolving Credit Agreement.

Term Loan Credit Agreement and Related Amendment

In May 2012 we entered into a credit agreement among us, the several lenders from time to time party thereto, Morgan Stanley Senior Funding, Inc., as administrative agent, joint lead arranger and joint bookrunner (the "Term Agent"), and Wells Fargo Securities, LLC, as joint lead arranger and joint bookrunner, as amended (the "Term Loan Credit Agreement"), which provided for a senior secured term loan facility of $300 million to be advanced at closing and provides for a senior secured incremental term loan facility of up to $75 million, subject to certain conditions, including (i) obtaining commitments from any one or more lenders, whether or not currently party to the Term Loan Credit Agreement, to provide such increased amounts and (ii) the available amount of incremental loans being reduced by the amount of any increases in the maximum revolver amount under the Amended and Restated Revolving Credit Agreement (discussed above). Also in May 2012, certain of our subsidiaries (the "Term Guarantors") entered into a general continuing guarantee of the Company's obligations under the Term Loan Credit Agreement in favor of the Term Agent (the "Term Guarantee").

In April 2013 we entered into Amendment No.1 to Credit Agreement (the "Amendment"), which was effective on May 9, 2013, and amended the Term Loan Credit Agreement. As of the Amendment date, there was approximately $297.0 million of term loans outstanding under the Term Loan Credit Agreement (the "Initial Loans"), of which we paid $20.0 million in connection with the Amendment. Under the Amendment, the lenders agreed to provide to us term loans in an aggregate principal amount of $277.0 million, which were exchanged for and used to refinance the Initial Loans (the "Tranche B-1 Loans"). The Tranche B-1 Loans mature on May 8, 2019, but provide for an accelerated maturity in the event our outstanding 3.375% Convertible Senior Notes due 2018 are not converted, redeemed, repurchased or refinanced in full on or before the date that is 91 days prior to the maturity date thereof. The Tranche B-1 Loans shall amortize in equal quarterly installments in aggregate amounts equal to 0.25% of the Tranche B-1 Loan amount, with the balance payable at maturity, and will bear interest at a rate, at our election, equal to (i) LIBOR (subject to a floor of 1.00%) plus a margin of 3.50% or (ii) a base rate plus a margin of 2.50%.

37



The Term Loan Credit Agreement is guaranteed by the Term Guarantors 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. In addition, the Amendment amended the Term Loan Credit Agreement, by among other things, removing the covenant that we be required to maintain a minimum interest coverage ratio, and providing for a 1% prepayment premium in the event that we enter into a refinancing of, or amendment in respect of, the Tranche B-1 Loans on or prior to the first anniversary of the effective date of the Amendment that, in either case, results in the all-in yield of such refinancing or amendment being less than the all-in yield on the Tranche B-1 Loans. As amended, the Term Loan Credit Agreement requires us to maintain a maximum senior secured leverage ratio tested as of the last day of each fiscal quarter for the four consecutive fiscal quarters then ending of not more than (A) 4.5 to 1.0 through September 30, 2013, (B) 4.0 to 1.0 thereafter through September 30, 2015, and (C) 3.5 to 1.0 thereafter. The Term Loan Credit Agreement also contains conditions providing for either voluntary or mandatory prepayments. Conditions for mandatory prepayments include but are not limited to asset sales with proceeds in excess of $1 million and the amount of excess cash flows, as defined in the Term Loan Credit Agreement to be calculated annually with the delivery of financial statements.

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.

Subject to the terms of the Intercreditor Agreement, if the covenants under the Term Loan Credit Agreement are breached, the lenders may, subject to various customary cure rights, require the immediate payment of all amounts outstanding and foreclose on collateral. Other customary events of default in the Term Loan Credit Agreement include, without limitation, failure to pay obligations when due, initiation of insolvency proceedings, defaults on certain other indebtedness, and the incurrence of certain judgments that are not stayed, satisfied, bonded or discharged within 60 days.

As of June 30, 2014, our senior secured leverage ratio was 0.9:1.0, and we were in compliance with all covenants under the Term Loan Credit Agreement.

For the six months ended June 30, 2014 and 2013, we paid interest of $5.4 million and $8.5 million, respectively, and principal of $21.4 million and $20.8 million, respectively, under the Term Loan Credit Agreement and related Amendment. As of June 30, 2014, we had $213.5 million outstanding under the Term Loan Credit Agreement of which $2.8 million was classified as current on our Condensed Consolidated Balance Sheet. In connection with the closing of the Term Loan Credit Agreement in May 2012 and related Amendment in April 2013, we paid a total of $8.5 million in original issuance discount fees which will be amortized over the life of the facility using the effective interest rate method. For the six months ended June 30, 2014 and 2013, we charged $0.5 million and $0.4 million, respectively, of amortization for original issuance discount fees as Interest Expense in the Condensed Consolidated Statements of Operations. Additionally, for each of the six month periods ended June 30, 2014 and 2013 we charged $0.4 million of accelerated amortization in connection with a $20 million voluntary principal payment as Other, net in the Condensed Consolidated Statements of Operations.

38 Cash Flow



Cash used in operating activities for the first six months of 2014 totaled $8.5 million, compared to $6.6 million provided by operating activities during the same period in 2013. Cash used in operations during the current year period was the result of net income adjusted for various non-cash activities, including depreciation, amortization, deferred income taxes, stock-based compensation, and accretion of debt discount of $66.1 million, offset by a $74.6 million increase in our working capital. Increases in working capital for the current year period can be attributed to increased production as well as finished goods and purchasing activities resulting from higher raw material requirements necessary to meet current production demand. Changes in key working capital accounts for the first six months of 2014 as compared to the same period in 2013 are summarized below (in millions):

Source (Use) of cash: 2014 2013 Change Accounts receivable $ (11.2 )$ (27.9 )$ 16.7 Inventories (75.8 ) (53.3 ) (22.5 ) Accounts payable and accrued liabilities 9.1 26.6 (17.5 ) Net use of cash (77.9 ) (54.6 ) (23.3 )



Accounts receivable increased by $11.2 million in the first six months of 2014 as compared to an increase of $27.9 million in the prior year period. Days sales outstanding, a measure of working capital efficiency that measures the amount of time a receivable is outstanding, decreased to approximately 25 days as of June 30, 2014, compared to 28 days as of the same period in 2013. The increase in accounts receivable during the first six months of 2014 was primarily due to timing of shipments and a 14.5% increase in our consolidated net sales as compared to the prior year period. Inventory increased by $75.8 million during the first six months of 2014 as compared to an increase of $53.3 million in the 2013 period. The increase in inventory for the 2014 period was primarily due to higher finished goods inventory resulting from production levels exceeding customer shipments for the first six months of 2014. Our inventory turns, a commonly used measure of working capital efficiency that measures how quickly inventory turns per year, was approximately 6 times in both the 2014 and 2013 periods. Accounts payable and accrued liabilities increased by $9.1 million in 2014 compared to an increase of $26.6 million for the same period in 2013. The increase during the first six months of 2014 was primarily due to increased production levels and increased purchasing activities required to meet current demand. Days payable outstanding, a measure of working capital efficiency that measures the amount of time a payable is outstanding, was 27 days in 2014 as compared to 32 days in the same period in 2013.

Investing activities provided $0.1 million during the first six months of 2014 compared to $20.1 million used in the same period in 2013. Investing activities for the first six months of 2014 include proceeds from the sale of certain Retail branch location assets totaling $4.1 million as well as capital expenditures to support growth and improvement initiatives at our facilities totaling $4.2 million. Cash used in investing activities in the first six months of 2013 was primarily related to the acquisition of certain assets of Beall totaling $13.9 million.

Financing activities used $22.5 million during the first six months of 2014 primarily due to principal payments under our term loan credit facility of approximately $21.4 million.

As of June 30, 2014, our liquidity position, defined as cash on hand and available borrowing capacity, amounted to $222.3 million, representing an increase of $34.6 million and a decrease of $32.0 million as compared to June 30, 2013 and December 31, 2013, respectively. Total debt and capital lease obligations amounted to $351.3 million as of June 30, 2014. As we continue to see improvements to the overall trailer industry, as well as our operating performance metrics, we believe our liquidity is adequate to fund operations, working capital needs and capital expenditures for the remainder of 2014.

39 Capital Expenditures



Capital spending amounted to $4.2 million for the first six months of 2014 and is anticipated to be approximately $20 million for 2014. Capital spending for 2014 has been and is expected to continue to be primarily utilized for maintenance related projects and to support growth and improvement initiatives within our facilities.

Off-Balance Sheet Transactions

As of June 30, 2014, we had approximately $7.5 million in operating lease commitments. We did not enter into any material off-balance sheet debt or operating lease transactions during the quarter ended June 30, 2014.

Contractual Obligations and Commercial Commitments

We have included a summary of our Contractual Obligations and Commercial Commitments in our annual report on Form 10-K for the year ended December 31, 2013. With the exception of the increase in our raw material purchases commitments (see "Item 3. Qualitative and Quantitative Disclosures About Market Risks-Commodity Prices" section below for further details) and a decrease in our term loan credit facility (see Note 4 of our condensed consolidated financial statements) there have been no material changes to the summary provided in that report.

Backlog



Orders that have been confirmed by customers in writing 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 and terms. Our backlog of orders was approximately $842 million at June 30, 2014 compared to $711 million at December 31, 2013 and $680 million at June 30, 2013. We expect to complete the majority of our existing backlog orders within the next 12 months.

OUTLOOK



The demand environment for trailers remained healthy during the first six months of 2014, as evidenced by our strong and improving backlog, a trailer demand forecast by industry forecasters above replacement demand levels for the next several years and our ability to improve and recapture lost margins. Recent estimates from industry analysts, ACT Research Company ("ACT") and FTR Associates ("FTR"), forecast strong demand levels for the remainder of 2014 and beyond, with ACT currently estimating demand to be approximately 262,000 trailers for 2014, representing an increase of 10% as compared to 2013, and forecasting continued strong demand levels into the foreseeable future with estimated annual average demand for the five year period ending 2019 in excess of 268,000 new trailers. FTR anticipates new trailer demand to be approximately 259,000 new trailers in 2014, representing an increase of 10% as compared to 2013, while projecting a decrease in 2015 with demand totaling 244,000 trailers. Nevertheless, there remain downside concerns relating to issues with the U.S. and global economy, unemployment, and housing and construction-related markets in the U.S.

Other challenges we face as we proceed further into 2014 will primarily relate to managing raw material commodity and component costs. While most commodity costs have been stable in recent periods, raw material costs have historically had periods of volatility. As has been our policy, we will endeavor to pass along raw material and component price increases to our customers in addition to continuing our hedging activities in an effort to minimize the risk of changes in commodity prices having a significant impact on our operating results.

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We believe we are well-positioned for long-term growth in the trailer industry because: (1) our core customers are among the dominant participants in the trucking industry; (2) our DuraPlateฎ and other industry leading brand trailers continue to have increased 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 continued expansion of our presence through our Company-owned branch locations and independent dealer network.

Based on the published industry demand forecasts, customer feedback regarding their current requirements, our existing backlog of orders and our continued efforts to be selective in our order acceptance to ensure we obtain appropriate value for our products, we estimate that for the full year 2014 total new trailers sold will be between 53,000 and 55,000, which reflects volumes approximately 13% to 18% stronger than 2013 demand levels. As a result of our commitment to recapture margins within our Commercial Trailer Products segment, our expectation for growth in trailer volumes is similar to the expected industry growth rate, and we have already begun to realize the improvements in pricing and gross margins and we expect continued improvements throughout the remainder of 2014.

We are not relying solely on volume and price recovery within the trailer industry to improve operations and enhance our profitability. Executing our strategic initiative to become a diversified industrial manufacturer will provide us the opportunity to address new markets, enhance our financial profile and reduce the cyclicality within our business. While demand for some of these products is dependent on the development of new products, customer acceptance of our product solutions and the general expansion of our customer base and distribution channels, we anticipate the near-term growth rate of demand for these products to be comparable to or slightly less than that of our Commercial Trailer Products segment in the current environment. The Walker acquisition completed in May 2012, as well as our purchase of certain assets of Beall Corporation completed in February 2013, further diversifies our business, complements our leadership position in trailer manufacturing and related products and technologies and potentially provides for additional growth and value creation as we actively pursue margin enhancing synergies. In addition, we have been and will continue to focus on developing innovative new products that both add value to our customers' operations and allow us to continue to differentiate our products from the competition.

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, 2013. There have been no material changes to the summary provided in that report.


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Source: Edgar Glimpses


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