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SHYFT GROUP, INC. - Quarter Report: 2019 March (Form 10-Q)

spar20190331_10q.htm
 

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

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019.

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to ___________________

 

Commission File Number 001-33582

 

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

 

Michigan
(State or Other Jurisdiction of
Incorporation or Organization)

 

38-2078923
(I.R.S. Employer Identification No.)

1541 Reynolds Road
Charlotte, Michigan

(Address of Principal Executive Offices)

 


48813
(Zip Code)

 

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.

 

 

Yes

X

 

No

 

 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§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).

 

Yes

X

 

No

 

 

 

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller Reporting Company

Emerging Growth Company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

 

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

 

Yes

 

 

No

X

 

 

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

 


Class

Outstanding at
April 25, 2019

Common stock, $.01 par value

35,350,834 shares

 

 

 

 

 

SPARTAN MOTORS, INC.

 

INDEX
____________________________________

 

Page

 

FORWARD-LOOKING STATEMENTS

3

 

 

PART I.  FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements:

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets – March 31, 2019  and December 31, 2018 (Unaudited)

4

 

 

 

 

 

 

Condensed Consolidated Statements of Operations - Three Months Ended March 31, 2019 and 2018 (Unaudited)

5

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2019 and 2018 (Unaudited)

6

 

 

 

 

 

 

Condensed Consolidated Statement of Shareholders’ Equity – Three Months Ended March 31, 2019 (Unaudited)

7

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

36

 

 

 

 

 

Item 4.

Controls and Procedures

37

 

 

 

 

PART II.  OTHER INFORMATION

 

 

 

 

 

 

Item 1A.

Risk Factors

37

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

37

 

 

 

 

 

Item 6.

Exhibits

38

 

 

 

 

SIGNATURES

39

 

 

 

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:

 

Changes in economic conditions, including changes in interest rates, credit availability, financial market performance and our industries can have adverse effects on its earnings and financial condition, as well as our customers, dealers and suppliers.

 

Changes in relationships with major customers and suppliers could significantly affect our revenues and profits.

 

Increased costs, including costs of raw materials, component parts, and labor costs, potentially impacted by changes in labor rates and practices and/or new or increased tariffs or similar restrictions, could reduce our operating income.

 

Constrained government budgets may have a negative effect on our business and its operations.

 

The integration of businesses or assets we have acquired or may acquire in the future involves challenges that could disrupt our business and harm our financial condition.

 

When we introduce new products, we may incur expenses that we did not anticipate, such as start-up and recall expenses, resulting in reduced earnings.

 

Amendments of the laws and regulations governing our businesses, or the promulgation of new laws and regulations, could have a material impact on our operations.

 

We source components from a variety of domestic and global suppliers who may be subject to disruptions from natural or man-made causes.  Disruptions in our supply of components could have a material and adverse impact on our results of operations or financial position.

 

Changes in the markets we serve may from time to time require us to re-configure our production lines or re-locate production of products between buildings or to new locations in order to maximize the efficient utilization of our production capacity.  Costs incurred to effect these re-configurations may exceed our estimates and efficiencies gained may be less than anticipated.

 

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, 2018, 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 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. 

 

 

 

Item 1.

Financial Statements

 

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited) 

 

   

March 31,

   

December 31,

 
   

2019

   

2018

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 21,368     $ 27,439  

Accounts receivable, less allowance of $308 and $133

    104,399       106,801  

Contract assets

    44,055       36,027  

Inventories

    84,457       69,992  

Other current assets

    5,437       5,070  

Total current assets

    259,716       245,329  
                 

Property, plant and equipment, net

    56,175       56,567  

Right of use assets-operating leases

    12,930       -  

Goodwill

    33,823       33,823  

Intangible assets, net

    8,407       8,611  

Other assets

    3,303       2,313  

Net deferred tax asset

    7,705       7,141  

TOTAL ASSETS

  $ 382,059     $ 353,784  
                 

LIABILITIES AND SHAREHOLDERS' EQUITY

               
                 

Current liabilities:

               

Accounts payable

  $ 87,803     $ 76,399  

Accrued warranty

    16,482       16,090  

Accrued compensation and related taxes

    9,253       10,520  

Deposits from customers

    19,150       22,632  

Operating lease liability

    2,547       -  

Other current liabilities and accrued expenses

    18,326       12,396  

Current portion of long-term debt

    19       60  

Total current liabilities

    153,580       138,097  
                 

Other non-current liabilities

    5,269       4,058  

Long-term operating lease liability

    10,517       -  

Long-term debt, less current portion

    26,042       25,547  

Total liabilities

    195,408       167,702  

Commitments and contingencies

               

Shareholders' equity:

               

Preferred stock, no par value: 2,000 shares authorized (none issued)

    -       -  

Common stock, $0.01 par value; 80,000 shares authorized; 35,350 and 35,321 outstanding

    353       353  

Additional paid in capital

    82,517       82,816  

Retained earnings

    104,299       103,571  

Total Spartan Motors, Inc. shareholders’ equity

    187,169       186,740  

Non-controlling interest

    (518

)

    (658

)

Total shareholders’ equity

    186,651       186,082  

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

  $ 382,059     $ 353,784  

 

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)

 

   

Three Months Ended March 31,

 
   

2019

   

2018

 
                 

Sales

  $ 233,963     $ 173,038  

Cost of products sold

    209,387       150,880  

Restructuring charges

    49       -  

Gross profit

    24,527       22,158  
                 

Operating expenses:

               

Research and development

    2,374       1,389  

Selling, general and administrative

    20,501       17,873  

Restructuring charges

    63       20  

Total operating expenses

    22,938       19,282  
                 

Operating income

    1,589       2,876  
                 

Other income (expense):

               

Interest expense

    (374

)

    (323

)

Interest and other income

    335       1,593  

Total other income (expense)

    (39

)

    1,270  
                 

Income before taxes

    1,550       4,146  
                 

Taxes (benefit)

    13       (48

)

                 

Net income

    1,537       4,194  
                 

Less: net income attributable to non-controlling interest

    140       -  
                 

Net income attributable to Spartan Motors Inc.

  $ 1,397     $ 4,194  
                 

Basic net earnings per share

  $ 0.04     $ 0.12  
                 

Diluted net earnings per share

  $ 0.04     $ 0.12  
                 

Basic weighted average common shares outstanding

    35,265       35,094  

Diluted weighted average common shares outstanding

    35,265       35,094  

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

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

(In thousands)

(Unaudited)

 

   

Three Months Ended

March 31,

 
   

2019

   

2018

 

Cash flows from operating activities:

               

Net income

  $ 1,537     $ 4,194  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

               

Depreciation and amortization

    2,525       2,452  

Accruals for warranty

    2,789       1,673  

Deferred income taxes

    (564

)

    3  

Stock based compensation related to stock awards

    860       819  

(Increase) decrease in operating assets:

               

Accounts receivable

    2,403       (241

)

Contract assets

    (8,029

)

    (3,068

)

Inventories

    (14,464

)

    (3,920

)

Other assets

    (436

)

    (422

)

Increase (decrease) in operating liabilities:

               

Accounts payable

    11,480       9,335  

Cash paid for warranty repairs

    (2,397 )     (2,583

)

Accrued compensation and related taxes

    (1,266

)

    (4,256

)

Deposits from customers

    (3,482

)

    (5,073

)

Other current liabilities and accrued expenses

    5,547       1,805  

Other long term liabilities

    636       (86

)

Taxes on income

    458       (200

)

Total adjustments

    (3,940

)

    (3,762

)

Net cash (used in) provided by operating activities

    (2,403

)

    432  
                 

Cash flows from investing activities:

               

Purchases of property, plant and equipment

    (1,934

)

    (2,037

)

Net cash used in investing activities

    (1,934

)

    (2,037

)

                 

Cash flows from financing activities:

               

Payments on long-term debt

    (19

)

    (18

)

Purchase and retirement of common stock

    (793

)

    -  

Net cash used in the exercise, vesting or cancellation of stock incentive awards

    (922

)

    (2,493

)

Net cash used in financing activities

    (1,734

)

    (2,511

)

                 

Net decrease in cash and cash equivalents

    (6,071

)

    (4,116

)

Cash and cash equivalents at beginning of period

    27,439       33,523  

Cash and cash equivalents at end of period

  $ 21,368     $ 29,407  

 

 See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

   

Number of

   

Common

   

Additional

Paid In

   

Retained

   

Non-

Controlling

   

Total

Shareholders'

 
   

Shares

   

Stock

   

Capital

   

Earnings

   

Interest

   

Equity

 

Balance at December 31, 2018

    35,321     $ 353     $ 82,816     $ 103,571     $ (658

)

  $ 186,082  
                                                 

Issuance of common stock and the tax impact of stock incentive plan transactions

    9       -       (922

)

    -       -       (922

)

                                                 

Issuance of restricted stock, net of cancellation

    121       1       (1

)

    -       -       -  
                                                 

Purchase and retirement of common stock

    (101

)

    (1

)

    (236 )     (556

)

    -       (793

)

                                                 

Stock based compensation expense related to restricted stock

    -       -       860       -       -       860  
                                                 

Transition adjustment for adoption of new lease standard

    -       -       -       (113

)

    -       (113

)

                                                 

Net income

    -       -       -       1,397       140       1,537  
                                                 

Balance at March 31, 2019

    35,350     $ 353     $ 82,517     $ 104,299     $ (518

)

  $ 186,651  

 

   

Number of

   

Common

   

Additional

Paid In

   

Retained

   

Non-

Controlling

   

Total

Shareholders'

 
   

Shares

   

Stock

   

Capital

   

Earnings

   

Interest

   

Equity

 

Balance at December 31, 2017

    35,097     $ 351     $ 79,721     $ 88,855     $ (658

)

  $ 168,269  
                                                 

Issuance of common stock and the tax impact of stock incentive plan transactions

    3       -       (2,493

)

    -       -       (2,493

)

                                                 

Issuance of restricted stock, net of cancellation

    191       2       (2

)

    -       -       -  
                                                 

Stock based compensation expense related to restricted stock

    -       -       819       -       -       819  
                                                 

Transition adjustment for adoption of new revenue recognition standard

    -       -       -       3,668       -       3,668  
                                                 

Net income

    -       -       -       4,194       -       4,194  
                                                 

Balance at March 31, 2018

    35,291     $ 353     $ 78,045     $ 96,717     $ (658

)

  $ 174,457  

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar 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, 2018, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 5, 2019. Refer to the Adoption of Lease Accounting Policy section below for the adoption of a new lease accounting standard in the first quarter of 2019.

 

We are a niche market leader in specialty vehicle manufacturing and assembly for the commercial vehicle (including last-mile delivery, specialty service and vocation-specific up-fit segments), emergency response and recreational vehicle industries. 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; Snyder and Neligh, Nebraska; Ladson, South Carolina; Ephrata, Pennsylvania; Pompano Beach, Florida; Bristol, Indiana; Kansas City, Missouri; and Saltillo, Mexico.

 

On December 17, 2018, the Company acquired all of the assets and assumed certain liabilities of Strobes-R-Us, Inc. (“SRUS” or "Strobes"), a premier provider of up-fit services for government and non-government vehicles through its majority owned subsidiary, Spartan Upfit Services, Inc.  The acquisition will enable the Company to increase its product offerings to both fleet and emergency response customers, while further expanding its manufacturing capabilities into the southeastern U.S. market.  As part of this acquisition, Spartan acquired Strobes-R-Us’ state-of-the-art up-fit facility and product showroom in Pompano Beach, Florida.  Spartan Upfit Services, Inc. and the related noncontrolling interest will be reported as part of the Fleet Vehicles and Services segment.

 

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. Our Kansas City, Missouri, Pompano Beach, Florida, Ladson, South Carolina and Saltillo, Mexico locations sell and install equipment used in commercial and fleet vehicles. Our Brandon, South Dakota, Snyder and Neligh, Nebraska, and Ephrata, Pennsylvania locations manufacture emergency response vehicles under the Spartan, Smeal, US Tanker and Ladder Tower Company brand names. Our Charlotte, Michigan location manufactures heavy-duty chassis and vehicles and supplies aftermarket parts and accessories under the Spartan Chassis and Spartan brand names. Spartan USA was 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. In February 2017, by agreement of the parties, the court proceeding was dismissed with prejudice and the judge entered an order to this effect as the parties agreed to seek a dissolution plan on their own. The Company is continuing to work on this dissolution plan and no dissolution terms have been determined as of the date of this Form 10-Q.

 

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 March 31, 2019, the results of operations and cash flows for the three-month period ended March 31, 2019. These condensed consolidated financial statements 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, 2018.

 

The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results 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 variable rate debt instruments approximate their fair value at March 31, 2019 and December 31, 2018.

 

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

 

 

New Accounting Standards

 

In June 2016, the FASB issued Accounting Standards Update 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 is intended to introduce a revised approach to the recognition and measurement of credit losses, emphasizing an updated model based on expected losses rather than incurred losses. The provisions of this standard are effective for reporting periods beginning after December 15, 2019 and early adoption is permitted. We believe that the adoption of the provisions of ASU 2016-13 will not have a material impact on our consolidated financial position, results of operations or cash flows.

 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (“ASU 2016-02”). The new standard 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. The new standard 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 with 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 adopted ASU 2016-02 as of January 1, 2019 using the modified retrospective approach. See the “Adoption of Lease Accounting Policy” section below and Note 6 - Leases for a description of the impact of the adoption of the provisions of ASU 2016-02 on our consolidated financial position, results of operations and cash flows. 

 

Except for the changes below, we have consistently applied the accounting policies to all periods presented in these condensed consolidated financial statements.

 

Adoption of Lease Accounting Policy

 

We applied ASU 2016-02 and all related amendments ("ASC 842") using the modified retrospective method by recognizing the cumulative effect of adoption as an adjustment to the opening balance of retained earnings at January 1, 2019. Therefore, the comparative information has not been adjusted and continues to be reported under prior leasing guidance. In addition, we elected to apply the following package of practical expedients on a consistent basis permitting entities not to reassess: (i) whether any expired or existing contracts are or contain a lease; (ii) lease classification for any expired or existing leases and; (iii) whether initial direct costs for any expired or existing leases qualify for capitalization under the amended guidance. As a result, in the first quarter of 2019 we recorded ROU assets of $13,582 for operating leases and $675 for financing leases. We also recorded operating lease liabilities of $13,716 and finance lease liabilities of $696. The decrease to retained earnings was $113, net of the tax effect of $42, reflecting the cumulative impact of the accounting change. The standard did not have a material effect on consolidated net income or cash flows.

 

We determine if an arrangement is a lease at inception. Operating leases are included in ROU assets – operating leases, Operating lease liability, and Long-term operating lease liability on our Condensed Consolidated Balance Sheets. Finance leases are included in Other assets, Other current liabilities and accrued expenses and Other non-current liabilities on our Condensed Consolidated Balance Sheets.

 

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. We include options to extend or terminate the lease in our lease term when it is reasonably certain that we will exercise that option. Lease expense for lease payments on operating leases is recognized on a straight-line basis over the lease term.

 

We do not record a ROU asset or lease liability for leases with an expected term of 12 months or less. Expenses for these leases are recognized on a straight-line basis over the lease term.

 

We have lease agreements with lease and non-lease components, which are accounted for separately for leases related to real property. For leases related to personal property we account for lease and non-lease components associated with a lease as a single lease component.

 

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

 

 

Revenue Recognition Accounting Policy

 

Essentially all of our revenue is generated through contracts with our customers. We may recognize revenue over time or at a point in time when or as obligations under the terms of a contract with our customer are satisfied, depending on the terms and features of the contract and the products supplied. Our contracts generally do not have any significant variable consideration. The collectability of consideration on the contract is reasonably assured before revenue is recognized. On certain vehicles, payment may be received in advance of us satisfying our performance obligations. Such payments are recorded in Customer deposits on the Condensed Consolidated Balance Sheets. The corresponding performance obligations are generally satisfied within one year of the contract inception. In such cases, we have elected to apply the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component. The financing impact on contracts that contain performance obligations that are not expected to be satisfied within one year are expected to be immaterial to our condensed consolidated financial statements.

 

We have elected to utilize the practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred because the amortization period for the prepaid costs that would have otherwise been deferred and amortized is one year or less. Revenue recognized in a current period from performance obligations satisfied in a prior period, if any, is immaterial to our condensed consolidated financial statements. We use an observable price to allocate the stand-alone selling price to separate performance obligations within a contract or a cost-plus margin approach when an observable price is not available. The estimated costs to fulfill our base warranties are recognized as expense when the products are sold (see “Note 7 – Commitments and Contingent Liabilities” for further information on warranties). Our contracts with customers do not contain a provision for product returns, except for contracts related to certain parts sales.

 

Revenue for parts sales for all segments is recognized at the time that control and risk of ownership has passed to the customer, which is generally when the ordered part is shipped to the customer. Historical return rates on parts sales have been immaterial. Accordingly, no return reserve has been recorded. Instead, returns are recognized as a reduction of revenue at the time that they are received.

 

For certain of our vehicles and chassis, we sell separately priced service contracts that provide roadside assistance or extend certain warranty coverage beyond our base warranty agreements. These separately priced contracts range from 1 to 6 years from the date of the shipment of the related vehicle or chassis. We receive payment with the shipment of the related vehicle or at the inception of the extended service contract, if later, and recognize revenue over the coverage term of the agreement, generally on a straight-line basis, which approximates the pattern of costs expected to be incurred in satisfying the obligations under the contract.

 

Distinct revenue recognition policies for our segments are as follows:

 

Fleet Vehicles and Services

Our walk-in vans and truck bodies are generally built on a chassis that is owned and controlled by the customer. Due to the customer ownership of the chassis, the performance obligation for these walk-in vans and truck bodies is satisfied as the vehicles are built. Accordingly, the revenue and corresponding cost of products sold associated with these contracts are recognized over time based on the inputs completed for a given performance obligation during the reporting period. Certain contracts will specify that a walk-in van or truck body is to be built on a chassis that we purchase and subsequently sell to the customer. The revenue on these contracts is recognized at the time that the performance obligation is satisfied and control and risk of ownership has passed to the customer, which is generally upon shipment of the vehicle from our manufacturing facility to the customer or receipt of the vehicle by the customer, depending on contract terms. We have elected to treat shipping and handling costs subsequent to transfer of control as fulfillment activities and, accordingly, recognize these costs as the revenue is recognized.

 

Revenue for up-fit and field service contracts is recognized over time, as equipment is installed in the customer’s vehicle or as repairs and enhancements are made to the customer’s vehicles. Revenue and the corresponding cost of products sold is estimated based on the inputs completed for a given performance obligation. Our performance obligation for up-fit and field service contracts is satisfied when the equipment installation or repairs and enhancements of the customer’s vehicle has been completed. Payment on our fleet vehicles and services performance obligations is received an average of 35 days after revenue is recognized.

  

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

 

 

Emergency Response Vehicles 

Our emergency response chassis and apparatuses are generally manufactured to order based on customer-supplied specifications. Due to the custom nature of the products and the attributes of the contracts, we do not have a ready alternative use for our emergency response chassis and apparatuses and we have an enforceable right to payment on the contracts. Accordingly, performance obligations for these custom ordered chassis and apparatuses are satisfied as the apparatuses and chassis are built. We recognize revenue and the corresponding cost of products sold on these contracts over time based on the inputs completed for a given performance obligation during the reporting period. We have elected to treat shipping and handling costs subsequent to transfer of control as fulfillment activities and, accordingly, recognize these costs as the revenue is recognized. Payment is received an average of 48 days following the recognition of revenue for chassis and 103 days for complete apparatuses.

 

Revenue on certain emergency response chassis and apparatuses that are sold from stock or utilized as demonstration units is recognized at the point in time that the contract is received. Revenue related to modifications made to trucks sold from stock or that were utilized as demonstration units is recognized over time as the modifications are completed. Payment is received an average of 60 days following the recognition of revenue for stock or demonstration units.

 

Specialty Chassis and Vehicles

We recognize revenue and the corresponding cost of products sold on the sale of motor home chassis when the performance obligation is completed and control and risk of ownership of the chassis has passed to our customer, which is generally upon shipment of the chassis to the customer.

 

Revenue and the corresponding cost of products sold associated with other specialty chassis is recognized over time based on the inputs completed for a given performance obligation during the reporting period. The performance obligations for other specialty chassis contracts are satisfied as the products are assembled. Payment is received an average of 24 days following the recognition of revenue for other specialty chassis. 

 

 

 

NOTE 2 – INVENTORIES

 

Inventories are summarized as follows:

 

   

March 31,

   

December 31,

 
   

2019

   

2018

 

Finished goods

  $ 16,837     $ 14,696  

Work in process

    10,402       5,926  

Raw materials and purchased components

    60,645       52,474  

Reserve for slow-moving inventory

    (3,427

)

    (3,104

)

Total inventory

  $ 84,457     $ 69,992  

 

We also 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, and amounted to $9,475 and $8,807 at March 31, 2019 and December 31, 2018. When the demonstration units are sold, the cost related to the demonstration unit is included in Cost of products sold on our Condensed Consolidated Statements of Operations.

 

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

 

 

 

NOTE 3 - DEBT

 

Long-term debt consists of the following:

 

   

March 31,
201
9

   

December 31,
201
8

 

Line of credit revolver (1)

  $ 25,460     $ 25,460  
Capital lease obligation     -       147  
Finance lease obligation (See Note 1 - General and Summary of Accounting Policies and Note 6 - Leases)     601       -  
Total debt     26,061       25,607  
Less current portion of long-term debt     (19 )     (60 )

Total long-term debt

  $ 26,042     $ 25,547  

 

 

(1)

On August 8, 2018, we entered into a Credit Agreement (the "Credit Agreement") by and among us and certain of our subsidiaries as borrowers, Wells Fargo Bank, N.A., as administrative agent ("Wells Fargo"), and the lenders party thereto consisting of Wells Fargo, JPMorgan Chase Bank, N.A. and PNC Bank National Association (the "Lenders"). Under the Credit Agreement, we may borrow up to $150,000 from the Lenders under a five-year secured revolving credit facility. The credit facility matures August 8, 2023. We may also request an increase in the facility of up to $75,000 in the aggregate, subject to customary conditions. The credit facility is also available for the issuance of letters of credit of up to $20,000 and swing line loans of up to $15,000, subject to certain limitations and restrictions. This line carries an interest rate of either (i) the highest of prime rate, the federal funds effective rate from time to time plus 0.5%, or the one month adjusted LIBOR plus 1.0%; or (ii) adjusted LIBOR plus margin based upon our ratio of debt to earnings from time to time.  The applicable borrowing rate including margin was 3.75% (or one-month LIBOR plus 1.25%) at March 31, 2019. The credit facility is secured by security interests in, and liens on, all assets of the borrowers, other than real property and certain other excluded assets.

 

On December 1, 2017, we entered into a First Amendment to the Second Amended and Restated Credit Agreement (the "First Credit Agreement") by and among us and certain of our subsidiaries, as borrowers, Wells Fargo, National Association, as agent, and the lenders party thereto consisting of Wells Fargo, National Association, JPMorgan Chase Bank, N.A. and PNC Bank National Association. Under the First Credit Agreement, we were able to borrow up to $100,000 under a three-year unsecured revolving credit facility. The First Credit Agreement was paid off and terminated when the “Credit Agreement” described above was entered into on August 8, 2018. This line carried an interest rate of the higher of either (i) the highest of prime rate, the federal funds effective rate plus 0.5%, or the one month adjusted LIBOR plus 1.00%; or (ii) adjusted LIBOR plus margin based upon our ratio of debt to earnings from time to time.

 

Under the terms of our Credit Agreement we are required to maintain certain financial ratios and other financial covenants, which limited our available borrowings under our line of credit to a total of approximately $75,600 and $86,410 at March 31, 2019 and December 31, 2018, respectively. The agreement also prohibits us from incurring additional indebtedness; limits certain acquisitions, investments, advances or loans; limits our ability to pay dividends in certain circumstances; and restricts substantial asset sales. At March 31, 2019 and December 31, 2018, we were in compliance with all covenants in our credit agreement.

 

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

 

 

 

NOTE 4 – REVENUE

 

Contract assets and liabilities 

The tables below disclose changes in contract assets and liabilities as of the periods indicated.

 

Contract assets

       

Opening balance (January 1, 2019)

  $ 36,027  

Reclassification of the beginning contract assets to receivables, as the result of rights to consideration becoming unconditional

    (21,106

)

Contract assets recognized, net of reclassification to receivables

    29,134  

Net change

    8,028  

Ending balance (March 31, 2019)

  $ 44,055  

 

Contract liabilities

       

Opening balance (January 1, 2019)

  $ 22,632  

Reclassification of the beginning contract liabilities to revenue, as the result of performance obligations satisfied

    (7,565

)

Cash received in advance and not recognized as revenue

    4,083  

Net change

    (3,482

)

Ending balance (March 31, 2019)

  $ 19,150  

 

 

The aggregate amount of the transaction price allocated to remaining performance obligations in existing contracts that are yet to be completed are expected to be recognized as revenue in the following annual time-periods:

 

   

1-12 Months (1)

   

13 Months

and beyond(1)

   

Total

 

Revenue expected to be recognized as of March 31, 2019:

                       

Fleet Vehicles and Services

  $ 188,528     $ -     $ 188,528  

Emergency Response Vehicles

    209,078       6,415       215,493  

Specialty Chassis and Vehicles

    29,174       32       29,206  

Total

  $ 426,780     $ 6,447     $ 433,227  

 

 

(1)

Revenue above includes amounts related to extended warranties and roadside assistance contracts of $229 and $37 for one to 12 months and $605 and $32 for 13 months and beyond, respectively.

 

 

For performance obligations that are satisfied over time, revenue is expected to be recognized evenly over the time period to complete the contract due to the assembly line nature of the business operations. For performance obligations that are satisfied at a point in time, revenue is expected to be recognized when the customer obtains control of the product, which is generally upon shipment from our facility. No amounts have been excluded from the transaction prices above related to the guidance on constraining estimates of variable consideration.

 

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

 

 

In the following tables, revenue is disaggregated by primary geographical market and timing of revenue recognition for the three months ended March 31, 2019. The tables also include a reconciliation of the disaggregated revenue with the reportable segments.

 

 

   

Three Months Ended March 31, 2019

 
   

Fleet

Vehicles

and

Services

   

Emergency

Response

Vehicles

   

Specialty

Chassis

and

Vehicles

   

Total

Reportable

Segments

   

Other

   

Total

 

Primary geographical markets

                                               

United States

  $ 117,818     $ 54,747     $ 51,663     $ 224,228     $ (2,128

)

  $ 222,100  

Other

    4,831       7,010       22       11,863       -       11,863  

Total sales

  $ 122,649     $ 61,757     $ 51,685     $ 236,091     $ (2,128

)

  $ 233,963  
                                                 

Timing of revenue recognition

                                 

Products transferred at a point in time

  $ 9,336     $ 5,042     $ 42,546     $ 56,924     $ (2,128

)

  $ 54,796  

Products and services transferred over time

    113,313       56,715       9,139       179,167       -       179,167  

Total sales

  $ 122,649     $ 61,757     $ 51,685     $ 236,091     $ (2,128

)

  $ 233,963  

 

 

   

Three Months Ended March 31, 2018

 
   

Fleet

Vehicles

and

Services

   

Emergency

Response

Vehicles

   

Specialty

Chassis

and

Vehicles

   

Total

Reportable

Segments

   

Other

   

Total

 

Primary geographical markets

                                               

United States

  $ 58,521     $ 58,548     $ 48,147     $ 165,216     $ (1,601

)

  $ 163,615  

Other

    1,170       8,164       89       9,423       -       9,423  

Total sales

  $ 59,691     $ 66,712     $ 48,236     $ 174,639     $ (1,601

)

  $ 173,038  
                                                 

Timing of revenue recognition

                                 

Products transferred at a point in time

  $ 5,182     $ 6,376     $ 41,268     $ 52,826     $ -     $ 52,826  

Products and services transferred over time

    54,509       60,336       6,968       121,813       (1,601

)

    120,212  

Total sales

  $ 59,691     $ 66,712     $ 48,236     $ 174,639     $ (1,601

)

  $ 173,038  

 

 

 

NOTE 5 – RESTRUCTURING CHARGES

 

During the three months ended March 31, 2019, we incurred restructuring charges related to a company-wide initiative to streamline operations.

 

During the three months ended March 31, 2018, we incurred restructuring charges related to a company-wide initiative to streamline operations and consolidate our Delavan, Wisconsin production into our Brandon, South Dakota operations.

 

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

 

 

Restructuring charges included in our Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018, broken down by segment, are as follows:

 

   

Three Months Ended March 31, 2019

 
   

Fleet

Vehicles and

Services

   

Emergency

Response

Vehicles

   

Specialty

Chassis and

Vehicles

   

Other

   

Total

 

Cost of products sold

                                       

Accrual for severance

  $ -     $ -     $ 7     $ -     $ 7  
Production relocation     -       42       -       -       42  

Selling, general and administrative

                                       

Accrual for severance

    -       -       21       -       21  

Production relocation

    -       42       -       -       42  

Total Selling, general and administrative

    -       42       21       -       63  
                                         

Total restructuring

  $ -     $ 84     $ 28     $ -     $ 112  

 

 

   

Three Months Ended March 31, 2018

 
   

Fleet

Vehicles

and

Services

   

Emergency

Response

Vehicles

   

Specialty

Chassis

and

Vehicles

   

Other

   

Total

 

Cost of products sold

                                       

Accrual for severance

  $ -     $ -     $ -     $ -     $ -  

Selling, general and administrative

                                       

Accrual for severance

    -       17       3       -       20  

Total restructuring

  $ -     $ 17     $ 3     $ -     $ 20  

 

 

The following table provides a summary of the compensation related charges incurred during the three months ended March 31, 2019 as part of our restructuring initiatives, along with the related outstanding balances to be paid in relation to those expenses, which is reflected within Accrued compensation and related taxes on our Condensed Consolidated Balance Sheets.

 

   

Severance

 

Balance, January 1, 2019

  $ 291  

Accrual for severance

    28  

Payments and adjustments made in period

    (161

)

Balance, March 31, 2019

  $ 158  

 

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

 

 

 

NOTE 6 – LEASES

 

We have operating and finance leases for land, buildings and certain equipment. Our leases have remaining lease terms of 1 year to 9 years, some of which include options to extend the leases for up to 4 years. Our leases do not contain residual value guarantees. As of March 31, 2019, assets recorded under finance leases were immaterial (See Note 3 - Debt).

 

Operating lease expenses are classified as cost of products sold and operating expenses on the Condensed Consolidated Statements of Operations. The components of lease expense were as follows:

   

Three months ended

March 31, 2019

 
         

Operating leases

  $ 841  

Short term leases(1)

    24  

Total lease expense

  $ 865  

 

  (1)

Includes expenses for month-to-month equipment leases, which are classified as short-term as the Company is not reasonably certain to renew the lease term beyond one month.

 

The weighted average remaining lease term and weighted average discount rate were as follows:

   

Three months ended

March 31, 2019

 

Weighted average remaining lease term of operating leases

    6.3 years  

Weighted average discount rate of operating leases

    4.8 %

 

Supplemental cash flow information related to leases was as follows:

 

   

Three months ended

March 31, 2019

 

Cash paid for amounts included in the measurement of lease liabilities:

       

Operating cash flow from operating leases

  $ 841  

 

Right of use assets obtained in exchange for lease obligations:

       
         

Operating leases

  $ -  
         

Finance leases

  $ -  

 

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

 

 

Maturities of operating lease liabilities as of March 31, 2019 are as follows:

       

 

 

Years ending December 31:

         

2019 (1)

  $ 2,390  

2020

    2,761  

2021

    2,193  

2022

    1,849  

2023

    1,863  

Thereafter

    4,149  

Total lease payments

    15,205  

Less: imputed interest

    2,141  

Total lease liabilities

  $ 13,064  

 

(1)

Excluding the three months ended March 31, 2019.

 

The aggregate amount of future minimum annual rental payments applicable to noncancelable leases as of December 31, 2018 were as follows:

 

   

Future Minimum
Lease Payments

Year ending December 31:

2019

  $ 3,291  

2020

    2,831  

2021

    2,193  

2022

    1,849  

2023

    1,863  

Thereafter

    4,149  

Total

  $ 16,176  

 

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

 

 

 

NOTE 7 - 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 March 31, 2019 and December 31, 2018, we had outstanding letters of credit totaling $895 and $913 related to certain emergency response vehicle contracts and our workers compensation insurance.

 

At March 31, 2019, 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, our financial position, future operating results or cash flows will not be materially affected by the final outcome of these legal proceedings.

 

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 three months ended March 31, 2019 and 2018 were as follows:

 

   

2019

   

2018

 

Balance of accrued warranty at January 1

  $ 16,090     $ 18,268  

Warranties issued during the period

    2,503       1,516  

Cash settlements made during the period

    (2,397

)

    (2,583

)

Changes in liability for pre-existing warranties during the period, including expirations

    286       157  

Balance of accrued warranty at March 31

  $ 16,482     $ 17,358  

 

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. In February 2017, by agreement of the parties, the court proceeding was dismissed with prejudice and the judge entered an order to this effect as the parties agreed to seek a dissolution plan on their own. No dissolution terms have been determined as of the date of this Form 10-Q. In the fourth quarters of 2015 and 2014, we accrued charges totaling $1.0 million and $0.2 million to write down certain inventory items associated with this joint venture to their estimated fair values. Costs associated with the wind-down will be impacted by the final dissolution agreement. 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 are not expected to be material to our results.

 

 

 

 

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

 

 

 

NOTE 8 – TAXES ON INCOME

 

Our effective income tax rate was 0.8% for the three months ended March 31, 2019, compared to a net benefit of (1.1)% for the three months ended March 31, 2018. Our effective tax rate in 2019 was primarily impacted by the recording of a discrete tax benefit related to additional state tax credits from prior years becoming available for utilization in future tax returns, with a net reduction in income tax expense of $296. Our effective tax rate for the first quarter ended March 31, 2018 was impacted by a discrete benefit related to the difference in stock compensation expense recognized for book purposes and tax purposes that reduced our tax expense by $1,355, partially offset by $249 of increases for other discrete items.

 

 

 

NOTE 9 – INTEREST AND OTHER INCOME

 

Interest and other income is as shown below:

   

Three Months Ended

March 31,

 
   

2019

   

2018

 

Net working capital settlement from acquisition of Smeal (1)

  $ -     $ 1,500  

Other miscellaneous

    335       93  

Total interest and other income

  $ 335     $ 1,593  

 

(1)  The net working capital settlement from the acquisition of Smeal was recorded to other income because the settlement occurred after the expiration of the measurement period on January 1, 2018.

 

 

 

NOTE 10 - 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: Fleet Vehicles and Services, Emergency Response Vehicles and Specialty Chassis and Vehicles.

 

We evaluate the performance of our reportable segments based on Adjusted EBITDA. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization, and other adjustments made in order to present comparable results from period to period. For the periods covered by this Form 10-Q, these adjustments include: restructuring charges; accruals and adjustments to prior accruals for product recalls; various items related to business acquisition and litigation activities; and the impact of temporary production disruptions due to severe weather-related flooding surrounding the Company's -facilities. We exclude these items from earnings because we believe they will be incurred infrequently and/or are otherwise not indicative of a segment's regular, ongoing operating performance. Adjusted EBITDA is also used as a performance metric for certain of our compensation programs, as discussed in our proxy statement for our 2019 annual meeting of shareholders, which proxy statement was filed with the SEC on April 19, 2019.

 

Our Fleet Vehicles and Services segment consists of our operations at our Bristol, Indiana location, and beginning in 2018 certain operations at our Ephrata, Pennsylvania location along with our operations at our up-fit centers in Kansas City, Missouri; Ladson, South Carolina, Pompano Beach, Florida and Saltillo, Mexico. The segment focuses on designing and manufacturing walk-in vans for the parcel delivery, mobile retail, and trades and construction industries, the production of commercial truck bodies, and the distribution of related aftermarket parts and accessories.

 

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; Snyder and Neligh, Nebraska; and Ephrata, Pennsylvania locations. This segment engineers and manufactures emergency response chassis and apparatus and distributes related aftermarket parts and accessories.

 

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 assemblies.

 

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar 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 “Eliminations and Other” pertain to capital assets maintained at the corporate level. Eliminations for inter-segment sales are shown in the column labeled “Eliminations and Other”. Appropriate expense amounts are allocated to the three reportable segments and are included in their reported operating income or loss.  Segment loss from operations in the “Eliminations and 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.

 

Three Months Ended March 31, 2019

   

Fleet

Vehicles and

Services

   

Emergency

Response

Vehicles

   

Specialty

Chassis and

Vehicles

   

Eliminations

and Other

   

Consolidated

 

Fleet vehicle sales

  $ 96,319     $ -     $ 2,128     $ (2,128

)

  $ 96,319  

Emergency response vehicle sales

    -       58,568       -       -       58,568  

Motor home chassis sales

    -       -       40,286       -       40,286  

Other specialty vehicle sales

    -       -       6,858       -       6,858  

Aftermarket parts and accessories sales

    26,330       3,189       2,413       -       31,932  
                                         

Total sales

  $ 122,649     $ 61,757     $ 51,685     $ (2,128

)

  $ 233,963  
                                         

Depreciation and amortization expense

  $ 598     $ 707     $ 353     $ 867     $ 2,525  

Adjusted EBITDA

    6,975       (2,292

)

    4,964       (5,015

)

    4,632  

Segment assets

    129,726       127,584       41,845       82,904       382,059  

Capital expenditures

    146       54       232       1,502       1,934  

 

 

Three Months Ended March 31, 2018

 

   

Fleet

Vehicles and

Services

   

Emergency

Response

Vehicles

   

Specialty

Chassis and

Vehicles

   

Eliminations

and Other

   

Consolidated

 
                                         

Fleet vehicle sales

  $ 49,825     $ -     $ 1,601     $ (1,601

)

  $ 49,825  

Emergency response vehicle sales

    -       64,107       -       -       64,107  

Motor home chassis sales

    -       -       39,567       -       39,567  

Other specialty vehicle sales

    -       -       5,367       -       5,367  

Aftermarket parts and accessories sales

    9,866       2,605       1,701       -       14,172  
                                         

Total sales

  $ 59,691     $ 66,712     $ 48,236     $ (1,601

)

  $ 173,038  
                                         

Depreciation and amortization expense

  $ 607     $ 624     $ 366     $ 855     $ 2,452  

Adjusted EBITDA

    4,590       1,242       3,121       (3,350

)

    5,603  

Segment assets

    79,584       112,142       29,323       87,151       308,200  

Capital expenditures

    804       125       56       1,052       2,037  

 

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

 

 

The table below presents the reconciliation of our consolidated income before taxes to total segment Adjusted EBITDA. Adjusted EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income. Adjusted EBITDA may have limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. In addition, although we have excluded certain charges in calculating Adjusted EBITDA, we may in the future incur expenses similar to these adjustments, despite our assessment that such expenses are infrequent and/or not indicative of our regular, ongoing operating performance. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or infrequent items.

 

   

Three Months Ended

March 31,

 
   

2019

   

2018

 

Total segment adjusted EBITDA

  $ 9,647     $ 8,953  

Add (subtract):

               

Interest expense

    (374

)

    (323

)

Depreciation and amortization expense

    (2,525

)

    (2,452

)

Restructuring expense

    (112

)

    (20

)

Acquisition expense

    (45

)

    (162

)

Litigation settlement

    (43

)

    -  

Nebraska flooding expenses

    (123

)

    -  

Net income attributable to non-controlling interest

    140       -  

Impact of acquisition adjustments for net working capital

    -       1,500  

Unallocated corporate expenses

    (5,015

)

    (3,350

)

Consolidated income before taxes

  $ 1,550     $ 4,146  

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

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 a niche market leader in specialty vehicle manufacturing and assembly for the commercial vehicle (including last-mile delivery, specialty service and vocation-specific up-fit segments), emergency response and recreational vehicle industries. Our products include: walk-in vans and truck bodies used in e-commerce/parcel delivery; up-fit equipment used in the mobile retail and utility trades; fire trucks and fire truck chassis; luxury Class A diesel motor home chassis; military vehicles; and contract manufacturing and assembly services. We also supply replacement parts and offer repair, maintenance, field service and refurbishment services for the vehicles that we manufacture. Our operating activities are conducted through our wholly-owned operating subsidiary, Spartan Motors USA, Inc. (“Spartan USA”), with locations in Charlotte, Michigan; Bristol, Indiana; Ephrata, Pennsylvania; Ladson, South Carolina; Pompano Beach, Florida; Brandon, South Dakota; Snyder and Neligh, Nebraska, along with contract manufacturing in Kansas City, Missouri and Saltillo, Mexico. 

 

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. Our Kansas City, Missouri, Ladson, South Carolina and Saltillo, Mexico locations sell and install equipment used in fleet vehicles. Our Charlotte, Michigan location manufactures heavy-duty chassis and vehicles, and supplies aftermarket parts and accessories under the Spartan Chassis and Spartan ER brand names. Our Brandon, South Dakota; Snyder and Neligh, Nebraska; and Ephrata, Pennsylvania locations manufacture emergency response vehicles under the Spartan, Smeal, US Tanker and Ladder Tower Company brand names.

 

Our diversification across several sectors provides numerous opportunities while reducing overall risk as the various markets we serve tend to have different cyclicality. We have an innovative team focused on building lasting relationships with our customers by designing and delivering market leading specialty vehicles, vehicle components, and services. Additionally, our business structure provides the agility to quickly respond to market needs, take advantage of strategic opportunities when they arise and correctly size and scale operations to ensure stability and growth. Our expansion of equipment up-fit services in our Fleet Vehicles and Services segment and the growing opportunities that we have capitalized on in last mile delivery as a result of the rapidly changing e-commerce market are excellent examples of our ability to generate growth and profitability by quickly fulfilling customer needs.

 

We believe we can best carry out our long-term business plan and obtain optimal financial flexibility by using a combination of borrowings under our credit facilities, as well as internally or externally generated equity capital, as sources of expansion capital.

 

 

Executive Overview

 

 

Revenue of $234.0 million in the first quarter of 2019, an increase of 35.2% compared to $173.0 million in the first quarter of 2018.

 

Gross profit of $24.5 million in the first quarter of 2019, an increase of 10.7% compared to $22.2 million in the first quarter of 2018.

 

Gross Margin of 10.5% in the first quarter of 2019, compared to 12.8% in the first quarter of 2018.

 

Operating expense of $22.9 million, or 9.8% of sales in the first quarter of 2019, compared to $19.3 million or 11.1% of sales in the first quarter of 2018.

 

Operating income of $1.6 million in the first quarter of 2019, compared to $2.9 million in the first quarter of 2018.

 

Net income of $1.4 million in the first quarter of 2019, compared to $4.2 million in the first quarter of 2018.

 

Earnings per share of $0.04 in the first quarter of 2019, compared to $0.12 in the first quarter of 2018.

 

Order backlog of $432.3 million at March 31, 2019, a decrease of $122.3 million or 22.1% from our backlog of $554.6 million at March 31, 2018.

 

 

Table of Contents

 

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, strategic developments, and strengths include:

 

 

Our diversified business model.  We believe the major strength of our business model is market diversity and customization.  Our Fleet Vehicles and Specialty Chassis and Vehicles segments serve mainly business and consumer markets, effectively diversifying our company and complementing our Emergency Response Vehicles segment, which primarily serves governmental entities.  Additionally, the fleet vehicle market is an early-cycle industry, complementary to the late-cycle emergency response vehicle industry.  We intend to continue to pursue additional areas that build on our core competencies to diversify our business further.

     

 

Innovative product offerings such as the purpose-built up-fit featuring vehicle flooring with integrated mounting for the Ford Transit 130" wheelbase cargo van, which is built to withstand tough conditions, endure extra payload, and offer a quiet ride. The product boasts multiple storage and shelving options, as well as LED lights, a maximum-view partition, and a double-clamp ladder rack.

     

 

Our alliance with Motiv Power Systems, a leading producer of all-electric chassis for walk-in vans, box trucks, work trucks, buses and other specialty vehicles that provides Spartan with exclusive access to Motiv’s EPICTM all-electric chassis in manufacturing Class 4 – Class 6 walk-in vans.  This alliance demonstrates Spartan’s ability to innovate and advance the markets we serve, and places us ahead of the curve in the electric vehicle (EV) fleet market.

     

 

Our expansion into the equipment up-fit market for vehicles used in the parcel delivery, trades and construction industries.  This rapidly expanding market offers an opportunity to add value to current and new customers for our fleet vehicles and vehicles produced by other original equipment manufacturers.

     

 

Spartan introduced its refrigeration technology to demonstrate our ability to apply the latest technical advancements with our unique understanding of last-mile delivery optimization.  Utilimaster's Work-Driven Design™ process provides best-in-class conversion solutions in walk-in vans, truck bodies, and cargo van vehicles.  The refrigerated van is up-fitted to optimally preserve cold cargo quality while offering customizations such as removable bulkheads and optional thermal curtains.  The multi-temperature solution requires no additional fuel source, so it can serve a wide variety of categories from food and grocery to time and temperature sensitive healthcare deliveries.

     

 

The introduction of the K3 605 chassis. The K3 605 is equipped with Spartan Connected Coach, a technology bundle featuring the new digital dash display and keyless push-button start. It also features Spartan's Advanced Protection System, a collection of safety systems that includes collision mitigation with adaptive cruise control; electronic stability control; automatic traction control; Spartan Safe Haul; and factory chassis-integrated air supply for tow vehicle braking systems.

     

 

The introduction of Spartan Safe Haul.  Spartan Safe Haul is the motor home industry’s only chassis-integrated air supply for tow vehicle braking systems, available on Spartan Class A motor home chassis for the 2019 model year.

 

 

 

 

Spartan Connected Coach, a technology bundle for our motor home chassis that includes a 15-inch digital dash displaying gauge functions, tire pressure monitoring, blind spot indicators, navigation, and other information. Connected Coach also offers passive keyless start and adjustable Adaptive Cruise Control, and brings proven automotive technology to the RV market.

     

 

Spartan will introduce the all new purpose-built 93' Mid-Mount Platform designed for operation in tight spaces, and an evolution to the Intelligent Pump Solution pumper, the IPS-NXT, which allows for traditional pumper volume in a more maneuverable platform.

     

 

The strength of our balance sheet, which includes robust working capital, low debt and access to credit through our revolving line of credit.

 

The following section provides a narrative discussion about our financial condition and results of operations. Certain amounts in the narrative may not sum due to rounding. 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 5, 2019.

 

 

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):

   

Three Months Ended

March 31,

 
   

2019

   

2018

 

Sales

    100.0       100.0  

Cost of products sold

    89.5       87.2  

Restructuring charge

    0.0       0.0  

Gross profit

    10.5       12.8  

Operating expenses:

               

Research and development

    1.0       0.8  

Selling, general and administrative

    8.8       10.3  

Restructuring charge

    0.0       0.0  

Operating income

    0.7       1.7  

Other income (expense), net

    0.0       0.7  

Income before taxes

    0.7       2.4  

Taxes

    0.0

 

    (0.0

)

Net income attributable to non-controlling interest

    (0.1

)

    -  

Net income

    0.6       2.4  

 

We adopted Accounting Standards Update 2016-02, Leases (“ASU 2016-02” or “ASC 842”) on January 1, 2019. Our adoption of ASC 842 resulted in changes to our lease policy whereby we now recognize a right of use asset and lease liability for operating and finance leases, among certain other changes. Please see Note 1, General and Summary of Accounting Policies, in the Notes to Condensed Consolidated Financial Statements appearing in Item 1 of this Form 10-Q for further information regarding our adoption of ASC 842.

 

Quarter Ended March 31, 2019 Compared to the Quarter Ended March 31, 2018

 

Sales

For the quarter ended March 31, 2019, we reported consolidated sales of $234.0 million, compared to $173.0 million for the first quarter of 2018 an increase of $61.0 million or 35.2%. This increase reflects sales volume increases of $63.0 million in our Fleet Vehicles and Services segment and $2.8 million in our Specialty Vehicles and Chassis segment. Pricing increases of $1.3 million and $0.7 million are reflected in the Specialty Vehicles and Chassis segment and the Emergency Response Vehicles segment, respectively. These increases were partially offset by a $5.7 million volume decrease in our Emergency Response Vehicles segment, a $0.6 million decrease due to sales mix and a decrease in intersegment eliminations of $0.5 million. Please refer to our segment discussion below for further information about segment sales.

 

Cost of Products Sold

Cost of products sold was $209.4 million in the first quarter of 2019, compared to $150.9 million in the first quarter of 2018, an increase of $58.5 million or 38.8%. Cost of products sold increased by $54.7 million due to the higher sales volumes in the first quarter of 2019. Product mix in 2019 added an additional $6.0 million to cost of products sold, while higher warranty expense added $1.1 million and $2.3 million was added in tariff-driven commodity and component cost increases in the first quarter of 2019. These were partially offset by a decrease of $4.8 million due to productivity improvements and cost reductions driven by the higher sales volume. As a percentage of sales, cost of products sold increased to 89.5% in the first quarter of 2019, compared to 87.2% in the first quarter of 2018. The higher volume, product mix and tariff-driven commodity and component costs experienced in 2019 resulted in decreases of 220, 20 and 10 basis points, respectively. These decreases were partially offset by a 20 basis point increase due to productivity improvements and cost reductions in 2019.

 

Gross Profit

Gross profit was $24.5 million for the first quarter of 2019, compared to $22.2 million for the first quarter of 2018, an increase of $2.3 million, or 10.7%. Higher sales volume contributed $4.8 million to the increase in gross profit and pricing increases added an additional $2.0 million in 2019. Productivity improvements and cost reductions added $4.4 million to gross profit in 2019. These increases were partially offset by a $6.6 million product mix impact and a $2.3 million tariff-driven commodity and component cost increase in 2019. Gross margin decreased to 10.5% from 12.8% over the same period, with decreases of 220 basis points due to higher volume and 20 basis points due to product mix experienced in the first quarter of 2019. These decreases were partially offset by increases of 10 basis points due to productivity improvements and cost reductions in the first quarter of 2019. 

 

 

Operating Expenses

Operating expense was $22.9 million for the first quarter of 2019, compared to $19.3 million for the first quarter of 2018, an increase of $3.6 million or 18.8%. Research and development expense in the first quarter of 2019 was $2.4 million, compared to $1.4 million in the first quarter of 2018, an increase of $1.0 million, or 70.9%, due to higher spending on new product development projects in 2019. Selling, general and administrative expense was $20.5 million in the first quarter of 2019, compared to $17.9 million for the first quarter of 2018, an increase of $2.6 million or 14.7%. Higher selling costs of $0.4 million was driven by increased marketing costs to support the sales function. Increased spending related to the Strobes location in Florida and the Ephrata truck body location in Pennsylvania amounted to $1.0 million. Professional fees also increased by $1.0 million for outsourced services.

 

Other income/ (expense)

Interest expense was $0.4 million for the first quarter of 2019, comparable with the $0.3 million of expense for the first quarter of 2018. Interest and other income was $0.3 million in the first quarter of 2019, compared to the $1.6 million of income for the first quarter of 2018 which included the net working capital adjustment of $1.5 million related to the Smeal acquisition.

 

Taxes

Our effective income tax rate was 0.8% for the three months ended March 31, 2019, compared to (1.1)% for the three months ended March 31, 2018. Our effective tax rate in 2019 was primarily impacted by the recording of a discrete tax benefit related to additional state tax credits from prior years becoming available for utilization in future tax returns, with a net reduction in income tax expense of $296. Our effective tax rate for the first quarter ended March 31, 2018 was impacted by a discrete benefit related to the difference in stock compensation expense recognized for book purposes and tax purposes that reduced our tax expense by $1,355, partially offset by $249 of increases for other discrete items.

 

Net Income

We recorded net income of $1.4 million or $0.04 per share for the first quarter of 2019, compared to net income of $4.2 million, or $0.12 per share, for the first quarter of 2018. Driving the decrease in net income for the three months ended March 31, 2019 compared with the prior year were the factors discussed above.

 

Adjusted EBITDA

Our consolidated adjusted EBITDA in the first quarter of 2019 was $4.6 million, compared to $5.6 million for the first quarter of 2018, a decrease of $1.0 million or 17.3%.

  

The table below describes the changes in Adjusted EBITDA for the three months ended March 31, 2019 compared to the same period of 2018 (in millions):

 

Adjusted EBITDA three months ended March 31, 2018

  $ 5.6  

Tariff driven commodity and component cost increases

    (2.3

)

Sales mix

    (4.0

)

Higher sales volume in 2019

    2.2  

Price increase realized in 2019

    2.0  

Productivity improvements and cost reductions

    4.6  

Increase in new product development expense

    (1.0

)

Increased marketing costs related to Strobes and Ephrata Truck Body

    (0.4

)

Administrative infrastructure costs for Strobes and Ephrata Truck Body

    (1.1

)

Increase in professional fees

    (1.0

)

Adjusted EBITDA three months ended March 31, 2019

  $ 4.6  

 

 

Adjusted net income

Our consolidated adjusted net income in the first quarter of 2019 was $1.5 million, compared to $3.3 million for the first quarter of 2018, a decrease of $1.8 million or 54.5%. This decrease was due to the factors impacting adjusted EBITDA described above, in addition to a $0.6 million increase in adjusted income tax expense in 2019.

 

 

Order Backlog

Our order backlog by reportable segment is summarized in the following table (in thousands).

 

   

March 31,

2019

   

March 31,

2018

 

Fleet Vehicles and Services

  $ 188,528     $ 335,325  

Emergency Response Vehicles

    214,659       189,627  

Specialty Chassis and Vehicles

    29,137       29,663  

Total consolidated

  $ 432,324     $ 554,615  

 

Our Fleet Vehicles and Services backlog decreased by $146.8 million, or 43.8%, driven by the partial build-out of the $214.3 million contract received in September 2017 to supply delivery vehicles, which will be fulfilled through 2019. Our Emergency Response Vehicles backlog increased by $25.0 million, or 13.2%, primarily due to increased orders received in 2019. Our Specialty Chassis and Vehicles segment backlog decreased by $0.5 million, or 1.8%, due to a reduced backlog related to parts. We anticipate filling our current backlog orders for our Fleet Vehicles and Services segment over the next 10 months, for our Emergency Response Vehicles segment over the next 12 months and our Specialty Chassis and Vehicles segment over the next 3 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.

 

Reconciliation of Non-GAAP Financial Measures

 

This Form 10-Q contains adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) and adjusted net income, which are both non-GAAP financial measures. These non-GAAP financial measures are calculated by excluding items that we believe to be infrequent or not indicative of our continuing operating performance. For the periods covered by this Form 10-Q, such items include expenses associated with restructuring actions taken to improve the efficiency and profitability of certain of our manufacturing operations, various items related to business acquisition and litigation activities, and the impact of severe natural phenomena in areas surrounding our production facilities.

 

We present the non-GAAP financial measures adjusted EBITDA and adjusted net income because we consider them to be important supplemental measures of our performance. The presentation of adjusted EBITDA enables investors to better understand our operations by removing items that we believe are not representative of our continuing operations and may distort our longer term operating trends. The presentation of adjusted net income enables investors to better understand our operations by removing the impact of tax adjustments, including the impact that our deferred tax asset valuation allowance adjustment has had on our tax expense and net income in 2019, and other items that we believe are not indicative of our longer term operating trends. We believe these measures to be useful to improve the comparability of our results from period to period and with our competitors, as well as to show ongoing results from operations distinct from items that are infrequent or not indicative of our continuing operating performance. We believe that presenting these non-GAAP financial measures is useful to investors because it permits investors to view performance using the same tools that management uses to budget, make operating and strategic decisions, and evaluate our historical performance. We believe that the presentation of these non-GAAP financial measures, when considered together with the corresponding GAAP financial measures and the reconciliations to those measures, provides investors with additional understanding of the factors and trends affecting our business than could be obtained in the absence of these disclosures.

 

Our management uses adjusted EBITDA to evaluate the performance of and allocate resources to our segments. In addition, non-GAAP measures are used by management to review and analyze our operating performance and, along with other data, as internal measures for setting annual budgets and forecasts, assessing financial performance, and comparing our financial performance with our peers. Adjusted EBITDA is also used, along with other financial and non-financial measures, for purposes of determining certain incentive compensation for our management team.

 

 

Financial Summary (Non-GAAP)

Consolidated

(In thousands, Unaudited)

 

   

Three Months Ended

March 31,

 
   

2019

   

2018

 

Net income attributable to Spartan Motors, Inc.

  $ 1,397     $ 4,194  

Add (subtract):

               

Restructuring charges

    112       20  

Acquisition related expenses

    45       162  

Litigation expense (settlement)

    43       -  

Nebraska flooding expense

    123       -  

Impact of acquisition adjustments for net working capital

    -       (1,500

)

Deferred tax asset valuation allowance adjustment

    (99

)

    74  

Tax effect of adjustments

    (78

)

    315  

Adjusted net income attributable to Spartan Motors, Inc.

  $ 1,543     $ 3,265  
                 

Net income attributable to Spartan Motors, Inc.

  $ 1,397     $ 4,194  

Add (subtract):

               

Interest expense

    374       323  

Depreciation and amortization

    2,525       2,452  

Taxes on income

    13       (48

)

Restructuring charges

    112       20  

Acquisition related expenses

    45       162  

Litigation expense (settlement)

    43       -  

Nebraska flooding expenses

    123       -  

Impact of acquisition adjustments for net working capital

    -       (1,500

)

Adjusted EBITDA

  $ 4,632     $ 5,603  

 

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: Fleet Vehicles and Services, Emergency Response Vehicles, and Specialty Chassis and Vehicles. Our Specialty Chassis and Vehicles segment now manufactures certain fleet vehicles due to a realignment of our operating segments completed during the second quarter of 2017. These vehicles are sold via intercompany transactions to our Fleet Vehicles and Services segment, which then sells the vehicles to the final customer.

 

We evaluate the performance of our reportable segments based on Adjusted EBITDA.  Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization, and other adjustments made in order to present comparable results from period to period.  For the periods covered by this Form 10-Q, these adjustments include: restructuring charges; accruals and adjustments to prior accruals for product recalls; various items related to business acquisition and litigation activities; and the impact of temporary production disruptions due to severe weather-related flooding surrounding the Company’s facilities.  We exclude these items from earnings because we believe they will be incurred infrequently and/or are otherwise not indicative of a segment's regular, ongoing operating performance.  Adjusted EBITDA is also used as one performance metric for certain of our compensation programs, as discussed in our proxy statement for our 2019 annual meeting of shareholders, which proxy statement was filed with the SEC on April 19, 2019.

 

 

The table below presents the reconciliation of our total segment Adjusted EBITDA to consolidated income before taxes. Adjusted EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income. Adjusted EBITDA may have limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. In addition, although we have excluded certain charges in calculating Adjusted EBITDA, we may in the future incur expenses similar to these adjustments, despite our assessment that such expenses are infrequent and/or not indicative of our regular, ongoing operating performance. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or infrequent items.

 

   

Three Months Ended

March 31,

 
   

2019

   

2018

 

Total segment adjusted EBITDA

  $ 9,647     $ 8,953  

Add (subtract):

               

Interest expense

    (374

)

    (323

)

Depreciation and amortization expense

    (2,525

)

    (2,452

)

Restructuring expense

    (112

)

    (20

)

Acquisition expense

    (45

)

    (162

)

Litigation (expenses) settlement

    (43

)

    -  

Nebraska flooding expenses

    (123

)

    -  

Net income attributable to non-controlling interest

    140       -  

Impact of acquisition adjustments for net working capital

    -       1,500  

Unallocated corporate expenses

    (5,015

)

    (3,350

)

Consolidated income before taxes

  $ 1,550     $ 4,146  

 

 

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, Ladson, South Carolina, Pompano Beach, Florida and Saltillo, Mexico. This segment focuses on designing and manufacturing walk-in vans for the parcel delivery, mobile retail, and trades and construction industries, and supplies related aftermarket parts and services under the Utilimaster brand name.

 

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; Snyder and Neligh, Nebraska; and Ephrata, Pennsylvania locations. This segment engineers and manufactures emergency response chassis and vehicles.

 

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

 

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

 

 

Fleet Vehicles and Services

   

Financial Data

 
   

(Dollars in Thousands)

 
   

Three Months Ended March 31,

 
   

2019

   

2018

 
   

Amount

   

%

   

Amount

   

%

 
                                 

Sales

  $ 122,649       100.0

%

  $ 59,691       100.0

%

                                 

Adjusted EBITDA

    6,975       5.7

%

    4,590       7.7

%

                                 

Segment assets

    117,934               79,584          

 

Comparison of the Three-Month Periods Ended March 31, 2019 and 2018

 

Sales in our Fleet Vehicles and Services segment were $122.6 million for the first quarter of 2019, compared to $59.7 million for the first quarter of 2018, an increase of $62.9 million or 105.4%, driven by higher sales volumes in vehicle sales of $52.5 million and $10.4 million in parts sales due to higher volumes primarily from our up-fit business. Our Fleet Vehicles and Services segment had no changes in pricing of products sold that had a significant impact on our financial statements when comparing the first quarter of 2019 to the first quarter of 2018. 

 

Adjusted EBITDA in our Fleet Vehicles and Services segment for the first quarter of 2019 was $7.0 million compared to $4.6 million in the first quarter of 2018, an increase of $2.4 million or 52.0%. Higher sales volume accounted for a $4.4 million increase while productivity improvements and cost reductions generated $4.5 million. These increases were partially offset by $1.0 million in tariff-driven commodity and component cost increases in the first quarter of 2019, while $3.8 million of the decrease was due to the product mix and $1.7 million was due to increased marketing, administrative and research and development costs.

 

Emergency Response Vehicles 

   

Financial Data

 
   

(Dollars in Thousands)

 
   

Three Months Ended March 31,

 
   

2019

   

2018

 
   

Amount

   

%

   

Amount

   

%

 
                                 

Sales

  $ 61,757       100.0

%

  $ 66,712       100.0

%

                                 

Adjusted EBITDA

    (2,292

)

    (3.7

)%

    1,242       1.9

%

                                 

Segment assets

    139,729               112,142          

 

 

Comparison of the Three-Month Periods Ended March 31, 2019 and 2018

 

Sales in our Emergency Response Vehicles segment were $61.8 million in the first quarter of 2019, compared to $66.7 million in the same period of 2018, a decrease of $4.9 million or 7.4%. Lower sales volume resulted in a decrease of $5.7 million in 2019 revenue. This decrease was partially offset by a $0.8 million increase due to pricing changes realized in 2019.

 

Adjusted EBITDA for our Emergency Response Vehicles segment was $(2.3) million in the first quarter of 2019, compared to $1.2 million in the first quarter of 2018, a decrease of $3.5 million or 291.7%. This change was due to a decrease of $2.7 million from product mix, $0.4 million from the lower production volume, $0.4 million due to tariff-driven increases in commodity prices, and a $0.8 million increase in additional costs including higher warranty costs in 2019, which were partially offset by a $0.8 million increase due to pricing adjustments realized in 2019.

 

 

Specialty Chassis and Vehicles

   

Financial Data

 
   

(Dollars in Thousands)

 
   

Three Months Ended March 31,

 
   

2019

   

2018

 
   

Amount

   

%

   

Amount

   

%

 
                                 

Sales

  $ 51,685       100.0

%

  $ 48,236       100.0

%

                                 

Adjusted EBITDA

    4,964       9.6

%

    3,121       6.5

%

                                 

Segment assets

    41,845               29,323          

 

Comparison of the Three-Month Periods Ended March 31, 2019 and 2018

 

Sales in our Specialty Chassis and Vehicles segment were $51.7 million in the first quarter of 2019, compared to $48.2 million in 2018, an increase of $3.5 million or 7.2%. This increase was driven by increases of $2.0 million in other specialty chassis and vehicles due to higher sales volumes and $0.7 million in sales of aftermarket parts and accessories. Pricing adjustments realized in the first quarter of 2019 added $1.1 million to sales of motor home chassis and $0.2 million to other specialty chassis and vehicles. These increases were partially offset by a decrease of $0.6 million due to product mix.

 

Adjusted EBITDA for our Specialty Chassis and Vehicles segment for the first quarter of 2019 was $5.0 million, compared to $3.1 million in the same period of 2018, an increase of $1.9 million, or 59.1%. Higher pricing in 2019 drove a $1.3 million increase, while higher sales volume in 2019 resulted in a $0.8 million increase and productivity improvements and cost reductions in 2019 resulted in a $0.9 million increase. These increases were partially offset by decreases of $1.0 million due to tariff-driven increases in commodity and component costs and $0.1 million due to the product mix experienced in 2019.

 

Financial Condition

 

Balance Sheet at March 31, 2019 compared to December 31, 2018

 

For line items impacted by our adoption of the new leasing standard on January 1, 2019, please see “Note 1 – General and Summary of Accounting Policies” in the Notes to Condensed Consolidated Financial Statements contained in Part 1 of this Form 10-Q for further information regarding the impact of this new accounting standard.

 

Cash decreased by $6.0 million, or 21.9%, to $21.4 million at March 31, 2019 from $27.4 million at December 31, 2018. Please see the discussion of cash flow activity below for more information on our sources and uses of cash in the first three months of 2019.

 

Accounts receivable decreased by $2.4 million, or 2.2%, to $104.4 million at March 31, 2019, compared to $106.8 million at December 31, 2018 due to a $2.8 million payment received on aged invoices.

 

Inventory increased by $14.5 million, or 20.7%, to $84.5 million at March 31, 2019 compared to $70.0 million at December 31, 2018 mainly due to an increase in raw materials and work in process inventory as a result of the ramp up in production following our traditional year-end shut down in December.

 

Contract assets increased to $8.1 million or 22.5%, to $44.1 million at March 31, 2019 compared to $36.0 million at December 31, 2018 due to the ramp up in production following our traditional year-end shut down in December.

 

Accounts payable increased by $11.4 million or 14.9% to $87.8 million at March 31, 2019 compared to $76.4 million at December 31, 2018 due to the timing of payments and the ramp-up in other production following our traditional year-end shut down in December.

 

Accrued compensation and related taxes decreased by $1.2 million or 11.4% to $9.3 million at March 31, 2019 compared to $10.5 million at December 31, 2018 due to the payout of accrued 2018 incentive compensation in the first quarter of 2019.

 

Deposits from customers decreased by $3.4 million or 15.0% to $19.2 million at March 31, 2019 compared to $22.6 million at December 31, 2018 as a result of more deposits applied to invoices than received from customers.

 

 

Other current liabilities and accrued expenses increased by $5.9 million or 47.8%, to $18.3 million at March 31, 2019 from $12.4 million at December 31, 2018, due primarily to increases of $2.5 million for additional healthcare costs and $1.8 million for increased payroll deductions primarily due to withholdings on stock vesting along with fluctuations due to timing.

 

Other non-current liabilities and accrued expenses increased by $1.2 million or 29.8%, to $5.3 million at March 31, 2019 from $4.1 million at December 31, 2018, due to fluctuations from timing.

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash Flows

 

Cash and cash equivalents decreased by $6.0 million to $21.4 million at March 31, 2019, compared to $27.4 million at December 31, 2018. 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

 

We utilized $2.4 million of cash from operating activities during the three months ended March 31, 2019, a decrease of $2.8 million from $0.4 million of cash generated from operations for the three months ended March 31, 2018.  Cash flow from operating activities decreased from 2018 due to an $11.3 million increase in cash utilized in the fulfillment of customer orders (including changes in accounts receivable, inventory, contract assets, and customer deposits) and a $2.0 million decrease in net income net of non-cash charges in 2019. This decrease was partially offset by a $10.5 million increase in cash generated through changes in other working capital items, including other current liabilities, accounts payable, accrued expenses and accrued compensation which were driven by the timing of payments.

 

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 three month period ended March 31, 2019.  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 $1.9 million in investing activities in the first three months of 2019, for acquisition of capital assets related to our operations, a $0.1 million decrease compared to the $2.0 million utilized in the first three months of 2018.

 

During the remainder of 2019, we expect to make additional cash capital investments of $14.0 million to $15.0 million, including capital spending for expanding production facilities, the replacement and upgrades of machinery and equipment used in operations and the implementation of our ERP system.

 

Cash Flow from Financing Activities

 

We utilized $1.7 million of cash through financing activities in the first three months of 2019, compared to $2.5 million utilized in the first three months of 2018 due primarily to decreases in stock compensation.

 

Working Capital

 

Our working capital was as follows (in thousands):

   

March 31,

2019

   

December 31,

2018

   

Change

 
                         

Current assets

  $ 259,716     $ 245,329     $ 14,387  

Current liabilities

    153,580       138,097       15,483  

Working capital

  $ 106,136     $ 107,232     $ (1,096 )

 

 

The decrease in our working capital at March 31, 2019 from December 31, 2018, results from changes in cash, accounts receivable, and accounts payable and other liabilities, which were partially offset by increases in inventory and contract assets. Refer to the balance sheet discussion appearing above in Management’s Discussion and Analysis of Financial Condition and Results of Operations for an explanation of the causes of the material changes in working capital line items.

 

Contingent Obligations

 

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. In February 2017, by agreement of the parties, the court proceeding was dismissed with prejudice and the judge entered an order to this effect as the parties agreed to seek a dissolution plan on their own. No dissolution terms have been determined as of the date of this Form 10-Q. In the fourth quarters of 2015 and 2014, we accrued charges totaling $1.0 million and $0.2 million to write down certain inventory items associated with this joint venture to their estimated fair values. Costs associated with the wind-down will be impacted by the final dissolution agreement. 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 are not expected to be material to our results.

 

 Debt

 

On August 8, 2018, we entered into a Credit Agreement (the "Credit Agreement") by and among us, certain of our subsidiaries, as borrowers, Wells Fargo Bank, N.A., as administrative agent ("Wells Fargo"), and the lenders party thereto consisting of Wells Fargo, JPMorgan Chase Bank, N.A. and PNC Bank National Association (the "Lenders"). Under the Credit Agreement, we may borrow up to $150 million from the Lenders under a five-year secured revolving credit facility. The credit facility matures August 8, 2023. We may also request an increase in the facility of up to $75 million in the aggregate, subject to customary conditions. The credit facility is also available for the issuance of letters of credit of up to $20 million and swing line loans of up to $15 million, subject to certain limitations and restrictions. This line carries an interest rate of either (i) the highest of prime rate, the federal funds effective rate from time to time plus 0.5%, or the one month adjusted LIBOR plus 1.0%; or (ii) adjusted LIBOR plus margin based upon our ratio of debt to earnings from time to time. The applicable borrowing rate including margin was 3.75% (or one-month LIBOR plus 1.25%) at March 31, 2019. The credit facility is secured by security interests in, and liens on, all assets of the borrowers, other than real property and certain other excluded assets.

 

Under the terms of our Credit Agreement, we have the ability to issue letters of credit totaling $20.0 million. At March 31, 2019 and December 31, 2018, we had outstanding letters of credit totaling $0.9 million and $0.9 million, respectively, related to certain emergency response vehicle contracts and our workers compensation insurance.

 

Under the terms of our Credit Agreement we are required to maintain certain financial ratios and other financial covenants, which limited our available borrowings under our line of credit to a total of approximately $75.6 million and $86.4 million at March 31, 2019 and December 31, 2018. The agreement also prohibits us from incurring additional indebtedness; limits certain acquisitions, investments, advances or loans; limits our ability to pay dividends in certain circumstances; and restricts substantial asset sales. At March 31, 2019, we were in compliance with all covenants in our Credit Agreement, and based on our outlook for 2019, we expect to be able to meet these covenants over the next twelve months.

 

Equity Securities

 

On April 28, 2016, our Board of Directors authorized the repurchase of up to 1.0 million shares of our common stock in open market transactions. At March 31, 2019 there were 0.8 million shares remaining under this repurchase authorization. During the first quarter of 2019, we repurchased a total of 101,006 shares of our common stock under this authorization.  If we were to repurchase the remaining 0.8 million shares of stock under the repurchase program, it would cost us approximately $7.4 million based on the closing price of our stock on April 25, 2019. We believe that we have sufficient resources to fund any potential stock buyback in which we may engage.

 

 

Dividends

 

The amounts or timing of any dividend distribution are subject to earnings, financial condition, liquidity, capital requirements and such other factors as our Board of Directors deems relevant. We declared dividends on our outstanding common shares in 2019 and 2018 as shown in the table below.

 

Date dividend

declared

 

Record date

 

Payment date

 

Dividend per

share ($)

   

Total

dividend paid

($000)

 
                         

October 24, 2018

 

November 14, 2018

 

December 14, 2018

  $ 0.05     $ 1,757  

May 2, 2018

 

May 15, 2018

 

June 15, 2018

    0.05       1,759  

October 24, 2017

 

November 15, 2017

 

December 15, 2017

    0.05       1,753  

May 2, 2017

 

May 15, 2017

 

June 15, 2017

    0.05       1,755  

 

 

CRITICAL ACCOUNTING POLICIES

 

The following discussion of critical accounting policies is intended to supplement Note 1, General and Summary of Accounting Policies, of the Notes to Consolidated Financial Statements contained in Item 8 in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 5, 2019. These policies were selected because they are broadly applicable within our operating units and they involve additional management judgment due to the sensitivity of the methods, assumptions and estimates necessary in determining the related statement of income, asset and/or liability amounts.

 

Revenue Recognition

Essentially all of our revenue is generated through contracts with our customers. We may recognize revenue over time or at a point in time when or as obligations under the terms of a contract with our customer are satisfied, depending on the terms and features of the contract and the products supplied. Our contracts generally do not have any significant variable consideration. The collectability of consideration on the contract is reasonably assured before revenue is recognized. On certain vehicles, payment may be received in advance of us satisfying our performance obligations. Such payments are recorded in Customer deposits on the Condensed Consolidated Balance Sheets. The corresponding performance obligations are generally satisfied within one year of the contract inception. In such cases, we have elected to apply the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component. The financing impact on contracts that contain performance obligations that are not expected to be satisfied within one year are expected to be immaterial to our financial statements. We have elected to utilize the practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred because the amortization period for the prepaid costs that would have otherwise been deferred and amortized is one year or less. Revenue recognized in a current period from performance obligations satisfied in a prior period, if any, is immaterial to our financial statements. We use an observable price to allocate the stand-alone selling price to separate performance obligations within a contract or a cost-plus margin approach when an observable price is not available. The estimated costs to fulfill our base warranties are recognized as expense when the products are sold. Our contracts with customers do not contain a provision for product returns, except for contracts related to certain parts sales.

 

Revenue for parts sales for all segments is recognized at the time that control and risk of ownership has passed to the customer, which is generally, when the ordered part is shipped to the customer. Historical return rates on parts sales have been immaterial. Accordingly, no return reserve has been recorded. Instead, returns are recognized as a reduction of revenue at the time that they are received.

 

For certain of our vehicles and chassis, we sell separately priced service contracts that provide roadside assistance or extend certain warranty coverage beyond our base warranty agreements. These separately priced contracts range from 1 to 6 years from the date of the shipment of the related vehicle or chassis. We receive payment with the shipment of the related vehicle or at the inception of the extended service contract, if later, and recognize revenue over the coverage term of the agreement, generally on a straight-line basis, which approximates the pattern of costs expected to be incurred in satisfying the obligations under the contract.

 

See Note 1, General and Summary of Accounting Policies, of the Notes to Condensed Consolidated Financial Statements contained in Item 1 of this Form 10-Q for more information regarding our revenue recognition policies.

 

 

Accounts Receivable

We maintain an allowance for customer accounts that reduces receivables to amounts that are expected to be collected. In estimating the allowance for doubtful accounts, we make certain assumptions regarding the risk of uncollectable open receivable accounts. This risk factor is applied to the balance on accounts that are aged over 90 days: generally, this reserve has an estimated range from 10-25%. The risk percentage applied to the aged accounts may change based on conditions such as: general economic conditions, industry-specific economic conditions, historical and anticipated customer performance, historical experience with write-offs and the level of past due amounts from year to year. However, generally our assumptions are consistent year-over-year and there has been little adjustment made to the percentages used. In addition, in the event there are certain known risk factors with an open account, we may increase the allowance to include estimated losses on such “specific” account balances. The “specific” reserves are identified by a periodic review of the aged accounts receivable. If there is an account in question, credit checks are made and there is communication with the customer, along with other means to try to assess if a specific reserve is required. The inclusion of the “specific” reserve has historically caused the greatest fluctuation in our allowance for doubtful accounts balance. Please see Note 1, General and Summary of Accounting Policies, in the Notes to Consolidated Financial Statements contained in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2018 for further details.

 

Goodwill and Other Indefinite-Lived Intangible Assets

In accordance with authoritative guidance on goodwill and other indefinite-lived intangible assets, such assets are tested for impairment at least annually and written down when and to the extent impaired. We perform our annual impairment test for goodwill and indefinite-lived intangible assets as of October 1 of each year, or more frequently if an event occurs or conditions change that would more likely than not reduce the fair value of the asset below its carrying value.

 

At March 31, 2019 and December 31, 2018, we had recorded goodwill at our Fleet Vehicles and Services, Emergency Response Vehicles and Specialty Chassis and Vehicles reportable segments. The Fleet Vehicles and Services and Emergency Response Vehicles reportable segments were determined to be reporting units for goodwill impairment testing, while the reporting unit for the goodwill recorded in the Specialty Chassis and Vehicles segment was determined to be limited to the Reach Manufacturing component of that reportable segment. The goodwill recorded in these reporting units was evaluated for impairment as of October 1, 2018 using a discounted cash flow valuation except for SRUS which is included in the Fleet Vehicles and Services segment and was recently acquired in December 2018.

 

We first assess qualitative factors including, but not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for our products and current and forecasted financial performance to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we determine that it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, we are not required to calculate the fair value of a reporting unit. We have the option to bypass this qualitative assessment and proceed to a quantitative goodwill impairment assessment. If we elect to bypass the qualitative assessment, or if after completing the assessment it is determined to be more likely than not that the fair value of a reporting unit is less than its carrying value, we perform an impairment test by comparing the fair value of a reporting unit with its carrying amount, including goodwill. The fair value of the reporting unit is determined by estimating the future cash flows of the reporting unit to which the goodwill relates, and then discounting the future cash flows at a market-participant-derived weighted-average cost of capital (“WACC”). In determining the estimated future cash flows, we consider current and projected future levels of income based on our plans for that business; business trends, prospects and market and economic conditions; and market-participant considerations. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered to not be impaired. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to the excess, up to the value of the goodwill.

 

We evaluate the recoverability of our indefinite lived intangible assets, which, as of March 31, 2019, consisted of our Utilimaster and Smeal trade names, by comparing the estimated fair value of the trade names with their carrying values. We estimate the fair value of our trade names based on estimates of future royalty payments that are avoided through our ownership of the trade name, discounted to their present value. In determining the estimated fair value of the trade names, we consider current and projected future levels of revenue based on our plans for Utilimaster and Smeal branded products, business trends, prospects and market and economic conditions.

 

Significant judgments inherent in these analyses include assumptions about appropriate sales growth rates, WACC and the amount of expected future net cash flows. The judgments and assumptions used in the estimate of fair value are generally consistent with the projections and assumptions that are used in current operating plans. Such assumptions are subject to change as a result of changing economic and competitive conditions. The determination of fair value is highly sensitive to differences between estimated and actual cash flows and changes in the related discount rate used to evaluate the fair value of the reporting units and trade name.

 

 

In 2018, we elected to bypass the qualitative assessment and proceed to the quantitative goodwill impairment assessment for all of our reporting units. The estimated fair values of these reporting units exceeded their carrying values by 184%, 36% and 378%, respectively, as of October 1, 2018, the most recent annual assessment date. Based on the discounted cash flow valuations at October 1, 2018, an increase in the WACC for the reporting units of 400 basis points would not result in impairment.

 

The acquired Utilimaster and Smeal trade names have indefinite lives as it is anticipated that they will contribute to our cash flows indefinitely. The estimated fair values of our Utilimaster and Smeal trade names exceeded their associated carrying values of $2.9 million and $2.4 million, respectively, by 1,758% and 269%, respectively, as of October 1, 2018. Accordingly, there was no impairment recorded on these trade names. Based on the discounted cash flow valuations at October 1, 2018, an increase in the WACC used for these impairment analyses of 400 basis points would not result in impairment in the trade names.

 

Since October 1, 2018, there have been no events or changes in circumstances that would more likely than not reduce the fair value of our Fleet Vehicles and Services, Emergency Response Vehicles, or Specialty Chassis and Vehicles reporting units or our indefinite-lived intangible assets below their respective carrying costs.

 

We cannot predict the occurrence of certain events or changes in circumstances that might adversely affect the carrying value of goodwill and indefinite-lived intangible assets. Such events may include, but are not limited to, the impact of the general economic environment; a material negative change in relationships with significant customers; strategic decisions made in response to economic and competitive conditions; and other risk factors as detailed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

See Note 1, General and Summary of Accounting Policies and Note 5, Goodwill and Intangible Assets, in the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2018 for further details on our goodwill and indefinite-lived intangible assets.

 

Warranties

Our policy is to record a provision for the estimated cost of warranty-related claims at the time of the sale, and periodically adjust the warranty liability to reflect actual experience. The amount of warranty liability accrued reflects actual historical warranty cost, which is accumulated on specific identifiable units. From that point, there is a projection of the expected future cost of honoring our obligations under the warranty agreements. Historically, the cost of fulfilling our warranty obligations has principally involved replacement parts and labor for field retrofit campaigns and recalls, which increase the reserve. Our estimates are based on historical experience, the number of units involved and the extent of features and components included in product models. See Note 7, Commitments and Contingent Liabilities, in the Notes to Condensed Consolidated Financial Statements contained in Item 1 of this Form 10-Q, for further information regarding warranties.

 

Provision for Income Taxes

We account for income taxes under a method that requires deferred income tax assets and liabilities to be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. Authoritative guidance also requires deferred income tax assets, which include state tax credit carryforwards, operating loss carryforwards and deductible temporary differences, be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred income tax assets will not be realized.

 

We evaluate the likelihood of realizing our deferred income tax assets by assessing our valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization include our forecast of future taxable income, the projected reversal of temporary differences and available tax planning strategies that could be implemented to realize the net deferred income tax assets.

 

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The determination is based on the technical merits of the position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. Although management believes the estimates are reasonable, no assurance can be given that the final outcome of these matters will not be different from what is reflected in the historical income tax provisions and accruals.

 

Interest and penalties attributable to income taxes are recorded as a component of income taxes.

 

 

EFFECT OF INFLATION

 

Inflation affects us in two principal ways. First, our revolving credit agreement is, generally, tied to the prime and LIBOR interest rates so that increases in those interest rates would be translated into additional interest expense. Second, general inflation impacts prices paid for labor, parts and supplies. Whenever possible, we attempt to cover increased costs of production and capital by adjusting the prices of our products. However, we generally do not attempt to negotiate inflation-based price adjustment provisions into our contracts. Since order lead times can be as much as nine months, we have limited ability to pass on cost increases to our customers on a short-term basis. In addition, the markets we serve are competitive in nature, and competition limits our ability to pass through cost increases in many cases. We strive to minimize the effect of inflation through cost reductions and improved productivity. Refer to the Commodities Risk section in Item 3 of this Form 10-Q, for further information regarding commodity cost fluctuations.

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

 

Interest Rate Risk

We are exposed to market risks related to changes in interest rates and the effect of such a change on outstanding variable rate short-term and long-term debt. At March 31, 2019, we had $18.5 million in debt outstanding under our variable rate short-term and long-term debt agreements. An increase of 100 basis points in interest rates would result in additional interest expense of $0.2 million on an annualized basis for the floating rate debt that we incurred in January 2017 for the acquisition of Smeal. We believe that we have sufficient financial resources to accommodate this hypothetical increase in interest rates. We do not enter into market-risk-sensitive instruments for trading or other purposes.

 

Commodities risk

We are also exposed to changes in the prices of raw materials, primarily steel and aluminum, along with components that are made from these raw materials. We generally do not enter into derivative instruments for the purpose of managing exposures associated with fluctuations in steel and aluminum prices. We do, from time to time, engage in pre-buys of components that are impacted by changes in steel, aluminum and other commodity prices in order to mitigate our exposure to such price increases and align our costs with prices quoted in specific customer orders. We also actively manage our material supply sourcing, and may employ various methods to limit risk associated with commodity cost fluctuations. Changes in input costs have impacted our results for the three months ended March 31, 2019, and may continue to do so during the remainder of 2019 and beyond. See Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part 1, Item 2 of this Form 10-Q for information on the impacts of changes in input costs during the three months ended March 31, 2019.

 

Prevailing interest rates, interest rate relationships and commodity costs are primarily determined by market factors that are beyond our control. All information provided in response to this item consists of forward-looking statements. Reference is made to the section captioned “Forward-Looking Statements” before Part I of this Quarterly Report on Form 10-Q for a discussion of the limitations on our responsibility for such statements.

 

 

Item 4.

Controls and Procedures.

 

An evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of March 31, 2019. Based on and as of the time of such evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed by us in the reports that we file or submit is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

No changes in our internal control over financial reporting were identified as having occurred during the quarter ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II.  OTHER INFORMATION

 

 

Item 1A.

Risk Factors

 

We have included in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018, a description of certain risks and uncertainties that could affect our business, future performance or financial condition (the “Risk Factors”). There have been no material changes from the disclosure provided in the Form 10-K for the year ended December 31, 2018 with respect to the Risk Factors. Investors should consider the Risk Factors prior to making an investment decision with respect to our stock.

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

Issuer Purchases of Equity Securities

 

On April 28, 2016, our Board of Directors authorized the repurchase of up to 1.0 million shares of our common stock in open market transactions. During the quarter ended March 31, 2019, we repurchased a total of 101,006 shares of our common stock under this authorization.

 

During the quarter ended March 31, 2019, there were 109,033 shares delivered by associates in satisfaction of tax withholding obligations that occurred upon the vesting of restricted shares. These shares are not repurchased pursuant to the Board of Directors authorization disclosed above.

 





Period

 


Total
Number of
Shares
Purchased

   



Average
Price Paid
per Share

   

Total Number of
Shares Purchased
as Part of Publicly
Announced Plans or

Programs

   


Number of Shares

That May Yet Be

Purchased Under the

Plans or Programs (1)

 

January 1 to January 31

    97,078     $ 7.84       -       906,072  

February 1 to February 28

    3,928       7.99       -       808,994  

March 1 to March 31

    109,033       8.83       -       808,994  

Total

    210,039     $ 8.34       -       808,994  

 

 

(1)

This column reflects the number of shares that may yet be purchased pursuant to the April 28, 2016 Board authorization described above.

 

 

Item 6.

Exhibits.

 

 

(a)

Exhibits. The following exhibits are filed as a part of this report on Form 10-Q:

 

Exhibit

No.

 

Document

 

 

 

10.1   Spartan Motors, Inc. 2019 Leadership Team Compensation Plan dated April 15, 2019 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed April 16, 2019).*
     
10.2   Form of Spartan Motors, Inc. Performance Share Unit Agreement (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed April 16, 2019).*
     
10.3   Form of Spartan Motors, Inc. Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K filed April 16, 2019).*
     

31.1

 

Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.

 

 

 

32

 

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. § 1350.

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Schema Document

 

 

 

101.CAL

 

XBRL Calculation Linkbase Document

 

 

 

101.DEF

 

XBRL Definition Linkbase Document

 

 

 

101.LAB

 

XBRL Label Linkbase Document

 

 

 

101.PRE

 

XBRL Presentation Linkbase Document

     
  * Management contract or compensatory plan or arrangement.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date:  May 2, 2019

SPARTAN MOTORS, INC.

 

 

 

 

 

 

 

By

/s/ Frederick J. Sohm

 

 

Frederick J. Sohm
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)

 

39