SHYFT GROUP, INC. - Quarter Report: 2016 June (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________

FORM 10-Q

Commission File Number 000-13611

SPARTAN MOTORS, INC.
(Exact Name of Registrant as Specified in Its Charter)

Registrant’s Telephone Number, Including Area Code:  (517) 543-6400

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

SPARTAN MOTORS, INC.

INDEX
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FORWARD-LOOKING STATEMENTS

There are certain statements within this Report that are not historical facts. These statements are called “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements involve important known and unknown risks, uncertainties and other factors and can be identified by phrases using “estimate,” “anticipate,” “believe,” “project,” “expect,” “intend,” “predict,” “potential,” “future,” “may,” “will”, “should” and similar expressions or words. Our future results, performance or achievements may differ materially from the results, performance or achievements discussed in the forward-looking statements. There are numerous factors that could cause actual results to differ materially from the results discussed in forward-looking statements, including, among others:

This list provides examples of factors that could affect the results described by forward-looking statements contained in this Report. However, this list is not intended to be all inclusive. The risk factors disclosed in Item 1A “Risk Factors” of Part II of this Quarterly Report on Form 10-Q and in Part I – Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015, include all known risks our management believes could materially affect the results described by forward-looking statements contained in this Report. However, those risks may not be the only risks we face. Our business, operations, and financial performance could also be affected by additional factors that are not presently known to us or that we currently consider to be immaterial to our operations. In addition, new risks may emerge from time to time that may cause actual results to differ materially from those contained in any forward-looking statements. We believe that the forward-looking statements contained in this Report are reasonable. However, given these risks and uncertainties, we cannot provide you with any guarantee that the anticipated results will be achieved. All forward-looking statements in this Report are expressly qualified in their entirety by the cautionary statements contained in this Section and you are cautioned not to place undue reliance on the forward-looking statements contained in this Report as a prediction of actual results. We disclaim any obligation to update or revise information contained in any forward-looking statement to reflect developments or information obtained after the date this Report is filed with the Securities and Exchange Commission.

SPARTAN MOTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value) 

See Accompanying Notes to Condensed Consolidated Financial Statements.

SPARTAN MOTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

See Accompanying Notes to Condensed Consolidated Financial Statements.

SPARTAN MOTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See Accompanying Notes to Condensed Consolidated Financial Statements.

SPARTAN MOTORS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(In thousands)

(Unaudited)

See Accompanying Notes to Condensed Consolidated Financial Statements.

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share data) 

NOTE 1 - GENERAL AND SUMMARY OF ACCOUNTING POLICIES

For a description of key accounting policies followed, refer to the notes to the Spartan Motors, Inc. (the “Company”, “we”, “our” or “us”) consolidated financial statements for the year ended December 31, 2015, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 9, 2016. There have been no changes in such accounting policies as of the date of this report.

Spartan Motors, Inc. is a custom engineer and manufacturer of specialized motor vehicle chassis and bodies. Our principal chassis markets are emergency response vehicles, motor homes and other specialty vehicles. We also manufacture bodies for various markets including emergency response vehicles and delivery and service vehicles.

Our operating activities are conducted through our wholly-owned operating subsidiary, Spartan Motors USA, Inc. (“Spartan USA”), with locations in Charlotte, Michigan; Brandon, South Dakota; Ephrata, Pennsylvania; and Bristol, Indiana; as well as contract manufacturing in Kansas City, Missouri; and Saltillo, Mexico. Spartan USA is the result of a consolidation of several of our subsidiaries, including Crimson Fire, Inc., Spartan Motors Chassis, Inc., and Utilimaster Corporation, into a single business entity.

Our Charlotte, Michigan location manufactures heavy duty chassis and vehicles and supplies aftermarket parts and services under the Spartan Chassis and Spartan ERV brand names. Our Brandon, South Dakota and Ephrata, Pennsylvania locations manufacture emergency response vehicles under the Spartan ERV brand name. Our Bristol, Indiana location manufactures delivery and service vehicles and supplies related aftermarket parts and services under the Utilimaster brand name, while our Kansas City, Missouri and Saltillo, Mexico locations sell and install equipment used in delivery vehicles. Spartan USA is also a participant in Spartan-Gimaex Innovations, LLC (“Spartan-Gimaex”), a 50/50 joint venture with Gimaex Holding, Inc. Spartan-Gimaex is reported as a consolidated subsidiary of Spartan Motors, Inc. In February 2015, Spartan USA and Gimaex Holding, Inc. mutually agreed to begin discussions regarding the dissolution of the joint venture. In June 2015, Spartan USA and Gimaex Holding, Inc. entered into court proceedings to determine the terms of the dissolution. The terms of the dissolution have not yet been determined, pending the outcome of the court proceedings.

These unaudited condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements reflect all normal and recurring adjustments that are necessary for the fair presentation of our financial position as of June 30, 2016, the results of operations for the three and six month periods ended June 30, 2016 and the cash flows for the six month period ended June 30, 2016, and should be read in conjunction with the audited consolidated financial statements and footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2015.

The results of operations for the three and six months ended June 30, 2016 are not necessarily indicative of the results to be expected for the full year.

We are required to disclose the fair value of our financial instruments in accordance with Financial Accounting Standards Board (“FASB”) Codification relating to “Disclosures about Fair Values of Financial Instruments.” The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and our fixed and variable rate debt instruments approximate their fair value at June 30, 2016 and December 31, 2015.

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share data)

Recently issued accounting standards

In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation – Stock Compensation (“ASU 2016-09”). ASU 2016-09 simplifies the accounting for a stock payment’s tax consequences by requiring the recognition of the income tax effects of awards in the income statement when the awards vest or are settled. It also allows a company to elect to account for forfeitures as they occur rather than on an estimated basis and revises the classification of certain tax payments related to stock compensation on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of our pending adoption of ASU 2016-09 on our consolidated financial statements.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently evaluating the impact of our pending adoption of ASU 2016-02 on our consolidated financial statements.

In November 2015, the FASB issued Accounting Standards Update 2015-17, Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”). ASU 2015-17 requires net deferred tax assets and liabilities to be classified as non-current on the Consolidated Balance Sheets. Prior to adoption of the new standard, net deferred tax assets and liabilities were presented separately as current and non-current on the Consolidated Balance Sheets. ASU 2015-17 is effective for financial statements issued for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted. We retrospectively adopted ASU 2015-17 as of the second quarter of 2016. As a result, we reclassified $3,164 of Deferred income tax assets (current) to Deferred income taxes, net (non-current) and $2,520 from Deferred income tax liabilities to Deferred income taxes, net. The December 31, 2015 balances in Total current assets decreased by $3,164, Other assets increased by $644 and Total assets and Total liabilities both decreased by $2,520.

In July 2015, the FASB issued Accounting Standards Update 2015-11, Inventory (Topic 330) – Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 requires entities that measure inventory using the first-in, first-out or average cost methods to measure inventory at the lower of cost or net realizable value to more closely align the measurement of inventory in Generally Accepted Accounting Practices with International Financial Reporting Standards. Net realizable value is defined as estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal. ASU 2015-11 is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016. We do not believe the adoption of ASU 2015-11 will have a material impact on our consolidated financial position, results of operations or cash flows.

In February 2015, the FASB issued Accounting Standards Update 2015-02 Consolidation (Topic 810), Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 modifies the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The amendments under the new guidance modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities, eliminate the presumption that a general partner should consolidate a limited partnership and affect the consolidation analysis of reporting entities that are involved with VIEs. ASU 2015-02 is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The adoption of the provisions of ASU 2015-02 did not have an impact on our consolidated financial position, results of operations or cash flows.

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share data)

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 is based on the principle that revenue should be recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. Early adoption for annual reporting periods beginning after December 15, 2016 is permitted. On August 12, 2015, FASB delayed the effective date to give companies an extra year to implement the standard. The standard will be effective in 2018, but companies will have the option of adopting it as of the original 2017 effective date. We are currently evaluating the adoption method and the impact of the adoption of the new revenue recognition standard.

In March 2016, the FASB issued Accounting Standards Update No. 2016-08, Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”). ASU 2016-08 clarifies the implementation guidance for principal-versus-agent considerations in the revenue recognition standard. A principal-versus-agent consideration applies to sales that involve two or more suppliers to a customer. Each participant in the sale must determine whether they control the good or service and are entitled to the gross amount of the transaction or are acting as an agent and should collect only a fee or commission for arranging the sale. ASU 2016-08 will go into effect when the revenue standard issued in ASU 2014-09 becomes effective.

In April 2016, the FASB issued Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing (“ASU 2016-10”). ASU 2016-10 clarifies the implementation guidance in Topic 606 for identifying performance obligations and determining when to recognize revenue on licensing agreements for intellectual property. ASU 2016-10 removes the requirement to assess whether promised goods or services are performance obligations if they are immaterial to the contract with the customer and allows an entity to elect to account for shipping and handling activities that occur after the customer has obtained control of a good as an activity to fulfill the promise to transfer the good rather than as an additional promised service. ASU 2016-10 also includes implementation guidance on determining whether a license granted by an entity provides a customer with a right to use the intellectual property, which is satisfied at a point in time, or a right to access the intellectual property, which is satisfied over time. ASU 2016-10 will go into effect when the revenue standard issued in ASU 2014-09 becomes effective.

In May 2016, the FASB issued Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers (Topic 606), Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”). ASU 2016-12 clarifies the implementation guidance on assessing collectability, presentation of sales taxes, non-cash consideration and completed contracts and contract modifications at transition. ASU 2016-12 will go into effect when the revenue standard issued in ASU 2014-09 becomes effective.

NOTE 2 – INVENTORIES

Inventories are summarized as follows:

We have a number of demonstration units as part of our sales and training program. These demonstration units are included in the “Finished goods” line item above. The net carrying amount was $2,818 and $2,857 at June 30, 2016 and December 31, 2015.

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share data)

NOTE 3 – RESTRUCTURING

During the three and six months ended June 30, 2016 and 2015, we incurred restructuring charges related to efforts undertaken to upgrade production processes at our Brandon, South Dakota and Ephrata, Pennsylvania locations. Restructuring charges incurred in 2015 also included costs related to the relocation of our Ocala, Florida manufacturing operations to our Charlotte, Michigan and Brandon, South Dakota facilities.

Restructuring charges included in our Consolidated Statements of Operations for the three and six month periods ended June 30, 2016 and 2015, which were all related to our Emergency Response Vehicles segment, are as follows:

The following table provides a summary of the compensation related charges incurred during the six months ended June 30, 2015 as part of our restructuring initiatives, along with the related outstanding balances to be paid in relation to those expenses. There was no outstanding balance at January 1, 2016.

NOTE 4 - COMMITMENTS AND CONTINGENT LIABILITIES

Under the terms of our credit agreement with our banks, we have the ability to issue letters of credit totaling $20,000. At June 30, 2016 and December 31, 2015, we had outstanding letters of credit totaling $1,050 and $1,337 related to certain emergency response vehicle contracts and our workers compensation insurance.

At June 30, 2016, we and our subsidiaries were parties, both as plaintiff and defendant, to a number of lawsuits and claims arising out of the normal course of our businesses. In the opinion of management, other than the Spartan-Gimaex dissolution discussion below, our financial position, future operating results or cash flows will not be materially affected by the final outcome of these legal proceedings.

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share data)

Chassis Agreements 

We are party to chassis bailment inventory agreements with General Motors Company (“GM”) and Chrysler Group, LLC (“Chrysler”) which allow GM and Chrysler to draw up to $10,000 against our revolving credit line for chassis placed at our facilities. As a result of these agreements, there was $343 and $3,795 outstanding on our revolving credit line at June 30, 2016 and December 31, 2015. Under the terms of the bailment inventory agreements, these chassis never become our property, and the amount drawn against the credit line will be repaid by a GM or Chrysler dealer at the time an order is placed for one of our bodies, utilizing a GM or Chrysler chassis. As such, the chassis, and the related draw on the line of credit, are not reflected in the accompanying Condensed Consolidated Balance Sheets.

Warranty Related

We provide limited warranties against assembly/construction defects. These warranties generally provide for the replacement or repair of defective parts or workmanship for a specified period following the date of sale. The end users also may receive limited warranties from suppliers of components that are incorporated into our chassis and vehicles.

Certain warranty and other related claims involve matters of dispute that ultimately are resolved by negotiation, arbitration or litigation. Infrequently, a material warranty issue can arise which is beyond the scope of our historical experience. We provide for any such warranty issues as they become known and are estimable. It is reasonably possible that additional warranty and other related claims could arise from disputes or other matters beyond the scope of our historical experience.

Changes in our warranty liability during the six months ended June 30, 2016 and 2015 were as follows:

Changes in liability for pre-existing warranties during the period includes $2,226 for campaigns and recalls outside of our normal warranty programs and $909 for changes in the estimated liability for existing warranties resulting from newly available claim data.

Spartan-Gimaex joint venture

In February 2015, Spartan USA and Gimaex Holding, Inc. mutually agreed to begin discussions regarding the dissolution of the Spartan-Gimaex joint venture. In June 2015, Spartan USA and Gimaex Holding, Inc. entered into court proceedings to determine the terms of the dissolution. Through December 31, 2015, we recorded charges totaling $1,217 to write down certain inventory items associated with this joint venture to their estimated fair values. There were no further charges recorded during the six months ended June 30, 2016. Costs associated with the wind-down will be impacted by the final dissolution agreement. In accordance with accounting guidance, the costs we have accrued so far represent the low end of the range of the estimated total charges that we believe we may incur related to the wind-down. While we are unable to determine the final cost of the wind-down with certainty at this time, we may incur additional charges, depending on the final terms of the dissolution, and such charges could be material to our future operating results.

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share data)

NOTE 5 – EARNINGS (LOSS) PER SHARE

The following table presents a reconciliation of the weighted average shares outstanding used in the Net earnings (loss) per share (“EPS”) calculation:

Stock awards noted as anti-dilutive were not included in the basic (Restricted stock awards) and diluted (Stock option awards) weighted average common shares outstanding.

NOTE 6 – TAXES

Our effective tax rate was 0.2% and 2.0% for the three and six month periods ended June 30, 2016. Our effective tax rate in 2016 was impacted by a valuation allowance recorded in 2015 against substantially all of our deferred tax assets. We continue to anticipate the need for this valuation allowance in 2016. We expect that any tax provision or benefit that we record in 2016 based upon taxable income or loss will be offset by an equal adjustment to our valuation allowance. As a result, our tax provision for the three and six months ended June 30, 2016 does not include a current year tax expense, but consists of adjustments to reserves for uncertain tax positions and a true-up of certain prior year state tax provisions to the amount of tax paid based on the actual filing. Our effective rates for the three and six months ended June 30, 2015 were 48.1% and 16.4%, and were based on statutory rates applied to actual pre-tax income or loss.

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share data)

NOTE 7 – SHAREHOLDERS’ EQUITY

In October 2011, our Board of Directors authorized the re-purchase of up to 1,000 shares of the Company’s common stock. In April 2016, our Board of Directors authorized the re-purchase of up to 1,000 additional shares of our common stock, and terminated the October 2011 authorization effective June 30, 2016. The following tables represent our open market purchases of our common stock during the three and six months ended June 30, 2016.

NOTE 8 - BUSINESS SEGMENTS

We identify our reportable segments based on our management structure and the financial data utilized by our chief operating decision makers to assess segment performance and allocate resources among our operating units. We have three reportable segments: Emergency Response Vehicles, Fleet Vehicles and Services, and Specialty Chassis and Vehicles. Previously, we reported sales of aftermarket parts and accessories related to our emergency response vehicles, motor home chassis and defense vehicles as part of our Specialty Chassis and Vehicles segment. As a result of a realignment of our operating segments completed during the second quarter of 2016, aftermarket parts and accessories related to emergency response vehicles are now included in the Emergency Response Vehicles segment. Segment results from prior periods are shown reflecting the change.

Our Emergency Response Vehicles segment consists of the emergency response chassis operations at our Charlotte, Michigan location and our operations at our Brandon, South Dakota and Ephrata, Pennsylvania locations, along with our Spartan-Gimaex joint venture. This segment engineers and manufactures emergency response chassis and vehicles and distributes related aftermarket parts and accessories.

Our Fleet Vehicles and Services segment consists of our operations at our Bristol, Indiana location, along with our operations at our up-fit centers in Kansas City, Missouri and Saltillo, Mexico and focuses on designing and manufacturing walk-in vans for the delivery and service market, the production of commercial truck bodies and the distribution of related aftermarket parts and assemblies. This segment was formerly referred to as Delivery and Service Vehicles; however, there has been no change in the operations contained within this segment.

Our Specialty Chassis and Vehicles segment consists of our Charlotte, Michigan operations that engineer and manufacture motor home chassis, defense vehicles and other specialty chassis and distribute related aftermarket parts and accessories.

Appropriate expense amounts are allocated to the three reportable segments and are included in their reported operating income or loss.

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share data)

The accounting policies of the segments are the same as those described, or referred to, in Note 1 - General and Summary of Accounting Policies. Assets and related depreciation expense in the column labeled “Other” pertain to capital assets maintained at the corporate level. Segment loss from operations in the “Other” column contains corporate related expenses not allocable to the operating segments. Interest expense and Taxes on income are not included in the information utilized by the chief operating decision makers to assess segment performance and allocate resources, and accordingly, are excluded from the segment results presented below. Intercompany transactions between operating segments were immaterial in all periods presented.

Three Months Ended June 30, 2016

Three Months Ended June 30, 2015

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share data)

Six Months Ended June 30, 2016

Six Months Ended June 30, 2015

Spartan Motors, Inc. was organized as a Michigan corporation on September 18, 1975, and is headquartered in Charlotte, Michigan. Spartan Motors began development of its first product that same year and shipped its first fire truck chassis in October 1975.

We are known as a leading, niche market engineer and manufacturer in the heavy-duty, custom vehicles marketplace. Our operating activities are conducted through our wholly-owned operating subsidiary, Spartan Motors USA, Inc. (“Spartan USA”), with locations in Charlotte, Michigan; Brandon, South Dakota; Ephrata, Pennsylvania; and Bristol, Indiana; along with contract manufacturing in Kansas City, Missouri; and Saltillo, Mexico. 

We recently completed a corporate reorganization in order to consolidate our U.S. operations into a single subsidiary and to simplify our corporate structure. On July 1, 2015, our former Spartan Motors Chassis, Inc. subsidiary (which operated our Charlotte, Michigan location) and our former Crimson Fire Aerials, Inc. subsidiary (which operated our Ephrata, Pennsylvania location) were merged into Spartan USA. On January 1, 2016, our former Utilimaster Corporation subsidiary (which operated our Bristol, Indiana location) was also merged into Spartan USA.

Our Charlotte, Michigan location manufactures heavy duty chassis and vehicles and supplies aftermarket parts and assemblies under the Spartan Chassis and Spartan ERV brand names. Our Brandon, South Dakota and Ephrata, Pennsylvania locations manufacture emergency response vehicles under the Spartan ERV brand name. Our Bristol, Indiana location manufactures vehicles used in the parcel delivery, mobile retail and trades and construction industries, and supplies related aftermarket parts and services under the Utilimaster brand name, while our Kansas City, Missouri and Saltillo, Mexico locations sell and install equipment used in fleet vehicles. Spartan USA is also a participant in Spartan-Gimaex Innovations, LLC (“Spartan-Gimaex”), a 50/50 joint venture with Gimaex Holding, Inc that was formed to provide emergency response vehicles for the domestic and international markets. Spartan-Gimaex is reported as a consolidated subsidiary of Spartan Motors, Inc. In February 2015, Spartan USA and Gimaex Holding, Inc. mutually agreed to begin discussions regarding the dissolution of the joint venture. In June 2015, Spartan USA and Gimaex Holding, Inc. entered into court proceedings to determine the terms of the dissolution.

Our business strategy is to further diversify product lines and develop innovative design, engineering and manufacturing expertise in order to be the best value producer of specialty vehicle products. We have an innovative team focused on building lasting relationships with our customers. This is accomplished by striving to deliver premium specialty chassis and vehicles, vehicle components, and services that inspire customer loyalty. Our diversification across several sectors creates numerous opportunities while minimizing overall risk. Additionally, our business model provides the agility to quickly respond to market needs, take advantage of strategic opportunities when they arise and correctly size operations to ensure stability and growth.

Executive Overview

We believe we are well positioned to take advantage of long-term opportunities, and continue our efforts to bring product innovations to each of the markets that we serve. Some of our recent innovations and strategic developments include:

The following section provides a narrative discussion about our financial condition and results of operations. The comments should be read in conjunction with our Condensed Consolidated Financial Statements and related Notes thereto included in Item 1 of this Form 10-Q and in conjunction with our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 9, 2016.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, the components of the Company’s Condensed Consolidated Statements of Operations as a percentage of sales (percentages may not sum due to rounding):

Quarter Ended June 30, 2016 Compared to the Quarter Ended June 30, 2015

Sales

For the quarter ended June 30, 2016, we reported consolidated sales of $162.5 million, compared to $144.8 million for the second quarter of 2015, an increase of $17.7 million or 12.2%. These results reflect increases in sales in our Fleet Vehicles and Services and Specialty Chassis and Vehicles segments, which were partially offset by a decrease in sales in our Emergency Response Vehicles segment. Please refer to our segment discussion below for more information about sales within our segments.

Cost of Products Sold

Cost of products sold was $141.7 million in the second quarter of 2016, compared to $127.3 million in the second quarter of 2015, an increase of $14.4 million or 11.3%. This increase was mainly due to the higher sales volume in the second quarter of 2016 compared to the second quarter of 2015. As a percentage of sales, cost of products sold decreased to 87.2% in the second quarter of 2016, compared to 87.9% in the second quarter of 2015, driven by a more favorable product mix in 2016, which included a higher proportion of higher margin parts revenue than the second quarter of 2015.

Gross Profit

Gross profit was $20.8 million for the second quarter of 2016, compared to $17.4 million for the second quarter of 2015, an increase of $3.4 million, or 19.5%. Gross margin increased to 12.8% from 12.0% over the same time period, mainly due to the favorable product mix experienced in the second quarter of 2016 compared to 2015.

Operating Expenses

Operating expense was $16.4 million for the second quarter of 2016, compared to $15.1 million for the second quarter of 2015, an increase of $1.3 million or 8.6%. Research and development expense in the second quarter of 2016 was $1.8 million, compared to $1.2 million in the second quarter of 2015, an increase of $0.6 million, or 50.0%, driven by headcount increases undertaken in order to improve our ability to enact product enhancements across business units. Selling, general and administrative expense was $14.4 million in the second quarter of 2016, compared to $13.2 million in the second quarter of 2015, an increase of $1.2 million, or 9.1%. $0.9 million of this increase was due to higher incentive compensation expense recorded in 2016 based on financial results, while the remainder was due to an increase in market development spending in 2016. Restructuring charges were $0.2 million in the second quarter of 2016, compared to $0.8 million in the second quarter of 2015, a decrease of $0.6 million, or 75.0%, as a result of decreased spending on re-engineering in our Emergency Response Vehicles segment as projects are completed.

Taxes

Our effective income tax rate was 0.2% in the second quarter of 2016, compared to 48.1% in the second quarter of 2015. Our effective tax rate for the second quarter of 2016 was impacted by the deferred tax asset valuation allowance that we recorded in 2015. Our tax provision for 2016 based upon taxable income was offset by an equal adjustment to our valuation allowance, which resulted in a tax rate of 0% applied to 2016 earnings. The tax expense recorded in the second quarter of 2016 results from adjustments to reserves for uncertain tax positions and a true-up of certain prior provisions for various state tax liabilities to the amounts reported on the actual tax filings. Our effective tax rate in the second quarter of 2015 differed from the statutory rate due to the non-deductible NHTSA penalty accrued during the second quarter.

Net Income

We recorded net income of $4.4 million, or $0.13 per share, for the second quarter of 2016, compared to net income of $1.2 million, or $0.03 per share for the same period in 2015. Driving the increase in net income for the three months ended June 30, 2016 compared with the prior year were the factors discussed above.

Order Backlog

At June 30, 2016, we had $304.0 million in backlog compared to $262.7 million at June 30, 2015, an increase of $41.3 million or 15.7%. This increase is mainly attributable to a $51.1 million increase in our Fleet Vehicles and Services backlog, which included a $32.5 million increase in vehicle orders along with an $18.6 million increase in equipment up-fit orders. Also contributing to the overall order backlog increase was an increase of $3.4 million in our Emergency Response Vehicles backlog. These increases were partially offset by a $13.2 million decrease in our Specialty Chassis and Vehicles backlog resulting from lower motor home order intake in the second quarter of 2016 compared with the same period of 2015. We anticipate filling our current backlog orders for our Emergency Response Vehicles segment over the next 11 months, for our Fleet Vehicles and Services segment over the next 6 months and our Specialty Chassis and Vehicles segment over the next 2 months.

While orders in the backlog are subject to modification, cancellation or rescheduling by customers, this has not been a major factor in the past. Although the backlog of unfilled orders is one of many indicators of market demand, several factors, such as changes in production rates, available capacity, new product introductions and competitive pricing actions, may affect actual sales. Accordingly, a comparison of backlog from period-to-period is not necessarily indicative of eventual actual shipments.

Six months Ended June 30, 2016 Compared to the Six Months Ended June 30, 2015

Sales

For the six months ended June 30, 2016, we reported consolidated sales of $296.3 million, compared to $273.2 million for the same period in 2015, an increase of $23.1 million or 8.5%. These results reflect increases in sales in our Fleet Vehicles and Services and Specialty Chassis and Vehicles segments, which were partially offset by a decrease in sales in our Emergency Response Vehicles segment. Please refer to our segment discussion below for more information about sales within our segments.

Cost of Products Sold

Cost of products sold was $259.6 million in the six months ended June 30, 2016, compared to $243.8 million in the same period of 2015, an increase of $15.8 million or 6.5%. This increase was mainly due to the higher sales volume in 2016 compared to 2015, and was partially offset by $0.5 million of restructuring charges recorded in the six months ended June 30, 2015 that did not recur in 2016. As a percentage of sales, cost of products sold decreased to 87.6% in 2016, compared to 89.2% in 2015, primarily driven by a more favorable product mix in 2016, which included a higher proportion of higher margin parts revenue than in 2015.

Gross Profit

Gross profit was $36.6 million for the six months ended June 30, 2016, compared to $29.0 million for the same period of 2015, an increase of $7.6 million, or 26.2%. Gross margin increased to 12.4% from 10.6% over the same time period, mainly due to the favorable product mix experienced in 2016 compared to 2015.

Operating Expenses

Operating expense was $31.6 million for the six months ended June 30, 2016, compared to $31.0 million for the same period of 2015, an increase of $0.6 million or 1.9%. Research and development expense in the six months ended June 30, 2016 was $3.0 million, compared to $2.6 million in the same period of 2015, an increase of $0.4 million, or 15.4%, driven by headcount increases undertaken in order to improve our ability to enact product enhancements across business units. Selling, general and administrative expense was $28.0 million in the six months ended June 30, 2016, compared to $26.8 million in the same period of 2015, an increase of $1.2 million, or 4.5%. $1.6 million of this increase was due to higher incentive compensation expense recorded in 2016 based on financial results, while $0.6 million was due to higher accruals for bad debts recorded in 2016. These increases were partially offset by a $1.0 million NHTSA penalty recorded in 2015 that did not recur in 2016. Restructuring charges were $0.6 million in the six months ended June 30, 2016, compared to $1.5 million in the same period of 2015, a decrease of $0.9 million, or 60.0%, as a result of decreased spending on re-engineering in our Emergency Response Vehicles segment as projects are completed.

Taxes

Our effective income tax rate was 2.0% in the six months ended June 30, 2016, compared to 16.4% in the same period of 2015. Our effective tax rate in 2016 has been impacted by the deferred tax asset valuation allowance that we recorded in 2015. Our tax provision for 2016 based upon taxable income was offset by an equal adjustment to our valuation allowance, which resulted in a tax rate of 0% applied to 2016 earnings. The $0.1 million of tax expense recorded in the six months ended June 30, 2016 results from adjustments to reserves for uncertain tax positions and a true-up of certain prior provisions for various state tax liabilities to the amounts reported on the actual tax filings. Our effective tax rate for the six months ended June 30, 2015 differed from the statutory rate mainly due to a $1 million non-deductible NHTSA penalty incurred during the period.

Net Income

We recorded net income of $4.9 million, or $0.14 per share, for the six months ended June 30, 2016, compared to a net loss of $1.7 million, or $0.05 per share for the same period in 2015. Driving the increase in net income for the six months ended June 30, 2016 compared with the prior year were the factors discussed above.

Our Segments

We identify our reportable segments based on our management structure and the financial data utilized by our chief operating decision makers to assess segment performance and allocate resources among our operating units. We have three reportable segments: Emergency Response Vehicles, Fleet Vehicles and Services, and Specialty Chassis and Vehicles. Previously, we reported sales of aftermarket parts and accessories related to our emergency response vehicles, motor home chassis and defense vehicles as part of our Specialty Chassis and Vehicles segment. As a result of a realignment of our operating segments completed during the second quarter of 2016, aftermarket parts and accessories related to emergency response vehicles are now included in the Emergency Response Vehicles segment. Segment results from prior periods are shown reflecting the change.

Our Emergency Response Vehicles segment consists of the emergency response chassis operations at our Charlotte, Michigan location and our operations at our Brandon, South Dakota and Ephrata, Pennsylvania locations, along with our Spartan-Gimaex joint venture. This segment engineers and manufactures emergency response chassis and vehicles and distributes related aftermarket parts and accessories.

Our Fleet Vehicles and Services segment consists of our operations at our Bristol, Indiana location, along with our operations at our up-fit centers in Kansas City, Missouri and Saltillo, Mexico. This segment designs and manufactures walk-in vans and commercial truck bodies for the delivery and service market and distributes related aftermarket parts and accessories. This segment was formerly referred to as Delivery and Service Vehicles. There has been no change in the operations contained within this segment.

Our Specialty Chassis and Vehicles segment consists of our Charlotte, Michigan operations that engineer and manufacture motor home chassis, defense vehicles and other specialty chassis and distribute related aftermarket parts and accessories.

For certain financial information related to each segment, see Note 8 - Business Segments, of the Notes to Condensed Consolidated Financial Statements appearing in Item 1 of this Form 10-Q.

Emergency Response Vehicles 

Comparison of the Three Month Periods Ended June 30, 2016 and 2015

Sales in our Emergency Response Vehicles segment were $52.4 million in the second quarter of 2016, compared to $62.8 million in 2015, a decrease of $10.4 million, or 16.6%, driven by lower unit sales volume in 2016. There were no changes in pricing of products sold by our Emergency Response Vehicles segment that had a significant impact on our financial statements when comparing these periods.

Operating loss for our Emergency Response Vehicles segment was $2.4 million in the second quarter of 2016, compared to $0.9 million in 2015, an increase of $1.5 million, or 166.7%. $1.7 million of this increase was due to a product recall charge recorded in 2016, $1.2 million was due to labor efficiencies experienced in 2015 resulting from two multi-unit orders that did not recur in 2016 and $0.7 million was due to the lower overall unit volume. These increases were partially offset by decreases of $1.5 million in 2016 due to a more favorable product mix and $0.6 million due to lower restructuring charges incurred in the second quarter of 2016 compared to the prior year.

Comparison of the Six Month Periods Ended June 30, 2016 and 2015

Sales in our Emergency Response Vehicles segment were $93.5 million for the six months ended June 30, 2016, compared to $107.6 million for the same period of 2015, a decrease of $14.1 million, or 13.1%, driven by lower unit volume in 2016. There were no changes in pricing of products sold by our Emergency Response Vehicles segment that had a significant impact on our financial statements when comparing these periods.

Operating loss for our Emergency Response Vehicles segment was $6.1 million for the six months ended June 30, 2016, compared to $6.0 million for the same period of 2015, an increase of $0.1 million, or 1.7%. $2.5 million of this increase was due to higher product recall and other warranty charges recorded in 2016, $1.2 million was due to labor efficiencies experienced in 2015 resulting from two multi-unit orders that did not recur in 2016, and $0.8 million was due to the lower overall unit volume experienced in 2016. These increases were partially offset by decreases of $2.1 million in 2016 due to a more favorable product mix, $1.4 million due to lower restructuring charges incurred in 2016, $0.7 million due to the NHTSA penalties incurred in 2015 and $0.2 million due to reduced operating expense as a result of a sales department reorganization enacted in 2016.

Fleet Vehicles and Services

Comparison of the Three Month Periods Ended June 30, 2016 and 2015

Sales in our Fleet Vehicles and Services segment were $73.8 million in the second quarter of 2016, compared to $52.8 million in the second quarter of 2015, an increase of $21.0 million or 39.8% due to a $12.0 million increase in vehicle sales driven by higher unit volume and an $9.0 million increase in sales of aftermarket parts and accessories in the second quarter of 2016. There were no changes in pricing of products sold by our Fleet Vehicles and Services segment that had a significant impact on our financial statements when comparing the first quarter of 2016 to the first quarter of 2015.

Operating income in our Fleet Vehicles and Services segment for the second quarter of 2016 was $6.5 million compared to $3.3 million in the second quarter of 2015, an increase of $3.2 million or 97.0%, driven by the increase in higher margin parts revenue in 2016.

Comparison of the Six Month Periods Ended June 30, 2016 and 2015

Sales in our Fleet Vehicles and Services segment were $133.1 million for the six months ended June 30, 2016, compared to $107.7 million for the same period of 2015, an increase of $25.4 million, or 23.6%, due to increases of $21.0 million in sales of aftermarket parts and accessories and $4.3 million in vehicle sales driven by higher unit volume in 2016. There were no changes in pricing of products sold by our Fleet Vehicles and Services segment that had a significant impact on our financial statements when comparing these periods.

Operating income for our Fleet Vehicles and Services segment was $12.0 million for the six months ended June 30, 2016, compared to $5.9 million for the same period of 2015, an increase of $6.1 million, or 103.4%, driven by the increase in higher margin parts revenue in 2016.

Specialty Chassis and Vehicles

Comparison of the Three Month Periods Ended June 30, 2016 and 2015

Sales in our Specialty Chassis and Vehicles segment were $36.3 million in the second quarter of 2016, compared to $29.2 million in the second quarter of 2015, an increase of $7.1 million or 24.3%. Sales of motor home chassis increased by $4.8 million in 2016, with $4.2 million due to higher unit volumes and $0.6 million due to pricing changes enacted in the second quarter. Sales of other specialty chassis increased by $2.3 million in 2016 due to higher unit volumes. Other than the motor home pricing, there were no changes in pricing of products sold by our Specialty Chassis and Vehicles segment that had a significant impact on our financial statements when comparing the first quarter of 2016 to the first quarter of 2015.

Operating income for our Specialty Chassis and Vehicles segment for the second quarter of 2016 was $3.1 million, compared to $1.7 million in the second quarter of 2015, an increase of $1.4 million, or 82.4%. $0.9 million of this increase was due to the higher sales of other specialty vehicles in the second quarter of 2016, $0.6 million was due to the motor home pricing changes enacted in 2016 and $0.5 million of the increase was due to the NHTSA penalty recorded in the second quarter of 2015, which did not recur in 2016. These increases were partially offset by a $0.6 million increase in Selling, general and administrative expense in 2016, driven in equal parts by higher marketing spending and an increase in bad debt reserves.

Comparison of the Six Month Periods Ended June 30, 2016 and 2015

Sales in our Special Chassis and Vehicles segment were $69.6 million for the six months ended June 30, 2016, compared to $57.9 million for the same period of 2015, an increase of $11.7 million, or 20.2%. $7.2 million of the increase was due to higher motor home unit volume in 2016, while motor home pricing changes enacted in the second quarter of 2016 accounted for $0.6 million of the increase. Sales of other specialty chassis and vehicles increased by $4.2 million, driven by higher unit volumes in 2016, while sales of aftermarket parts and assemblies decreased by $0.3 million in 2016 due to lower unit volumes. Other than the motor home pricing, there were no changes in pricing of products sold by our Specialty Chassis and Vehicles segment that had a significant impact on our financial statements when comparing these periods.

Operating income for our Specialty Chassis and Vehicles segment was $4.6 million for the six months ended June 30, 2016, compared to $2.4 million for the same period of 2015, an increase of $2.2 million, or 91.7%. $1.5 million of this increase was due to the higher sales volumes experienced in 2016, $1.4 million of the increase was due to the NHTSA penalty that was recorded in 2015 and did not recur in 2016, while $0.6 million of the increase was due to the motor home pricing discussed above. These increases were partially offset by a $0.5 million increase in general warranty expenses recorded during 2016, with the remainder of the change due to increased General and administrative expense in 2016, primarily accruals for bad debt.

Financial Condition

Balance Sheet at June 30, 2016 compared to December 31, 2015

Cash increased by $7.1 million, or 21.6%, to $39.8 million at June 30, 2016 from $32.7 million at December 31, 2015. Please see the discussion of cash flow activity below for more information on our sources and uses of cash in the first six months of 2016. 

Accounts receivable increased by $13.0 million, or 23.0%, to $69.6 million at June 30, 2016, compared to $56.6 million at December 31, 2015, due to higher sales volume in the latter half of the second quarter of 2016 compared to sales in the latter half of the fourth quarter of 2015.

Accounts payable increased by $11.3 million, or 41.5%, to $38.7 million at June 30, 2016 compared to $27.3 million at December 31, 2015 due to the timing of payments and the ramp up in production following our traditional

year-end shut down in December.

Accrued compensation and related taxes increased by $2.5 million, or 28.5%, to $11.2 million at June 30, 2016 from $8.7 million at December 31, 2015, mainly due to an increase in incentive compensation accruals as a result of the first and second quarter financial performance.

Deposits from customers increased by $5.5 million, or 42.2%, to $18.6 million at June 30, 2016 compared to $13.1 million at December 31, 2015 due to more prepayments received than applied to invoices at our Emergency Response Vehicles segment.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

Cash and cash equivalents increased by $7.1 million to $39.8 million at June 30, 2016, compared to $32.7 million at December 31, 2015. These funds, in addition to cash generated from future operations and available credit facilities, are expected to be sufficient to finance the Company’s foreseeable liquidity and capital needs.

Cash Flow from Operating Activities

For the six months ended June 30, 2016, we generated $16.7 million of cash from operating activities, which represents a $20.1 million increase from the $3.4 million of cash that was used by operations for the six months ended June 30, 2015. The increase in cash generated in 2016 results from our improved financial performance compared to the prior year along with changes in working capital, particularly increases in accounts payable and customer deposits.

See the Financial Condition section contained in Item 2 of this Form 10-Q for further information regarding balance sheet line items that drove cash flows for the six month period ended June 30, 2016. Also see the Condensed Consolidated Statements of Cash Flows contained in Item 1 of this Form 10-Q for the other various factors that represented the remaining fluctuation of cash from operations between the periods.

Cash Flow from Investing Activities

We utilized $5.8 million in investing activities in the first six months of 2016, a $3.5 million increase compared to the $2.3 million utilized in the first six months of 2015. This increase is mainly the result of the construction of our new assembly plant in Charlotte, Michigan as well as increased investment in our Bristol, Indiana facility as part of our relocation of truck body production for the Fleet Vehicles and Services segment to this location from our former Wakarusa, Indiana location.

During the remainder of 2016, we expect to make additional cash capital investments of $10.0 million to $11.0 million, including capital spending for the replacement and upgrades of machinery and equipment used in operations along with approximately $5.0 million to $5.5 million for the new assembly plant in Charlotte, Michigan to be used for the manufacture of Isuzu F-Series trucks.

Cash Flow from Financing Activities

We utilized $3.9 million of cash in financing activities during the first six months of 2016, compared to $2.3 million in the first six months of 2015. This increase is primarily due to the repurchase of 421,692 shares of common stock at a total cost of $2.0 million in the second quarter of 2016.

Working Capital

Our working capital was as follows (in thousands):