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

_________________

________________

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
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 001-33582001-33582

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.)

41280 Bridge Street

1541 Reynolds Road
Charlotte,Novi
, Michigan
(Address of Principal Executive Offices)

 


4881348375
(Zip Code)

 

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

 

Securities registered pursuant to Section 12(b) of the Securities Exchange Act:

 

Title of Each Class
Common Stock, $.01 Par Value

Trading Symbol(s)

SPAR

Name of Each Exchange on which Registered
NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Securities Exchange Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes

No

X

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes

No

X

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 ☒    No ☐

X

No

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

Yes

X

No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.Yes X ☒      No ☐                                

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or 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

X

   Non-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 Rule 12b-2 of the Exchange Act).

Yes ☐    No ☒

No

X

The aggregate market value of the registrant’s votingregistrant’s common stock held by non-affiliates of the registrant, based on the last sales price of such stock on NASDAQ Global Select Market on June 30, 2017,28, 2019, the last business day of the registrant’s most recently completed second fiscal quarter: $295,236,168.$372,242,152.

 

The number of shares outstanding of the registrant’sregistrant’s Common Stock, $.01 par value, as of February 23, 2018: 35,089,68428, 2020: 35,427,976 shares

 

Documents Incorporated by Reference

 

Portions of the definitive proxy statement for the registrant’s May 23, 201820, 2020 annual meeting of shareholders, to be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2017,2019 are incorporated by reference in Part III.



 


 

 

FORWARD-LOOKING STATEMENTS

 

This Form 10-K contains some statements 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. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“Risk Factors”) that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements.

 

Risk Factors include the risk factors listed and more fully described in Item 1A below, “Risk Factors”, as well as risk factors that we have discussed in previous public reports and other documents filed with the Securities and Exchange Commission. The list in Item 1A below includes all known risks our management believes could materially affect the results described by forward-looking statements contained in this Form 10-K. However, these risks may not be the only risks we face. Our business, operations, and financial performance could also be affected by additional factors that are not presently known to us or that we currently consider to be immaterial to our operations. In addition, new Risk Factors may emerge from time to time that may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, although we believe that the forward-looking statements contained in this Form 10-K are reasonable, we cannot provide you with any guarantee that the anticipated results will be achieved. All forward-looking statements in this Form 10-K are expressly qualified in their entirety by the cautionary statements contained in this section and investors should not place undue reliance on forward-looking statements as a prediction of actual results. The Company undertakes no obligation to update or revise any forward-looking statements to reflect developments or information obtained after the date this Form 10-K is filed with the Securities and Exchange Commission.

 


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PART I

Item 1.

Business.

 

When used in this Form 10-K, “Company”, “we”, “us” or “our” refers to Spartan Motors, Inc. and, depending on the context, could also be used to refer generally to the Company and its subsidiaries, which are described below.

General

 

Spartan Motors, Inc. was organized as a Michigan corporation on September 18, 1975, and is headquartered in Charlotte,Novi, Michigan. As used herein, the term “Company”, “we”, “us” or “our” refers to Spartan Motors, began development ofInc. and its first product that same year and shipped its first fire truck chassis in October 1975.subsidiaries unless designated or identified otherwise.

 

We are a niche market leader in specialty vehicle manufacturing and assembly for the engineeringcommercial vehicle (including last-mile delivery, specialty service and manufacturing of heavy-duty, purpose-built specialty vehicles.vocation-specific upfit segments) and recreational vehicle industries. Our products include:include walk-in vans and truck bodies used in e-commerce/parcel delivery; up-fitdelivery, upfit equipment used in the mobile retail and utility trades; fire trucks and fire truck chassis;utility trades, luxury Class A diesel motor home chassis;chassis, military vehicles;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; Brandon, South Dakota; Ephrata, Pennsylvania; Pompano Beach, Florida; Bristol, Indiana; Snyder and Neligh, Nebraska; and Delevan, Wisconsin, along with contract manufacturing inNorth Charleston, South Carolina; Kansas City, MissouriMissouri; Montebello, Carson, Union City and Roseville, California; Mesa, Arizona; Dallas and Weatherford, Texas; and Saltillo, Mexico. We employed 2,327 people across all of our business units and corporate location as of January 31, 2018.

 

Our vehicles, parts and services are sold to commercial users, original equipment manufacturers (OEMs), dealers, commercial and individual end users, and municipalities and other governmental entities. In 2017 55.7% of our revenue was derived from original equipment manufacturers, dealers, and end users, while 44.3% was derived from municipalities and other governmental entities. Our product portfolio gives us access to multiple differentiated markets and corresponding customer bases which help to mitigate the impact of business cycles.

In 2015 we began executing against an aggressive turnaround plan targeting a return to profitability within three years. 2017 marks the end of that turnaround phase with our ER business returning to profitability and the beginning of our growth phase. We will continue to work towards maximizing operational efficiency and profitability, and add in a new focus on growing our revenue and market share through a combination of organic growth, acquisitions and entry into new synergistic markets. As illustrated in the charts below, over the past five years our revenue has increased by $237.6 million, a compound annual growth rate (CAGR) of 10.8%, while net income and adjusted EBITDA have grown by $21.9 million and $22.4 million respectively.  Please see the reconciliation of adjusted EBITDA to Net income attributable to Spartan Motors, Inc., below.

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 customerscustomers 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-fitupfit services in our Fleet Vehicles and Services segment, the recent award of a $214 million order from the United States Postal Service, 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.

 

WeAcquisition of Royal Truck Body

On September 9, 2019, the Company completed the acquisition of Fortress Resources, LLC D/B/A Royal Truck Body (“Royal”) for $89.4 million in cash, subject to certain post-closing adjustments. Royal is a leading California-based designer, manufacturer and installer of service truck bodies and accessories. Royal manufactures and assembles truck body options for various trades, service truck bodies, stake body trucks, contractor trucks, and dump bed trucks. Royal is the largest service body company in the western United States with its principal facility in Carson, California. Royal has additional manufacturing, assembly, and service space in branch locations in Union City and Roseville, California; Mesa, Arizona; and Dallas and Weatherford, Texas. This acquisition allows us to quickly expand our footprint in the western United States supporting our strategy of coast-to-coast manufacturing and distribution. Royal is part of our Specialty Chassis and Vehicle segment. See “Note 3 – Acquisition Activities” of the Notes to Consolidated Financial Statements appearing in Item 8 of this Form 10-K for further discussion of this transaction.

Divestiture of the Emergency Response and Vehicle Business

On February 1, 2020, the Company completed the sale of its Emergency Response and Vehicle (“ERV”) business for $55 million in cash, subject to certain post-closing adjustments. The ERV business consisted of the emergency response cab-chassis and apparatus operations in Charlotte, Michigan, and the Spartan apparatus operations in Brandon, South Dakota; Snyder and Neligh, Nebraska; and Ephrata, Pennsylvania. The divestiture will allow us to further focus on accelerating growth and profitability in our commercial, fleet, delivery and specialty vehicles markets. As a result of this divestiture, the ERV business is accounted for as a discontinued operation for all periods presented. See “Note 2 – Discontinued Operations” of the Notes to Consolidated Financial Statements appearing in Item 8 of this Form 10-K for further discussion of this transaction.

Unless noted otherwise, the data in this Form 10-K reflects our continuing operations and, therefore, excludes the performance of our prior ERV business. Over the past five years our sales have increased by $399.3 million, a compound annual growth rate (CAGR) of 20.6%, while income (loss) from continuing operations and adjusted EBITDA have grown by $36.7 million and $44.0 million, respectively. Please see the abilityreconciliation of income (loss) from continuing operations to carry out our long-term growth plan and obtain optimal financial flexibility by using a combination of cash generated from borrowings, borrowings under our credit facilities as well as internally or externally generated equity capital as sources of expansion capital.adjusted EBITDA below.

 


3

 

Our Segments

 

We identify our reportable segments based on our management structure and the financial data utilized by our chief operating decision makersmaker to assess segment performance and allocate resources among our operating units. We have threetwo reportable segments: Fleet Vehicles and Services Emergency Response Vehicles("FVS") and Specialty Chassis and Vehicles.Vehicles (“SCV”). For certain financial information related to each segment, see Note 16,"Note 18 – Business Segments," of the Notes to Consolidated Financial Statements appearing in Item 8 of this Form 10-K. RevenueSales by segment is as follows:

 

 

Fleet Vehicles and Services Segment

 

We manufacture fleetcommercial vehicles used in the e-commerce/last mile/parcel delivery, beverage and grocery delivery, laundry and linen, mobile retail, and trades and construction industries through our Bristol, IndianaIndiana; Ephrata, Pennsylvania; North Charleston, South Carolina; Charlotte, Michigan and beginning in 2018, our Ephrata, Pennsylvania operations.Montebello, California locations. Our fleetcommercial vehicles are marketed under the Utilimaster brand name, which serves a diverse customer base and also sells aftermarket parts and accessories for walk-in vans and other delivery vehicles. We also provide vocation-specific equipment up-fitupfit services, which are marketed and sold under the Spartan Up-fitUtilimaster Upfit Services and Strobes-R-Us go-to-market brand,brands, through our contract manufacturing operations at St. Louis, Missouriin Kansas City, Missouri; North Charleston, South Carolina; Pompano Beach, Florida; and Saltillo, Mexico. Our Fleet Vehicles and Services segment employed 8982,097 associates at our Bristol, Indiana facility, as of JanuaryDecember 31, 2018,2019, of which 121838 were contracted employees.associates.

 

We offer fleet vehicles in class 1 through 6,7, the largest range of product offerings among our competitors.

 

Class 1

Class 2

Class 3

Class 4

Class 5

Class 6

Class 7

In the years ended December 31, 2017, 2016 and 2015, interior equipment up-fitting and aftermarket parts sales represented 17.3%, 25.9% and 14.9% of the Fleet Vehicles and Services segment sales. 

 

Innovation

Our Solution“Solution Experts” employ a customer-centric approach by working with customers through a process of listening and learning, needs assessment, and design innovation through building and implementing solutions custom designed for our customers. Recent innovations implemented by our Solution Experts include innovative and cost saving solutions for the specialty service segment, utility industry, food and beverage delivery, and mobile retail industry, such as safe loading equipment, keyless entry systems, backup camera systems, and refrigeration solutions. Our teams can deliver product customization ranging from out-of-the-box to 100% custom solutions.

 


4

 

Products

 

Walk-in VanVanss

Assembled on a “stripped” truck chassis supplied with engine and drive train components, but without a cab, our walk-in vans are used in the parcel delivery, mobile retail and construction trades industries and feature a durable and lightweight aluminum body with a highly modular cargo area accessible from the cab. Our walk-in vans offer low step-in height for easy entry and exit and the best driver visibility in the industry.

Truck BodieBodiess

Our truck bodies are the industry standard for heavy-duty commercial delivery and are installed on a chassis from a variety of manufacturers that isare supplied with a finished cab and are the industry standard for heavy-duty commercial delivery.cab.  They feature a highly customizable cargo area for maximum versatility and are manufactured with anti-rust galvanized steel and aluminum. Available with cargo lengths from 10 to 28 feet and interior heights ranging from 72 to 108 inches.

Reach®

The Reach is a smaller, more nimble walk-in van offering up to 35% better fuel economy than traditional walk-in vans.van. Built on an Isuzu diesel chassis, which has been electrified by Cummings and available in lengths of 12 or 14 feet, the Reach offers a versatile cargo area with integrated logistics tracks allowing for a tailored up-fitupfit through either pre-designed vocational or completely custom packages.

Cutaway

Our cutaway truck bodies are the industry standard for medium-duty commercial delivery and are installed on a chassis from a variety of manufacturers that isare supplied with a finished cab and are the industry standard for medium-duty commercial delivery.cab.  The innovative cab can be designed to fit as many as five crew members and can be configured with a set-back walk-through bulkhead allowing access to the cargo area from the cab. Available with cargo lengths from 10 to 18 feet and interior heights ranging from 72 to 90 inches.

Velocity®

A productive, efficient and ergonomically designed walk-in van designed to make large product/package deliveries easy, with lower entry/exit height and 3-point grab rails at side and rear doors. Economical to operate with a cost of ownership about half thatthat of a traditional walk-in van.

Specialty Up-fitUpfit

We install specialty interior and exterior up-fitupfit equipment for walk-in vans, truck bodies and passenger vans for added safety, cargo handling efficiency, and vocational functionality.

Parts and Accessories

We provide a full line of parts and accessories for our walk-in vans and truck bodies.

 

Marketing

We market our fleetcommercial vehicles, including walk-in vans, cutaway vans and truck bodies, under the Aeromaster®, Velocity, Ultimate, Trademaster®, Metromaster®, Utilivan®, SpartanUtilimaster Upfit Services and Reach brand names. We sell our fleet vehicles to leasing companies, national and fleet accounts (national accounts typically have 1,000+ vehicle fleets and fleet accounts typically have 100+ vehicle fleets), and through a network of independent truck dealers in the U.S. and Canada. In 2018 we will begin marketingWe also market our truck bodies direct to retail customers in select markets. We provide aftermarket support, including parts sales and field service, to all of our fleet vehicle customers through our Customer Service Department located in Bristol, Indiana, which maintains the only online parts resource among the major delivery vehicle manufacturers. Except in limited circumstances, we do not provide financing to dealers or, fleet or national accounts. We also maintain multi-year supply agreements with certain key fleet customers in the parcel and linen/uniform rental industries.

 


5

 

Manufacturing

We applyare implementing the Spartan Production System, of lean manufacturing and continuous improvement to all of our fleet vehicle operations in order to maximize efficiency and reduce costs. We manufacturemanufacture walk-in vans and truck bodies at our Bristol, Indiana facility and beginning in 2018, manufacture truck bodies at our Ephrata, Pennsylvania facility.Pennsylvania; Montebello, California; and Charlotte, Michigan facilities. We have dedicated facilities at Kansas City, MissouriMissouri; North Charleston, South Carolina; Pompano Beach, Florida; and Saltillo, Mexico aligned with our commercial and OEM customers for the installation of up-fitupfit equipment. Our walk-in vans and truck bodies are manufactured on non-automated assembly lines utilizing a combination of high- and low-skilled tradespeople and assemblers. Our up-fitupfit facilities utilize teams of workers requiring minimal capital investment for efficient and timely installation of a variety of equipment.

Emergency Response VehiclesSegment

We are one of the top three fire truck apparatus and cab-chassis manufacturers in North America, with an emphasis on broad categorical coverage. We engineer and manufacture custom emergency response cabs and chassis and complete apparatus to customer specifications, for use by the fire industry throughout the United States and Canada.

Our Emergency Response Vehicles segment consists of the emergency response cab-chassis and apparatus operations at our Charlotte, Michigan location and the Spartan apparatus operations at our Brandon, South Dakota; Snyder and Neligh, Nebraska; Ephrata, Pennsylvania; and Delevan, Wisconsin locations, along with our Spartan-Gimaex joint venture.

The Emergency Response Vehicles segment has extensive engineering experience in creating custom vehicles that perform specialized tasks, and generally manufactures vehicles only upon receipt of confirmed purchase orders; thus, it does not have significant amounts of completed product inventory. As an emergency response vehicle producer, Spartan Motors believes it holds a unique position for continued growth due to its engineering reaction time, manufacturing expertise and flexibility. The Emergency Response Vehicles segment employed 953 associates as of January 31, 2018, 2 of which were contracted employees.  

Innovation

We communicate with end users to continuously identify innovations and bring the latest technology, safety and functionality to our emergency response cab-chassis and apparatus customers. Over the past few years, we have introduced innovations on our emergency response chassis and apparatus such as: our Spartan Select and S-180 truck programs, designed to provide the custom apparatus that emergency response professionals need with unprecedented order-to-delivery cycle times as short as 180 days; our industry-leading Advanced Protection System, which includes side curtain airbags, crew protecting knee bags, outboard accident sensors, smart restraint systems, heavy duty windshield wipers for increased visibility in all weather conditions, and a 360 degree camera that gives around-the truck visibility; our Advanced Climate Control system, the most advanced HVAC system available in the industry; Mobile Gateway, which  provides an extensive group of connectivity features - even if the communications infrastructure is compromised or down; heated roll down side glass; optimized engine tunnel; and a new fire truck cab interior configuration, which provides additional space and comfort in both the driver and officer positions, improved shoulder harness accessibility, increased interior volume and a 45% reduction in in-cab noise levels when traveling at 45 mph.

Products

Cab & Chassis

Our emergency response chassis consist of the cab, frame and running gear to which the apparatus is fitted. We custom manufacture emergency response chassis to customer specifications through our Spartan USA subsidiary. These specifications vary based on such factors as application, terrain, street configuration and the nature of the community, state or country in which the fire truck will be utilized. We have three fire truck chassis models within this product line: the Gladiator; Metro Star; and Metro Star X.

Pumpers

Our pumpers are custom manufactured to customer specifications on Spartan chassis and are available as side, top or rear mount utilizing stainless steel or aluminum bodies with highly customizable storage configurations.


Aerials

We engineer, manufacture and market aerial ladder components for fire trucks under the Spartan, Smeal and Ladder Tower brands. Our aerial products are produced through our Spartan USA operations in Snyder, Nebraska and Ephrata, Pennsylvania, which have developed a full line of aerial products.

Rescues

Our rescues are optimized to carry the crew and the right equipment. Custom designs and configurations, include walk-in and walk-around to deliver the ultimate accessibility and storage capacity. 

Tankers

Our tankers feature a full-size pump with multiple valve options to fit individual departments’ needs, backed by a vast onboard water tank that can respond to structural operations and serve as a mobile water supply source.

Parts and Accessories

We provide a full line of parts and accessories which are distributed by our dealer channel, and available factory direct.

Service

Spartan and its go-to-market brands provide factory service and authorized service across a network of nearly 300 service centers in North America. In addition to routine maintenance, body, aerial, pump, drivetrain, and chassis repair, Spartan and its brands offer departments without the budget for new apparatus the opportunity to refurbish their existing unit or fleet.

Marketing

We market our custom emergency response cab-chassis and apparatus through a network of dealers throughout the U.S. and Canada, as well as select markets in South America and Asia, under the Spartan, Smeal, Ladder Tower and UST brands. Our dealer organizations establish close working relationships with municipal fire departments. These personal contacts focus on the quality of the group’s specialty products and allow us to keep customers updated on new and improved product lines and end users’ needs. We provide aftermarket support, including parts sales, directly through our refurbishment centers located throughout the United States and through our dealer network.

In 2017 and consistent with prior years, we were one of the largest participants of the Fire Department Instructors Conference, the largest fire and safety industry trade show in North America. We also participate in other trade shows throughout the year. Trade shows provide the opportunity to display products and to meet directly with OEMs who purchase chassis, dealers who sell finished vehicles and fire departments that use the finished products. Engineers from our advanced product development team attend these trade shows, and along with communication with our dealer network, work to provide the innovation, functionality and quality that fire departments need.

Manufacturing

We apply the Spartan Production System of lean manufacturing and continuous improvement to bring world class efficiency, productivity and quality to our chassis and apparatus operations. We manufacture our emergency response cab-chassis and apparatus at our Charlotte, Michigan; Brandon, South Dakota; Snyder, Nebraska; and Ephrata Pennsylvania locations. Emergency response cab-chassis are manufactured at our Charlotte, Michigan facility, while our apparatus and aerial ladders are manufactured at our Brandon, South Dakota; Snyder, Nebraska; Delavan, Wisconsin; and Ephrata, Pennsylvania locations. We are able to match the manufacturing capabilities of our various locations with the demands of the specific products in order to maximize efficiency. Due to the custom nature of our products, our manufacturing processes utilize skilled workers working on non-automated assembly lines. Our chassis and apparatus are generally manufactured to customer specifications in response to orders received. We also manufacture a limited number of chassis and apparatus for use as demonstration vehicles or to be sold from stock.


Specialty Chassis and VehiclesVehicles Segment Segment

Our Specialty Chassis and Vehicles segment operates out of our Charlotte, Michigan facility where we engineer and manufacture luxury Class A diesel motor home chassis, manufacture our Reach walk-in van, provide contract assembly of defense vehicles and other specialty chassis,vehicles and other commercial vehicles, and distribute related aftermarket parts and accessories. Our specialty vehicle products are manufactured to customer specifications upon receipt of confirmed purchase orders. As a specialty chassis and vehicle manufacturer, we believe we hold a unique position for continued growth due to the high quality and performance of our products, our engineering reaction time, manufacturing expertise and flexibility, and the scalability of our operations. Our specialty vehicle products are generally sold through original equipment manufacturers in the case of chassis and vehicles and to dealer distributors or directly to consumers for aftermarket parts and accessories. In addition, beginning in September 2019 with our acquisition of Royal, the Specialty Chassis and Vehicles segment includes operations in Carson, Union City and Roseville, California; Mesa, Arizona; and Dallas and Weatherford, Texas. Royal is a leading California-based designer, manufacturer and installer of service truck bodies and accessories. The Specialty Chassis and Vehicles segment employed 461551 associates (all in Charlotte, Michigan) as of JanuaryDecember 31, 2018,2019, of which 99116 were contracted employees. associates.

 

Innovation

We promote effective communication through trade shows and motor home rallies with a wide variety of motor home owners to identify needs and bring our customers the latest technology and highest quality in our motor home and specialty chassis. Over the pastpast few years, we have introduced innovations on our motor home chassis, including: custom tuned suspensions, independent front suspension, and passive steer tag axle that greatly improve ride, handling and maneuverability; adaptive cruise control, collision mitigation, electronic stability control and lane departure warning to improve safety; and automatic air leveling that adds convenience and functionality to top line motor homes.

 

Products

Products

Motor home chassisHome Chassis

We custom manufacture diesel chassis for luxury Class A motor homes to the individual specifications of our motor home OEM customers through our Spartan USA subsidiary. These specifications vary based on specific interior and exterior design specifications, power requirements, horsepower, and electrical needs of the motor home bodies to be attached to the Spartan chassis. Our motor home chassis feature diesel engines of 360 to 605 horsepower and are used in motor homes ranging from 37 to 45 feet. Our motor home chassis are separated into four models: the K1, K2, K3, and K4 series chassis.

Isuzu N-gas and F-series

We provide final assembly services for Isuzu N-gas and F-series chassis for the North American market. These class 3 and class 5 chassis are utilized in a variety of final configurations for light duty freight hauling and industrial uses. We have a low-cost structure and a highly skilled team of assembly workers, which, along with a dedication to lean manufacturing and continuous improvement allow us to deliver superior value in contract manufacturing.

  

Service Truck Bodies

We manufacture and assemble truck body options for a variety of trades, service truck bodies, stake body trucks, contractor trucks and dump bed trucks.

Defense and Specialty chassisChassis and vehiclesVehicles

We partner with a variety of OEM customers to provide chassis and complete vehicle assembly for military vehicles, drill rigs, shuttle bus chassis and other specialty chassis and vehicles.

Parts and Accessories

We provide a full line of parts and accessories for our motor home, defense and specialty chassis as well as maintenance and repair services for our motor home and specialty chassis.

 

6

 

Marketing

We sell our Class A diesel motor home chassis to OEM manufacturers for use in construction of premium motor homes. We actively participate in a variety of trade shows and motor home rallies that promote our products and aftermarket parts and services in additionaddition to providing an opportunity to communicate with our end customers to showcase Spartan’s latest innovations and identify needs and opportunities for continuous improvement of our chassis.


 

Manufacturing

Our motor home chassis and specialty manufacturingmanufacturing operations benefit from implementing the Spartan Production System, of lean manufacturing and continuous improvement to bring efficiency and cost reduction throughout our Specialty Chassis and Vehicles segment. We manufacture motor home chassis, drill rigs, military vehicles and specialty bus chassis on non-automated assembly lines at our Charlotte, Michigan facility.lines. We assemble Isuzu N-gas and F-series chassis on high-volume assembly lines at our Charlotte, Michigan location that utilize a variety of state of the artstate-of-the-art automation and testing equipment.

 

Competition

Recent Acquisition

On January 1, 2017, we acquired substantially all of the assets and certain liabilities of Smeal Fire Apparatus Co., Smeal Properties, Inc., Ladder Tower Co., and U.S. Tanker Co., resulting in the addition of $124.7 million of revenue in 2017. When used in this Annual Report on Form 10-K, “Smeal” refers to the assets, liabilities, and operations acquired from such entities. The assets acquired consist of the assets used by the former owners of Smeal in the operation of its business designing, manufacturing, and distributing emergency response vehicle bodies and aerial devices for the fire service industry. Smeal has operations in Snyder and Neligh, Nebraska; Delavan, Wisconsin; and Ephrata, Pennsylvania and is operated as part of our Emergency Response Vehicles segment. Our acquisition of Smeal resulted in the expansion of our product portfolio and, with the addition of the Smeal dealer network, an expansion of our geographic reach across 44 states and 13 Canadian provinces and territories. The acquisition strengthened our emergency response vehicle product line with the addition of market leading aerial designs and three manufacturing locations that will allow us to align our product portfolio with location specific manufacturing expertise to further increase efficiency and accelerate our Emergency Response Vehicles segment’s return to profitability. 

Our strategy is to accelerate our growth by expanding into additional products and markets through opportunistic, strategic acquisitions. We believe that we have the management expertise, balance sheet strength and capital availability to enable continued growth through both organic expansion and an aggressive acquisition strategy.

Competition

The principal methods we use to build competitive advantages include short engineering reaction time, custom design capability, high product quality, superior customer service and quick delivery. We employ a solutions-based approach to offer specialized productsproducts tailored to customer needs across the spectrum of our products. We compete with companies that manufacture for similar markets, including some divisions of large diversified organizations that have total sales and financial resources exceeding ours. Our competition in the fleet vehicle market ranges from one large manufacturer in the walk-in van market to a number of smaller manufacturers in the truck body and equipment up-fitupfit markets. Our direct competitors in the emergency vehicle apparatus market are principally larger manufacturers that compete throughout the North American market and often have a strong international presence. Certain competitors are vertically integrated and manufacture their own emergency response chassis and/or apparatus, although they generally do not sell their chassis to outside customers (other OEMs). Our competitors in the specialty vehicle market are principally large multi-product line manufacturers of specialty and heavy-duty vehicles.

 

Suppliers

Suppliers

We are dedicated to establishing long-term and mutually beneficial relationships with our suppliers. Through these relationships, we benefit from new innovations, higher quality, reduced lead times, smoother/faster manufacturing ramp-up of new vehicle introductionsintroductions and lower total costs of doing business. Our accelerating growth and company-wide supply chain management initiatives allow us to benefit from economies of scale and maximize to focus on a common vision.

 

The single largest commodity directly utilizedutilized in production is aluminum, which we purchase under purchase agreements based on forecasted production requirements. To a lesser extent we are dependent upon suppliers of lumber, fiberglass and steel for our manufacturing. We have initiated long-term supplier agreements and are consolidating suppliers where beneficial to gain pricing advantages. There are several readily available sources for the majority of these raw materials. However, we are heavily dependent on specific component part products from a few single source vendors. We maintain a qualification, on-site inspection, assistance, and performance measurement system to control risks associated with reliance on suppliers. We normally do not carry inventories of such raw materials or components in excess of those reasonably required to meet production and shipping schedules. Material and component cost increases are passed on to our customers whenever possible. However, thereThere can be no assurance that there will not be any supply issues over the long-term.


 

In the assembly of our fleet vehicles, we use chassis supplied by third parties, and generally do not purchase these chassis for inventory. For this market, we typically accept shipment of truck chassis owned by dealers or end users, for the purposepurpose of installing and/or manufacturing our specialized commercial vehicles on such chassis, but from time to time we do purchase chassis for use in fulfilling certain customer orders.

Research and Development

Our success depends on our ability to innovate and add new products and features ahead of changing market demands and new regulatory requirements. Thus, we emphasize research and development and commit significant resources to develop and adapt new productsproducts and production techniques. Our engineering team of nearly 200100 technical professionals is looking past “current practices” and “best practices” to deliver “next practices” for our customers and shareholders. Our engineering group is organized as a unified team serving one goal throughout the company,company: to deliver world class products and manufacturing processes regardless of product line or location, a concept that we refer to as “One Spartan Engineering”. The team balances the synergies of One Spartan Engineering with fully integrated teams dedicated to product line specialization. Results are accomplished with the appropriate blend of predictive analysis and physical property testing in our Research and Development facilities along with ride-and-drive analysis. Our efforts range from executing special orders for current production; to new production development for new functionality and product improvements; to exciting technologies that are new to the markets we serve, like vehicle electrification. Our engineering actions are driven by our firm commitment to safety, quality, delivery, and productivity. We spent $6.5$4.9 million, $6.8$3.7 million and $4.6$3.6 million on research and development in 2019, 2018, and 2017, 2016 and 2015, respectively.

 

7

 

Product Warranties

 

We provide limited warranties against assembly and construction defects. These warranties generally provide for the replacement or repair of defective parts or workmanship for specified periods, ranging from one year to the life of the product,twenty years, following the date of sale. With the use of validation testing, predictive analysis tools and engineering and design standards, we strive to continuously improve product quality and durability, and reduce our exposure to warranty claims. The end users also may receive limited warranties from suppliers of components that are incorporated into our chassis and vehicles. For more information concerning our product warranties, see Note 10,"Note 12 – Commitments and Contingent Liabilities," of the Notes to Consolidated Financial Statements appearing in this Form 10-K.

 

Patents, Trademarks and Licenses

We have 2723 United States patents, (provisional and regular), which include rights to the design and structure of chassis and certain peripheral equipment and we have 14 pending patent applications in the United States. The existing patents will expire on various dates from 20182020 through 2033 and all are subject to payment of required maintenance fees. We also own 33 United States109 federal, state and international trademark and service mark registrations. The trademark and service mark registrations are generally renewable under applicable laws, subject to payment of required fees and the filing of affidavits of use. In addition, we have various internationalpending trademark registrations and pending applications.

 

We believe our products are identified by our trademarks and that our trademarks are valuable assets to allboth of our business segments. We are not aware of any infringing uses or any prior claims of ownership of our trademarks that could materially affect our business. It is our policy to pursue registration of our primary marks whenever possible and to vigorously defend our patents, trademarks and other proprietary marks against infringement or other threats to the greatest extent practicable under applicable laws.

 

Environmental Matters

Compliance with federal, state and local environmental laws and regulations has not had, nor is it expected to have, a material effect on our capital expenditures, earnings or competitive position.

Joint Venture

 

Spartan USA is a participantbelieves 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 dissolutionpreservation of the joint venture.environment because it leads to a safer, healthier world for today and in the future. In June 2015,addition to the various product offerings provided by Spartan, USAalternative fuel specialty vehicles are offered to help reduce pollutant emissions. Spartan also subscribes to environmentally conscious manufacturing practices while working to obtain ISO 14001 certification for some locations by the end of 2020, and Gimaex Holding, Inc. entered into court proceedingsother locations in 2021, and strongly encourages its suppliers to determinehave similar manufacturing philosophies. Spartan recycles waste in many aspects of our daily operations and in 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-K.office.

 

Associates

We employed 2,3272,724 associates as of JanuaryDecember 31, 2018,2019 in our continuing operations, substantially all of which are full-time, including 222956 contracted associates. Management considers its relations with associates to be positive. Our production processes at our non-unionized facilities employ a combination of high- and low-skilled tradespeople and assemblers involved in body, electrical, mechanical, paint, and assembly operations.


 

Customer Base

We serve customers ranging from municipalities to OEMs to commercial customers and vehicle dealers throughout our product lines. Sales to our top 10 customers in 20172019 accounted for 38.8%68.1% of our revenue.sales. Sales to customers that individually exceeded 10% of our consolidated revenuesales for 20162019, 2018 and 20152017 are detailed in the chart below. In 2017 no customer individually exceeded 10% of our consolidated revenue.

 

Year

 

Customer

 

Sales

($ millions)

  

Percentage of

consolidated

revenue

  

Segment

2016

 

Jayco, Inc.

 $71.0   12.0% 

Specialty Chassis and Vehicles

2015

 

Jayco, Inc.

 $78.8   14.3% 

Specialty Chassis and Vehicles

 

Year

 

Customer

 

Sales

($ millions)

  

Percentage of

consolidated

sales

  

Segment

2019 Amazon $173.0   22.9% FVS
2019 USPS $113.8   15.0% FVS
             
2018 USPS $81.7   14.3% FVS
2018 Jayco, Inc. $73.4   12.9% SCV
2018 Newmar Corporation $70.5   12.4% SCV

2018

 

Isuzu

 $69.1   12.1

%

 

FVS and SCV

             
2017 Jayco, Inc. $64.9   16.0% SCV
2017 Newmar Corporation $53.6   13.3% SCV

8

 

WeWe do have other significant customers which, if the relationship changes significantly, could have a material adverse impact on our financial position and results of operations. We believe that we have developed strong relationships with our customers and continually work to develop new customers and markets. See related risk factors in Item 1A of this Form 10-K.

 

Sales to customers outside the United States were $81.2$21.4 million, $31.7$21.2 million and $40.1$13.4 million for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively, or 11.5%2.8%, 5.4%3.7% and 7.3%3.3%, respectively, of sales for those years. All of our long-lived assets are located in the United States.

 

Order Backlog

Order Backlog

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

 

  

December 31,

2017

  

December 31,

2016

  

Increase/(decrease)

 

Fleet Vehicles and Services

 $267,698  $89,549  $178,149 

Emergency Response Vehicles

  233,583   139,870   93,713 

Specialty Chassis and Vehicles

  33,806   20,037   13,769 

Total consolidated

 $535,087  $249,456  $285,631 
  

December 31,

2019

  

December 31,

2018

  

Increase/(decrease)

 

FVS

 $305,876  $218,775  $87,101 

SCV

  30,734   37,656   (6,922

)

Total consolidated

 $336,610  $256,431  $80,179 

 

The increase in Fleet Vehicles and ServicesOur FVS backlog wasincreased by $87.1 million, or 39.8%, driven by a $214.3 million contract received in September, 2017 to supply delivery vehicles, which will be fulfilled through 2019. The increase in our Emergency Response Vehicles backlog was drivennew orders for walk-in vans offset by the Smeal acquisition, which added $84.4build out of the USPS contract that originated in 2017. Our SCV segment backlog decreased by $6.9 million, or 18.4%, due to our backlog at December 31, 2017. The increasea reduction in Specialty Chassis and Vehicles backlog was driven by an increase in orders forClass A diesel motor home chassis as a result of new model introductions in 2017.market demand.

 

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 periodperiod-to-period is not necessarily indicative of eventual actual shipments.

  

Non-GAAP Financial Measure

This report contains adjusted EBITDA (earnings before interest, taxes, depreciation and amortization), which is a non-GAAP financial measure. This non-GAAP measure is calculated by excluding items that we believe to be infrequent or not indicative of our continuing operating performance. ForIn the periods covered by this report such items include expenses associatedfourth quarter of 2019, in connection with restructuring actions taken to improve the efficiency and profitability of certaindivestiture of our manufacturingERV business, we refined the definition of adjusted EBITDA as income from continuing operations expenses relatedbefore interest, income taxes, depreciation and amortization, as adjusted to product recall campaigns, non-cash charges related to the impairment of assets, expenses related to a recent business acquisition,eliminate the impact of restructuring charges, acquisition related expenses and adjustments, non-cash stock-based compensation expenses, and other gains and losses not reflective of our ongoing operations. Adjusted EBITDA for all prior years presented has been recast to conform to the step-up in inventory value associated with the recent business acquisition, and the impact of the business acquisition on the timing of chassis revenue recognition.current presentation.

 

We present the non-GAAP measure adjusted EBITDA because we consider them it to be an important supplemental measure 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 termlonger-term operating trends. We believe this measure 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 this non-GAAP measure 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 this non-GAAP measure, when considered together with the corresponding GAAP financial measures and the reconciliations to that measure, provides investors with additional understanding of the factors and trends affecting our business than could be obtained in the absence of this disclosure.

 

Our management uses adjusted EBITDA to evaluate the performance of and allocate resources to our segments. Adjusted EBITDA is also used, along with other financial and non-financial measures, for purposes of determining annual and long-term incentive compensation for our management team.

 


9

 

The following table reconciles Net income attributable to Spartan Motors, Inc.reconciles Income from continuing operations to Adjusted EBITDA for the periods indicated.

 

  

2017

  

2016

  

2015

  

2014

  

2013

 

Net Income (loss) attributable to Spartan Motors, Inc.

 $15,935  $8,610  $(16,972) $1,173  $(5,971)

Interest expense

  864   410   365   341   311 

Income tax

  90   100   4,880   (2,103)  (1,881)

Depreciation & Amortization

  9,937   7,903   7,437   8,378   9,238 

EBITDA

  26,826   17,023   (4,290)  7,789   1,697 

Restructuring charges

  1,252   1,095   2,855   2,157   - 
Impact of intercompany chassis sales to Smeal  2,073   -   -   -   - 

Acquisition related expenses

  1,354   882   -   -   - 
Impact of inventory fair value step-up  189   -   -   -   - 

Product recall expenses

  (368)  3,457   8,600   -   1,979 

Contingent consideration

  -   -   -   742   21 

Asset impairment

  -   406   2,234   -   5,198 

NHTSA settlement

  -   -   2,269   -   - 

Joint venture expenses

  1   7   508   144   (2)

Adjusted EBITDA

 $31,327  $22,870  $12,176  $10,832  $8,893 
  

2019

  

2018

  

2017

  

2016

  

2015

 
Income from continuing operations $36,790  $18,116  $17,471  $18,273  $149 
Net (income) loss attributable to non-controlling interest  (140)  -   1   7   - 

Interest expense

  1,839   1,080   864   410   365 

Income tax

  10,355   3,334   2,382   6,645   13,366 

Depreciation and amortization

  6,073   6,214   6,032   5,215   4,959 

Restructuring and other related charges

  316   662   798   -   - 

Acquisition related expenses and adjustments

  3,531   1,952   588   14   - 

Non-cash stock-based compensation expense

  5,281   4,027   3,536   1,536   1,198 

Adjusted EBITDA

 $64,045  $35,385  $31,672  $32,100  $20,037 

 

Available Information

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other reports (and amendments thereto) filed or furnished pursuant to Section 13(a) of the Securities Exchange Act are available, free of charge, on our internet website (www.SpartanMotors.com) as soon as reasonably practicable after we electronically file or furnish such materials with the Securities and Exchange Commission.Commission ("SEC").

 

The public may read and copy materials that we file with the SEC at the SEC’sSEC’s Public Reference Room at 100 F Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.


 

Item 1A.

Risk Factors..

 

Our financial condition, results of operations and cash flows are subject to various risks, many of which are not exclusively within our control that may cause actual performance to differ materially from historical or projected future performance. The risksrisks described below are the risks known to us that we believe could materially affect our business, financial condition, results of operations, or cash flows. However, these risks may not be the only risks we face. Our business could also be affected by additional factors that are not presently known to us, factors we currently consider to be immaterial to our operations, or factors that emerge as new risks in the future.

 

We dependGeneral economic, market, and/or political conditions, whether on local and municipal governments for a substantial portion ofglobal, national, or more regional scale, could have a negative effect on our business.business.

 

In 2017, localConcerns regarding acts of terrorism, armed conflicts, natural disasters, budget shortfalls, cyber events, civil unrest, governmental actions, and municipal governments wereepidemics have in the end customer for 42% of our revenue, including custom fire truck chassis, fire truck bodies, aerial ladderspast and other fire truck related apparatus.  These markets are heavily impacted by municipal capital spending budgets, which may be impacted by fluctuating municipal tax revenues.  These budgetary constraintscould in the future create significant uncertainties that may have material and adverse effects on consumer demand (particularly the specialty and motor home markets), shipping and transportation, the availability of manufacturing components, commodity prices and our ability to engage in overseas markets as tariffs are implemented. An economic recession, whether resulting from one of these events or others, would have a significant adverse effect on the overall fire and emergency vehicle market and/or cause a shift in the fire and emergency vehicle market away from highly customized products toward commercially produced vehicles.  These changes could result in weakened demand for our products, which may have anmaterial adverse impact on our net sales, financial condition profitability and/and results of operations.

Our efforts to remediate a material weakness in our internal control over financial reporting may not be as effective as we currently expect and, in any event, will result in increased costs in the short-term.

As disclosed under Item 9A of this Annual Report on Form 10-K, our management concluded that our internal control over financial reporting was not effective as of December 31, 2019 due to a material weakness in our internal control over financial reporting. As disclosed in more detail in Item 9A below, the material weakness relates to our processes for recognizing revenue within our FVS business unit.

By definition, a material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis. We have concluded that our consolidated financial statements included within this Form 10-K present fairly, in all material respects, our financial position, results of operations, and cash flows. flows for the periods presented, in conformity with GAAP. However, if not effectively and timely corrected, the deficiencies noted in our assessment of the effectiveness of our internal controls as of December 31, 2019 present the risk that future financial statements could contain a material misstatement.

We have already started to implement efforts to remediate these deficiencies and expect that the remediation of this material weakness will be completed prior to the end of fiscal 2020. However, if our remediation efforts take longer than expected or are more difficult to implement than expected, we continue to run the risk of a misstatement of our financial statements. And, even if our remediation efforts are effective, they will result in certain increased costs and expenses, which will negatively impact our near-term financial performance.

 

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.

 

As part of our growth strategy, we have pursued and expect we will continuecontinue to selectively pursue, acquisitions of businesses or assets in order to diversify, expand our capabilities, enter new markets, or increase our market share. Integrating any newly acquired business or assets can be expensive and can require a great deal of management time and other resources. If we are unable to successfully integrate the newly acquired businesses with our existing business, we may not realize the synergies we expect from the acquisition and our business and results of operations may be adversely impacted.

10

The divestiture of our emergency response business could negatively impact our future financial performance.

Effective February 1, 2020, we completed the sale of our Emergency Response and Vehicle (“ERV”) business. Certain aspects of the ERV business were integrated with our continuing operations, including certain information technology, purchasing, human resources, and finance functions and certain physical operations at our Charlotte, Michigan facility. The full separation of the ERV business from our continuing operations and the transition of all aspects of that business to the buyer is expected to take 12 months or more. We expect to incur additional costs and expenses to complete the transition of that business, and we also expect the full separation and transition of that business to divert resources, including certain of our personnel and management resources, away from our continuing operations. Significant systems separation is required to clone, test, cleanse data and support the applications for both the purchaser and our future business during the Transitional Services Agreement. All of these activities represent risk to the ongoing business as well as divert IT resources during this process. In addition, as is generally the case with the sale of a business, we could incur exposure to claims from the purchaser of the ERV business pursuant to the terms and conditions of the purchase agreement. One or more of these matters could have a negative impact on our future financial performance.

 

Re-configuration or relocation of our production operations could negatively impact our earnings.

 

We may, from time to time, re-configure our production lines or relocate production of products between buildings or locationslocations or to new locations in order to maximize the efficient utilization of our existing production capacity or take advantage of opportunities to increase manufacturing efficiencies. Costs incurred to effect these re-configurations or re-locations may exceed our estimate,estimates, and efficiencies gained may be less than anticipated, each of which may have a negative impact on our results of operations and financial position.

 

Disruptions within our dealer network could adversely affect our business.

 

We rely, for certain of our products, on a network of independent dealers to market, deliver, provide training for, and service our products to and for customers. Our business is influenced by our ability to initiate and manage new and existing relationships with dealers.

 

From time to time, we or an individual dealer may choose to terminate the relationship, or the dealership could face financial difficulty leading to failure or difficulty in transitioning to new ownership. In addition, our competitors could engage in a strategy to attempt to acquire or convert our dealers to carry their products. We do not believe our business is dependent on any single dealer, the loss of which would have a sustained material adverse effect upon our business.

 

However, disruptiondisruption of dealer coverage within a specific local market could have an adverse impact on our business within the affected market. The loss or termination of a significant number of dealers could cause difficulties in marketing and distributing our products and have an adverse effect on our business, operating results or financial condition. In the event that a dealer in a strategic market experiences financial difficulty, we may choose to provide financial support such as extending credit to a dealership, reducing the risk of disruption, but increasing our financial exposure.

 

We may not be able to successfully implement and manage our growth strategy.

 

Our growth strategy includes expanding existing market share through product innovation, continued expansion into industrial and global markets and merger or acquisition related activities.


We believe our future success depends in part on our research and development and engineering efforts, our ability to manufacture or source the products and customer acceptance of our products. As it relates to new markets, our success also depends on our ability to create and implement local supply chain, sales and distribution strategies to reach these markets.

 

The potential inability to successfully implement and manage our growth strategy could adversely affect our business and our results of operations. The successful implementation of our growth strategy will depend, in part, on our ability to integrate operations with acquired companies.

 

Our efforts to grow our business in emerging markets are subject to all of these risks plus additional, unique risks. In certain markets, the legal and political environment can be unstable and uncertain which could make it difficult for us to compete successfully and could expose us to liabilities.

 

We also make investments in new business development initiatives which, like many startups, could have a relatively high failurefailure rate. We limit our investments in these initiatives and establish governance procedures to contain the associated risks, but losses could result and may be material. Our growth strategy also may involve acquisitions, joint venture alliances and additional arrangements of distribution. We may not be able to enter into acquisitions or joint venture arrangements on acceptable terms, and we may not successfully integrate these activities into our operations. We also may not be successful in implementing new distribution channels, and changes could create discord in our existing channels of distribution.

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.

Our results of operations may be significantly affected by the availability and pricing of manufacturing components and labor, changes in labor rates and practices, and increases in tariffs or similar restrictions on materials we import. Increases in costs of raw materials used in our products could affect the cost of our supply materials and components, as rising steel and aluminum prices as well as increased tariffs have impacted the cost of certain of our manufacturing components. Although we attempt to mitigate the effect of any escalation in components, labor costs, and tariffs by negotiating with current or new suppliers and by increasing productivity or, where possible, by increasing the sales prices of our products, we cannot be certain that we will be able to do so without it having an adverse impact on the competitiveness of our products and, therefore, our sales volume. If we cannot successfully offset increases in our manufacturing costs, this could have a material adverse impact on our margins, operating income and cash flows. Our profit margins may decrease if prices of purchased component parts, labor rates, and/or tariffs increase, and we are unable to pass on those increases to our customers. Even if we were able to offset higher manufacturing costs by increasing the sales prices of our products, the realization of any such increases often lags the rise in manufacturing costs, especially in our operations, due in part to our commitment to give our customers and dealers price protection with respect to previously placed customer orders.

11

Disruption of our supply base could affect our ability to obtain component parts.

We increasingly rely on component parts from global sources in order to manufacture our products. Disruption of this supply base due to international political events, natural disasters, the recent outbreak of coronavirus or other factors could affect our ability to obtain component parts at acceptable prices, or at all, and have a negative impact on our sales, results of operations and financial position.

 

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

 

The introductionintroduction of new products is critical to our future success. We have additional costs when we introduce new products, such as initial labor or purchasing inefficiencies, but we may also incur unexpected expenses. For example, we may experience unexpected engineering or design issues that will force a recall of a new product or increase production costs of the product above levels needed to ensure profitability. In addition, we may make business decisions that include offering incentives to stimulate the sales of products not adequately accepted by the market, or to stimulate sales of older or less marketable products. The costs resulting from these types of problems could be substantial and have a significant adverse effect on our earnings.

 

Any negativenegative change in our relationship with our major customers could have significant adverse effects on revenues and profits.

 

Our financial success is directly related to the willingness of our customers to continue to purchase our products. Failure to fill customers’ orders in a timely manner or on the terms and conditions they may impose could harm our relationships with our customers. The importance of maintaining excellent relationships with our major customers may also give these customers leverage in our negotiations with them, including pricing and other supply terms, as well as post-sale disputes. This leverage may lead to increased costs to us or decreased margins. Furthermore, if any of our major customers experience a significant downturn in their business or fail to remain committed to our products or brands, then these customers may reduce or discontinue purchases from us, which could have an adverse effect on our business, results of operations and financial condition. There were notwo customers that accounted for 10 percent or greater of consolidated sales in 2017.2019.

 

We depend on a small group of suppliers for some of our components, and the loss of any of these suppliers could affect our ability to obtain components at competitive prices, whichwhich would decrease our sales or earnings.

 

Most chassis emergency response vehicle, aerial ladder and specialty vehicle commodity components are readily available from a variety of sources. However, a few proprietary or specialty components are produced by a small group of suppliers.

 

In addition, we generally do not purchase chassis for our delivery vehicles.  Rather, we accept shipments of vehicle chassis owned by dealers or end-users for the purpose of installing and/or manufacturing our specialized truck bodies on such chassis.  There are four primary sources for commercial chassis, and we have established relationships with all major chassis manufacturers.

 

Changes in our relationships with these suppliers, shortages, production delays or work stoppagesstoppages by the employees of such suppliers could have a material adverse effect on our ability to timely manufacture our products and secure sales. If we cannot obtain an adequate supply of components or commercial chassis, this could result in a decrease in our sales and earnings.


Disruption of our supply base could affect our ability to obtain component parts.

We increasingly rely on component parts from global sources in order to manufacture our products.  Disruption of this supply base due to international political events or natural disasters could affect our ability to obtain component parts at acceptable prices, or at all, and have a negative impact on our sales, results of operations and financial position.

 

Changes to laws and regulations governing our business could have a material impact on our operations.

 

Our manufactured products and the industriesindustries in which we operate are subject to extensive federal and state regulations. Changes to any of these regulations or the implementation of new regulations could significantly increase the costs of manufacturing, purchasing, operating or selling our products and could have a material adverse effect on our results of operations. Our failure to comply with present or future regulations could result in fines, potential civil and criminal liability, suspension of sales or production, or cessation of operations.

 

Certain U.S. tax laws currently afford favorable tax treatment for financing the purchase and sale of recreational vehicles that are used as the equivalent of second homes. These laws and regulations have historically been amended frequently, and it is likely that further amendments and additional regulations will be applicable to us and our products in the future. Amendments to these laws and regulations and the implementation of new regulations could have a material adverse effect on our results of operations.

12

 

Our operations are subject to a variety of federal and state environmental regulations relating to noise pollution and the use, generation, storage, treatment, emission and disposal of hazardous materials and wastes. Although we believe that we are currently in material compliance with applicable environmental regulations, our failure to comply with present or future regulations could result in fines, potential civil and criminal liability, suspension of production or operations, alterations to the manufacturing process, costly cleanup or capital expenditures.

Our operating results may fluctuate significantly on a quarter-to-quarter basis.

Our quarterly operating results depend on a variety of factors including the timing and volume of orders, the completion of product inspections and acceptance by our customers, and various restructuring initiatives that may be undertaken from time to time. In addition, our Fleet Vehicles and Services segment experiences seasonality whereby product shipments in the first and fourth quarters are generally lower than other quarters as a result of the busy holiday delivery operations experienced by some of its largest customers. Accordingly, our financial results may be subject to significant and/or unanticipated quarter-to-quarter fluctuations.

 

Our businesses are cyclical, and this can lead to fluctuations in our operating results.

 

The industries in which we operate are highly cyclical and there can be substantial fluctuations in our manufacturing, shipments and operating results, and the results for any prior period may not be indicative of results for any future period. Companies within these industries are subject to volatility in operating results due to external factors such as economic, demographic and political changes. Factors affecting the manufacture of chassis, emergency response vehicles, aerial ladders, specialty vehicles, delivery vehicles and other of our products include but are not limited to:

 

 

Commodity prices;prices;

 

Fuel availability and prices.

Federal, state and municipal budgets;

 

Unemployment trends;

 

International tensions and hostilities;

 

General economic conditions;

 

Various tax incentives;

 

Strength of the U.S. dollar compared to foreign currencies;

 

Overall consumer confidence and the level of discretionary consumer spending;

 

DealersDealers’ and manufacturers’ inventory levels; and

 

Interest rates and the availability of financing.

 

Economic, legal and other factors could impact our customerscustomers’ ability to pay accounts receivable balances due from them.

 

In the ordinary course of business, customers are granted terms related to the sale of goods and services delivered to them. These terms typically include a period of time between when the goods and services are tendered for delivery to the customer and when the customer needs to pay for these goods and services. The amounts due under these payment terms are listed as accounts receivable on our balance sheet. Prior to collection of these accounts receivable, our customers could encounter drops in sales, unexpected increases in expenses, or other factors which could impact their ability to continue as a going concern and which could affect the collectability of these amounts. Writing off uncollectible accounts receivable could have a material adverse effect on our earnings and cash flow as the Company haswe have major customers with material accounts receivable balances at any given time.


 

Our business operations could be disrupted if our information technology systems fail to perform adequately or experience a security breachbreach.

 

We rely on our information technology systems to effectively manage our business data, communications, supply chain, product engineering, manufacturing, accounting and other business processes. While we believe we have robust processes in place to protect our information technology systems, if these systems are damaged, cease to function properly or are subject to a cyber-security breach such as ransomware, phishing, infection with viruses or intentional attacks aimed at theft or destruction of sensitive data, we may suffer an interruption in our ability to manage and operate the business, and our results of operations and financial condition may be adversely affected.

Like most corporations, our information systems are a target of attacks.  In addition, third-party providers of data hosting or cloud services, as well as our suppliers, may experience cyber-security incidents that may involve data we share with them. Although the incidents that we have experienced to date have not had a material effect on our business, financial condition or results of operations, there can be no assurance that such incidents will not have a material adverse effect on us in the future. In order to address risks to our information systems, we continue to make investments in personnel, technologies and training of personnel.

13

 

Implementing a new enterprise resource planning systeminformation systems could interfere with our business or operations.

 

We are in the process of implementing a new enterprise resource planning (ERP) system.  The ERP system was implemented at our first location in 2017, with the remaining locations expected to be implemented throughout 2018 to 2020.  This project requiresinformation systems infrastructure and applications that impact multiple locations. These projects require significant investment of capital and human resources, the re-engineering of many processes of our business, and the attention of many associates and managers who would otherwise be focused on other aspects of our business. Should the systemsystems not be implemented successfully, we may incur impairment charges that could materially impact our financial results. If the system doessystems do not perform in a satisfactory manner once implementation is complete, our business and operations could be disrupted and our results of operations negatively affected, including our ability to report accurate and timely financial results.

Global political conditions could have a negative effect on our business.

Concerns regarding acts of terrorism, armed conflicts, natural disasters and budget shortfalls have created significant global economic and political uncertainties that may have material and adverse effects on consumer demand (particularly the specialty and motor home markets), shipping and transportation, the availability of manufacturing components, commodity prices and our ability to engage in overseas markets.

 

Risks associated with international sales and contracts could have a negative effect on our business.

 

In 2017, 20162019, 2018 and 20152017 we derived 11.5%2.8%, 5.4%3.7% and 7.3% of3.3% of our revenue from sales to, or related to, end customers outside the United States. We expect that international sales will continue to account for a meaningful amount of our total revenue, especially in our emergency response vehicles segment.  Accordingly, we face numerous risks associated with conducting international operations, any of which could negatively affect our financial performance, including changes in foreign country regulatory requirements, the strength of the U.S. dollar compared to foreign currencies, import/export restrictions, the imposition of foreign tariffs and other trade barriers and disruptions in the shipping of exported products.

 

Additionally, as a U.S. corporation, we are subject to the Foreign Corrupt Practices Act, which may place us at a competitive disadvantage to foreign companies that are not subject to similar regulations.

 

Fuel shortages, or higher prices for fuel, could have a negative effect on sales.

 

Gasoline or diesel fuel is required for the operation of the specialty vehicles we manufacture. There can be no assurance that the supply of these petroleum products will continue uninterrupted, that rationing will not be imposed or that the price of or tax on these petroleum products will not significantly increase in the future. Increases in gasoline and diesel prices and speculation about potential fuel shortages have had an unfavorable effect on consumer demand for motor homes from time to time in the past and may continue to do so in the future. This, in turn, may have a material adverse effect on our sales volume. Increases in the price of oil also can result in significant increases in the price of many of the components in our products, which may have an adverse impact on margins or sales volumes.

 

Our operating results may fluctuate significantly on a quarter-to-quarter basis.

Our quarterly operating results depend on a variety of factors including the timing and volume of orders, the completion of product inspections and acceptance by our customers, and various restructuring initiatives that may be undertaken from time to time.  In addition, our Fleet Vehicles and Services segment experiences seasonality whereby product shipments in the first and fourth quarters are generally lower than other quarters as a result of the busy holiday delivery operations experienced by some of its largest customers.  Accordingly, our financial results may be subject to significant and/or unanticipated quarter-to-quarter fluctuations.


We could incur asset impairmentimpairment charges for goodwill, intangible assets or other long-lived assets.

 

We have a significant amount of goodwill, intangible assets and other long-lived assets. At least annually, we review goodwill and non-amortizing intangible assets for impairment. Identifiable intangible assets, goodwill and other long-lived assets are also reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable from future cash flows.  In 2016 and 2015 we recorded asset impairment charges totaling $0.4 and $2.2 million against an asset group related to certain locations of our Emergency Response Vehicles segment.  If the operating performance at one or more of our reporting units fails to meet future forecasts, or if future cash flow estimates decline, we could be required, under current U.S. accounting rules, to record additional impairment charges for our goodwill, intangible assets or other long-lived assets. Any write-off of a material portion of such assets could negatively affect our results of operations or financial position. See “Note 2 – Discontinued Operations” and “Note 7 – Goodwill and Intangible Assets” of the Notes to Consolidated Financial Statements appearing in Item 8 of this Form 10-K for further discussion of goodwill, intangibles and other long-lived assets.

 

Our stock price has been and may continue to be volatile, which may result in losses to our shareholders.

 

The market price of the Company’sour common stock has been and may continue to be subject to wide fluctuations in response to, among other things, quarterly fluctuations in operating results, a failure to meet published estimates of or changes in earnings estimates by securities analysts, sales of common stock by existing holders,stockholders, loss of key personnel, market conditions in our industries, shortages of key product inventory components and general economic conditions.

 

If there is a rise in the frequency and size of product liability, warranty and other claims against us, including wrongful death claims, our business, results of operations and financial condition may be harmed.

 

We are frequently subject, in the ordinary course of business, to litigation involving product liability and other claims, including wrongful deathdeath claims, related to personal injury and warranties. We partially self-insure our product liability claims and purchase excess product liability insurance in the commercial insurance market. We cannot be certain that our insurance coverage will be sufficient to cover all future claims against us. Any increase in the frequency and size of these claims, as compared to our experience in prior years, may cause the premiums that we are required to pay for such insurance to rise significantly. It may also increase the amounts we pay in punitive damages, which may not be covered by our insurance. In addition, a major product recall or increased levels of warranty claims could have a material adverse effect on our results of operations.

 

In 2015 we entered into a settlement agreement with the National Highway Traffic Safety Administration (“NHTSA”) pertaining to our early warning and defect reporting. The terms of the agreement include certain performance obligations that, if not completed satisfactorily, could subject us to additional fines of up to $5 million.

Increased costs, including costs of raw materials, component parts and labor costs, potentially impacted by changes in labor rates and practices, could reduce our operating income.

Our results of operations may be significantly affected by the availability and pricing of manufacturing components and labor, as well as changes in labor rates and practices.  Increases in costs of raw materials used in our products could affect the cost of our supply materials and components, as rising steel and aluminum prices have impacted the cost of certain of our manufacturing components.  Although we attempt to mitigate the effect of any escalation in components and labor costs by negotiating with current or new suppliers and by increasing productivity or, where necessary, by increasing the sales prices of our products, we cannot be certain that we will be able to do so without it having an adverse impact on the competitiveness of our products and, therefore, our sales volume.  If we cannot successfully offset increases in our manufacturing costs, this could have a material adverse impact on our margins, operating income and cash flows.  Our profit margins may decrease if prices of purchased component parts or labor rates increase and we are unable to pass on those increases to our customers.  Even if we were able to offset higher manufacturing costs by increasing the sales prices of our products, the realization of any such increases often lags behind the rise in manufacturing costs, especially in our operations, due in part to our commitment to give our customers and dealers price protection with respect to previously placed customer orders.

14

 

Item 1B.

Unresolved Staff Comments..

 

None.


 

Item 2.

Properties..

 

The following table sets forth information concerning the properties we own or lease.We have 12 company-owned and 26 leased locations, of which our Fleet Vehicle and Services segment operates in 18 locations and our Specialty Chassis and Vehicles segment operates in 18 locations. We consider our properties to generally be in good condition, well maintained, and suitable and adequate to meet our business requirements for the foreseeable future. In 2017,2019, our manufacturing plants, taken as a whole, operated moderately below capacity. We do not anticipate difficulty in renewing existing leases as they expire or in finding alternative facilities.

Square Footage

Owned/Leased

Operating Segment

 Manufacturing/Assembly
Bristol, Indiana417,000LeasedFleet Vehicles and Services

Charlotte, Michigan

110,000

Owned

Fleet Vehicles and Services
Kansas City, Missouri60,000LeasedFleet Vehicles and Services

Charlotte, Michigan

181,000OwnedSpecialty Chassis and Vehicles

Charlotte, Michigan

156,000OwnedEmergency Response Vehicles

Brandon, South Dakota

24,000OwnedEmergency Response Vehicles

Brandon, South Dakota

21,000LeasedEmergency Response Vehicles

Delavan, Wisconsin

39,000LeasedEmergency Response Vehicles

Ephrata, Pennsylvania

45,000LeasedEmergency Response Vehicles

Ephrata, Pennsylvania

41,400LeasedEmergency Response Vehicles

Neligh, Nebraska

42,300OwnedEmergency Response Vehicles

Snyder, Nebraska

224,000OwnedEmergency Response Vehicles

1,360,700

Warehousing

Bristol, Indiana35,000LeasedFleet Vehicles and Services
Charlotte, Michigan25,000OwnedFleet Vehicles and Services
Charlotte, Michigan74,000OwnedSpecialty Chassis and Vehicles
Charlotte, Michigan11,000OwnedEmergency Response Vehicles
Brandon, South Dakota1,000OwnedEmergency Response Vehicles
Brandon, South Dakota10,200LeasedEmergency Response Vehicles
Ephrata, Pennsylvania4,500LeasedEmergency Response Vehicles
Ephrata, Pennsylvania1,600LeasedEmergency Response Vehicles
Neligh, Nebraska6,200OwnedEmergency Response Vehicles
Snyder, Nebraska70,500OwnedEmergency Response Vehicles

239,000

Research and Development

Bristol, Indiana

3,000

LeasedFleet Vehicles and Services
Charlotte, Michigan

12,000

OwnedEmergency Response/Specialty Chassis and Vehicles

15,000

Service Area/Inspection

Charlotte, Michigan53,000OwnedEmergency Response/Specialty Chassis and Vehicles
Brandon, South Dakota7,000LeasedEmergency Response Vehicles

Ephrata, Pennsylvania

6,800

Leased

Emergency Response Vehicles

66,800

Offices

Corporate Offices – Charlotte, Michigan12,000OwnedNot Applicable
Bristol, Indiana36,000LeasedFleet Vehicles and Services
Kansas City, Missouri3,000LeasedFleet Vehicles and Services
Charlotte, Michigan127,000OwnedEmergency Response/Specialty Chassis and Vehicles
Brandon, South Dakota7,000OwnedEmergency Response Vehicles
Brandon, South Dakota3,000LeasedEmergency Response Vehicles
Delavan, Wisconsin4,800LeasedEmergency Response Vehicles
Ephrata, Pennsylvania12,500LeasedEmergency Response Vehicles
Ephrata, Pennsylvania8,000LeasedEmergency Response Vehicles
Neligh, Nebraska1,900OwnedEmergency Response Vehicles
Snyder, Nebraska19,700OwnedEmergency Response Vehicles

234,900

Unutilized

Charlotte, Michigan

84,000

Owned

Not Applicable

Total square footage

2,000,400


 

Item 3.

Legal ProceedingsProceedings..

 

At December 31, 2017,2019, we were parties, both as plaintiff or defendant, to a number of lawsuits and claims arising out of the normal conduct of our businesses. Our management does not currently expect our financial position, future operating results or cash flows to be materially affected by the final outcome of these legal proceedings.

 

Item 4.

Mine Safety Disclosures.

 

Not applicable

 

PART II

 

Item 5.

Market For Registrant’sfor Registrant’s Common Equity, Related Stockholder Stockholder Matters, and Issuer Purchases of Equity Securities.

 

Our common stock is traded on the NASDAQ Global Select Market under the symbol “SPAR.”

 

The following table sets forth the high and low sale prices for our common stock for the periods indicated, all as reported by the NASDAQ Global Select Market:

 

 

High

  

Low

  

High

  

Low

 

Year Ended December 31, 2017:

        

Year Ended December 31, 2019:

        

Fourth Quarter

 $18.10  $11.10  $19.31  $13.18 

Third Quarter

  11.25   8.50   14.32   9.63 

Second Quarter

  9.28   7.45   11.05   8.38 

First Quarter

  9.40   6.45   9.68   7.11 
                

Year Ended December 31, 2016:

        

Year Ended December 31, 2018:

        

Fourth Quarter

 $10.50  $7.20  $14.86  $6.70 

Third Quarter

  9.95   6.16   16.10   13.35 

Second Quarter

  6.50   3.95   19.45   14.15 

First Quarter

  4.12   2.61   18.35   13.05 

 

15

 

We paid dividends on our outstanding common shares in 2017, 20162019, 2018 and 20152017 as shown in the table below.

 

Date dividend

declared

 

Record date

 

Payment date

 

Dividend per

share ($)

  

Total

dividend paid

($000)

 

Oct. 24, 2017

 

Nov. 15, 2017

 

Dec. 15, 2017

 $0.05  $1,753 
             

May 2, 2017

 

May 15, 2017

 

June 15, 2017

  0.05   1,755 
             

Nov. 2, 2016

 

Nov. 15, 2016

 

Dec. 15, 2016

  0.05   1,720 
             

April 28, 2016

 

May 19, 2016

 

June 23, 2016

  0.05   1,724 
             

Oct. 26, 2015

 

Nov. 12, 2015

 

Dec. 17, 2015

  0.05   1,713 
             

May 8, 2015

 

May 21, 2015

 

June 25, 2015

  0.05   1,713 

Date dividend

declared

 

Record date

 

Payment date

 

Dividend per

share ($)

Nov. 4, 2019

 

Nov. 14, 2019

 

Dec. 16, 2019

 $0.05
        

May 6, 2019

 

May 17, 2019

 

June 17, 2019

  0.05
        

Oct. 24, 2018

 

Nov. 14, 2018

 

Dec. 14, 2018

  0.05
        

May 2, 2018

 

May 15, 2018

 

June 15, 2018

  0.05
        

Oct. 24, 2017

 

Nov. 15, 2017

 

Dec. 15, 2017

  0.05
        

May 2, 2017

 

May 15, 2017

 

June 15, 2017

  0.05

 


 

No assurance, however, can be given that any future distributions will be made or, if made, as to the amounts or timing of any future distributions as such distributions are subject to earnings, financial condition, liquidity, capital requirements, and such other factors as our Board of Directors deems relevant. The number of shareholders of record of our common stock on February 23, 201828, 2020 was 333.292. See Item 12 below for information concerning our equity compensation plans.

 

The following graph compares the cumulative total stockholder return on our common stock with the cumulative total return on the Nasdaq Composite Index and a company-selected peer group for the period beginning on December 31, 20122014 and ending on the last day of 2017.2019. The graph assumes an investment of $100 in our stock, the Nasdaq Composite Index and the company-selected peer groupgroups on December 31, 2012,2014, and further assumes the reinvestment of all dividends. Stock price performance, presented for the period from December 31, 20122014 to December 31, 2017,2019, is not necessarily indicative of future results.

 

The company-selected peer group wasgroups were determined based on a custom peer groupgroups of companies against whom we compete for sales or management talent, that were identified for the purpose of benchmarking executive officer compensation in 2018 (the “2018 Peer Group”) and 2014 (the “2014 Peer Group”). The change in peer groups was primarily due to changes that have occurred since 2014 in our business mix and that of the companies that make up the 2014 Peer Group. The 2018 Peer Group consists of durable goods manufacturers with revenues ranging from one-half to double that of the Company, and includes: Alamo Group, Inc.; Altra Industrial Motion Corp.; Blue Bird Corp.; Columbus McKinnon Corp.; Commercial Vehicle Group, Inc.; Douglas Dynamics, Inc.; ESCO Technologies, Inc.; Federal Signal Corp.; LCI Industries, Inc.; Methode Electronics, Inc.; Miller Industries, Inc.; Shiloh Industries, Inc.; Standard Motor Products; The Manitowoc Company, Inc.; Wabash National Corp.; and Winnebago Industries, Inc. The 2014 Peer Group consists of companies in the specialty manufacturing and automotive industries, against whom we compete for sales or management talent, which was identified for the purpose of benchmarking officer salaries in 2014. The peer groupand includes: LCI Industries, Inc. (formerly, Drew Industries, Inc.); Standard Motor Products, Inc.; Winnebago Industries, Inc.; Federal Signal Corp.; Methode Electronics, Inc.; Shiloh Industries, Inc.; Commercial VehicleAlamo Group, Inc.; Altra Industrial Motion Corp.; AlamoCommercial Vehicle Group, Inc.; ESCO Technologies, Inc.; Federal Signal Corp.; LCI Industries, Inc.; Methode Electronics, Inc.; Miller Industries, Inc.; andShiloh Industries, Inc.; Standard Motor Products, Inc.; Twin Disc, Inc.; and Winnebago Industries, Inc.

 

16

 

  

12/31/2012

  

12/31/2013

  

12/31/2014

  

12/31/2015

  

12/31/2016

  

12/31/2017

 

Spartan Motors, Inc.

 $100.00  $138.46  $110.74  $67.00  $202.21  $347.38 

NASDAQ Stock Market

 $100.00  $140.10  $160.32  $171.53  $186.63  $202.36 

Peer Group

 $100.00  $162.79  $157.35  $151.75  $222.37  $274.90 

  

12/31/2014

  

12/31/2015

  

12/31/2016

  

12/31/2017

  

12/31/2018

  

12/31/2019

 

Spartan Motors, Inc.

 $100.00  $60.50  $182.60  $313.68  $145.36  $366.53 

NASDAQ Stock Market

 $100.00  $106.99  $116.42  $150.60  $146.15  $198.45 

2018 Peer Group

 $100.00  $89.91  $135.24  $171.64  $118.25  $176.17 

2014 Peer Group

 $100.00  $96.44  $141.32  $174.70  $121.30  $185.39 

 

The stock price performance graph and related information shall not be deemed “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference by any general statement incorporating by reference this annual report on Form 10-K into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate this information by reference.

 


17

 

Issuer Purchases of Equity Securities

On October 19, 2011, our Board of Directors authorized management to repurchase up to a total of 1.0 million shares of our common stock in open market transactions, contingent upon market conditions. During the second quarter of 2016, we repurchased a total of 422,000 shares of our common stock at an average price of $4.74 per share under this authorization. We did not repurchase any shares in 2015.

 

On April 28, 2016, our Board of Directors terminated the 2011 repurchase authorization effective June 30, 2016, and authorized the repurchase of up to 1.0 million additional shares of our common stock in open market transactions. At December 31, 20172019 there were 1.00.8 million shares remaining under this repurchase authorization. If we were to repurchase the remaining 1.00.8 million shares of stock under the repurchase program, it would cost us $15.2$11.9 million based on the closing price of our stock on February 23, 2018.28, 2020. We believe that we have sufficient resources to fund any potential stock buyback in which we may engage.

 

During the quarter ended December 31, 2019, no shares were repurchased under this authorization. A summary of our purchases of our common stock during the fourth quarter of fiscal year 20172019 is as follows:

 





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

 

Oct. 1, 2017 to Oct. 31, 2017October 2019

  -  $-   -   1,000,000808,994 

Nov. 1, 2017 to Nov. 30, 2017November 2019

  -   -   -   1,000,000808,994 

Dec. 1, 2017 to Dec. 31, 2017December 2019

  -   -   -   1,000,000808,994 

Total

  -  $-   -   1,000,000808,994 

 


18

 

Item 6.

Selected Financial Data.

 

The selected financial data shown below for each of the five years in the period ended December 31, 20172019 has been derived from our Consolidated Financial Statements. The following data should be read in conjunction with the Consolidated Financial Statements and related Notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Form 10-K.

 

Five-Year Operating and Financial Summary

(In Thousands, Except Per Share Data)

 

  

2017 (1)

  

2016

  

2015

  

2014

  

2013

 
                     
                     

Sales

 $707,098  $590,777  $550,414  $506,764  $469,538 

Cost of products sold (2)

  617,655   518,113   502,783   450,702   424,312 

Restructuring charges

  208   136   519   808   - 

Gross profit

  89,235   72,528   47,112   55,254   45,226 
                     

Operating expenses:

                    

Research and development

  6,523   6,772   4,560   3,851   3,074 

Selling, general and administrative

  65,497   56,172   52,695   51,205   45,496 

Goodwill impairment

  -   -   -   -   4,854 

Restructuring charges

  1,044   959   2,336   1,349   - 

Operating income (loss)

  16,171   8,625   (12,479)  (1,151)  (8,198)
                     

Other income (expense), net

  (147)  78   (121)  77   348 

Income (loss) before taxes

  16,024   8,703   (12,600)  (1,074)  (7,850)

Income tax expense (benefit) (3)

  90   100   4,880   (2,103)  (1,881)

Net earnings (loss)

  15,934   8,603   (17,480)  1,029   (5,969)

Less: Net earnings (loss) attributable to non-controlling interest

  (1)  (7)  (508)  (144)  2 
                     

Net earnings (loss) attributable to Spartan Motors, Inc.

 $15,935  $8,610  $(16,972) $1,173  $(5,971)
                     

Basic earnings (loss) per share

 $0.46  $0.25  $(0.50) $0.03  $(0.18)
                     

Diluted earnings (loss) per share

 $0.46  $0.25  $(0.50) $0.03  $(0.18)
                     

Cash dividends per common share

 $0.10  $0.10  $0.10  $0.10  $0.10 
                     

Basic weighted average common shares outstanding

  34,949   34,405   33,826   34,251   33,550 

Diluted weighted average common shares outstanding

  34,949   34,405   33,826   34,256   33,550 

Balance Sheet Data:

                    

Net working capital (4)

 $89,055  $74,467  $82,764  $92,832  $93,839 

Total assets (4)

  301,164   243,294   228,151   236,807   250,073 

Long-term debt, including current portion

  17,989   139   5,187   5,261   5,340 

Shareholders’ equity

  168,269   152,952   148,491   168,618   171,551 

(1)

On January 1, 2017, we acquired Smeal. Smeal has been included in our consolidated results of operations starting on the acquisition date. See Note 2, “Acquisition Activities” in Item 8, “Financial Statements and Supplementary Data" in this Annual Report for further discussion.

(2)

Beginning in 2015, certain engineering costs related to routine product changes that were formerly classified within Research and development have been classified within Cost of products sold to more consistently align the results of our individual business units. Expenses of $7,825 for 2014 and $7,837 for 2013 have been reclassified accordingly.

(3)

See Note 8, "Taxes on Income" in Item 8, "Financial Statements and Supplementary Data" in this Annual Report for a discussion of material items impacting the 2017, 2016 and 2015 income tax provisions.’’

(4)

Beginning in the second quarter of 2016, we adopted a new accounting pronouncement which requires net deferred tax assets and liabilities to be classified as non-current on the Consolidated Balance Sheets. We retrospectively adopted this standard, and accordingly our Net working capital and Total assets for prior periods are shown reflecting this change.

  

2019

  

2018

  

2017

  

2016

  

2015

 

Sales

 $756,542  $570,527  $404,248  $407,795  $357,195 

Cost of products sold

  639,509   497,370   341,176   343,896   311,982 

Restructuring charges

  6   13   120   -   - 

Gross profit

  117,027   73,144   62,952   63,899   45,213 

Operating expenses:

                    

Research and development

  4,864   3,771   3,596   4,870   3,326 

Selling, general and administrative

  64,473   46,206   39,329   34,330   29,080 

Restructuring charges

  76   649   678   -   - 

Operating income

  47,614   22,518   19,349   24,699   12,807

 

Other (expense) income, net

  (469

)

  (1,068

)

  504

 

  219   708

 

Income before taxes

  47,145   21,450   19,853   24,918   13,515

 

Income tax expense

  10,355   3,334   2,382   6,645   13,366 

Income from continuing operations

  36,790   18,116   17,471   18,273   149

 

Loss from discontinued operations, net of income taxes

  (49,216

)

  (3,104

)

  (1,537)  (9,670

)

  (17,121)

(Loss) income

  (12,426)  15,012   15,934   8,603   (16,972)

Less: income (loss) attributable to non-controlling interest

  140   -   (1

)

  (7

)

  -

 

(Loss) income attributable to Spartan Motors, Inc.

 $(12,566) $15,012  $15,935  $8,610  $(16,972

)

Basic earnings (loss) per share attributable to Spartan Motors, Inc.:

                    
                     

Continuing operations

 $1.03  $0.52  $0.50  $0.53  $- 

Discontinued operations

  (1.39

)

  (0.09

)

  (0.04)  (0.28

)

  (0.50)

Basic earnings per share

 $(0.36) $0.43  $0.46  $0.25  $(0.50

)

                     

Diluted earnings (loss) per share attributable to Spartan Motors, Inc.:

                    
                     

Continuing operations

 $1.03  $0.52  $0.50  $0.53  $- 

Discontinued operations

  (1.39

)

  (0.09

)

  (0.04)  (0.28

)

  (0.50)

Diluted earnings per share

 $(0.36) $0.43  $0.46  $0.25  $(0.50

)

                     

Cash dividends per common share

 $0.10  $0.10  $0.10  $0.10  $0.10 

Basic weighted average common shares outstanding

  35,318   35,187   34,949   34,405   33,826 

Diluted weighted average common shares outstanding

  35,416   35,187   34,949   34,405   33,826 

Balance Sheet Data:

                    

Total assets

  450,537   353,784   301,164   243,294   228,151 

Long-term debt, including current portion

  88,847   25,607   17,989   139   5,187 

Shareholders’ equity

  171,747   186,082   168,269   152,952   148,491 

 


19

 

Item 7.

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

 

General

 

Spartan Motors, Inc. was organized as a Michigan corporation on September 18, 1975, and is headquartered in Charlotte,Novi, 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 leading, niche market engineerleader in specialty vehicle manufacturing and manufacturerassembly for the commercial vehicle (including last-mile delivery, specialty service and vocation-specific upfit segments) and recreational vehicle industries. Our products include walk-in vans and truck bodies used in e-commerce/parcel delivery, upfit equipment used in the heavy-duty, purpose-built specialtymobile retail, and utility trades, luxury Class A diesel motor home chassis, military vehicles, market.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; Brandon, South Dakota; Ephrata, Pennsylvania; Snyder and Neligh, Nebraska; Delavan, Wisconsin; andPompano Beach, Florida; Bristol, Indiana along with contract manufacturing inIndiana; North Charleston, South Carolina; Kansas City, MissouriMissouri; Montebello, Carson, Union City and Roseville, California; Mesa, Arizona; Dallas and Weatherford, Texas; and Saltillo, Mexico.

 

On January 1, 2017, Spartan USA acquired substantially all of the assets and certain liabilities of Smeal Fire Apparatus Co., Smeal Properties, Inc., Ladder Tower Co., and U.S. Tanker Co. When used in this Annual Report on Form 10-K, “Smeal” refers to the assets, liabilities, and operations acquired from such entities. The assets acquired consist of the assets used by the former owners of Smeal in the operation of its business designing, manufacturing, and distributing emergency response vehicle bodies and aerial devices for the fire service industry. Smeal has operations in Snyder and Neligh, Nebraska; Delavan, Wisconsin; and Ephrata, Pennsylvania and is operated as part of our Emergency Response Vehicles 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 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 brand names.  Our Brandon, South Dakota; Snyder and Neligh, Nebraska; Delavan, Wisconsin; and Ephrata, Pennsylvania locations manufacture emergency response vehicles under the Spartan, Smeal, U.S. Tanker and Ladder Tower brand names. Spartan USA is also a participant in Spartan-Gimaex Innovations, LLC (“Spartan-Gimaex”), a 50/50 joint venture with Gimaex Holding, Inc. that was formed to provide emergency response vehicles for the domestic and international markets. Spartan-Gimaex is reported as a consolidated subsidiary of Spartan Motors, Inc. In February 2015, Spartan USA and Gimaex Holding, Inc. mutually agreed to begin discussions regarding the dissolution of the joint venture. In June 2015, Spartan USA and Gimaex Holding, Inc. entered into court proceedings to determine the terms of the dissolution. 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-K.

Our business strategy is to further diversify product lines and develop innovative design, engineering and manufacturing expertise in order to be the best value producer of custom vehicle products. Our diversification across several sectorsproduct lines provides numerous opportunities while reducing overall risk.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 modelstructure 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 upfit 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 have an innovative team focused on building lasting relationships with our customers. This is accomplished by striving to deliver premium custom vehicles, vehicle components, and services. 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.

 


On February 1, 2020, the Company completed the sale of its Emergency Response and Vehicle (“ERV”) business for $55 million in cash, subject to certain post-closing adjustments. The ERV business consisted of the emergency response cab-chassis and apparatus operations in Charlotte, Michigan, and the Spartan apparatus operations in Brandon, South Dakota; Snyder and Neligh, Nebraska; and Ephrata, Pennsylvania. The divestiture will allow us to further focus on accelerating growth and profitability in our commercial, fleet, delivery and specialty vehicles markets. As a result of this divestiture, the ERV business is accounted for as a discontinued operation for all periods presented. See “Note 2 – Discontinued Operations” of the Notes to Consolidated Financial Statements appearing in Item 8 of this Form 10-K for further discussion of this transaction.


Executive Overview

 

RevenueSales of $707.1$756.5 million in 2017,2019, compared to $590.8$570.5 million in 2016.2018.

 

Gross Marginmargin of 12.6%15.5% in 2017,2019, compared to 12.3%12.8% in 2016.2018.

 

Operating expense of $73.1$69.4 million, or 10.3%9.2% of sales in 2017,2019, compared to $63.9$50.6 million or 10.8%8.9% of sales in 2016.2018.

 

Operating income of $16.2$47.6 million in 2017,2019, compared to $8.6$22.5 million in 2016.2018.

 

Income tax expense of $0.1$10.4 million in 2017, flat with 2016.2019, compared to $3.3 million in 2018.

 

Net incomeIncome from continuing operations of $15.9$36.8 million in 2017,2019, compared to $8.6$18.1 million in 2016.2018.

 

Earnings per share from continuing operations of $0.46$1.03 in 2017,2019, compared to $0.25$0.52 in 2016.2018.

 

Operating cash flow of $22.0$34.2 million in 2017,2019, compared to $23.3$8.0 million in 2016.2018.

 

Order backlog of $535.1$336.6 million at December 31, 2017,2019, compared to $249.5$256.4 million at December 31, 2016.2018.

 

The following table shows our sales by market for the years ended December 31, 2017, 20162019, 2018 and 20152017 as a percentage of total sales:

 

 

2017

  

2016

  

2015

  

2019

  

2018

  

2017

 

Fleet vehicles

  35.5%  47.1%  41.4%  66.6

%

  52.2

%

  51.4

%

Motor home chassis

  17.6%  16.6%  18.8%  16.8

%

  26.2

%

  30.8

%

Other vehicles

  2.6%  2.6%  1.7%  5.7

%

  3.9

%

  4.6

%

Total business/consumer

  55.7%  66.3%  61.9%

Emergency response vehicles

  41.5%  29.7%  34.0%

Defense vehicles

  0.0%  1.0%  0.7%

Aftermarket parts and accessories

  2.8%  3.0%  3.4%  10.9

%

  17.7

%

  13.2

%

Total government

  44.3%  33.7%  38.1%

Total sales

  100.0

%

  100.0

%

  100.0

%

 

We continue to focus on growth by expanding our market share in existing markets, pursuing new commercial opportunities through our alliance with Isuzu and other manufacturers and pursuing strategic acquisitions that enable us to expand into existing or new markets as opportunities occur.


 

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

20

Innovative product offerings such as the purpose-built upfit 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 diversified business model. We believealliance 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 us with exclusive access to Motiv’s EPIC all-electric chassis in manufacturing Class 4 – Class 6 walk-in vans. This alliance demonstrates our ability to innovate and advance the major strengthmarkets we serve, and places us ahead 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 curve in the electric vehicle (EV) 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 in order to further diversify our business.market.

Our acquisition of Smeal, completed in January 2017 which brings significant scale to our Emergency Response Vehicles segment, expands the geographic reach of our dealer network and adds complementary products to our existing emergency response product portfolio.
 

Our expansion into the equipment up-fitupfit 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.

 

Our expanding geographical footprint. WithThe introduction of our refrigeration technology, which demonstrates our ability to apply the acquisitionlatest technical advancements with our unique understanding of Smeal we acquired new locations that will allow uslast-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 upfitted to maximize manufacturing efficiency across product linesoptimally preserve cold cargo quality while offering customizations such as removable bulkheads and geographical areas.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.

Our Spartan Select and 180 truck programs, designed to provide the custom apparatus that emergency response professionals need with unprecedented order-to-delivery cycle times as short as 180 days.

 

The introduction of the Velocity,K3 605 chassis. The K3 605 is equipped with Spartan Connected Coach, a technology bundle featuring the new deliverydigital 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 design that combines the productivity of a walk-in van for multi-stop deliveries with the superior fuel economy of the Ford Transit chassis.braking systems.

 

The expansionintroduction of our alliance with Isuzu to includeSpartan Safe Haul. Spartan Safe Haul is the assembly of Isuzu’s new F-Series truck. This expanded relationship demonstrates Isuzu’s confidence in Spartan’s quality, people, flexibility and expertise and provides another positive example of our successful execution of our multi-year planmotor home industry’s only chassis-integrated air supply for improving performance.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. Spartan Connected Coach also offers passive keyless start and adjustable Adaptive Cruise Control and brings proven automotive technology to the RV market.

 

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 that follow should be read in conjunction with our Consolidated Financial Statements and related Notes thereto appearing in Item 8 of this Form 10-K.

 


21

 

Results of Operations

 

The following table sets forth, for the periods indicated, the components of our consolidated statements of income,operations, as a percentage of revenuessales (percentages may not sum due to rounding):

 

 

Year Ended December 31,

  

Year Ended December 31,

 
 

2017

  

2016

  

2015

  

2019

  

2018

  

2017

 

Sales

  100.0   100.0   100.0   100.0   100.0   100.0 

Cost of products sold

  87.4   87.7   91.4   84.5   87.2   84.4 

Gross profit

  12.6   12.3   8.6   15.5   12.8   15.6 

Operating expenses:

                        

Research and development

  0.9   1.1   0.8   0.7   0.7   0.9 

Selling, general and administrative

  9.4   9.7   10.0   8.5   8.1   9.7 

Operating income (loss)

  2.3   1.5   (2.3)

Other income, net

  -   -   - 

Income (loss) before taxes on income

  2.3   1.5   (2.3)

Income tax expense (benefit)

  -   -   0.9 

Net earnings (loss)

  2.3   1.5   (3.2)

Restructuring charges

  0.0   0.1   0.2 

Operating income

  6.3   3.9   4.8 

Other (expense) income, net

  (0.1

)

  (0.2

)

  0.1

 

Income from continuing operations before income taxes

  6.2   3.7   4.9 

Income tax expense

  1.4   0.6   0.6 

Income from continuing operations

  4.8   3.1   4.3 

Loss from discontinued operations, net of income taxes

  (6.5

)

  (0.5

)

  (0.4)

Non-controlling interest

  -   -   (0.1)  -   -   - 
                        

Net earnings (loss) attributable to Spartan Motors, Inc.

  2.3   1.5   (3.1)

Net (loss) income attributable to Spartan Motors, Inc.

  (1.7)  2.6   3.9 


Year Ended December 31, 20197 compared to Year Ended December 31, 20186

 

RevenueSales

Consolidated sales for the year ended December 31, 20172019 increased by $116.3$186.0 million, or 19.7%32.6% to $707.1$756.5 million from $590.8$570.5 million in 2016, driven by our acquisition of Smeal on January 1, 2017. Revenue2018. Sales in our Emergency Response Vehicles segment increased by $119.9 million, mainly due to our acquisition of Smeal. Revenue in our Fleet Vehicles and Services segment decreased by $27.3 million, mainly due to a reduction in equipment up-fit orders received in 2017, while revenue in our Specialty Chassis and VehiclesFVS segment increased by $24.0$188.3 million, driven by strong shipments of motor home chassis. These changes in revenue are discussed more fully in the discussion of our segments below.

Cost of Products Sold

Cost of products sold increased by $99.7 million, or 19.2%, to $617.9 million for the year ended December 31, 2017 from $518.2 million in 2016, primarily due to increased sales volume in 2017 driven by our acquisition of Smeal on January 1, 2017.

Gross Profit

Gross profit increased by $16.7 million, or 23.0%, to $89.2 million in 2017 from $72.5 million in 2016. Savings from increased operational efficiency in 2017 contributed $13.8 million to the increase, while the Smeal acquisition and higher overall non-Smeal sales volume contributed $7.1 million and $3.0 million, respectively, to the increase. Lower recall and warranty related charges in 2017 contributed $5.4 million to the increase while pricing adjustments impacting 2017 sales contributed $1.5 million to the increase. These increases were partially offset by a reduction in gross profit of $14.1 million due to a less favorable overall product mix in 2017 compared to 2016.

Gross Margin

Gross margin increased by 30 basis points to 12.6% in 2017 from 12.3% in 2016. Operational efficiency added 170 basis points to gross margin in 2017, while reduction of recall and warranty expense added 70 basis points and pricing adjustments added 20 basis points. These increases were largely offset by a 200 basis point decrease due to the unfavorable product mix in 2017.

Operating Expenses

Operating expenses for the year ended December 31, 2017 increased by $9.2 million, or 14.4%, to $73.1 million from $63.9 million in 2016. Research and development expense decreased by $0.3 million in 2017, due to lower engineering project spending, mainly related to our discontinuation from the bidding process for the USPS next generation vehicle. Selling, general and administrative expense increased by $9.3 million, to $65.5 million in 2017 from $56.2 million in 2016. $6.0 million of this increase was due our acquisition of Smeal on January 1, 2017, while $3.0 million was due to an increase in legalvehicle sales of $185.0 million in 2019 and professional fees, largely related to acquisition activities, and $0.3$3.3 million was due to an increase in information technology related spending. Restructuring charges recorded in 2017 were relatively flat with 2016, as we continued with various operational improvement projects.

Income Tax Expense

Income tax expense for the year ended December 31, 2017 was flat with the prior year at $0.1 million. Our effective tax rate in 2017 was 0.6%, compared to 1.1% in 2016.

In 2017 higher income before taxes caused a $2.7 million increase to federal income taxes at the statutory rate as compared to 2016. This increase to current income tax expense was favorably offset by three items that had not occurred in 2016: a $1.0 million benefit from the write-off of the tax basis of stock owned by the Company in an inactive, wholly-owned subsidiary that had been deemed worthless; $0.5 million adjustment related to the domestic manufacturing deduction; and a $0.4 million credit from the adoption in 2017 of new accounting guidance regarding the treatment of tax windfalls caused by the vesting of certain stock compensation.

The write-off of the worthless stock in the inactive subsidiary caused us to forfeit certain state credit and net operating loss carry-forwards recordedfavorable pricing. Sales in our deferred tax assets at $3.0 million, which were written off to deferred income tax expense. These carry-forwards had been fully offset by a valuation allowance, which was consequently reduced by $3.0 million. During 2017 we had determined that it was more likely than not that the benefit from our deferred tax assets would be realizable, and recorded an additional $6.5 million reduction to our valuation allowance. Therefore, in 2017 we reduced our valuation allowance by $9.5 million in total, $6.6 million greater than the reduction recorded in 2016. Partially offsetting that reduction was a $3.0 million decrease to the deferred tax assets due to the reduction in the federal corporate income tax rate from 35% to 21%. This rate reduction was a component of the Tax Cuts and Jobs Act of 2017, enacted on December 22, 2017 and effective January 1, 2018. The re-measurement of our deferred tax assets to the new rate was recorded in accordance with current accounting guidance as deferred income tax expense.


Net Earnings

Net earnings for the year ended December 31, 2017 increasedSCV segment decreased by $7.3 million or 84.9%, to $15.9 million compared to $8.6driven by lower sales of $28.5 million in 2016. Driving this increase were the increase in gross profit of $16.7 million, which wasmotor home chassis and other specialty chassis and vehicle sales, partially offset by the $9.2 million increase in operating expenses as discussed above.

Net Loss Attributable to Non-Controlling Interest

Net losssales attributable to non-controlling interest consiststhe Royal acquisition of the portion$17.0 million and favorable pricing of the after-tax loss related to the Spartan-Gimaex joint venture that is attributable to our joint venture partner, and was immaterial for the years ended December 31, 2017 and 2016.

Net Earnings Attributable to Spartan Motors, Inc.

Net earnings attributable to Spartan Motors, Inc. for the year ended December 31, 2017$4.2 million. Inter-segment eliminations increased by $7.3 million to $15.9 million compared to $8.6 million in 2016. Driving this increase were the increases in gross profit of $16.7 million, which was partially offset by the $9.2 million increase in operating expenses as discussed above. On a per share basis, net earnings increased by $0.21 to $0.46 per share in 2017 compared to $0.25 per share in 2016, due to the factors discussed above.

Year Ended December 31, 2016compared to Year Ended December 31, 2015

Revenue

Consolidated sales for the year ended December 31, 2016 increased by $40.4 million, or 7.3% to $590.8 million from $550.4 million in 2015, driven by a $50.7 million increase in our Fleet Vehicles and Services segment. This increase was partially offset by decreases of $10.2 million in our Emergency Response Vehicles segment and $0.1 million in our Specialty Chassis and Vehicles segment.$5.0 million. These changes in revenuesales are discussed more fully in the discussion of our segments below.

 

Cost of Products Sold

Cost of products sold increased by $14.9$142.1 million, or 3.0%28.6%, to $518.2$639.5 million for the year ended December 31, 20152019 from $503.3$497.4 million in 2015,2018, primarily due to increased sales volume in 2016.2019. Cost of products sold increased by $144.6 million due to higher sales volume and by $5.6 million due to product mix. These increases were partially offset by decreases of $8.2 million due to productivity improvements and cost reductions in 2019. As a percentage of sales, cost of products sold decreased to 84.5% in 2019, compared to 87.2% in 2018.

 

Gross Profit

Gross profit increased by $25.4$43.9 million, or 53.9%60.0%, to $72.5$117.0 million in 20162019 from $47.1$73.1 million in 2015.2018. The increase was mainlydue to favorable volume of $23.2 million, pricing improvements of $7.5 million and productivity and cost reductions of $13.2 million. Gross margin increased to 15.5% in 2019 from 12.8% over the year ended in 2018 due to the higher equipment up-fit and other specialty chassis sales in 2016. Also contributing to the increase was an approximately $4.0 million increase resulting from improved manufacturing performance in our Emergency Response Vehicles segment, along with reductions of $1.7 million in accruals for warranty and recalls, $0.7 million in asset impairment charges and $0.4 million in restructuring charges recorded in 2016 compared to 2015. In addition, we incurred $1.0 million of charges related to the wind-down of our Spartan-Gimaex joint venture in 2015 that did not recur in 2016.

Gross Margin

Gross margin increased by 370 basis points to 12.3% in 2016 from 8.6% in 2015, mainly driven by a more favorable product mix resulting from the increase in equipment up-fit and other specialty chassis sales in 2016.items mentioned above. 

 

Operating Expenses

Operating expenses for the year ended December 31, 20162019 increased by $4.3$18.8 million, or 7.2%37.1%, to $63.9$69.4 million from $59.6$50.6 million in 2015.2018. Research and development expense increased by $2.2$1.1 million in 2016, with approximately equal amounts2019 due to charges incurred for testing related to product recalls in our Emergency Response Vehicles segment, new vehicle development expenses incurred in our Fleet Vehicles and Services segment, and increasedhigher engineering management and administrative costs experienced in 2016.project spending. Selling, general and administrative expense increased by $3.5$18.3 million, or 39.5%, to $64.5 million in 2016 compared to 2015.2019 from $46.2 million in 2018. This increase was primarily due to a $4.4$13.2 million in additional salaried associates, annual merit increases and incentive compensation. The remaining increase in incentive compensation in 2016 based on company performance, along with $0.8of $5.1 million of costs related to the Smeal acquisition that closed on January 1, 2017expansion of locations and a $0.5 million increasethe General Truck Body and Royal Truck Body acquisitions in legal fees in 2016. These increases were partially offset by charges of $1.2 million for asset impairments and $1.0 million for a NHTSA penalty recorded in 2015 that did not recur in 2016.2019. Restructuring charges recorded in 2016 were2019 decreased $0.5 million compared to 2018 due to decreased severance costs in 2019.

Other Income and Expense

Interest expense for the year ended December 31, 2019 increased by $0.7 million, or 70.3%, to $1.8 million from $1.1 million in 2018. The increase was due primarily to the additional debt incurred for the Royal acquisition. Interest and other income for the year ended December 31, 2019 increased by $1.4 million, lower than those recordedor 100%, to $1.4 million from $0.0 million in 2015 as the activities related to our Emergency Response Vehicles segment restructuring initiated in 2015 wound down.2018

Income Tax Expense

Income tax expense for the year ended December 31, 2016 decreased by $4.82019 was $10.4 million to expense of $0.1 millionas compared to $4.9 million in 2015.the prior year at $3.3 million. Our effective tax rate in 20162019 was 1.1%22.0%, compared to (38.7)%15.6% in 2015. Our effective tax rate in 2016 was impacted by a $2.9 million reduction2018. As compared to our deferred tax asset valuation allowance as a result of the taxable income generated in 2016. Our effective tax rate in 2015 was heavily impacted by an increase in the valuation allowances for various deferred tax assets.


During the year ended December 31, 2015, we2018, income tax expense incurred in 2019 was greater due to a higher effective tax rate being applied to a higher Income from continuing operations before income taxes amount.

The 2019 effective tax rate was higher than the federal statutory rate of 21% primarily due to state and foreign income taxes recorded an increase to our deferred tax asset valuation allowance, representingat statutory rates. The 2019 effective rate was higher than the portion of our deferred tax assets, net of the deferred tax liabilities, that, based on an assessment of available positive and negative evidence, may not be realizable in future periods. During the year ended December 31, 2016, we reversed a portion of the deferred tax asset valuation allowance2018 rate as a result of a higher tax benefit for the taxable income we generated.vesting of certain stock compensation of $1.2 million recorded in 2018 as compared to $0.1 million in 2019.

22

 

Net EarningsIncome from Continuing Operations

Net earningsIncome from continuing operations for the year ended December 31, 20162019 increased by $26.1$18.7 million, or 103.1%, to income of $8.6$36.8 million compared to a loss of $17.5$18.1 million in 2015.2018. On a diluted per share basis, income from continuing operations increased $0.51 to $1.03 in 2019 compared to $0.52 per share in 2018. Driving this increase were the increases in gross profitfactors noted above.

Loss from Discontinued Operations, Net of $25.4Income Taxes

Loss from discontinued operations for the year ended December 31, 2019 increased to $49.2 million and decrease of $4.8compared to $3.1 million in taxes, which were2018. The increase of $46.1 million loss was primarily due to the impairment of the goodwill and indefinite lived intangible assets of $13.9 million, as well as the impairment of the ERV business held for sale of $39.2 million to its fair value less costs to sell in 2019, offset by the $4.3 million increase in operating expenses as discussed above.improvement on operations.    

Year Ended December 31, 2018 compared to Year Ended December 31, 2017

 

Net Loss Attributable to Non-Controlling InterestSales

Net loss attributableConsolidated sales for the year ended December 31, 2018 increased by $166.3 million, or 41.1% to non-controlling interest consists$570.5 million from $404.2 million in 2017. Sales in our FVS segment increased by $136.4 million, mainly due to an increase in vehicle sales in 2018, while sales in our SCV segment increased by $34.4 million driven by strong shipments of motor home chassis. Inter-segment eliminations increased by $4.5 million. These changes in sales are discussed more fully in the portiondiscussion of the after-tax loss relatedour segments.

Cost of Products Sold

Cost of products sold increased by $156.2 million, or 45.8%, to the Spartan-Gimaex joint venture that is attributable to our joint venture partner. Net loss attributable to non-controlling interest decreased by $0.5$497.4 million for the year ended December 31, 20162018 from $341.2 million in 2017, primarily due to increased sales volume in 2018. Cost of products sold increased by $152.1 million due to the higher sales volumes, $1.2 million due to start-up costs incurred at our truck body operations in Ephrata, Pennsylvania, $5.0 million due to tariffs, commodity and component cost increases of $2.3 million in 2018, and $1.5 million due to chassis disruptions and resulting freight and other costs in 2018. These increases were partially offset by decreases of $2.4 million due to the product mix in 2018 and $3.5 million due to operational and organizational improvements in 2018. As a percentage of sales, cost of products sold increased to 87.2% in 2018, compared to the year ended December 31, 2015 due to charges recorded84.4% in 2015 related to the wind-down of the joint venture that did not reoccur in 2016.2017.

 

Net Earnings Attributable to Spartan Motors, Inc.Gross Profit

Net earnings attributableGross profit increased by $10.1 million, or 16.2%, to Spartan Motors, Inc.$73.1 million in 2018 from $63.0 million in 2017. Savings from increased operational efficiency in 2018 contributed $6.4 million to the increase, while higher overall sales volume contributed $13.2 million to the increase. Pricing adjustments impacting 2018 sales contributed $0.4 million to the increase. These increases were partially offset by a reduction in gross profit of $3.7 million due to a less favorable overall product mix, $5.0 million in tariff-driven commodity and component cost increases, $1.2 million due to start-up costs incurred in our Ephrata truck body operations and $1.5 million due to chassis disruptions and resulting freight and other costs in 2018 compared to 2017.   

Operating Expenses

Operating expenses for the year ended December 31, 20162018 increased by $25.6$7.0 million, or 16.1%, to $50.6 million from $43.6 million in 2017. Research and development expense remained flat. Selling, general and administrative expense increased by $6.9 million, to income$46.2 million in 2018 from $39.3 million in 2017. Legal and professional fees increased $2.7 million due to an increase in acquisition activities, trade shows and other promotional activities increased $1.8 million and $3.2 million was due to an increase in information technology related spending. Restructuring charges recorded in 2018 remained flat.

Income Tax Expense

Income tax expense for the year ended December 31, 2018 was $3.3 million as compared to the prior year at $2.4 million. Our effective tax rate in 2018 was 15.6%, compared to 12.0% in 2017.

The 2018 effective tax rate was lower than the federal statutory rate of $8.621% primarily due to a discrete tax benefit of $1.2 million caused by the vesting of certain stock compensation. The 2018 effective rate was higher than the 2017 rate due to a number of significant one-time adjustments whose net effect reduced our 2017 effective tax rate and did not recur in 2018. Certain of these adjustments included a $3.0 million charge for the remeasurement of our deferred tax assets due to the Tax Cuts and Jobs Act of 2017, offset by a $6.5 million reduction in our valuation allowance related to temporary differences between book and tax bases in assets and liabilities and a $1.0 million benefit from the disposal of stock in an inactive subsidiary that had been deemed worthless.

23

Income from Continuing Operations

Income from continuing operations for the year ended December 31, 2018 increased by $0.6 million, or 3.7%, to $18.1 million compared to a loss of $17.0$17.5 million in 2015.2017. On a diluted per share basis, net earningsincome from continuing operations increased by $0.75$0.02 to income of $0.25 per share$0.52 in 20162018 compared to a loss of $0.50 per share in 2015,2017. Driving this increase were the factors noted above.

Loss from Discontinued Operations, Net of Income Taxes

Loss from discontinued operations for the year ended December 31, 2018 increased to $3.1 million compared to $1.5 million in 2017. The increase of $1.6 million loss was primarily due to the factors discussed above.year-over-year decrease of income tax benefit of $1.2 million.

 

Our Segments

 

We identify our reportable segments based on our management structure and the financial data utilized by our chief operating decision makersmaker to assess segment performance and allocate resources among our operating units. We have threetwo reportable segments: Fleet Vehicles and Services Emergency Response Vehicles and Specialty Chassis and Vehicles. As a result of a realignment of our operating segments completed during the second quarter of 2017, certain fleet vehicles are now manufactured by our Specialty Chassis and Vehicles segment and sold via intercompany transactions to our Fleet Vehicles and Services segment, which then sells the vehicles to the final customer. Segment results from prior periods are shown reflecting the estimated impact of this realignment as if it had been in place for those periods.   

 

As a result of a realignment of our operating segments completed during the second quarter of 2016, aftermarket parts and accessories related to emergency response vehicles, which were formerly reported under the Specialty Chassis and Vehicles segment, are now included in the Emergency Response Vehicles segment. Segment results from 2015 are shown reflecting the change.

Beginning in 2017, weWe evaluate the performance of our reportable segments based on Adjusted EBITDA. Adjustedon adjusted EBITDA is defined as earnings(earnings before interest, taxes, depreciation and amortization), which is a non-GAAP financial measure. This non-GAAP measure is calculated by excluding items that we believe to be infrequent or not indicative of our continuing operating performance. In the fourth quarter of 2019, in connection with the divestiture of our ERV business, we refined the definition of adjusted EBITDA as income from continuing operations before interest, income taxes, depreciation and amortization, as adjusted by other adjustments made in order to present comparable results from period to period. These adjustments include restructuring charges and items related to our acquisition of Smeal, such as expenses incurred to complete the acquisition,eliminate the impact of fair valuerestructuring charges, acquisition related expenses and adjustments, to inventory acquired from Smeal,non-cash stock-based compensation expenses, and the impact on the timingother gains and losses not reflective of the recognition of gross profit for our chassis that are utilized by our recently acquired Smealongoing operations. We exclude these items from earnings in our Adjusted EBITDA measure becausefor all prior years presented have been recast to conform to the current presentation.

The table below presents the reconciliation of our income from continuing operations before income taxes to 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 believe they will be incurred infrequentlyhave 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 are otherwise not indicative of a segment'sour regular, ongoing operating performance. For those reasons,Our presentation of Adjusted EBITDA is also usedshould not be construed as a performance metric foran inference that our executive compensation program, as discussed in our proxy statement for our 2017 annual meeting of shareholders, which proxy statement was filed with the SEC on April 13, 2017.future results will be unaffected by unusual or infrequent items.

  

Year Ended

December 31,

2019

  

Year Ended

December 31,

2018

  

Year Ended

December 31,

2017



Income from continuing operations before income taxes $47,145  $21,450  $19,853 

Net (income) loss attributable to non-controlling interest

  (140)  -   1 

Interest expense

  109   481   156 

Depreciation and amortization expense

  4,570   3,896   4,675 

Restructuring and other related charges

  82   176   746 

Unallocated corporate expenses

  29,613   19,297   15,585 

Total segment adjusted EBITDA

 $81,379  $45,300  $41,016 

24

 

Our Fleet Vehicles and ServicesFVS 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-fitupfit centers in KansasKansas City, MissouriMissouri; Ephrata, Pennsylvania; North Charleston, South Carolina; Pompano Beach, Florida; Montebello, California and Saltillo, Mexico andMexico. This segment focuses on designing and manufacturing walk-in vans for the parcel delivery, mobile retail, and trades and construction industries, and the production of commercial truck bodies and distributessupplies related aftermarket parts and accessories.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; Delavan, Wisconsin; and Ephrata, Pennsylvania locations, along with our Spartan-Gimaex joint venture. This segment engineers and manufactures emergency response chassis and apparatus.


Our Specialty Chassis and VehiclesSCV 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.

Appropriate expense amounts are allocated to In addition, beginning in September 2019 with the three reportable segmentsacquisition of Royal, the Specialty Chassis and are includedVehicles segment includes operations in their reported operating income or loss.Carson, Union City and Roseville, California; Mesa, Arizona; and Dallas and Weatherford, Texas. Royal is a leading California-based designer, manufacturer and installer of service truck bodies and accessories. 

 

The accounting policies of the segments are the same as those described, or referred to, in Note"Note 1 - – General and Summary of Accounting PoliciesPolicies.." 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”. 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. Appropriate expense amounts are allocated to the two reportable segments and are included in their reported operating income or loss.

 

For certain financial information related to each segment,, see Note 16,"Note 18 – Business Segments," of the Notes to Consolidated Financial Statements appearing in Item 8 of this Form 10-K.

 

Fleet Vehicles and Services

 

Segment Financial Data

(Dollars in Thousands)

 

Year Ended December 31,

  

Year Ended December 31,

 
 

2017

  

2016

  

2015

  

2019

  

2018

  

2017

 
 

Amount

  

Percentage

  

Amount

  

Percentage

  

Amount

  

Percentage

  

Amount

  

Percentage

  

Amount

  

Percentage

  

Amount

  

Percentage

 
                                                

Sales

 $251,095   100.0

%

 $278,389   100.0

%

 $227,683   100.0

%

 $575,894   100.0

%

 $387,549   100.0

%

 $251,095   100.0

%

Adjusted EBITDA

 $26,958   10.7

%

 $31,237   11.2.

%

 $17,569   7.7

%

 $60,663   10.5

%

 $26,680   6.9

%

 $26,958   10.7

%

Segment assets

 $60,550      $65,277      $70,491      $154,138      $117,508      $60,550     

 

Year ended December 31, 20172019 compared to year ended December 31, 20162018

 

Sales in our Fleet Vehicles and ServicesFVS segment decreasedincreased by $27.3$188.3 million, or 9.8%48.6%, to $575.9 million in 2019 from $387.5 million in 2018. This increase was driven by a $185.0 million increase in vehicle sales mainly due to higher unit volumes and $3.3 million in pricing increases. The sales volume increase in 2019 includes $91.4 million of chassis pass-thru sales compared to $65.4 million in 2018.

Adjusted EBITDA in our FVS segment was $60.7 million for the year ended December 31, 2019, an increase of $34.0 million compared to $26.7 million for the year ended December 31, 2018. Higher sales volumes in 2019 contributed $26.2 million to the overall increase while pricing increases contributed $3.7 million and productivity improvements and cost reductions generated $14.2 million. These increases were partially offset by decreases of $5.3 million due to the mix of products sold in 2019 and a $5.9 million increase in marketing, administrative and research and development costs.

Order backlog for our FVS segment increased by $87.1 million, or 39.8%, to $305.9 million in 2019 compared to $218.8 million in 2018, driven by new orders for walk-in vans offset by the build out of the USPS contract that originated in 2017. Our backlog enables visibility into future net sales which can normally range from two to twelve months depending on the product. This visibility allows us to more effectively plan and predict our sales and production activity.

25

Year ended December 31, 2018 compared to year ended December 31, 2017

Sales in our FVS segment increased by $136.4 million, or 54.3%, to $387.5 million in 2018 from $251.1 million in 2017 from $278.4 million in 2016. $28.7 million of the decrease2017. This increase was due to lower equipment up-fit sales, driven by an order from 2016 that did not extend into 2017, partially offset by a more favorable mix of vehicle sales driven by a change$105.0 million increase in ourvehicle sales mainly due to higher unit volume and a $29.3 million increase in aftermarket parts and accessories sales mainly due to higher upfit and truck body sales strategy. International sales accounted for 5.1%in 2018. Our adoption of ASC 606, Revenue from Contracts with Customers (“ASC 606”) on January 1, 2018 resulted in an additional $2.1 million increase in revenue in our Fleet Vehiclesrecognized during the period compared to what would have been recognized under previous guidance, mainly due to the timing of vehicle production and Services segment in 2017.shipments.

 

Adjusted EBITDA for our Fleet Vehicles and ServicesFVS segment was $26.7 million for the year ended December 31, 2018, a decrease of $0.3 million compared to $27.0 million for the year ended December 31, 2017, a decrease of $4.2 million compared to $31.2 million for the year ended December 31, 2016. $12.1 million of this2017. This decrease was due to lower partstariffs of $5.0 million, product mix of $4.0 million, commodity and up-fit salescomponent cost increases of $2.1 million and $1.2 million of start-up costs incurred in 2017, which wasour Ephrata truck body manufacturing operation. These decreases were partially offset by an increasethe impact of $11.9 million in operational efficiency related to vehicle production. [JW1] higher volume.

 

Order backlog for our Fleet Vehicles and ServicesFVS segment increaseddecreased by $178.2$48.9 million, or 198.9%18.3%, to $218.8 million in 2018 compared to $267.7 million in 2017, compared to $89.5 million in 2016, mainly due todriven by the awardpartial build-out of athe $214 million contract to supply truck bodiesdelivery vehicles to the United States Postal Service we received in September, 2017 which was partially offset by an $35.9a $48.3 million decreaseincrease in the backlog for other fleet vehicles. Our backlog enables visibility into future net sales which can normally range from two to twelve months depending on the product. This visibility allows us to more effectively plan and predict our sales and production activity.

 

Year ended December 31, 2016 compared to year ended December 31, 2015Specialty Chassis and Vehicles

 

Sales in our Fleet Vehicles and Services segment increased by $50.7 million, or 22.3%, to $278.4 million in 2016 from $227.7 million in 2015. $37.3 million of the increase was due to higher aftermarket parts and accessories sales, driven by higher demand for equipment up-fit. $10.0 million was due to increased vehicle unit volume, while $3.4 million was due to a more favorable mix of vehicle sales driven by a change in our truck body sales strategy. International sales accounted for 1.9% of revenue in our Fleet Vehicles and Services segment in 2016.


Adjusted EBITDA for our Fleet Vehicles and Services segment was $31.2 million for the year ended December 31, 2016, an increase of $13.6 million compared to $17.6 million for the year ended December 31, 2015, driven by an increase in parts and equipment up-fit sales in 2016.

Order backlog for our Fleet Vehicles and Services segment decreased by $6.6 million, or 6.8%, to $89.5 million in 2016 compared to $96.1 million in 2015, driven by a $25.5 million decrease in equipment up-fit orders, which was partially offset by an $18.9 million increase in vehicle backlog. In January 2017, we received $37.0 million in new orders for our Fleet Vehicles and Services segment, a 21.9% increase from January 2016.

Emergency Response Vehicles

Segment Financial Data

(Dollars in Thousands)

 

Year Ended December 31,

 
  

2017

  

2016

  

2015

 
  

Amount

  

Percentage

  

Amount

  

Percentage

  

Amount

  

Percentage

 
                         

Sales

 $302,850   100.0

%

 $182,981   100.0

%

 $193,220   100.0

%

Adjusted EBITDA

 $3,192   1.1

%

 $(7,542)  (4.1

%)

 $(8,689)  (4.5

%)

Segment assets

 $133,546      $77,887      $76,030     

Year ended December 31, 2017compared to year ended December 31, 2016

Sales in our Emergency Response Vehicles segment increased by $119.9 million, or 65.5%, from 2016 to 2017 driven by the acquisition of Smeal in January of 2017, along with a $2.0 million increase due to pricing changes in 2017. These increases were partially offset by a $5.2 million decrease due to lower volume outside of the Smeal acquisition and a $1.6 million decrease due to the product mix sold in 2017. International sales accounted for 22.4% of revenue in our Emergency Response Vehicles segment in 2017.

Adjusted EBITDA for our Emergency Response Vehicles segment was $3.2 million for the year ended December 31, 2017, an increase of $10.7 million compared to $(7.5) million for the year ended December 31, 2016. The acquisition of Smeal added $3.3 million while volume and operational productivity improvements added $3.5 million to the increase in adjusted EBITDA, respectively. Pricing changes impacting 2017 revenue added $2.0 million, while lower warranty related costs added $1.9 million to the increase in adjusted EBITDA.

Order backlog for our Emergency Response Vehicles segment increased by $93.7 million or 67.0% to $233.6 million at December 31, 2017 compared to $139.9 million in 2016, driven by the acquisition of Smeal in January of 2017.

Segment Financial Data

(Dollars in Thousands)

 

Year Ended December 31,

 
  

2019

  

2018

  

2017

 
  

Amount

  

Percentage

  

Amount

  

Percentage

  

Amount

  

Percentage

 
                         

Sales

 $185,926   100.0

%

 $193,199   100.0

%

 $158,810   100.0

%

Adjusted EBITDA

 $20,716   11.1

%

 $18,620   9.6

%

 $14,058   8.9

%

Segment assets

 $137,777      $17,335      $21,445     

 

Year ended December 31, 20169 compared to year ended December 31, 20158

 

Sales in our Emergency Response VehiclesSCV segment decreased by $10.2$7.3 million or 5.3%3.8%, from 2015 to 2016. A $23.2$185.9 million in 2019 compared to $193.2 million in 2018.  This decrease was driven by a decrease of $23.5 million in motor home chassis sales and a decrease of $5.0 million in other specialty chassis and vehicle sales due to lower unit volumevolumes. This decrease was partially offset by a $13.0 million sales increase dueattributable to the product mix sold in 2016, which included fewer low content fire trucks. International sales accounted for 13.5%Royal acquisition of revenue in our Emergency Response Vehicles segment in 2016. There were no significant changes in the$17.0 million and pricing increases of the products in our Emergency Response Vehicles segment during 2016.$4.2 million.


 

Adjusted EBITDA for our Emergency Response VehiclesSCV segment was $(7.5)$20.7 million for the year ended December 31, 2016,2019, an increase of $1.2$2.1 million compared to $(8.7)$18.6 million for the year ended December 31, 2015, mainly2018. This increase was driven by $2.4 million attributable to acquisitions and pricing increases of $4.2 million. This increase was partially offset by $3.5 million due to reduced selling expense in 2016 resulting from headcount reductions.lower motor home and specialty chassis sales volume and higher supplier costs of $1.0 million. 

 

Order backlog for our Emergency Response VehiclesSCV segment decreased by $16.4$7.0 million, or 10.5%18.4%, to $139.9$30.7 million at December 31, 20162019 compared to $156.3$37.7 million at December 31, 2018. This decrease was due to a reduction in 2015, driven by athe Class A diesel motor home market demand. Our backlog enables visibility into future net sales which can normally range from less than one month to twelve months depending on the product. This visibility allows us to more selective bid process established in 2016 as part ofeffectively plan and predict our turnaround strategy.

Specialty Chassissales and Vehiclesproduction activity.

Segment Financial Data

(Dollars in Thousands)

 

Year Ended December 31,

 
  

2017

  

2016

  

2015

 
  

Amount

  

Percentage

  

Amount

  

Percentage

  

Amount

  

Percentage

 
                         

Sales

 $158,810   100.0

%

 $134,754   100.0

%

 $132,507   100.0

%

Adjusted EBITDA

 $14,058   8.9

%

 $8,334   6.2

%

 $8,833   6.7

%

Segment assets

 $33,700      $28,825      $24,032     

 

Year ended December 31, 20172018 compared to year ended December 31, 20172016

 

Sales in our SCV segment increased by $34.4 million, to $193.2 million in 2018 compared to $158.8 million in 2017.  Motor home chassis sales increased by $24.9 million due to higher unit volume in 2018, which was partially offset by a $1.4 million reduction due to an unfavorable sales mix. Sales of other specialty vehicles and aftermarket parts increased by $4.1 million and $1.7 million in 2018 due to higher unit volumes. Intercompany sales of fleet vehicles increased by $4.7 million due to higher unit volume in 2018. Pricing changes that impacted the year ended December 31, 2018 resulted in increased sales of $0.4 million. Our adoption of ASC 606 in January 2018 had an immaterial impact on sales in our Specialty Chassis and Vehicles segment increased by $24.0 million, to $158.8 million in 2017 compared to $134.8 million in 2016.  Motor home chassis sales increased by $26.6 million due to higher unit volumes, which was partially offset by a $0.5 million decrease due to pricing that impacted 2017 sales. Other specialty vehicle sales decreased by $2.7 million, driven by defense sales in 2016 that did not recur in 2017.  These increases were partially offset by a decrease of $0.2 million in aftermarket parts and accessories sales due to decreased unit volumes.segment.

 

Adjusted EBITDA for our Specialty Chassis and VehiclesSCV segment was $18.6 million for the year ended December 31, 2018, an increase of $4.5 million compared to $14.1 million for the year ended December 31, 2017, an2017. This increase of $5.8was driven by a $4.3 million comparedincrease related to $8.3 million for the year ended December 31, 2016. Operational efficiencies in 2017 resulted in an increase of $4.0 million, while higher unit volume, mainly in motor home chassis added $2.2sales volume and a $1.0 million to the increase in adjusted EBITDA. Theseother specialty vehicles and related products in 2018. The increases were partially offset by adecreases related to product mix of $0.5 million decrease due to pricing adjustments that impacted 2017.

Order backlog forand tariff related costs of $0.2 million. Our adoption of ASC 606 in January 2018 had an immaterial impact on adjusted EBITDA in our Specialty Chassis and Vehicles segment.

26

Order backlog for our SCV segment increased by $13.8$3.9 million, or 69.0%11.5%, to $37.7 million at December 31, 2018 compared to $33.8 million at December 31, 2017 compared to $20.0 million at December 31, 2016.2017. This increase was due primarily to a $14.5$3.4 million increase in backlog for motor home chassis in 2018. Our backlog enables visibility into future net sales which was partially offset by a $0.7 million decrease in aftermarket partscan normally range from less than one month to twelve months depending on the product. This visibility allows us to more effectively plan and accessories backlog in 2016.   predict our sales and production activity.

 

Year ended December 31, 2016 compared to year ended December 31, 2015

Sales in our Specialty Chassis and Vehicles segment increased by $2.3 million, to $134.8 million in 2016 compared to $132.5 million in 2015. Other specialty vehicles sales increased by $9.7 million due to increased unit volumes. This increase was partially offset by decreases in motor home chassis and aftermarket parts and accessories sales of $5.3 million and $2.1 million, respectively, driven by lower unit volumes in 2016.

Adjusted EBITDA for our Specialty Chassis and Vehicles segment was $8.3 million for the year ended December 31, 2016, a decrease of $0.5 million compared to $8.8 million for the year ended December 31, 2016, mainly due to the decrease in marketing and branding expenses in 2016.

Order backlog for our Specialty Chassis and Vehicles segment increased by $1.6 million, or 8.7%, to $20.0 million at December 31, 2016 compared to $18.4 million at December 31, 2015. This increase was due to a $6.3 million increase in backlog for motor home chassis and a $0.3 million increase in aftermarket parts and accessories backlog, which were partially offset by a decrease of $4.9 million in backlog for defense vehicles due to the fulfillment of defense orders on hand in 2016.

Financial Condition

Balance sheet at December 31, 2017 compared to December 31, 2016

Accounts receivable increased by $17.7 million, or 27.1%, to $83.1 million at December 31, 2017, compared to $65.4 million at December 31, 2016. $16.1 million of the increase was due to accounts receivable acquired through our acquisition of Smeal, with the remainder of the increase due to the timing of invoicing.

Inventory increased by $18.8 million, or 31.9%, to $77.7 million at December 31, 2017 compared to $58.9 million at December 31, 2016 mainly due to the addition of Smeal inventory of $26.1 million at December 31, 2017, offset by a decrease of $7.3 million in our Emergency Response Vehicles segment due to a continued focus on inventory reduction actions.


Property, plant and equipment, net increased by $2.1 million, or 4.0%, to $55.2 million at December 31, 2017 compared to $53.1 million at December 31, 2016 mainly due to the acquisition of Smeal during the year which resulted in assumption of $5.8 million along with additional purchases of $5.3 million during the year.  These increases were offset by depreciation.

Goodwill increased by $11.4 million, or 71.3%, to $27.4 million at December 31, 2017 compared to $16.0 million at December 31, 2016 due to the Smeal acquisition.

Intangible assets increased by $3.0 million, or 46.9%, to $9.4 million at December 31, 2017 compared to $6.4 million at December 31, 2016 due to an increase of $3.9 million from trade-names and certain non-patented technology acquired from Smeal, partially offset by amortization during the period.

Net deferred tax assets increased by $4.0 million or 121.2%, to $7.3 million at December 31, 2017 from $3.3 million at December 31, 2016 primarily as a result of three factors. A $9.5 million increase resulted from the reduction of our valuation allowance recorded during the year as it was deemed more likely than not that we would realize the benefit of the net deferred tax asset. This increase was offset by a $3.0 million decrease due to the forfeiture of certain state net operating loss and credit carry-forwards, and a $2.9 million reduction due to the new federal corporate income tax rate of 21% as legislated by the Tax Cuts and Jobs Act of 2017. Although the tax rate change is not effective until January 1, 2018, the enactment of the law in 2017 required us to revalue our net deferred tax asset from the 2017 statutory rate of 35% to the new 2018 statutory rate of 21%, in accordance with current accounting guidance.

Accounts payable increased by $9.3 million, or 29.7%, to $40.6 million at December 31, 2017 from $31.3 million at December 31, 2016. $2.1 million of the increase was due to accounts payable assumed through our acquisition of Smeal, with the remainder of the increase due to the timing of payments.

Accrued warranty decreased by $1.0 million, or 5.2%, to $18.3 million at December 31, 2017 from $19.3 million at December 31, 2016, due to payments for repairs made during the year of $13.8 million, offset by $7.5 million for accruals for warranties provided on vehicles produced during the year and additional accruals of $1.6 million for changes in existing warranties. In addition, we assumed $3.7 million in warranty obligations related to the acquisition of Smeal.

Deposits from customers increased by $9.3 million or 57.8% to $25.4 million at December 31, 2017 compared to $16.1 million at December 31, 2016. The increase was due to prepayments of $13.4 million remaining at December 31, 2017 related to Smeal, partially offset by more prepayments being applied to invoices for fulfilled orders than were received during 2017 for new orders in our Emergency Response Vehicles segment.

Other current liabilities and accrued expenses increased by $4.4 million, or 57.1%, to $12.1 million at December 31, 2017 from $7.7 million at December 31, 2016, with $2.4 million of the increase related to an increase in our accrued taxes, $1.8 million due to liabilities assumed through our acquisition of Smeal, and the remainder due to the timing of accruals for various expenses incurred but not yet invoiced.

Other non-current liabilities increased by $2.7 million, or 108.0%, to $5.2 million at December 31, 2017 from $2.5 million at December 31, 2016 due to a $1.7 million vendor rebate pre-payment received in 2017 along with an $0.7 million increase in our supplemental executive retirement plan liabilities and a $0.3 million increase in other liabilities.

Balance sheet at December 31, 2016 compared to December 31, 2015

Accounts receivable increased by $8.8 million, or 15.5%, to $65.4 million at December 31, 2016 from $56.6 million at December 31, 2015, with approximately equal parts of the increase due to increased sales late in the fourth quarter of 2016 compared to 2015 and the timing of payment receipts in late 2016 compared to late 2015. In January 2017, $7.4 million of our accounts receivable was forgiven as part of our acquisition of Smeal. Our receivable days sales outstanding decreased to 40 days sales at December 31, 2016 from 41 days at December 31, 2015 mainly due to increased sales compared to the previous year.

Inventory decreased by $1.7 million, or 2.8%, to $58.9 million at December 31, 2016 from $60.6 million at December 31, 2015, mainly due to completion and shipment of units and continued focus on inventory reduction actions.

Other current assets increased by $1.0 million, or 28.6%, to $4.5 million at December 31, 2016 from $3.5 million at December 31, 2015 mainly due to an increase in prepaid expenses during the period.

Net deferred tax asset increased by $2.7 million or 450.0%, to $3.3 million at December 31, 2016 from $0.6 million at December 31, 2015 as a result of the change in our valuation allowance during the year. The remaining residual value of $3.3 million represents that portion of our deferred income tax assets that could generate future tax losses and be successfully carried back and offset against current year taxable income to recover taxes paid.


Accounts payable increased by $4.0 million, or 14.7%, to $31.3 million at December 31, 2016 from $27.3 million at December 31, 2015, mainly due to increased sales volume which resulted in increased purchases to support production.

Accrued warranty increased by $2.7 million, or 16.3%, to $19.3 million at December 31, 2016 from $16.6 million at December 31, 2015, due to $5.7 million of accruals for warranties provided on vehicles produced during the year and additional accruals of $4.0 million for various repair campaigns in 2016 and $3.3 million for changes in existing warranties, offset by $10.3 million of payments for repairs made during the year.

Accrued compensation and related taxes increased by $4.5 million, or 51.7%, to $13.2 million at December 31, 2016 from $8.7 million at December 31, 2015, mainly due to an increase in incentive compensation accruals as a result of our financial performance during the year.

Deposits from customers increased by $3.0 million, or 22.9%, to $16.1 million at December 31, 2016 from $13.1 million at December 31, 2015, due to more customers electing to make deposits on orders in 2016. We receive deposits on orders at the option of our customers. Consequently, the amount of deposits on hand will vary from time to time.

Other current liabilities and accrued expenses increased by $1.1 million, or 16.7%, to $7.7 million at December 31, 2016 from $6.6 million at December 31, 2015 mainly due to the timing of accruals for various expenses incurred but not yet invoiced.

Liquidity and Capital Resources

 

Cash FlowsFlows

Our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statements of Cash Flows appearing in Item 8 of this Form 10-K, are summarized in the following table (in thousands):

 

 

Year Ended December 31,

  

Year Ended December 31,

 
 

2017

  

2016

  

2015

  

2019

  

2018

  

2017

 

Cash provided by (used in):

                        

Operating activities

 $22,016  $23,328  $12,856  $34,181  $8,026  $22,016 

Investing activities

  (34,230)  (13,385)  (4,687)  (98,965

)

  (14,185

)

  (34,230

)

Financing activities

  13,696   (10,603)  (4,038)  56,694   75   13,696 

Net increase (decrease) in cash and cash equivalents

 $1,482  $(660) $4,131  $(8,090

)

 $(6,084

)

 $1,482 

 

During 2017,2019, cash and cash equivalents increaseddecreased by $1.5$8.1 million to a balance of $33.5$19.3 million as of December 31, 2017.2019. These funds, in addition to cash generated from future operations and available credit facilities, are expected to be sufficient to finance our foreseeable liquidity and capital needs.

Cash Flow from OperatingOperating Activities

 

We generated $22.0$34.2 million of cash from operating activities during the year ended December 31, 2017, a decrease2019, an increase of $1.3$26.2 million from $23.3$8.0 million of cash generated from operating activities in 2016.2018. Cash flow from operating activities increased from 2018 due to a $15.2 million increase in net income net of non-cash charges and a $10.9 million increase from changes in operating assets and liabilities.

We generated $8.0 million of cash from operating activities during the year ended December 31, 2018, a decrease of $14.0 million from $22.0 million of cash generated from operating activities in 2017. Cash flow from operating activities decreased from 20162017 due to $3.5 million increase in cash paid for warranty claims and a $5.2$38.5 million increase in cash utilized in the fulfilment of customer orders. These decreases which were partially offset byorders and a $5.7$1.1 million increasedecrease in net income net of non-cash chargescharges. This was offset by a $3.0 million decrease in 2017cash paid for warranty claims in 2018 and $1.7a $22.7 million increase in cash generated through changes in other working capital items, mainly compensation related accruals.

We generated $23.3 million of cash from operating activities during the year ended December 31, 2016, an increase of $10.4 million from $12.9 million of cash generated from operating activities in 2015. Cash flow from operating activities increased from 2015 due to a $14.8 million increase in net income net of non-cash charges and credits in 2016, and $3.6 million of cash generated through changes in various working capital items, mainly compensation related accruals. These increases were partially offset by $8.0 million of cash utilized in the fulfilment of customer orders.


In 2018 we expect to incur non-recurring cash outlays of $15 million to $16 million. This estimate includes approximately $5.6 million of cash investment to expand certain production facilities, $3.7 million related to information technology upgrades, along with expenditures of $1.7 million for the replacement and upgrade of machinery and equipment used in operations. We plan to fund these cash outlays with borrowings from our existing $100 million line of credit along with cash generated from our operations in 2018.

accounts payable. 

 

Cash Flow from Investing Activities

 

We utilized $34.2$99.0 million in investing activities during the year ended December 31, 2017, a $20.82019, an $84.8 million increase compared to the $13.4$14.2 million utilized during the year ended December 31, 2016.2018. This increase is mainly due to the result ofcash needed for our acquisition of Smeal on January 1, 2017.Royal for $88.9 million in 2019 compared to our acquisition of Strobes-R-Us, Inc. for $5.2 million in 2018.  Purchases of property, plant and equipment also increased $1.0 million to $10.0 million in 2019 from $9.0 million in 2018.

 

We used $13.4utilized $14.2 million of cash forin investing activities during the year ended December 31, 2016, an increase of $8.72018, a $20.0 million fromdecrease compared to the $4.7$34.2 million utilized during the year ended December 31, 2017. This decrease is mainly due to the cash needed for our acquisition of Strobes-R-Us for $5.2 million in 2015, mainly2018 compared to our acquisition of Smeal for the construction of a new assembly plant$28.9 million in Charlotte, Michigan, along with the purchase2017.  Purchases of property, plant and equipment usedalso increased $3.7 million to $9.0 million in our operations.

2018 from $5.3 million in 2017.

 

Cash Flow from Financing Activities

 

We generated $13.7$56.7 million of cash through financing activities during the year ended December 31, 2017,2019, compared to $10.6$0.1 million utilizedgenerated during the year ended December 31, 2016.2018. This increase is mainlyprimarily due to an increase in borrowings on long-term debt of $84.3 million, offset by an increase in repayments on long-term debt of $30.1 million. Net cash used in the financingexercise, vesting or cancellation of our acquisition of Smeal from our existing $100 million line of credit on January 1, 2017.stock incentive awards decreased $1.9 million.

 

We used $10.6generated $0.1 million inof cash through financing activities during the year ended December 31, 2016, a $6.6 million increase2018, compared to the $4.0$13.7 million utilizedgenerated during the year ended December 31, 2015.2017. This increase was drivendecrease is mainly due to decreased advances on long-term debt of $25.2 million offset by decreased repayments on long-term debt of a $5$15.0 million payment on our outstanding debt andin 2018. Net cash used in the exercise, vesting or cancellation of stock incentive awards increased $2.0 million, utilized to repurchase ourthe purchase and retirement of common stock.

Recent Acquisition

On January 1, 2017, we completedstock increased $0.7 million and the acquisitionpayment of substantially all of the assets and certain liabilities of Smeal pursuant to an Asset Purchase Agreement dated December 12, 2016. This acquisition brought significant scale to our Emergency Response Vehicles segment, expanded the geographic reach of our dealer network and added complementary products to our existing emergency response product portfolio. See Note 2, Acquisition Activitiescontingent consideration increased $0.7 million in the Notes to Consolidated Financial Statements appearing in Item 8 of this Form 10-K for more information on this acquisition.2018.

 

Restructuring Activities

During the yearsyears ended December 31, 2017, 20162019, 2018 and 2015,2017, we incurred $1.3$0.1 million, $1.1$0.7 million and $2.9$0.8 million of restructuring charges. The restructuring charges, were incurred in 2017respectively for a company-wide initiative to streamline operations and integrate our Smeal acquisition. In 2016 and 2015, restructuring charges were incurred within our Emergency Response Vehicles segment related to the relocation of our Ocala, Florida manufacturing operations to our Charlotte, Michigan and Brandon, South Dakota facilities, along with efforts undertaken to upgrade production processes at our Brandon, South Dakota and Ephrata, Pennsylvania locations.

operations. See Note 4,"Note 6 – Restructuring Charges," in the Notes to Consolidated Financial Statements appearing in Item 8 of this Form 10-K for further information.

Working Capital

Our working capital is summarized in the following table (in thousands):

  

As of December 31,

 
  

2017

  

2016

  

2015

 
             

Current assets

 $198,787  $162,191  $155,137 

Current liabilities

  109,732   87,724   72,373 

Working capital

 $89,055  $74,467  $82,764 

Working capital increased from December 31, 2016 to December 31, 2017, driven by changes in accounts receivable, inventory, accounts payable, and deposits from customers as described above.

 


27

Working capital decreased from December 31, 2015 to December 31, 2016, driven by changes in accounts receivable, inventory, accounts payable, accrued warranty, accrued compensation and related taxes, and deposits from customers as described above.


 

Contingent Liabilities

Spartan-Gimaex joint ventureJoint 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. NoIn late 2019, Spartan USA initiated additional court proceedings to dissolve and liquidate the joint venture, but no dissolution terms have been determined as of the date of this Form 10-K. 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. TheIn accordance with accounting guidance, the costs we have accrued so far represent the low end of the range of the estimated total charges that we believe we may incur related to the wind-down. While we are unable to determine the final cost of the wind-down with certainty at this time, we may incur additional charges, depending on the final terms of the dissolution, and such charges couldare not expected to be material to our future operating results.

National Highway Traffic Safety Administration (“NHTSA”) penalty

In July 2015, we entered into a settlement agreement We recorded charges totaling $216 to write down certain inventory items associated with the NHTSA pertainingthis joint venture to our early warning and defect reporting. Under the terms of the agreement, we paid a fine of $1.0 million in equal installments over three years, and will complete performance obligations including compliance and regulatory practice improvements, industry outreach, and recalls to remedy potential safety defects in certain of our chassis, which we expect to complete in July of 2018. The following table presents the charges recorded in the Consolidated Statement of Operationstheir estimated fair values during the year ended December 31, 2015 as a result of this agreement (in thousands):2019.

Cost of products sold

 $1,269 

Selling, general and administrative

  1,000 
  $2,269 

 

Debt

On December 1, 2017, August 8, 2018, we entered into a First Amendment to our Second Amended and Restated Credit Agreement (the "Credit Agreement") by and among us and certain of our subsidiaries as borrowers, Wells Fargo Bank, National Association as administrative agent ("Wells Fargo"), as administrative agent, and the lenders party thereto consisting of Wells Fargo, JPMorgan Chase Bank, N.A. and PNC Bank National Association (the "Lenders"). UnderSubsequently, the Credit Agreement was amended on May 14, 2019, September 9, 2019 and September 25, 2019 and certain of our other subsidiaries executed guaranties guarantying the borrowers' obligations under the Credit Agreement.

As a result, at December 31, 2019, under the Credit Agreement, as amended, we may borrow up to $100 million$175,000 from the Lenders under a three-year unsecuredsecured revolving credit facility.facility which matures August 8, 2023. We may also request an increase in the facility of up to $35 million$50,000 in the aggregate, subject to customary conditions. The credit facility is also available for the issuance of letters of credit of up to $20 million,$20,000 and swing line loans of up to $15 million and revolving loans,$30,000, subject to certain limitations and restrictions. Interest rates on borrowings under theThis revolving credit facility are based oncarries an interest rate of either (i) the highest of the prime rate, the federal funds effective rate from time to time plus 0.5%, or the one month adjusted London interbank market rate ("LIBOR")LIBOR plus 1.0%; or (ii) adjusted LIBOR, in each case plus a margin based upon our ratio of debt to earnings from time to time. The Credit Agreement contains certain customary representations and covenants, including performance-based financial covenants on our part. The credit facility matures October 31, 2019, following which we have the option to renew the credit facility, subject to lender approval, for two successive one-year periods with an ultimate maturity date of October 31, 2021. Commitment fees range from 17.5 to 32.5 basis points on the unused portion of the line. In January 2017, we borrowed $32.8 million from our credit line to fund our acquisition of Smeal. At December 31, 2017 we had outstanding borrowings of $17.8 million against our credit line. We had no drawings against this credit line as of December 31, 2016. During the year ended December 31, 2017, and in future years, our revolving credit facility was utilized, and will continue to be utilized, to finance commercial chassis received under chassis bailment inventory agreements with General Motors Company (“GM”) and Chrysler Group, LLC (“Chrysler”). This funding is reflected as a reduction of the revolving credit facility available to us equal to the amount drawn by GM and Chrysler. See Note 10, Commitments and Contingent Liabilities, in the Notes to Consolidated Financial Statements appearing in Item 8 of this Form 10-K for further details about these chassis bailment inventory agreements. The applicable borrowing rate including margin was 3.0%3.7500% (or one-month LIBOR plus 1.5%1.25%) at December 31, 2017.2019. The credit facility is secured by security interests in, and liens on, all assets of the borrowers and guarantors, other than real property and certain other excluded assets.

 

Under the terms of our credit agreement with our banks,Credit Agreement, we have the ability to issue letters of credit totaling $20.0$20.0 million. At December 31, 20172019 and 2016,2018, we had outstanding letters of credit totaling $754 and $1,599$0.5 million related to certain emergency response vehicle contracts and our workersworker's compensation insurance.


 

Under the terms of the primary line of credit agreement, as amended,our Credit Agreement we are required to maintain certain financial ratios and other financial conditions,covenants, which limited our available borrowings (exclusive of outstanding borrowings) under our line of credit to a total of approximately $66.4 million$60.5 million and $73.6$86.4 million at December 31, 20172019 and 2016.2018, respectively.  The agreements prohibitCredit Agreement also prohibits us from incurring additional indebtedness; limitlimits certain acquisitions, investments, advances or loans; limitlimits our ability to pay dividends in certain circumstances; and restrictrestricts substantial asset sales.sales, all subject to certain exceptions and baskets. At December 31, 2017,2019 and December 31, 2018, we were in compliance with all covenants in our credit agreement,agreement.

Concurrent with the close of the sale of the ERV business and based oneffective January 31, 2020, the Credit Agreement was further amended by a fourth amendment, which released certain of our outlook for 2018, we expectsubsidiaries that were sold as part of the ERV business pursuant to the Asset Purchase Agreement.  The substantive business terms of the Credit Agreement remain in place and were not changed by the fourth amendment. The Company received proceeds of $55.0 million in cash from the sale. We subsequently paid down our borrowings under the revolving line of credit by $30.0 million. Net proceeds after estimated post-closing adjustments and transaction costs are expected to be able to meet these covenants over the next twelve months.$45.7 million.

We had capital lease obligations outstanding of $0.2 million and $0.1 million as of December 31, 2017 and 2016, due and payable over the next five years.

Equity Securities

On October 19, 2011, our Board of Directors authorized management to repurchase up to a total of 1.0 million shares of our common stock in open market transactions, contingent upon market conditions. During the second quarter of 2016, we repurchased a total of 422,000 shares of our common stock under this authorization. We did not repurchase any shares, under any repurchase authorizations, in 2017 or 2015.

On April 28, 2016, our Board of Directors terminated the 2011 repurchase authorization effective June 30, 2016, and authorized the repurchase of up to 1.0 million additional shares of our common stock in open market transactions. AtWe repurchased a total of 101,006 and 90,000 shares of our common stock during the years ended December 31, 2017 there2019 and 2018, respectively. No shares were 1.0 million shares remaining under this repurchase authorization.repurchased in 2017. If we were to repurchase the remaining 1.00.8 million shares of stock under the repurchase program, it would cost us $15.2$11.9 million based on the closing price of our stock on February 23, 2018.28, 2020. We believe that we have sufficient resources to fund any potential stock buyback in which we may engage.

28

 

Dividends

We paid dividends on our outstanding common shares in 2017, 20162019, 2018 and 20152017 as shown in the table below.

 

Date dividend

declared

  

Record date

  

Payment date

  

Dividend per

share ($)

  

Total

dividend paid

($000)

 

Oct. 24, 2017

  

Nov. 15, 2017

  

Dec. 15, 2017

  $0.05  $1,753 

May 2, 2017

  

May 15, 2017

  

June 15, 2017

   0.05   1,755 

Nov. 2, 2016

  

Nov. 15, 2016

  

Dec. 15, 2016

   0.05   1,720 

April 28, 2016

  

May 19, 2016

  

June 23, 2016

   0.05   1,724 

Oct. 26, 2015

  

Nov. 12, 2015

  

Dec. 17, 2015

   0.05   1,713 

May 8, 2015

  

May 21, 2015

  

June 25, 2015

   0.05   1,713 

Date dividend

declared

 

Record date

 

Payment date

 

Dividend per

share ($)

 

Nov. 4, 2019

 

Nov. 14, 2019

 

Dec. 16, 2019

 $0.05 

May 6, 2019

 

May 17, 2019

 

June 17, 2019

  0.05 

Oct. 24, 2018

 

Nov. 14, 2018

 

Dec. 14, 2018

  0.05 

May 2, 2018

 

May 15, 2018

 

June 15, 2018

  0.05 

Oct. 24, 2017

 

Nov. 15, 2017

 

Dec. 15, 2017

  0.05 

May 2, 2017

 

May 15, 2017

 

June 15, 2017

  0.05 

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, cash flows, results of operations, liquidity, capital expenditures or capital resources.

 

Contractual Obligations and Commercial Commitments

 

Our future contractual obligations for agreements, including agreements to purchase materials in the normal course of business, are summarized below.

 

  

Payments Due by Period (in thousands)

 
      

Less than

          

More than

 
  

Total

  

1 Year

  

1-3 Years

  

4-5 Years

  

5 Years

 
                     

Line of credit revolver (1)

 $18,868  $534  $18,334  $-  $- 

Capital leases

  189   64   104   21   - 

Operating leases

  7,715   2,494   3,589   1,632   - 

Contingent payments (2)

  1,394   1,394   -   -   - 

Purchase obligations

  59,071   59,071   -   -   - 
                     

Total contractual obligations

 $87,237  $63,557  $22,027  $1,653  $- 
  

Payments Due by Period (in thousands)

 
      

Less than

          

More than

 
  

Total

  

1 Year

  

1-3 Years

  

4-5 Years

  

5 Years

 
                     

Debt (1)

 $103,199   3,488   99,711   -   - 

Operating lease obligations

  37,951   5,937   14,287   7,978   9,749 

Purchase obligations

  1,830   1,830   -   -   - 
                     

Total contractual obligations

 $142,980  $11,255  $113,998  $7,978  $9,749 

 

 

(1)

TheDebt includes line of credit revolver includes estimated interest payments;payments and payments on finance leases. The interest payments on the related variable rate debt were calculated using the effective interest rate of 3.0%3.75% at December 31, 2017.2019.

(2)

Contingent payments are associated with the Smeal acquisition in January, 2017.


 

Critical Accounting Policies and Estimates

 

The following discussion of critical accounting policies and estimates is intended to supplement Note"Note 1 – General and Summary of Accounting Policies," of the Notes to Consolidated Financial Statements appearing in Item 8 of this Form 10-K. 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 

 

We recognize revenue in accordance with authoritative guidelines, including those of the Securities and Exchange Commission (“SEC”). Accordingly, revenue is recognized when title to the product and risk of ownership passes to the buyer. In certain instances, risk of ownership and title passes when the product has been completed in accordance with purchase order specifications and has been tendered for delivery to the customer. On certain customer requested bill and hold transactions, revenue recognition occurs after the customer has been notified that the products have been completed according to the customer specifications, have passedEssentially all of our quality control inspections,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 are ready for delivery. All sales are shown netfeatures of returns, discountsthe contract and sales incentive programs, which historicallythe products supplied. Our contracts generally do not have not been significant.any significant variable consideration. The collectability of any related receivableconsideration 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 Deposits from customers on the Consolidated Balance Sheets. The corresponding performance obligations are generally satisfied within one year of the contract inception. 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. 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.

29

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.

Revenue for upfit and field service contracts and walk-in vans and truck bodies built on a chassis owned and controlled by the customer is recognized over time, as equipment is installed in the customer’s vehicle, repairs and enhancements are made to the customer’s vehicles, or as the vehicles are built.

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 one to six 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.

 

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”specific account balances. The “specific”These 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 caused the greatest fluctuation in our allowance for doubtful accounts balance historically. Please see Note"Note 1 – General and Summary of Accounting Policies" in the Notes to Consolidated Financial Statements appearing in Item 8 of this Form 10-K and Appendix A included in this Form 10-K for further details and historical view of our allowance for doubtful accounts balance.

 

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 December 31, 2017,As of October 1, 2019, the most recent annual goodwill impairment assessment date, we had recorded goodwill at our Fleet Vehicles and Services, Emergency Response Vehicles and Specialty Chassis and Vehicles, reportableand Emergency Response Vehicles segments. The Fleet Vehicles and Services and Emergency Response Vehicles, reportableand Specialty Chassis Vehicle 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.testing. The goodwill recorded in these reporting units was evaluated for impairment as of October 1, 20172019 using a discounted cash flow valuation.

At December 31, 2016, we had recorded goodwill at our Fleet Vehicles and Services reportable segment, which was also determined to be a reporting unit for goodwill impairment testing. The goodwill recorded in the Fleet Vehicles and Services reporting unit was evaluated for impairment as of October 1, 2016 using a discounted cash flow valuation.


 

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.

30

 

We evaluate the recoverability of our indefinite lived intangible assets,assets, which, as of December 31, 2017,October 1, 2019, consisted of our Utilimaster, Smeal, and SmealRoyal 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, Smeal, and SmealRoyal Truck Body 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 2017,2019, 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 theseFleet Vehicles and Services and Specialty Chassis and Vehicles reporting units exceeded their carrying values by 232%, 91%337% and 62%67%, respectively, as of October 1, 2017,2019, the most recent annual assessment date. Based onHowever, the discounted cash flow valuationsestimated fair value of Emergency Response Vehicles reporting unit was less than its carrying value by 27%, thus goodwill of $11.5 million associated with the Emergency Response Vehicles reporting unit at October 1, 2017, an increase in the WACC for the reporting units of 500 basis points would not result in impairment.2019 was fully impaired.

 

The acquired Utilimaster, Smeal and SmealRoyal Truck Body trade names have indefinite lives as it is anticipated that they will contribute to our cash flows indefinitely. The estimated fair valuesvalue of our Utilimaster and Smeal trade namesname exceeded theirits associated carrying valuesvalue of $2.9$55.1 million and $2.4 million, respectively, by 545% and 141%, respectively,1,921% as of October 1, 2017. Accordingly, there2019 and it was no impairment recorded on thesedetermined not to be impaired. However, our Smeal trade names. Based on the discounted cash flow valuationsname was determined to be fully impaired, resulting in a reduction of its carrying value of $2.4 million, or 100% at October 1, 2017, an increase in2019. Because the WACC used for these impairment analyses of 500 basis points would not result in impairment in the trade names.

At December 31, 2014, our indefinite lived intangible assets included the Classic Fire trade name. During the quarter ended September 30, 2015, we determined that, based on updated sales forecasts for our Classic line of emergency response vehicles, it was more likely than not that our Classic FireRoyal trade name intangible asset was impaired. Accordingly, we conductedrecorded at fair value upon their acquisition as of September 9, 2019, an impairment test by comparingupdated recoverability analysis for the discounted future cash flows expected to result from our ownership of theRoyal  trade name with its carrying cost at September 30, 2015. The result of this analysis showed that the carrying cost of the Classic Fire trade name, which was recorded as an asset of our Emergency Response Vehicles segment exceeded its fair value. Accordingly, an impairment charge of $0.6 million was recorded during the three months ended September 30, 2015 to reduce the carrying cost of the trade name to its estimated fair value.not conducted on October 1, 2019.

 

See Note 5,“Note 2 – Discontinued Operationsin the Notes to the Consolidated Financial Statements appearing in Item 8 of this Form 10-K for further details on our goodwill and indefinite-lived intangible assets related to the ERV business. See “Note 7 Goodwill and Intangible Assets, in the Notes to Consolidated Financial Statements appearing in Item 8 of this Form 10-K for further details on our goodwill and indefinite-lived intangible assets.

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; or strategic decisions made in response to economic and competitive conditions; and other risk factors as detailed in Item 1A “Risk Factors” in this Annual Report on Form 10-K.


 

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 10,"Note 12 – Commitments and Contingent Liabilities," in the Notes to Consolidated Financial Statements appearing in Item 8 of this Form 10-K 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 than 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.

 

31

 

New and Pending Accounting Policies

 

See Note"Note 1, – General and Summary of Accounting Policies," in the Notes to Consolidated Financial Statements appearing in Item 8 of this Form 10-K.

 

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.

  

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk..

 

Our primaryInterest Rate Risk

We are exposed to market risk exposure is a changerisks related to changes in interest rates and the effect of such a change on outstanding variable rate short-term and long-term debt. At December 31, 2017,2019, we had $17.8$87.4 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$0.9 million on an annualized basis for the floating rate debt that we incurred in January 2017 for the acquisition of Smeal.basis. 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 due to normal market conditions and other factors including tariffs. See Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part 1, Item 7 of this Form 10-K for information on the impacts of changes in input costs during the year ended December 31, 2019.

 

We do not believe that there has been a material change in the nature or categories of the primary market risk exposures or in the particular markets that present our primary risk of loss. As of the date of this report, we do not know of or expect any material changes in the general nature of our primary market risk exposure in the near term. In this discussion, “near term” means a period of one year following the date of the most recent balance sheet contained in this report.

 

Prevailing interest rates, and 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 Annual Report on Form 10-K for a discussion of the limitations on our responsibility for such statements.

 


32

 

Item 8.

Financial Statements and Supplementary Data..

 

Report of Independent Registered Public Accounting Firm

 

Board of Directors and Shareholders

Spartan Motors, Inc.

Charlotte,Novi, Michigan

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of Spartan Motors, Inc. (the “Company”) and subsidiaries(Company) as of December 31, 20172019 and 2016,2018, the related consolidated statements of operations, shareholdersshareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017,2019, and the related notes and financial statement schedule as listed in the accompanying index in Item 15(a)(2) of this Form 10-K (collectively referred to as the “consolidatedconsolidated financial statements”)statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 20172019 and 2016,2018, and the results of theirits operations and theirits cash flows for each of the three years in the period ended December 31, 2017,2019, in conformity with accounting principles generally accepted in the United States of America.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB), the Company'sCompany’s internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”)(COSO), and our report dated March 1, 201816, 2020 expressed an unqualifiedadverse opinion thereon.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, in 2018, the Company changed its method of accounting for revenue from contracts with customers and in 2019, the Company changed its method of accounting for leases.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’sCompany’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

/S/ BDO USA, LLP

 

 

We have served as the Company's auditor since 2007.

 

Grand Rapids, MI

March 1, 201816, 2020

 


33

 

Report of Independent Registered Public Accounting Firm

 

Board of Directors and Shareholders

Spartan Motors, Inc.

Charlotte,Novi, Michigan

 

Opinion on Internal Control over Financial Reporting

 

We have audited Spartan Motors Inc.’s (the “Company’s”)Company’s) internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control – Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”)COSO criteria). In our opinion, the Company maintained,did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2017,2019, based on the COSO criteria.criteria.

We do not express an opinion or any other form of assurance on management's statements referring to any corrective actions taken by the Company after the date of management's assessment.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB), the consolidated balance sheets of the Company and subsidiaries as of December 31, 20172019 and 2016,2018, the related consolidated statements of operations, shareholdersshareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017,2019, and the related notes and schedulesschedule, and our report dated March 1, 201816, 2020 expressed an unqualified opinion thereon.

 

Basis for Opinion

 

The Company’sCompany’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “ItemItem 9A, Management’s Report on Internal Control over Financial Reporting”.Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness has been identified and identified in management's assessment regarding the Company’s processes for recognizing revenue within its Fleet Vehicles and Services (FVS) business unit that had been ineffectively designed, implemented and operated. Specifically (1) there was insufficient management review to prevent and detect inaccurate and/or non-existent sales orders, including orders entered without appropriate supporting documentation and orders that were not properly updated to reflect price changes agreed to by customers, and (2) their controls were insufficient to accurately verify the existence, completeness and accuracy of transactions resulting in recognition of revenue, including evidence of contracts with a customer and Company acceptance and approval of those contracts, revenue recognition agreement with contracted terms, and quarterly cut-off errors. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2019 financial statements, and this report does not affect our report dated March 16, 2020 on those financial statements.

As indicated in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Fortress Resources, LLC D/B/A Royal Truck Body (Royal), which was acquired on September 9, 2019, and which is included in the consolidated balance sheet of the Company as of December 31, 2019, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year then ended. Royal constituted 24.5% of total assets as of December 31, 2019, and 2.3% of revenues for the year then ended. Management did not assess the effectiveness of internal control over financial reporting of Royal because of the timing of the acquisition which was completed on September 9, 2019. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Royal.

Definition and Limitations of Internal Control over Financial Reporting

 

A company’scompany’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/S/ BDO USA, LLP

Grand Rapids, MI

March 1, 201816, 2020 

 


34

 

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

 

 

December 31,

  

December 31,

  

December 31,

  

December 31,

 
 

2017

  

2016

  

2019

  

2018

 

ASSETS

                

Current assets:

                

Cash and cash equivalents

 $33,523  $32,041  $19,349  $27,439 

Accounts receivable, less allowance of $139 and $487

  83,147   65,441 

Accounts receivable, less allowance of $228 and $99

  58,874   68,009 

Contract assets

  10,898   9,229 

Inventories

  77,692   58,896   59,456   39,213 

Income taxes receivable

  -   1,287 

Other receivables – chassis pool agreements

  8,162   - 

Other current assets

  4,425   4,526   5,344   3,952 

Current assets held for sale

  90,725   97,487 

Total current assets

  198,787   162,191   252,808   245,329 
        

Property, plant and equipment, net

  55,177   53,116   40,074   32,485 

Right of use assets – operating leases

  32,147   - 

Goodwill

  27,417   15,961   43,632   22,367 

Intangible assets, net

  9,427   6,385   54,061   5,011 

Other assets

  3,072   2,331   2,295   2,261 

Net deferred tax asset

  7,284   3,310 

Net deferred tax assets

  25,520   7,141 

Noncurrent assets held for sale

  -   39,190 

TOTAL ASSETS

 $301,164  $243,294  $450,537  $353,784 
                

LIABILITIES AND SHAREHOLDERS' EQUITY

                

Current liabilities:

                

Accounts payable

 $40,643  $31,336  $54,713  $73,384 

Accrued warranty

  18,268   19,334   5,694   4,407 

Accrued compensation and related taxes

  13,264   13,188   15,841   7,678 

Deposits from customers

  25,422   16,142   2,640   871 

Operating lease liability

  5,162   - 

Other current liabilities and accrued expenses

  12,071   7,659   15,967   8,620 

Short-term debt – chassis pool agreements

  8,162   - 

Current portion of long-term debt

  64   65   177   60 

Current liabilities held for sale

  49,601   43,077 

Total current liabilities

  109,732   87,724   157,957   138,097 
        

Other non-current liabilities

  5,238   2,544   4,922   4,058 

Long-term operating lease liability

  27,241   - 

Long-term debt, less current portion

  17,925   74   88,670   25,547 

Total liabilities

  132,895   90,342   278,790   167,702 

Commitments and contingencies

        
Commitments and contingent liabilities 

Shareholders' equity:

                

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

  -   -   -   - 

Common stock, $0.01 par value; 80,000 shares authorized; 35,097 and 34,383 outstanding

  351   344 

Common stock, $0.01 par value; 80,000 shares authorized; 35,343 and 35,321 outstanding

  353   353 

Additional paid in capital

  79,721   76,837   85,148   82,816 

Retained earnings

  88,855   76,428   86,764   103,571 

Total Spartan Motors, Inc. shareholders’ equity

  168,927   153,609 

Total Spartan Motors, Inc. shareholders’ equity

  172,265   186,740 

Non-controlling interest

  (658)  (657)  (518

)

  (658

)

Total shareholders' equity

  168,269   152,952   171,747   186,082 

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

 $301,164  $243,294  $450,537  $353,784 

 

See accompanying Notes to Consolidated Financial Statements.

 


35

 

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

(In thousands, except per share data)

 

 

Year Ended December 31,

  

Year Ended December 31,

 
 

2017

  

2016

  

2015

  

2019

  

2018

  

2017

 
                        

Sales

 $707,098  $590,777  $550,414  $756,542  $570,527  $404,248 

Cost of products sold

  617,655   518,113   502,783   639,509   497,370   341,176 

Restructuring charges

  208   136   519   6   13   120 

Gross profit

  89,235   72,528   47,112   117,027   73,144   62,952 
                        

Operating expenses:

                        

Research and development

  6,523   6,772   4,560   4,864   3,771   3,596 

Selling, general and administrative

  65,497   56,172   52,695   64,473   46,206   39,329 

Restructuring charges

  1,044   959   2,336   76   649   678 

Total operating expenses

  73,064   63,903   59,591   69,413   50,626   43,603 
                        

Operating income (loss)

  16,171   8,625   (12,479)

Operating income

  47,614   22,518   19,349 
            

Other income (expense):

                        

Interest expense

  (864)  (410)  (365)  (1,839

)

  (1,080

)

  (98

)

Interest and other income

  717 �� 488   244   1,370   12   602 

Total other (expense) income

  (469

)

  (1,068

)

  504

 

                     

Total other income (expense)

  (147)  78   (121)

Income from continuing operations before income taxes

  47,145   21,450   19,853 

Income tax expense

  10,355   3,334   2,382 

Income from continuing operations

  36,790   18,116   17,471 

Loss from discontinued operations, net of income taxes

  (49,216

)

  (3,104

)

  (1,537)

Net (loss) income

  (12,426)  15,012   15,934 

Less: net income (loss) attributable to non-controlling interest

  140   -   (1

)

                        

Income (loss) before taxes

  16,024   8,703   (12,600)

Net (loss) income attributable to Spartan Motors, Inc.

 $(12,566) $15,012  $15,935 
                        

Income tax expense

  90   100   4,880 
            

Net earnings (loss)

  15,934   8,603   (17,480)
            

Less: net loss attributable to non-controlling interest

  (1)  (7)  (508)
            

Net earnings (loss) attributable to Spartan Motors, Inc.

 $15,935  $8,610  $(16,972)
            

Basic net earnings (loss) per share

 $0.46  $0.25  $(0.50)
            

Diluted net earnings (loss) per share

 $0.46  $0.25  $(0.50)

Basic earnings per share

            

Continuing operations

 $1.03  $0.52  $0.50 

Discontinued operations

 $(1.39

)

 $(0.09

)

 $(0.04)

Basie earnings per share

 $(0.36) $0.43  $0.46 

Diluted earnings per share

            

Continuing operations

 $1.03  $0.52  $0.50 

Discontinued operations

 $(1.39

)

 $(0.09

)

 $(0.04)

Diluted earnings per share

 $(0.36) $0.43  $0.46 
                        

Basic weighted average common shares outstanding

  34,949   34,405   33,826   35,318   35,187   34,949 
                        

Diluted weighted average common shares outstanding

  34,949   34,405   33,826   35,416   35,187   34,949 

 

See accompanying Notes to Consolidated Financial Statements.

Statements


36

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31,
201
9, 2018 and 2017, 2016and 2015

(In thousands,, except per share data)data)

 

 

Number of

  

Common

  

Additional

  

Retained

  

Non-Controlling

  

Total Shareholders'

  

Number of

Shares

  

Common

Stock

  

Additional

Paid In

Capital

  

Retained

Earnings

  

Non-

Controlling

Interest

  

Total

Shareholders'

Equity

 
 

Shares

  

Stock

  

Paid In Capital

  

Earnings

  

Interest

  

Equity

                   

Balance at December 31, 2014

  34,094  $341  $75,695  $92,724  $(142) $168,618 
                        

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

  13   -   (419)  -   -   (419)
                        

Balance at December 31, 2016

  34,383   344   76,837   76,428   (657

)

  152,952 

Issuance of common stock related to stock incentive plan transactions

  29   -   (645

)

  -   -   (645

)

Dividends declared ($0.10 per share)

  -   -   -   (3,426)  -   (3,426)  -   -   -   (3,508

)

  -   (3,508

)

                        

Issuance of restricted stock, net of cancellation

  164   2   (2)  -   -   -   685   7   (7

)

  -   -   - 
                        

Stock based compensation expense related to restricted stock

  -   -   1,198   -   -   1,198 
                        
                        

Net loss

  -   -   -   (16,972)  (508)  (17,480)
                        

Balance at December 31, 2015

  34,271   343   76,472   72,326   (650)  148,491 
                        

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

  16   -   (234)  -   -   (234)
                        

Stock-based compensation expense

  -   -   3,536   -   -   3,536 

Net income (loss)

  -   -   -   15,935   (1

)

  15,934 

Balance at December 31, 2017

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

)

  168,269 

Transition adjustment for adoption of new revenue recognition standard

  -   -   -   3,668   -   3,668 

Balance at December 31, 2017, Adjusted

  35,097   351   79,721   92,523   (658)  171,937 

Issuance of common stock related to stock incentive plan transactions

  13   -   (2,670

)

  -   -   (2,670

)

Dividends declared ($0.10 per share)

  -   -   -   (3,444)  -   (3,444)  -   -   -   (3,516

)

  -   (3,516

)

                        

Purchase and retirement of common stock

  (422)  (4)  (932)  (1,064)  -   (2,000) (90) (1) (207) (448)    (656)
                        

Issuance of common stock related to investment in subsidiary

  247   2   1,946   -   -   1,948 

Issuance of restricted stock, net of cancellation

  518   5   (5)  -   -   -   54   1   (1

)

  -   -   - 
                        

Stock based compensation expense related to restricted stock

  -   -   1,536   -   -   1,536 
                        

Net earnings (loss)

  -   -   -   8,610   (7)  8,603 
                        

Balance at December 31, 2016

  34,383   344   76,837   76,428   (657)  152,952 
                        

Stock-based compensation expense

  -   -   4,027   -   -   4,027 

Net income

  -   -   -   15,012   -   15,012 

Balance at December 31, 2018

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

)

  186,082 
Transition adjustment for adoption of new lease standard  -   -   -   (113)  -   (113)

Balance at December 31, 2018, Adjusted

  35,321   353   82,816   103,458   (658

)

  185,969 

Issuance of common stock related to stock incentive plan transactions

  29   -   (645)  -   -   (645)  28   -   (766

)

  -   -   (766

)

                        

Dividends declared ($0.10 per share)

  -   -   -   (3,508)  -   (3,508)  -   -   -   (3,572

)

  -   (3,572

)

                        
Purchase and retirement of common stock (101) (1) (236) (556)    (793)

Cancellation of common stock related to investment in subsidiary

  -

 

  -

 

  (1,946

)

  -   -   (1,946

)

Issuance of restricted stock, net of cancellation

  685   7   (7)  -   -   -   96   1   (1

)

  -   -   - 
                        

Stock based compensation expense related to restricted stock

  -   -   3,536   -   -   3,536 
   ��                    

Net earnings (loss)

  -   -   -   15,935   (1)  15,934 
                        

Balance at December 31, 2017

  35,097  $351  $79,721  $88,855  $(658) $168,269 

Stock-based compensation expense

  -   -   5,281   -   -   5,281 

Net (loss) income

  -   -   -   (12,566)  140   (12,426)

Balance at December 31, 2019

  35,344  $353  $85,148  $86,764  $(518

)

 $171,747 

 

See accompanying Notes to Consolidated Financial Statements.

 


37

 

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

(In thousands)

 

 

Year Ended December 31,

  

Year Ended December 31,

 
 

2017

  

2016

  

2015

  

2019

  

2018

  

2017

 

Cash flows from operating activities:

            

Net earnings (loss)

 $15,934  $8,603  $(17,480)

Adjustments to reconcile net earnings (loss) to net cash provided by operating activities

            

Cash flows from operating activities:

            

Net (loss) income

 $(12,426) $15,012  $15,934 

Adjustments to reconcile net (loss) income to net cash provided by operating activities

            

Depreciation and amortization

  9,937   7,903   7,437   11,180   10,370   9,937 

Gain on disposal of assets

  (13)  (13)  (24)  (14)  -   (13

)

Impairment of assets

  -   406   2,234 

Impairment of goodwill and intangible assets

  13,856   -   - 
Impairment of assets held for sale 39,275  -  - 

Accruals for warranty

  9,099   12,989   15,388   12,671   8,660   9,099 

Expense from changes in fair value of contingent consideration

  -   (693

)

    

Deferred income taxes

  (3,974)  (2,666)  5,147   (18,225

)

  (755

)

  (3,974

)

Stock based compensation related to stock awards

  3,536   1,536   1,198 

Non-cash stock based compensation expense

  5,281   4,027   3,536 
Decrease (increase) in operating assets, net of effects of acquisition:                        

Accounts receivable

  (18,576)  (8,824)  (8,255)  22,812   (22,490

)

  (18,576

)

Contract assets

  (10,112

)

  (5,467

)

  - 

Inventories

  42,920   1,662   10,605   (14,783

)

  (24,340

)

  42,920 

Income taxes receivable

  1,287   468   (59)  -   -   1,287 

Other assets

  851   (1,020)  155   (709

)

  (658

)

  851 

Increase (decrease) in operating liabilities, net of effects of acquisition:

                        

Accounts payable

  5,366   4,018   4,556   (20,404

)

  35,297   5,366 

Cash paid for warranty repairs

  (13,854)  (10,265)  (8,015)  (11,818

)

  (10,838

)

  (13,854

)

Accrued compensation and related taxes

  (1,530)  4,504   458   7,737   (2,789

)

  (1,530

)

Deposits from customers

  (33,648)  3,047   1,571   1,163   4,444   (33,648

)

Payment of contingent consideration on acquisitions

  -   -   (1,338)

Other current liabilities and accrued expenses

  240   1,056   (707)  954   1,094   240 

Other long-term liabilities

  1,725   -   -   291   (345

)

  1,725 

Taxes on income

  2,716   (76)  (15)

Other

  (1,235

)

  -   - 

Accrued income taxes

  8,687   (2,503

)

  2,716 

Total adjustments

  6,082   14,725   30,336   46,607   (6,986

)

  6,082 

Net cash provided by operating activities

  22,016   23,328   12,856   34,181   8,026   22,016 
                        

Cash flows from investing activities:

                        

Purchases of property, plant and equipment

  (5,340)  (13,410)  (4,895)  (10,042

)

  (8,985

)

  (5,340

)

Proceeds from sale of property, plant and equipment

  13   25   208   15   -   13 

Acquisition of business, net of cash acquired

  (28,903)  -   -   (88,938

)

  (5,200

)

  (28,903

)

Net cash used in investing activities

  (34,230)  (13,385)  (4,687)  (98,965

)

  (14,185

)

  (34,230

)

                        

Cash flows from financing activities:

                        

Borrowings under credit facilities

  -   -   15,244 

Payments on credit facilities

  -   -   (15,244)

Proceeds from long-term debt

  32,919   10   -   92,000   7,684   32,919 

Payments on long-term debt

  (15,070)  (5,058)  (75)  (30,175

)

  (66

)

  (15,070

)

Payment of contingent consideration on acquisitions

  -   -   (162)  -   (701

)

  - 

Purchase and retirement of common stock

  -   (2,000)  -   (793

)

  (656

)

  - 

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

  (645)  (111)  (375)  (766

)

  (2,670

)

  (645

)

Payment of dividends

  (3,508)  (3,444)  (3,426)  (3,572

)

  (3,516

)

  (3,508

)

Net cash provided by (used in) financing activities

  13,696   (10,603)  (4,038)

Net cash provided by financing activities

  56,694   75   13,696 
                        

Net increase (decrease) in cash and cash equivalents

  1,482   (660)  4,131 

Net (decrease) increase in cash and cash equivalents

  (8,090

)

  (6,084

)

  1,482 

Cash and cash equivalents at beginning of year

  32,041   32,701   28,570   27,439   33,523   32,041 

Cash and cash equivalents at end of year

 $33,523  $32,041  $32,701  $19,349  $27,439  $33,523 

Note: Consolidated Statements of Cash Flows include continuing operations and discontinued operations for all years presented.

 

See accompanying Notes to Consolidated Financial Statements.

 


38

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

 

 

NOTE 1 - GENERAL AND SUMMARY OF ACCOUNTING POLICIES

 

Nature of Operations. Spartan Motors, Inc. (the “Company”, “we”, or “us”) is a custom engineerniche market leader in specialty vehicle manufacturing and manufacturer of specializedassembly for the commercial vehicle (including last-mile delivery, specialty service and vocation-specific upfit segments) and recreational vehicle industries. Our products include walk-in vans and truck bodies used in e-commerce/parcel delivery, upfit equipment used in the mobile retail and utility trades, luxury Class A diesel motor vehiclehome chassis, and bodies.  We have various subsidiaries that are manufacturers of bodies for various markets including fleetmilitary vehicles, and emergency response vehicles. Our principal chassis markets are emergency response vehicles, motor homes and other specialty vehicles.  

On January 1, 2017, Spartan USA acquired substantially all of the assets and certain liabilities of Smeal Fire Apparatus Co., Smeal Properties, Inc., Ladder Tower Co., and U.S. Tanker Co. When used in this Annual Report on Form 10-K, “Smeal” refers to the assets, liabilities, and operations acquired from such entities. The assets acquired consist of the assets used by the former owners of Smeal in the operation of its business designing,contract manufacturing and distributing emergency response vehicle bodiesassembly services. We also supply replacement parts and aerial devicesoffer repair, maintenance, field service and refurbishment services for the fire service industry. Smeal has operations in Snyder and Neligh, Nebraska; Delavan, Wisconsin; and Ephrata, Pennsylvania and is operated as part of our Emergency Response Vehicles segment.

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; Ephrata, Pennsylvania; Pompano Beach, Florida; Bristol, Indiana; North Charleston, South Carolina; Kansas City, Missouri; Montebello, Carson, Union City and Roseville, California; Mesa, Arizona; Dallas and Weatherford, Texas; and Saltillo, Mexico.

On February 1, 2020, the Company completed its sale of the Emergency Response and Vehicle (“ERV”) business for $55,000 in cash, subject to certain post-closing adjustments. The ERV business consisted of the emergency response cab-chassis and apparatus operations in Charlotte, Michigan, and the Spartan apparatus operations in Brandon, South Dakota; Snyder and Neligh, Nebraska; Delavan, Wisconsin;and Ephrata, Pennsylvania; Bristol, Indiana; Kansas City, Missouri; and Saltillo, Mexico.Pennsylvania. See “Note 2Discontinued Operations” for further discussion regarding this transaction.

 

Our Bristol, Indiana locationOn September 9, 2019, the Company entered into a Unit Purchase Agreement with Fortress Resources, LLC D/B/A Royal Truck Body (“Royal”), pursuant to which the Company acquired all the outstanding equity interests of Royal for $89,369 in cash. Royal is a leading California-based designer, manufacturer and installer of service truck bodies and accessories. Royal manufactures vehicles usedand assembles truck body options for various trades, service truck bodies, stake body trucks, contractor trucks, and dump bed trucks. Royal is the largest service body company in the parcel delivery, mobile retailwestern United States with its principal facility in Carson, California. Royal has additional manufacturing, assembly, and tradesservice space in branch locations in Union City and construction industries,Roseville, California; Mesa, Arizona; and supplies related aftermarket partsDallas and services underWeatherford, Texas. This acquisition allows us to quickly expand our footprint in the Utilimaster brand name.  Our Kansas City, Missouriwestern United States supporting our strategy of coast-to-coast manufacturing and Saltillo, Mexico locations sell and install equipment used in fleet vehicles.  Our Brandon, South Dakota, Snyder and Neligh, Nebraska, Delavan, Wisconsin 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 Spartandistribution. Royal is part of our Specialty Chassis and Vehicle segment.

On June 12, 2019, the Company acquired certain assets and assumed certain liabilities of General Truck Body, Inc., located in Montebello, California, through the Company’s wholly-owned subsidiary, Spartan brand names.  Spartan USA is also a participant in Spartan-Gimaex Innovations,Motors GTB, LLC (“Spartan-Gimaex”GTB”),. GTB is a 50/50 joint venture with Gimaex Holding, Inc. that was formedprovider of upfit services for government and non-government vehicles.  The acquisition will enable the Company to provide emergency response vehicles forincrease its product offerings to fleet customers, while further expanding its manufacturing capabilities in the domestic and international markets.  Spartan-GimaexU.S. market.  Spartan Motors GTB, LLC 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 dissolutionpart of the joint venture.  In June 2015, Spartan USAFleet Vehicles and Gimaex Holding, Inc. entered into court proceedings to determineServices segment.

On December 17, 2018, the termsCompany acquired all of the dissolution.  In February 2017, by agreementassets and assumed certain liabilities of Strobes-R-Us, Inc., located in Pompano Beach, Florida, through the Company’s majority-owned subsidiary, Spartan Upfit Services, Inc. dba Strobes-R-Us (“SRUS”). The total purchase price paid was $7,032, consisting of $5,200 in cash plus a $1,832 contingency for performance-based earn-out payments. SRUS is a premier provider of upfit services for government and non-government vehicles.  The acquisition will enable the Company to increase its product offerings to fleet 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 upfit facility and product showroom in Pompano Beach, Florida.  Spartan Upfit Services, Inc. and the related noncontrolling interest is reported as part of the parties, the court proceeding was dismissed with prejudiceFleet Vehicles 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-K.Services segment.

 

Principles of Consolidation. The consolidated financial statements include our accounts and the accounts of our wholly owned subsidiary, Spartan USA.USA and its subsidiaries. All intercompanyinter-company transactions have been eliminated.

39

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

 

Non-Controlling Interest

At December 31, 2017,2019, Spartan USA held a 50% share in Spartan-Gimaex, however, due to the management and operational structure of the joint venture, Spartan USA was considered to have had the ability to control the operations of Spartan-Gimaex. Accordingly, Spartan-Gimaex is reported as a consolidated subsidiary of Spartan Motors, Inc., The joint venture is not currently active and is in the process of being dissolved. At December 31, 2019, the Company holds an 80% share in SRUS, which is reported as a consolidated subsidiary of the Company within the Emergency ResponseFleet Vehicles and Services segment.

 

Use of Estimates. In the preparation of our financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”), management uses estimates and makes judgments and assumptions that affect asset and liability values and the amounts reported as income and expense during the periods presented. Certain of these estimates, judgments and assumptions, such as the allowance for credit losses, warranty expenses, impairment assessments of tangible and intangible assets, and the provision for income taxes, are particularly sensitive. If actual results are different from estimates used by management, they may have a material impact on the financial statements.

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 Deposits from customers on the 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 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. 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 12 – 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 one to six 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 upfit 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 upfit and field service contracts is satisfied when the equipment installation or repairs and enhancements of the customer’s vehicle has been completed. Our receivables are generally collected in less than three months, in accordance with our underlying payment terms.  

 


40

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

 

Revenue RecognitionSpecialty Chassis and Vehicles.

We recognize revenue in accordance with Accounting Standards Codification Topic (“ASC”) 605. Accordingly, revenueand the corresponding cost of products sold on the sale of motor home chassis when the performance obligation is recognized when title to the productcompleted and control and risk of ownership passesof the chassis has passed to our customer, which is generally upon shipment of the chassis to the buyer. In certain instances, riskcustomer. 

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. Other specialty chassis are generally built on a chassis that is owned and controlled by the customer. Due to the customer ownership and title passes whenof the product has been completedchassis, the performance obligations for other specialty chassis contracts are satisfied as the products are assembled. Our receivables will generally be collected in less than three months, in accordance with purchase order specifications and has been tendered for delivery to the customer. On certain customer requested bill and hold transactions, revenue recognition occurs prior to the products being delivered to the buyer. We enter into such transactions when there is a valid business reason and the buyer has committed to the purchase. At the time revenue is recognized, the customer has been notified that the products have been completed according to their specifications, the products have passed all of our quality control inspections and are ready for delivery and the customer has accepted all of the risks of ownership. All sales are shown net of returns, discounts and sales incentive programs, which historically have not been significant. Rebates for certain product sales, which are known and accrued at time of sale, are reflected as a reduction of revenue. Service revenue is immaterial at less than one percent of total sales. The collectability of any related receivable is reasonably assured before revenue is recognized.underlying payment terms. 

 

Business Combinations. When acquiring other businesses, we recognize identifiable assets acquired and liabilities assumed at their acquisition date estimated fair values, and separately from any goodwill that may be required to be recognized. Goodwill, when recognizable, is measured as the excess amount of any consideration transferred, which is measured at fair value, over the acquisition date fair values of the identifiable assets acquired and liabilities assumed. Acquisition gain, when recognizable,Amounts recorded in a business combination may change during the measurement period, which is measureda period not to exceed one year from the date of acquisition, as the excess ofadditional information about conditions existing at the acquisition date fair values of the identifiable assets acquired and liabilities assumed over the acquisition date fair value of any consideration transferred.becomes available.

 

Accounting for such acquisitions requires us to make significant assumptions and estimates and, although we believe any estimates and assumptions we make are reasonable and appropriate at the time they are made, unanticipated events and circumstances may arise that affect their accuracy, which may cause actual results to differ from those estimated by us. When necessary, we will adjust the values of the assets acquired and liabilities assumed against the goodwill or acquisition gain, as initially recorded, for a period of up to one year after the acquisition date.

 

Costs incurred to effect an acquisition, such as legal, accounting, valuation or other third-partythird-party costs, as well as internal general and administrative costs incurred are charged to expense in the periods incurred.

 

Shipping and Handling of Products. Costs incurred related to the shipment and handling of products are classified in cost of products sold. Amounts billed to customers for shipping and handling of products are included in sales.

 

Cash and Cash Equivalents include cash on hand, cash on deposit, treasuries and money market funds. We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

 

Accounts Receivable. Our receivables are subject to credit risk, and we do not typically require collateral on our accounts receivable. We perform periodic credit evaluations of our customers’ financial condition and generally require a security interest in the products sold. Receivables generally are due within 30 to 60 days. 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, management makes 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%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”specific account balances. The “specific”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 caused the greatest fluctuation in the allowance for doubtful accounts balance historically. Past due accounts are written off when collectability is determined to be no longer assured.

 

Inventories are stated at the lower of first-in, first-outfirst-in, first-out cost or net realizable value. Estimated inventory allowances for slow-moving inventory are based upon current assessments about future demands, market conditions and related management initiatives. If market conditions are less favorable than those projected by management, additional inventory allowances may be required.

Contract Assets arise upon the transfer of goods or services to a customer before the customer pays consideration. The Company will present the contract as either a contract asset or as a receivable, depending on the nature of the entity’s right to consideration for its performance.  Contract assets are a right to consideration in exchange for goods or services that the Company has transferred to a customer, when the right is conditioned on something other than the passage of time.

 


41

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

 

Property, Plant and Equipment is stated at cost and the related assets are depreciated over their estimated useful lives on a straight-line basis for financial statement purposes and an accelerated method for income tax purposes. Cost includes an amount of interest associated with significant capital projects. Estimated useful lives range from 20 years for buildings and improvements, 3three to 15 years for plant machinery and equipment, 3three to 7seven years for furniture and fixtures and 3three to 5five years for vehicles. Leasehold improvements are depreciated over the shorter of the lease term or the estimated useful life of the asset. Maintenance and repair costs are charged to earnings, while expenditures that increase asset lives are capitalized. We review our property, plant and equipment, along with all other long-lived assets that have finite lives, including finite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Assets held-for-sale are recorded at the lower of historical depreciated cost or the estimated fair value less costs to sell. See Note 6,"Note 8 Property,, Plant and Equipment" for further information on our property and equipment.

Assets and Liabilities Held for Sale  We classify assets and liabilities (disposal groups) to be sold as held for sale in the period in which all of the following criteria are met: management, having the authority to approve the action, commits to a plan to sell the disposal group; the disposal group is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such disposal groups; an active program to locate a buyer and other actions required to complete the plan to sell the disposal group have been initiated; the sale of the disposal group is probable, and transfer of the disposal group is expected to qualify for recognition as a completed sale within one year, except if events or circumstances beyond the Company's control extend the period of time required to sell the disposal group beyond one year; the disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

We initially measure a disposal group that is classified as held for sale at the lower of its carrying value or fair value less costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Conversely, gains are not recognized on the sale of a disposal group until the date of sale. We assess the fair value of a disposal group each reporting period it remains classified as held for sale and reports any subsequent changes as an adjustment to the carrying value of the disposal group, as long as the new carrying value does not exceed the carrying value of the disposal group at the time it was initially classified as held for sale.

Upon determining that a disposal group meets the criteria to be classified as held for sale, the Company reports the assets and liabilities of the disposal group, if material, in the line items assets held for sale and liabilities held for sale in the Consolidated Balance Sheets. Depreciation is not recorded during the period in which the long-lived assets, included in the disposal group, are classified as held for sale.

Additionally, we report the reporting results for a disposal group in discontinued operations separately from continuing operations to distinguish the financial impact of disposal transactions from ongoing operations if the disposal represents a strategic shift that has or will have a major effect on our operations and financial results.  

 

Related Party Transactions.Transactions. We purchase certain components used in the manufacture of our products and logistics services from parties that could be considered related to us because one or more of our executive officers or board members is also an executive officer or board member of the related party. See Note 17,"Note 19Related Party Transactions," for more information regarding our transactions with related parties.

 

Goodwill and Other Intangible Assets. Goodwill represents the excess of the cost of a business combination over the fair value of the net assets acquired.  Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to impairment tests on an annual basis, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Goodwill is allocated to the reporting unit from which it was created. A reporting unit is an operating segment or sub-segment to which goodwill is assigned when initially recorded. We review indefinite lived intangible assets annually for impairment by comparing the carrying value of those assets to their fair value.

 

Other intangible assets with finite lives are amortized over their estimated useful lives and are tested for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.

 

We perform our annual goodwill and indefinite lived intangible assets impairment test as of October 1 and monitor for interim triggering events on an ongoing basis. For goodwill we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Under authoritative guidance, we are not required to calculate the fair value of a reporting unit unless we determine that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. We have the option to bypass the qualitative assessment and proceed to a quantitative impairment test.

42

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

 

If

If we elect to bypass the qualitative assessment for a reporting unit, or if after completing the assessment we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we perform a quantitative impairment test, whereby we compare 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 estimated fair value, an impairment loss is recognized in an amount equal to the excess, up to the carrying value of the goodwill.

 

We evaluate the recoverability of our indefinite lived intangible assets,assets, which consistconsists of our Utilimaster, Smeal and SmealRoyal Truck Body 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 names,name, discounted to their present value. In determining the estimated fair value of the trade names, we consider current and projected future levels of revenuesales based on our plans for Utilimaster, Smeal and Smeal,Royal Truck Body branded products, business trends, prospects and market and economic conditions.

 

Significant judgments inherent in these assessments and analyses include assumptions about macroeconomic and industry conditions, 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 because 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 names.

See Note 5,“Note 2 – Discontinued Operationsin the Notes to the Consolidated Financial Statements appearing in Item 8 of this Form 10-K for further details on our goodwill and indefinite-lived intangible assets related to the ERV business. See “Note 7 Goodwill and Intangible Assets for further details on our goodwill and other intangible assets.


SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

 

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 management’s best estimate of the expected future cost of honoring our obligations under the warranty agreements. Expense related to warranty liabilities accrued for product sales, as well as adjustments to pre-existing warranty liabilities, are reflected within Cost of products sold on our Consolidated Statements of Operations. 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 10,"Note 12 Commitments and Contingent Liabilities," for further information regarding warranties.

Deposits from Customers. We sometimes receive advance payments from customers for product orders and record these amounts as liabilities. We accept such deposits when presented by customers seeking improved pricing in connection with orders that are placed for products to be manufactured and sold at a future date. RevenueSales associated with these deposits isare recognized over time based on the inputs completed for a given performance obligation during the reporting period or deferred and recognized upon shipment of the related product to the customer.customer depending on the terms of the contract.

 

Research and Development. Our research and development costs, which consist of compensation costs, travel and entertainment, administrative expenses and new product development among other items, are expensed as incurred.

 

Taxes on Income. We recognize deferred income tax assets and liabilities using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. Deferred tax liabilities generally represent tax expense recognized for which payment has been deferred, or expenses which have been deducted in our tax returns, but which have not yet been recognized as an expense in our financial statements.

 

We establish valuation allowances for deferred income tax assets in accordance with GAAP, which provides that such valuation allowances shall be established unless realization of the income tax benefits is more likely than not. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. At each reporting period, we consider the scheduled reversal of deferred tax liabilities, available taxes in carryback periods, tax planning strategies and projected future taxable income in making this assessment.

 

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 we believe the estimates are reasonable, no assurance can be given that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals.

43

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

 

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

See Note 8,"Note 10 Taxes on Income," for further details on our income taxes.

 

Earnings (Loss) Per Share. Basic earnings per share is based on the weighted average number of common shares share equivalents of stock appreciation rights (“SAR”s) and participating securities outstanding during the period. Diluted earnings per share also include the dilutive effect of additional potential common shares issuable from stock optionsstock-based awards and are determined using the treasury stock method. Basic earnings per share represents net earnings divided by basic weighted average number of common shares outstanding during the period, including the average dilutive effect of our SARs outstanding during the period determined using the treasury stock method.period. Diluted earnings per share represents net earnings divided by diluted weighted average number of common shares outstanding, which includes the average dilutive effect of our stock optionsall potentially dilutive securities that are outstanding during the period. Our unvested restricted stock awardsunits and performance stock units are included in the number of shares outstanding for both basic and diluted earnings per share calculations, unless a net loss is reported, in which situation unvested stock awards are excluded from the number of shares outstanding for both basic and diluted earnings per share calculations. See Note "Note 15Stock-Based Compensation" and "Note 17 Earnings Per Share" for further details.

 

Stock Incentive Plans-Based Compensation. ShareStock based payment compensation costs for equity-based awards is measured on the grant date based on the estimated fair value of the award at that date, and is recognized over the requisite service period, net of estimated forfeitures. Fair value of stock option and stock appreciation rights awards are estimated using a closed option valuation (Black-Scholes) model. Fair value of restricted stock awards, restricted stock units and performance stock units subject to a performance condition is based upon the quoted market price of the common stock on the date of grant. Fair value of performance stock units subject to a market condition is calculated using the Monte Carlo simulation model. Our incentive stock stock-based compensation plans are described in more detail in Note 13,"Note 15 Stock Based Compensation".


SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

 

Fair Value. We are required to disclose the estimated fair value of our financial instruments. The carrying value at December 31,2017 2019 and 20162018 of cash and cash equivalents, accounts receivable and accounts payable approximate their fair value due to their short-term nature. The carrying value of variable rate debt instruments approximate their fair value based on their relative terms and market rates.

Reclassifications. Certain immaterial amounts in the prior periods’ financial statements have been reclassified to conform to the current period’s presentation. These reclassifications had no impact on previously reported Net earnings (loss), Total assets, Total shareholders’ equity or cash flows.

 

Segment Reporting. We identify our reportable segments based on our management structure and the financial data utilized by the chief operating decision makersmaker to assess segment performance and allocate resources among our operating units. We have threetwo reportable segments: Fleet Vehicles and Services Emergency Response Vehicles and Specialty Chassis and Vehicles. More detailed information about our reportable segments can be found in Note 16,"Note 18 Business Segments".

 

Supplemental Disclosures of Cash Flow Information. Cash paid for interest was $619,$309$1,844, $630 and $374$619 for 2017,20162019, 2018 and 2015.2017. Cash paid (received) for income taxes, net of refunds, was $0,$2,232$4,942, $5,054 and $(18)$0 for 2017,20162019, 2018 and 2015.2017. Non-cash investing in 20172018 included $7,391 forgivenessthe issuance of accounts receivablethe Company’s stock in the amount of $1,950, which was reversed in 2019, and a contingent liability for the value of future consideration of $1,832 in conjunction with our acquisition of Smeal.SRUS. See Note 2"Note 3 Acquisition Activities" for further information about thisthe acquisition.

 

New Accounting StandardStandardss

In February 2017 December 2019, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update No.2017-05, 2019-12Other Income-Gains and Losses from, Income Taxes (Topic 740): Simplifying the Derecognition of Nonfinancial Assets (Subtopic 610-20)Accounting for Income Taxes (“ASU 2017-05”2019-12”). ASU 2017-052019-12 is intended to provide guidancesimplify the accounting for when gainsincome taxes by removing certain exceptions to the general principles of Topic 740 and losses on nonfinancial assets should be applied to a financial assetimproving consistent application of GAAP for other areas of Topic 740 by defining the term “nonfinancial asset”. ASU 2017-05 will go into effect when the revenueclarifying and amending existing guidance. The provisions of this standard issued in ASU 2014-09 becomes effective. We believe that theare effective for reporting periods beginning after December 15, 2020 and early adoption is permitted. The adoption of the provisions of ASU 2017-05 will 2019-12 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

 

In January 2017, June 2016, the FASB issued Accounting Standards Update No.2017-04,Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. Under the amendments in the new ASU, goodwill impairment testing will be performed by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, up to the carrying amount of the goodwill. The new standard is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. Early adoption is permitted for annual or interim goodwill impairment testing performed after January 1, 2017. Our adoption of ASU 2017-04 for our goodwill impairment testing performed as of October 1, 2017 did not have an impact on our consolidated financial position, results of operations or cash flows.

In January 2017, the FASB issued Accounting Standards Update 2017-01,Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”), which provides guidance to entities to assist with evaluating when a set of transferred assets and activities (collectively, the "set") is a business and provides a screen to determine when a set is not a business. Under the new guidance, when substantially all of the fair value of gross assets acquired (or disposed of) is concentrated in a single identifiable asset, or group of similar assets, the assets acquired would not represent a business. Also, to be considered a business, an acquisition would have to include an input and a substantive process that together significantly contribute to the ability to produce outputs. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and should be applied on a prospective basis to any transactions occurring within the period of adoption. Early adoption is permitted for interim or annual periods in which the financial statements have not been issued. The adoption of the provisions of ASU 2017-01 had no impact on our consolidated financial position, results of operations or cash flows.

In August 2016, the FASB issued Accounting Standards Update No.2016-15,Statement of Cash Flows (Topic 230) (“ASU 2016-15”). ASU 2016-15 is intended to reduce diversity in current practice regarding the manner in which certain cash receipts and cash payments are presented and classified in the cash flow statement. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We early adopted ASU 2016-15, effective with the third quarter of 2017, which did not have an impact on our consolidated financial position, results of operations or cash flows through December 31, 2017.


SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

In June 2016, the FASB issued Accounting Standards Update 2016-13,2016-13, Financial Instruments – CreditInstruments-Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”2016-13”). ASU 2016-132016-13 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 that theThe adoption of the provisions of ASU 2016-13 will 2016-13 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

 

In MarchFebruary 2016, the FASB issued Accounting Standards Update No.2016-09,Compensation – Stock Compensation (“ASU 2016-09”). ASU 2016-09 simplifies the accounting for a stock payment’s tax consequences by requiring the recognition of the income tax effects of awards in the income statement when the awards vest or are settled. It also allows a company to elect to account for forfeitures as they occur rather than on an estimated basis and revises the classification of certain tax payments related to stock compensation on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. Our adoption of ASU 2016-09 for the year ending December 31, 2017 resulted in a reduction of income tax expense of $394, which under previous accounting guidance would have been recorded to additional paid in capital.

In February 2016, the FASB issued Accounting Standards Update No.2016-02, 2016-02, Leases (“ASU 2016-02”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 for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently evaluatingadopted ASU 2016-02 as of January 1, 2019 using the modified retrospective approach. See the “Adoption of Lease Accounting Policy” section below and "Note 9 Leases"for a description of the impact of our pendingthe adoption of the provisions of ASU 2016-022016-02 on our consolidated financial position, results of operations or cash flows.  Upon adoption, we expect to recognize right of use assets and liabilities on the consolidated statement of financial position for leases currently classified as operating leases.   

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

In May 2014, the FASB issued Accounting Standards Update 2014-09,Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). Subsequently the FASB provided additional guidance to clarify certain aspects of the standard in Accounting Standards Updates No.2016-08, Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross versus Net); No.2016-10,Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing; and No.2016-12,Revenue from Contracts with Customers (Topic 606), Narrow-Scope Improvements and Practical Expedients. ASU 2014-09, as amended is based on the principle that revenue should be recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application.

 


44

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

We substantially completed our assessment of the impacts of the new revenue standard during the fourth quarter.  We have determined that the adoption of ASU 2014-09 will result in a change in the timing of revenue recognition for a significant portion of our contracts. For contracts related to substantially all of our Emergency Response Vehicle segment sales, certain of our Fleet Vehicles and Services segment sales, and certain of our Specialty Chassis and Vehicles segment sales (primarily related to our contract manufacturing operations), we will recognize revenue over time (during the production period) rather than at the point in time that the product is delivered to the customer. These contracts meet the criteria for recognizing revenue over time contracts either because 1) our performance creates or enhances an asset that the customer controls, or 2) our performance does not create an asset with an alternative use (due to significant customization of our products), and, based on our rights under the contract, we have an enforceable right to payment for our performance completed to date during the production period. We expect to utilize the practical expedient to not recognize the effects of financing when we receive customer deposits for contracts that will be fulfilled in less than one year. We expect that the disclosures in the notes to our consolidated financial statements related to revenue recognition will be significantly expanded under the new standard, specifically regarding the quantitative and qualitative information about performance obligations, and changes in contract assets and liabilities. 

We adopted ASU 2014-09 as of January 1, 2018 using the modified retrospective approach. As a result, in the first quarter of 2018 we expect to record a transition adjustment to increase retained earnings by approximately $4,900, reflecting the cumulative impact for the accounting change. This adjustment reflects the acceleration of approximately $38,000 in revenues and $33,100 in cost of products sold.

We are unable to precisely quantify the impact to revenue, gross profit or net income for future periods since revenue and gross profit recognized in those periods will depend on the actual production levels in those periods, but we expect the increase in revenue, gross profit and net income from recognizing revenue on these contracts over time in 2018 to be similar to the amounts included in the transition adjustment.


NOTE 2– ACQUISITION ACTIVITIES

On January 1, 2017, we completed the acquisition of substantially all of the assets and certain liabilities of Smeal pursuant to an Asset Purchase Agreement dated December 12, 2016.

This acquisition brings significant scale to our Emergency Response Vehicles segment, expands the geographic reach of our dealer network and adds complementary products to our existing emergency response product portfolio.

Sales and operating income included in our results since the January 1, 2017 acquisition are as follows:

  

Year Ended

December 31,

2017

 

Net sales

 $124,669 

Operating income

  2,070 

The above operating income amounts include a one-time charge to cost of products sold of $189 for the year ended December 31, 2017 related to the fair value step-up of inventories acquired from Smeal and sold during the period.


 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

 

 

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

Adoption of Operation (Unaudited)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, as of January 1, 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 following table provides unaudited pro formadecrease to retained earnings was $113, net salesof 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 (loss) 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 Consolidated Balance Sheets. Finance leases are included in Other assets, Other current liabilities and accrued expenses and Other non-current liabilities on our 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.

45

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

NOTE 2 – DISCONTINUED OPERATIONS

On February 1, 2020, we completed the sale of our ERV business for $55,000 in cash, subject to certain post-closing adjustments. The ERV business included the emergency response chassis operations in Charlotte, Michigan, and operations in Brandon, South Dakota; Snyder and Neligh, Nebraska; and Ephrata, Pennsylvania. The ERV business met the accounting criteria for held for sale classification as of December 31, 2019. The results of the ERV business have been reclassified to Loss from discontinued operations, net of tax in the Consolidated Statements of Operations for the years ended December 31, 2017 2019, 2018 and 2016, as if Smeal had been acquired on January1 of 2016.2017.

The unaudited pro forma results reflect certain adjustments related to the acquisition, such as changesLoss from discontinued operations presented in the depreciationConsolidated Statement of Operations for the years ended December 31, 2019, 2018 and amortization expense on the Smeal assets acquired resulting from the fair valuation of assets acquired, expenses incurred to complete the acquisition and the impact of acquisition financing.  The pro forma results do not include any anticipated cost synergies or other effects of the integration of Smeal.  Accordingly, such pro forma amounts are not necessarily indicative of the results that actually would have occurred had the acquisition been completed on the date indicated, nor are they indicative of the future operating results of the combined company.2017:

 

  

Years Ended

 
  

December 31,

2017

  

December 31,

2016

 

Net sales

 $707,098  $656,292 
         

Net earnings attributable to Spartan Motors, Inc.

 $18,792  $4,964 
         

Diluted net earnings per share

 $0.54  $0.14 
  

Year Ended December 31,

 
  

2019

  

2018

  

2017

 
             

Sales

 $261,860  $245,637  $302,850 

Cost of products sold

  245,785   220,526   276,567 

Gross profit

  16,075   25,111   26,283 

Operating expenses

  28,864   31,516   29,461 

Operating loss

  (12,789

)

  (6,405

)

  (3,178

)

Loss on asset impairments  53,131   -   - 

Other income (expense)

  1,021   2,228   (651)

Loss from discontinued operations before taxes

  (64,899

)

  (4,177

)

  (3,829

)

Income tax benefit

  15,683   1,073   2,292 

Net loss from discontinued operations

 $(49,216

)

 $(3,104

)

 $(1,537)

 

Purchase Price Allocation

The total purchase price paid forIn the annual goodwill and intangible assets impairment test as of October 1, 2019, we determined that the fair value of our acquisition ofERV business and Smeal was $41,513, subjecttrade name were less than their carrying values due to a net working capital adjustment and the tax gross-up payment described below. The consideration paid consisted of $28,903under-performance in cash, net of cash acquired of $3,825, and the forgiveness of certain liabilities owed by the former owners of Smeal to the Company in the amount of $7,391. Pursuant to the purchase agreement, the sellers may receive additional consideration in the form of a tax gross-up payment,2019 which is payable no later than April 1, 2018, and is notwas expected to exceed $1,394. The consideration paid is subjectcontinue in future periods. As a result, we recorded impairment expense of $13,856 to certain post-closing adjustments, including a net working capital adjustment that we expect to finalize inwrite off the first quarter of 2018. Smeal has been a significant chassis customer of Spartan USA. The price paid pursuant to the purchase agreement was the subject of arm's length negotiation between Smealgoodwill and us.

This acquisition was accounted for using the purchase method of accountingindefinite lived intangible assets. In conjunction with the purchase price allocated to the assets purchased and liabilities assumed based upon their estimated fair values at the date of acquisition. Identifiable intangible assets include trade-names and certain non-patented technology. The excessclassification of the purchase price overERV business as held for sale as of December 31, 2019, we recorded a loss of $39,275 to write down the estimated faircarrying values of the net tangible and intangibleassociated assets acquired of $11,456 was recorded as goodwill. During 2017, we made certain adjustments to our purchase price allocation to adjust inventory, other current assets, accrued warranty and other liabilities, which resulted in a $1,787 increase in goodwill. We recorded an estimate for contingent consideration related to the tax gross-up payment, valued in accordance with accounting guidance for business combinations and fair value measurements at $1,394.

The allocation of purchase price to assets acquired and liabilities assumed isto their fair values less estimated costs to sell of $3,604. The assets and liabilities of the discontinued operations are presented separately under the captions “Current assets held for sale”, “Noncurrent assets held for sale” and “Current liabilities held for sale” in the Consolidated Balance Sheets as follows:of December 31, 2019 and 2018.

 

Cash

 $3,825 

Accounts receivable

  6,523 

Inventory

  61,716 

Other current assets

  662 

Property, plant and equipment

  5,773 

Intangible assets

  3,900 

Goodwill

  11,456 

Total assets acquired

  93,855 
     

Accounts payable

  3,941 

Customer prepayments

  42,929 

Accrued warranty

  3,689 

Other liabilities

  1,783 

Total liabilities assumed

  52,342 
     

Total purchase price

 $41,513 


46

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

 

Contingent Consideration

  

December 31,

  

December 31,

 
  2019 (1)   2018 (1)  

Assets:

        

Accounts receivable, net

 $30,760  $38,792 

Contract assets

  36,740   26,798 

Inventories

  32,329   30,779 

Other current assets

  1,142   1,118 

Property, plant and equipment,

  21,967   24,082 

Right of use assets – operating leases

  5,960   - 

Goodwill

  -   11,456 

Intangible assets

  1,050   3,600 

Other noncurrent assets

  52   52 
Impairment of carrying value  (39,275)  - 

Total assets held for sale

 $90,725  $136,677 
         
  December 31,  December 31, 
  2019(1)  2018(1) 

Liabilities:

       

Accounts payable

  4,213   3,015 

Accrued warranty

  11,347   11,683 

Accrued compensation and related taxes

  3,047   2,842 

Deposits from customers

  21,409   21,761 

Operating lease liability

  727   - 

Other current liabilities

  3,495   3,776 

Long-term operating lease liability

  5,363   - 

Total liabilities held for sale

 $49,601  $43,077 

(1) As of December 31, 2019, assets and liabilities held for sale were classified as current. As of December 31, 2018, current and noncurrent assets held for sale were $97,487 and $39,190, respectively, and current liabilities held for sale was $43,077.

PursuantTotal depreciation and amortization and capital expenditures for the discontinued operations for the years ended December 31, 2019, 2018 and 2017:

  

Year Ended December 31,

 
  

2019

  

2018

  

2017

 
             

Depreciation and amortization

 $5,106  $4,156  $3,905 

Capital expenditures

 $2,431  $4,332  $1,364 

NOTE 3 – ACQUISITION ACTIVITIES

2019 Acquisition

On September 9, 2019, the Company completed the acquisition of Fortress Resources, LLC D/B/A Royal Truck Body (“Royal”) pursuant to which the Company acquired all the outstanding equity interests of Royal. The Company paid $89,369 in cash. The purchase price is subject to certain customary post-closing adjustments. The acquisition was financed using $89,369 borrowed from our existing $175,000 line of credit, as set forth in the Second Amended and Restated Credit Agreement, dated as of August 8, 2018. Included in our results since the September 9, 2019 acquisition are net sales of $17,073 and operating income of $2,382 for the year ended December 31, 2019.

47

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

Royal is a leading California-based designer, manufacturer and installer of service truck bodies and accessories. Royal manufactures and assembles truck body options for various trades, service truck bodies, stake body trucks, contractor trucks, and dump bed trucks. Royal is the largest service body company in the western United States with its principal facility in Carson, California. Royal has additional manufacturing, assembly, and service space in branch locations in Union City and Roseville, California; Mesa, Arizona; and Dallas and Weatherford, Texas. This acquisition allows us to quickly expand our footprint in the western United States supporting our strategy of coast-to-coast manufacturing and distribution. Royal is part of our Specialty Chassis & Vehicle segment. 

During the year ended 2019, we recorded pretax charges totaling $1,691 for legal expenses and other transaction costs related to the purchase agreement,acquisition. These charges, which were expensed in accordance with the former owners of Smeal may receive additional considerationaccounting guidance for business combinations, were recorded in “Selling, general and administrative” and reflected within the “Eliminations and Other” column in the formbusiness segment table in "Note 18 Business Segments."

Purchase Price Allocation

This acquisition was accounted for using the acquisition method of a tax gross-up payment. Theaccounting with the purchase agreement specifies that Spartan will make a paymentprice allocated to the former ownersassets purchased and liabilities assumed based upon their estimated fair values at the date of Smeal to cover certain stateacquisition. Identifiable intangible assets include customer relationships, trade names and federal tax liabilities fortrademarks, patented technology and non-competition agreements. The preliminary excess of the tax year ending December 31, 2017 that result frompurchase price over the transaction. The paymentestimated fair values of the net tangible and intangible assets acquired of $27,476 was recorded as goodwill, which is expected to be $1,394.deductible for tax purposes. The preliminary goodwill recognized is subject to a final net working capital adjustment.

 

The fair value of the net assets acquired was based on a preliminary valuation and the estimates and assumptions are subject to change within the measurement period. The Company is working with the buyer to finalize the working capital adjustments which may impact goodwill. The Company will finalize the purchase price allocation as soon as practicable within the measurement period, but in no event later than one year following the acquisition date.

The preliminary allocation of purchase price to assets acquired and liabilities assumed was as follows:

Cash and cash equivalents

 $431 

Accounts receivable, less allowance

  5,019 

Contract assets

  1,499 

Inventory

  6,453 

Other receivables – chassis pool agreements

  10,424 

Property, plant and equipment, net

  4,980 

Right of use assets-operating leases

  12,767 

Intangible assets

  47,150 

Goodwill

  27,476 

Total assets acquired

  116,199 
     

Accounts payable

  1,658 

Customer prepayments

  255 

Accrued warranty

  98 

Operating lease liabilities

  1,693 

Accrued compensation and related taxes

  569 

Other current liabilities and accrued expenses

  30 

Short-term debt – chassis pool agreements

  10,424 

Long-term operating lease liability

  11,074 

Long-term debt, less current portion

  1,029 

Total liabilities assumed

  26,830 
     

Total purchase price

 $89,369 

48

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

Goodwill Assigned

Intangible assets totaling $47,150 have provisionally been assigned to customer relationships, trade names and trademarks, patented technology and non-competition agreements as a result of the acquisition and consist of the following (in thousands):

  

Amount

  

Useful Life (in years)

Customer relationships

 $30,000  

15

Trade names and trademarks

  13,000  

Indefinite

Patented technology

  2,200  

8

Non-competition agreements

  1,950  

5

  $47,150   

The Company amortizes the customer relationships utilizing an accelerated approach and patented technology and non-competition agreements assets utilizing a straight-line approach. Amortization expense, including the intangible assets preliminarily recorded from the Royal acquisition, resulted in the recognition of $11,456 of goodwill, which is expected$666 for 2019, and estimated to be deductible$2,665, $2,665, $3,162, and $3,072 for tax purposes.the years 2020 through 2023, respectively.

 

Goodwill consists of operational synergies that are expected synergies resulting fromto be realized in both the acquisitionshort and long-term and the estimatedopportunity to enter into new markets which will enable us to increase value of the workforce employed. to our customers and shareholders. Key areas of expected cost savings include an expanded dealer network;network, complementary product portfolios;portfolios and manufacturing and supply chain work process improvements; and the elimination of redundant corporate overhead.improvements.

 

FinancingPro Forma Results (Unaudited)

The following table provides unaudited pro forma net sales and results of operations for the Acquisition

Our acquisition of Smeal was financed using $32,800 borrowed from our existing $100,000 line of credit, as set forth in the Second Amendedyears ended December 31, 2019 and Restated Credit Agreement, dated as of October 31, 2016, as amended by a First Amendment on December 1, 2017, by and among us and our affiliates, as borrowers;2018. The unaudited pro forma results reflect certain lenders; Wells Fargo Bank, National Association, as Administrative Agent; and Wells Fargo Securities, LLC, as Sole Lead Arranger and Sole Bookrunner.

Acquisition Related Expenses

During 2017 and 2016, we recorded pretax charges totaling $868 and $882 for legal expenses and other transaction costsadjustments related to the acquisition. These charges, which were expensed in accordance with the accounting guidance for business combinations, were recorded in “Selling, general and administrative” and reflected within the “Other” columnacquisition, such as changes in the business segment tables in Note 16,Business Segments.depreciation and amortization expense on the Royal assets acquired resulting from the fair valuation of assets acquired, expenses incurred to complete the acquisition and the impact of acquisition financing. The pro forma results do not include any anticipated cost synergies or other effects of the planned integration of Royal. Accordingly, such pro forma amounts are not necessarily indicative of the results that would have occurred nor are they indicative of the future operating results of the combined company.

  

Year ended December 31,

 
  

2019

  

2018

 

Pro forma results of operations from continuing operations

        

Net sales

 $789,585  $612,337 

Net income

 $36,760  $19,158 

Diluted earnings per share

 $1.04  $0.54 

2018 Acquisition

 

NOTE 3 – INVENTORIESOn December 17, 2018, the Company acquired the assets and assumed certain liabilities of Strobes-R-Us, Inc. through the Company’s majority-owned subsidiary, Spartan Upfit Services, Inc. dba Strobes-R-Us (“SRUS”). SRUS is a premier provider of upfit services for government and non-government vehicles. The acquisition enables the Company to increase its product offerings to fleet 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 upfit facility and product showroom in Pompano Beach, Florida.

 

Inventories are summarized as follows:

 

December 31,

 
  

2017

  

2016

 
         

Finished goods

 $15,539  $12,743 

Work in process

  15,980   14,063 

Raw materials and purchased components

  48,092   35,458 

Reserve for slow-moving inventory

  (1,919

)

  (3,368

)

         

Total Inventory

 $77,692  $58,896 

Purchase Price Allocation

The total purchase price paid for our acquisition of SRUS was $7,032 consisting of $5,200 in cash, plus a $1,832 contingency for performance-based earn-out payments. 

 

We also have a numberThis acquisition was accounted for using the acquisition method of demonstration unitsaccounting, which requires the purchase price to be allocated to the assets purchased and liabilities assumed based upon their estimated fair values at the date of acquisition. The excess of the estimated purchase price over the preliminary estimated fair values of the net tangible and intangible assets acquired of $195 was recorded as part ofgoodwill. During 2019, we made certain adjustments to our sales and training program. These demonstration units are included in the “Finished goods” line item above, and amounted to $7,435 and $3,558 at December 31,2017 and 2016. When the demonstration units are sold, the costpurchase price allocation related to the demonstration unit is includeddeferred tax asset, stock compensation, identified intangible assets, step-up valuation of fixed assets, and a revaluation of contingent consideration, which resulted in Cost of products sold on our Consolidated Statements of Operations. Thea $6,211 decrease in goodwill. The Company has finalized the reserve during 2017 ispurchase price allocation within the result of disposals of obsolete inventory and reduction ofmeasurement period, which was to occur no later than one year following the reserve associated with this inventory.

NOTE 4 – RESTRUCTURING CHARGES

During the year ended December 31, 2017, we incurred restructuring charges related to a company-wide initiative to streamline operations and integrate our Smeal acquisition. During 2016 and 2015, we incurred restructuring charges related to the relocation of our Ocala, Florida manufacturing operations to our Charlotte, Michigan and Brandon, South Dakota facilities, along with efforts undertaken to upgrade production processes at our Brandon, South Dakota and Ephrata, Pennsylvania locations.acquisition date.

 


49

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

 

Restructuring charges included

The allocation of purchase price to assets acquired and liabilities assumed was as follows:

Accounts receivable

 $1,165 

Inventory

  893 

Other current assets

  3 

Property, plant and equipment

  1,911 

Other Assets

  192 

Intangible assets

  3,100 

Goodwill

  195 

Total assets acquired

  7,459 
     

Accounts payable

  382 

Other current liabilities

  45 

Total liabilities assumed

  427 
     

Total purchase price

 $7,032 

Contingent Consideration

Pursuant to the purchase agreement, the former owners of the SRUS business may receive additional consideration through 2021 in our Consolidated Statementsthe form of Operationscertain performance-based earn-out payments, up to an aggregate maximum of $3,250.  The purchase agreement specifies annual payments for each calendar year beginning in 2019 through and including 2021 contingent upon earnings for that calendar year exceeding predetermined thresholds. In accordance with accounting guidance for business combinations, at the date of sale the Company recorded a contingent liability of $1,832 for the year ended December 31, 2017, broken down by segment, arevalue of the future consideration, which is ultimately its best estimate of the likelihood of the payments discounted to their present value.

NOTE 4 – REVENUE

Contract Assets and Liabilities

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

 

  

December 31, 2017

 
  

Fleet

Vehicles

and

Services

  

Emergency

Response

Vehicles

  

Specialty

Chassis

and

Vehicles

  

Other

  

Total

 

Cost of products sold

                    

Accrual for severance

 $97  $43  $30  $-  $170 

Production relocation

  -   38   -   -   38 
                     

General and Administrative

                    

Accrual for severance

  547   367   79   51   1,044 

Total restructuring

 $644  $448  $109  $51  $1,252 

During the years ended December 31, 2016 and 2015, we incurred restructuring charges related to efforts undertaken to upgrade production processes at our Brandon, South Dakota and Ephrata, Pennsylvania locations.

Restructuring charges included in our Consolidated Statements of Operations for the years ended December 31, 2016 and 2015, which were all related to our Emergency Response Vehicles segment, are as follows:

  

December 31, 2016

  

December 31, 2015

 

Cost of products sold

        

Inventory impairment

 $-  $345 

Production relocation/equipment impairment

  136   174 

Accrual for severance

  -   - 

Total cost of products sold

  136   519 
         

General and Administrative

        

Manufacturing process reengineering

  959   2,336 

Accrual for severance

  -   - 

Total general and administrative

  959   2,336 

Total restructuring

 $1,095  $2,855 
  

December 31,

2019

  

December 31,

2018

 

Contract Assets

        

Contract assets, beginning of year

 $9,229  $5,200 

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

  (9,229

)

  (5,200

)

Contract assets recognized, net of reclassification to receivables

  10,898   9,229 

Contract assets, end of year

  10,898   9,229 
         

Contract Liabilities

        

Contract liabilities, beginning of year

  871   201 

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

  (871

)

  (201

)

Cash received in advance and not recognized as revenue

  2,640   871 

Contract liabilities, end of year

  2,640   871 

 

The following table provides a summaryaggregate amount of the compensation related charges incurred duringtransaction price allocated to remaining performance obligations in existing contracts that are yet to be completed in the Fleet Vehicles and Services ("FVS") and Specialty Chassis and Vehicles ("SCV") segments are $305,796 and $30,777, respectively, with substantially all revenue expected to be recognized within one year ended as of December 31, 2017 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.2019.

  

Severance

 

Balance January 1, 2017

 $- 

Accrual for severance

  643 

Payments and adjustments made in period

  (201)

Balance March 31, 2017

  442 

Accrual for severance

  325 

Payments and adjustments made in period

  (540)

Balance June 30, 2017

  227 

Accrual for severance

  232 

Payments and adjustments made in period

  (366)

Balance September 30, 2017

  93 

Accrual for severance

  14 

Payments and adjustments made in period

  (95)

Balance December 31, 2017

 $12 

There were no compensation related charges incurred during the years ended December 31, 2016 or 2015.


50

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO 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 years ended December 31, 2019, 2018 and 2017. The tables also include a reconciliation of the disaggregated revenue with the reportable segments.

  

Year Ended December 31, 2019

 
  

FVS

  

SCV

  

Total

Reportable

Segments

  

Other

  

Total

 

Primary geographical markets

                    

United States

 $554,691  $185,768  $740,459  $(5,278

)

 $735,181 

Other

  21,203   158   21,361   -   21,361 

Total sales

 $575,894  $185,926  $761,820  $(5,278

)

 $756,542 
                     

Timing of revenue recognition

                    

Products transferred at a point in time

 $164,437  $137,894  $302,331  $(5,278

)

 $297,053 

Products and services transferred over time

  411,457   48,032   459,489   -   459,489 

Total sales

 $575,894  $185,926  $761,820  $(5,278

)

 $756,542 

  

Year Ended December 31, 2018

 
  

FVS

  

SCV

  

Total

Reportable

Segments

  

Other

  

Total

 

Primary geographical markets

                    

United States

 $367,730  $191,814  $559,544  $(10,221

)

 $549,323 

Other

  19,819   1,385   21,204   -   21,204 

Total sales

 $387,549  $193,199  $580,748  $(10,221

)

 $570,527 
                     

Timing of revenue recognition

                    

Products transferred at a point in time

 $113,576  $160,408  $273,984  $(10,221

)

 $263,763 

Products and services transferred over time

  273,973   32,791   306,764   -   306,764 

Total sales

 $387,549  $193,199  $580,748  $(10,221

)

 $570,527 

51

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

  

Year Ended December 31, 2017

 
  

FVS

  

SCV

  

Total

Reportable

Segments

  

Other

  

Total

 

Primary geographical markets

                    

United States

 $238,267  $158,246  $396,513  $(5,657

)

 $390,856 

Other

  12,828   564   13,392   -   13,392 

Total sales

 $251,095  $158,810  $409,905  $(5,657

)

 $404,248 
                     

Timing of revenue recognition

                    

Products transferred at a point in time

 $251,095  $158,810  $409,905  $(5,657

)

 $404,248 

Products and services transferred over time

  -   -   -   -   - 

Total sales

 $251,095  $158,810  $409,905  $(5,657

)

 $404,248 

 

NOTE 5 – INVENTORIES

Inventories are summarized as follows:

  

December 31,

 
  

2019

  

2018

 

Finished goods

 $4,764  $5,347 

Work in process

  1,773   2,190 

Raw materials and purchased components

  57,679   33,418 

Reserve for slow-moving inventory

  (4,760

)

  (1,742

)

Total Inventory

 $59,456  $39,213 

NOTE 6 – RESTRUCTURING CHARGES

We have incurred restructuring charges for a company-wide initiative to streamline operations. Restructuring charges included in our Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017, broken down by segment, are as follows:

  December 31, 

 

 

2019

 

 

2018

 

 

2017

 

FVS

 

$

-

 

 

$

-

 

 

$

644

 

SCV

 

 

 82

 

 

 

 180

 

 

 

109

 

Other

 

 

-

 

 

 

482

 

 

 

45

 

Total restructuring charges

 

$

82

 

 

$

662

 

 

$

798

 

The following table summarizes the compensation related charges incurred under these initiatives through year ended December 31, 2019. The accrual balance for severance is reflected within Accrued compensation and related taxes on our Consolidated Balance Sheets.

  

Severance

2019

  

Severance

2018

 

Accrual balance January 1,

 $199  $12 

Accrual for severance

  -   665 

Payments and adjustments made in period

  (199

)

  (478

)

Accrual balance December 31,

 $-  $199 

52

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

NOTE 7 – GOODWILL AND INTANGIBLE ASSETS

 

Goodwill

 

We test goodwill for impairment at the reporting unit level on an annual basis as of October 1, or whenever an event or change in circumstances occurs that would more likely than not reduce the fair value of a reporting unit below its carrying amount. See “Goodwill and Other Intangible Assets” within Note 1,"Note 1– General and Summary of Accounting Policies" for a description of our accounting policies regarding goodwill and other intangible assets.

 

As described in Note 2 - "Note 3 – Acquisition Activitieswe acquired substantially all of the assets and related liabilities of Smeal on January 1, 2017. The difference between the consideration paid and the acquisition-date fair value of the identifiable assets acquired and liabilities assumed was recognized as goodwill, as disclosed in the table below. The goodwill "at Smeal was evaluated as part of the annual assessment which occurred as of October 1, 2017, since there was no triggering event necessitating an earlier evaluation.

During the second quarter of 2017, operations related to the manufacturing of our Reach delivery vehicle were reassigned to our Specialty Chassis and Vehicles segment from our Fleet Vehicles and Services segment to reflect the information and reports that our chief operating decision makers use to allocate resources to and assess the performance of our operating segments. As a result, a portion of the goodwill assigned to our Fleet Vehicles and Services segment was reassigned to our Specialty Chassis and Vehicles segment using a relative fair value approach.

At December 31, 2017, 2019 and 2018, we had recorded goodwill at our Fleet Vehicles and Services Emergency Response Vehicles and Specialty Chassis and Vehicles reportable segments. The Fleet VehiclesFVS and Services and Emergency Response Vehicles reportableSCV 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.testing. The goodwill recorded in these reporting units was evaluated for impairment as of October 1,2017 2019 using a discounted cash flow valuation.

At December 31, 2016, we had recorded goodwill at our Fleet Vehiclesvaluation, and Services reportable segment, whichit was also determined to be a reporting unit for goodwill impairment testing. The goodwill recorded inthat the Fleet Vehicles and Services reporting unit was evaluated for impairment as of October 1,2016 using a discounted cash flow valuation.

The estimated fair valuesvalues of our Fleet Vehicles and Services, Emergency Responseand Specialty Chassis and Vehicles and Reach reporting units exceeded their carrying valuevalues by approximately 232%,91%337% and 62%67%, respectively, at as of October 1, 2017, indicating that the goodwill was not impaired.  Based on the discounted cash flow valuations at October 1, 2017, an increase in the weighted average cost of capital (“WACC”) used for these reporting units of 500 basis points would not result in impairment. 2019.

As discussed in Note "Note 1 – General and Summary of Accounting Policies," there are significant judgments inherent in our impairment assessments and discounted cash flow analyses. These discounted cash flow analyses are most sensitive to the WACC assumption.

The change in the carrying amount of goodwill for the year ended December 31, 2019 and 2018 were as follows (in thousands):

 


  FVS  SCV  Total
  December 31,  December 31,  December 31,
  2019  2018  2019  2018  2019  2018
Goodwill, beginning of year $21,729  $15,323  $638  $638  $22,367  $15,961
Acquisition and measurement period adjustments  (6,211)  6,406   27,476   -   21,265   6,406
Goodwill, end of year $15,518  $21,729  $28,114  $638  $43,632  $

22,367

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

Our goodwill by reportable segment is as follows:

  

Fleet Vehicles and

Services

  

Emergency Response

Vehicles

  

Specialty Vehicles and

Chassis

  

Total

 
  

December 31,

  

December 31,

  

December 31,

  

December 31,

 
  

2017

  

2016

  

2017

  

2016

  

 

2017

  

2016

  

2017

  

2016

 

Goodwill, beginning of year

 $15,961  $15,961  $-  $-  $-  $-  $15,961  $15,961 

Acquisition of Smeal

  -   -   11,456   -   -   -   11,456   - 

Reassignment of goodwill

  (638)  -   -   -   638   -   -   - 

Goodwill, end of year

 $15,323  $15,961  $11,456  $-  $638  $-  $27,417  $15,961 

 

OtherIntangible Assets

 

Fleet Vehicles and Services segment intangible assets

At December 31, 2017, 2019, we had other intangible assets associated with our Fleet Vehicles and ServicesFVS segment, including customer and dealer relationships, non-compete agreements, an acquired product development project and a trade name.names. The non-compete agreement,agreement, acquired product development project and certain other intangible assets are being amortized over their expected remaining useful lives based on the pattern of estimated after-tax operating income generated, or on a straight-line basis. Our Utilimaster and Strobes-R-Us trade name hasnames have an indefinite life and is are not amortized. We test our trade name for impairment at least annually, and test

At December 31, 2019, we had other intangible assets for impairment if impairment indicators are present.   

We testedassociated with our UtilimasterSCV segment, including customer relationships, trade name for impairment, as of October 1, 2017 names and 2016, by estimating the fair value of the trade name based on estimates of future royalty payments that are avoided through our ownership of the trade name, discounted to their present value.  The estimated fair value of our Utilimaster trade name at October 1, 2017 exceeded its carrying cost by 545%. Accordingly, there was no impairment recorded on this trade name. Based on the discounted cash flow valuation at October 1, 2017, an increase in the WACC used for this impairment analysis of 500 basis points would not result in impairment of the trade name.

Emergency Response Vehicles segment intangible assets

With the acquisition of Smeal, we acquired other intangible assets besides goodwill. We recorded $3,900 in intangible assets from the acquisition. The intangible assets consist of unpatentedtrademarks, patented technology and various trade names. The unpatented technology will be amortized usingnon-competition agreements. We amortize the straight-line methodcustomer relationships utilizing an accelerated approach over itsan estimated remaining useful life of 1015 years. Patented technology and non-competition agreements are amortized utilizing a straight-line approach over the estimated useful lives of eight years consistent with the pattern of economic benefits estimated to be received.and five years, respectively. The Royal trade names and trademarks are considered to have indefinite lives and as such will not be amortized but will be tested for impairment annually or if events or changes in circumstances indicate that it is more likely than not that the trade names are impaired.

We tested our Smeal trade name for impairment, as of October 1, 2017, by estimating the fair value of the trade name based on estimates of future royalty payments that are avoided through our ownership of the trade name, discounted to their present value. The estimated fair value of our Smeal trade name at October 1, 2017 exceeded its carrying cost by 136%. Accordingly, there was no impairment recorded on this trade name. Based on the discounted cash flow valuation at October 1, 2017, an increase in the WACC used for this impairment analysis of 500 basis points would not result in impairment of the trade name.

The following table provides information regarding our other intangible assets: amortized

 

  

As of December 31, 2017

  

As of December 31, 2016

 
  

Gross

carrying

amount

  

Accumulated

amortization

  

Net

  

Gross

carrying

amount

  

Accumulated

amortization

  

Net

 

Customer and dealer relationships

 $6,170  $3,709  $2,461  $6,170  $3,348  $2,822 

Acquired product development project

  1,860   1,514   346   1,860   1,167   693 

Unpatented technology

  1,500   150   1,350   -   -   - 

Non-compete agreements

  400   400   -   400   400   - 

Backlog

  320   320   -   320   320   - 

Trade Names

  5,270   -   5,270   2,870   -   2,870 
  $15,520  $6,093  $9,427  $11,620  $5,235  $6,385 


53

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

 

We evaluate the recoverability of our indefinite lived intangible assets, which, as of October 1, 2019, consisted of our Utilimaster, Strobes-R-Us and Royal 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 sales based on our plans for these trade name branded products, business trends, prospects and market and economic conditions. Because the evaluation of Royal’s intangible assets including the trade name was assessed as of September 9, 2019, and this amount was determined to approximate the fair value as of October 1, 2019, updated testing was not performed nor was deemed necessary. The fair value of our Utilimaster and Strobes-R-Us trade names exceeded their carrying values, and therefore do not result in an impairment

The following table provides information regarding our other intangible assets:

  

As of December 31, 2019

  

As of December 31, 2018

 
  

Gross

carrying

amount

  

Accumulated

amortization

  

Net

  

Gross

carrying

amount

  

Accumulated

amortization

  

Net

 

Customer relationships

 $37,570  $4,943  $32,627  $6,170  $4,029  $2,141 

Acquired product development project

  1,860   1,860   -   1,860   1,860   - 

Patented technology

  2,200   69   2,131   -   -   - 

Non-compete agreements

  2,950   617   2,333   400   400   - 

Backlog

  320   320   -   320   320   - 

Trade Names

  16,970   -   16,970   2,870   -   2,870 
  $61,870  $7,809  $54,061  $11,620  $6,609  $5,011 

We recorded $858,$708$1,200, $320 and $872$683 of intangible asset amortization expense during 2017,20162019, 2018 and 2015.2017.

 

The estimated remaining amortization associated with finite-lived intangible assets is expected to be expensed as follows:

 

 

Amount

  

Amount

 
    

2018

 $816 

2019

  449 

2020

  423  $3,151 

2021

  399   3,127 

2022

  375   3,624 

2023

  3,511 

2024

  3,181 

Thereafter

  1,695   20,496 

Total

 $4,157  $37,090 

  

 

NOTE 6 -8 – PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment are summarized by major classifications as follows:

 

 

December 31,

 
 

2017

  

2016

  

December 31,

 
         

2019

  

2018

 

Land and improvements

 $7,754  $8,049  $8,692  $7,791 

Buildings and improvements

  66,227   63,418   38,653   36,087 

Plant machinery and equipment

  39,800   34,879   33,348   27,267 

Furniture and fixtures

  22,285   12,954   21,416   19,947 

Vehicles

  3,063   2,912   1,872   1,558 

Construction in process

  1,770   7,876   3,527   1,157 

Subtotal

  140,899   130,088   107,508   93,807 

Less accumulated depreciation

  (85,722

)

  (76,972

)

  (67,434

)

  (61,322

)

Total property, plant and equipment, net

 $55,177  $53,116  $40,074  $32,485 

 

We recorded depreciation expense of $9,055,$7,195$5,892, $6,393 and $6,565$5,994 during 2017,20162019, 2018 and 2015.2017. There were no capitalized interest costs in 20172019 or 2016.

Construction in progress includes $790 and $6,624 at December 31, 2017 and 2016 for the implementation of our ERP system. The decrease construction in progress in 2017 was the result of our first phase of implementation that was completed during the year.  Additional phases of implementation are expected to go live in 2018 through 2020.

We review our long-lived assets that have finite lives for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.2018.

 


54

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

 

When reviewing long-lived assets for impairment, we group our long-lived assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. During the three months ended September 30, 2016, we determined that an asset group related to certain locations of our Emergency Response Vehicles segment may be impaired due to operating losses recorded in recent years, along with uncertainty regarding future financial performance at these locations. Accordingly, we conducted an impairment test on this asset group as of September 30, 2016 by comparing the non-discounted cash flows expected to result from the use and eventual disposition of the asset group with its carrying value, resulting in a determination that the asset group was impaired.

 

We estimated the fair value of our tangible long-lived assets of this asset group based on assessments or recent sale prices of similar assets. Impairment charges recorded within Cost of goods sold in the Consolidated Statement of Operations to adjust the carrying cost of these long-lived tangible assets to their estimated fair value at September 30, 2016 were $406 for machinery and equipment. No additional charges were recorded in 2016 or for the year ended December 31, 2017.

 

NOTE 7 -9 – LEASES

 

We have operating and finance leases for land, buildings and certain equipment. Our leases have remaining lease certain office equipment, computer hardware, manufacturing equipmentterms of one year to 17 years, some of which include options to extend the leases for up to 10 years. Our leases do not contain residual value guarantees. As of December 31, 2019, assets recorded under finance leases were immaterial (See "Note 14 – Debt"). Lease expense totaled $4,146, $2,794 and manufacturing and warehouse space under operating lease agreements. Building leases generally provide that we pay the cost of utilities, insurance, taxes and maintenance. Rent expense$2,196 for the years ended December 31,2017,2016 2019, 2018 and 2015 was $2,989,$3,086 and $2,876.2017.

 

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

  

Year ended

December 31,

2019

 
     

Operating leases

 $3,928 

Short-term leases(1)

  218 

Total lease expense

 $4,146 

(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:

Year ended

December 31,

2019

Weighted average remaining lease term of operating leases (in years)

8.4

Weighted average discount rate of operating leases

3.8%

Supplemental cash flow information related to leases was as follows:

  

Year ended

December 31,

2019

 

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

    

Operating cash flow for operating leases

 $4,544 
     
     
Right of use assets obtained in exchange for lease obligations:    
     

Operating leases

 $10,493 
     

Finance leases

 $- 

Maturities of operating lease commitments under non-cancelable leasesliabilities as of December 31, 2019 are as follows:

 

Year

 

Future Minimum

Operating Lease

Payments

 

2018

 $2,494 

2019

  1,915 

2020

  1,674 

2021

  1,483 

2022

  149 

Thereafter

  - 
     

Total

 $7,715 

We lease certain office equipment, computer hardware and material handling equipment under capital lease agreements. Cost and accumulated depreciation of capitalized leased assets included in machinery and equipment are $728 and $548, respectively, at December 31,2017. Future minimum capital lease commitments under non-cancelable leases are as follows:

 

 

Year

 

Future Minimum

Capital Lease

Payments

 

2018

 $70 

2019

  59 

2020

  26 

2021

  26 

2022

  21 

Thereafter

  - 
     

Total lease obligations, including imputed interest

  202 
     

Less imputed interest charges

  (13)
     

Total outstanding capital lease obligations

 $189 

Years ending December 31:

    

2020

 $5,937 

2021

  5,054 

2022

  4,614 

2023

  4,619 

2024

  4,390 

Thereafter

  13,337 

Total lease payments

  37,951 

Less: imputed interest

  5,622 

Total lease liabilities

 $32,329 

 


55

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

NOTE 10 – TAXES ON INCOME

Income taxes consist of the following:

  Year Ended December 31, 
  2019  2018  2017 
             
Taxes on income from continuing operations $10,355  $3,334  $2,382 
Income tax benefits from discontinued operations  (15,683)  (1,073)  (2,292)
Total taxes on income $(5,328) $2,261  $90 

Income taxes from continuing operations consist of the following:

  

Year Ended December 31,

 
  

2019

  

2018

  

2017

 

Current (benefit):

            

Federal

 $9,883  $2,819  $5,831 

State

  1,664   758   240 

Foreign

  128   67   - 

Total current

  11,675   3,644   6,071 

Deferred (benefit):

            

Federal

  (705

)

  (316

)

  (1,333

)

State

  (615

)

  6

 

  (2,356)

Total deferred

  (1,320

)

  (310

)

  (3,689

)

Total taxes on income

 $10,355  $3,334  $2,382 

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted. The Tax Act made broad and complex changes to the U.S. tax code that impacted the Company, most notably a reduction of the U.S. corporate income tax rate from 35 percent to 21 percent for tax years beginning after December 31, 2017. Other changes provided by the 2017 Tax Act included, but are not limited to, the acceleration of depreciation for certain assets placed into service after September 27, 2017, additional limitations on executive compensation, the repeal of the domestic manufacturing deduction and the new foreign derived intangible income deduction.

The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provided guidance on accounting for the tax effects of the Tax Act. We recognized the income tax effects of the Tax Act in our 2017 financial statements in accordance with SAB 118, in the reporting period in which the Tax Act was signed into law.

In accordance with SAB 118, we recorded a provisional amount of $2,963 of the deferred tax expense in connection with the re-measurement of certain deferred tax assets and liabilities as of December 31, 2017. In 2018 we completed the accounting for the effect of the 2017 Tax Act within the measurement period under the SEC guidance and reflected a net $373 decrease in the 2018 income tax expense.

56

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

 

NOTE 8 - TAXES ON INCOME

Income taxes consist of the following:

  

Year Ended December 31,

 
  

2017

  

2016

  

2015

 

Current (credit):

            

Federal

 $3,809  $2,203  $(520

)

State

  255   563   253 

Total current

  4,064   2,766   (267

)

Deferred (credit):

            

Federal

  (1,743

)

  (2,666

)

  3,994 

State

  (2,231

)

  -   1,153 

Total deferred

  (3,974

)

  (2,666

)

  5,147 

Total taxes on income

 $90  $100  $4,880 

The current tax expense amounts in 2016 and 2015 differ from the actual amounts payable to the taxing authorities due to the tax impact associated with stock incentive plan transactions under the plans described in Note 13,Stock Based Compensation. These adjustments were an addition of $123 and $44 in 2016 and 2015. These adjustments to current taxes on income were recognized as adjustments of additional paid-in capital. Commencing January 1, 2017, all such adjustments are recognized as current taxes on income.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted. The Tax Act makes broad and complex changes to the U.S. tax code that impact the Company, most notably a reduction of the U.S. corporate income tax rate from 35 percent to 21 percent for tax years beginning after December 31, 2017. Other changes provided by the 2017 Tax Act include, but are not limited to the acceleration of depreciation for certain assets placed into service after September 27, 2017. Prospective changes beginning in 2018 from the Tax Act include: additional limitations on executive compensation, the repeal of the domestic manufacturing deduction and capitalization of research and development expenditures.

The SEC staff issued Staff Accounting Bulletin No.118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. We recognized the income tax effects of the Tax Act in our 2017 financial statements in accordance with SAB 118, in the reporting period in which the Tax Act was signed into law.  We did not identify items for which the income tax effects of the Tax Act have not been completed and a reasonable estimate could not be determined as of December 31, 2017.

In accordance with SAB 118, we have recorded a provisional amount of $2,963 of the deferred tax expense in connection with the re-measurement of certain deferred tax assets and liabilities and we will continue to refine the measurement of the net deferred tax balance during the preparation of the 2017 tax return as additional guidance and information become available.

 

Differences between the expected income tax expense derived from applying the federal statutory income tax rate to earnings from continuing operations before taxes on income and the actual tax expense are as follows:

 

 Year Ended December 31,  

Year Ended December 31,

 
 

2017

  

2016

  

2015

  

2019

  

2018

  

2017

 
 

Amount

  

Percentage

  

Amount

  

Percentage

  

Amount

  

Percentage

  

Amount

  

Percen-

tage

  

Amount

  

Percen-

tage

  

Amount

  

Percen-

tage

 
                                                

Federal income taxes at the statutory rate

 $5,609   35.00

%

 $2,959   34.00

%

 $(4,284

)

  34.00

%

 $9,901   21.0

%

 $4,505   21.0

%

 $6,949   35.0

%

State tax expense, net of federal income tax benefit

  577   1.2   486   2.3   416   2.1 

Increase (decrease) in income taxes resulting from:

                                                

Deferred income tax re-measurement due to Tax Act

  2,963   18.49   -   -   -   -   -

 

  -

 

  (373

)

  (1.7

)

  2,963   14.9 

Other deferred income tax adjustment

  (241)  (1.50)  (51)  (0.59)  (156)  1.24   (75

)

  (0.2

)

  13

 

  -

 

  338

 

  1.7

 

Non-deductible compensation

  -   -   459   5.27   -   -   511   1.1   -   -   -   - 

Non-deductible NHTSA penalty

  -   -   -   -   340   (2.70

)

Other nondeductible expenses

  156   0.97   226   2.60   176   (1.39

)

  115   0.2   91   0.4   98   0.5 

Foreign derived intangible income deduction

  (45

)

  (0.1

)

  (35

)

  (0.2

)

  -   - 

Domestic manufacturing deduction

  (504

)

  (3.15

)

  -   -   -   -   -   -   -   -   (465

)

  (2.3

)

Stock based compensation

  (394

)

  (2.46

)

  -   -   -   -   (136

)

  (0.3

)

  (1,207

)

  (5.6

)

  (381

)

  (1.9

)

Worthless stock deduction of dissolved subsidiary

  (966

)

  (6.03

)

                  -   -   -   -   (966

)

  (4.9

)

State tax expense, net of federal income tax benefit

  547   3.41   68   0.78   (79

)

  0.63 

Forfeiture of state net operating loss and credit carry-forwards from dissolution of subsidiary

  3,039   18.97   -   -   -   -   -   -   -   -   3,039   15.3 

Foreign tax expense

  128   0.3   67   0.3   -   - 

Valuation allowance adjustment

  (9,544

)

  (59.56

)

  (2,932)  (33.69

)

  9,472   (75.17

)

  135   0.3   60   0.3   (9,544

)

  (48.0

)

Unrecognized tax benefit adjustment

  314   1.96   129   1.48   (162)  1.29   (61)  (0.1)  332   1.6   206   1.0 

Federal research and development tax credit

  (753

)

  (4.70

)

  (801

)

  (9.20

)

  (364

)

  2.89   (591

)

  (1.3

 

)

  (349

)

  (1.6

 

)

  (328

 

)

  (1.7

 

)

Foreign tax credit

  (38

)

  -

 

  (67

)

  (0.3

)

  -   - 

Other

  (136

)

  (0.84

)

  43   0.50   (63

)

  0.48   (66)  (0.1)  (189)  (0.9)  57

 

  0.3

 

Total

 $90   0.56

%

 $100   1.15

%

 $4,880   (38.73

)%

 $10,355   22.0

%

 $3,334   15.6

%

 $2,382   12.0

%

 


57

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

 

Temporary differences which give rise to deferred income tax assets (liabilities) are as follows:

 

 

December 31,

  

December 31,

 
 

2017

  

2016

  

2019

  

2018

 

Deferred income tax assets:

                
Loss on asset impairment for discontinued operations $12,764  $- 

Warranty reserve

 $3,595  $7,246   3,782   3,257 

Credit carry-forwards, net of federal income tax benefit

  317   3,199 

Inventory costs and reserves

  1,792   2,194   2,661   1,801 

Contract assets

  7,217   1,694 

Stock-based compensation

  1,195   984 

Net operating loss carry-forwards, net of federal income tax benefit

  449   723 

Compensation related accruals

  663   1,512   698   589 

Net operating loss carry-forwards, net of federal income tax benefit

  954   1,029 

Stock based compensation

  1,061   615 

Vendor compensation

  507   - 

Credit carry-forwards net of federal income tax benefit

  1,027   506 

Other

  409   773   916   611 

Total deferred income tax assets

 $9,298  $16,568  $30,709  $10,165 
                
                

Deferred income tax liabilities:

                

Depreciation

 $(1,230) $(2,294) $(2,666

)

 $(1,479

)

Intangible assets

  (574)  (840)  (1,974

)

  (1,205

)

Prepaid insurance

  (152)  (522)

Prepaid expenses

  (295

)

  (222

)

Total deferred income tax liabilities

 $(1,956) $(3,656) $(4,935

)

 $(2,906

)

                

Net deferred income tax assets

 $7,342  $12,912  $25,774  $7,259 

Valuation allowance

  (58)  (9,602)  (254

)

  (118

)

Net deferred tax asset

 $7,284  $3,310  $25,520  $7,141 

 

Based upon an assessment of the available positive and negative evidence at December 31, 2016, we determined whether sufficient future taxable income would be generated to realize2019, the benefit of thenet deferred tax assets as of December 31, 2016 and recorded a valuation allowance of $9,602 against a portion of the deferred tax assets. A significant portion of negative evidence considered was the cumulative loss incurred over the three-year period ending December 31, 2016. During 2017, the Company determined that based on recent operating results, as well as an assessment of expected future operating results, the realization of its remaining deferred tax assetsasset is more likely than not.  As a result,not to be realized based on the Company reversed substantially the entireconsideration of deferred tax liability reversals and future taxable income. The valuation allowance during 2017. The releasefor net deferred income tax assets relates to the impact of the valuation allowance was determined in accordance with the provisions of ASC 740, “Income Taxes,” which requires an assessment of both positivelimitation on executive compensation deductibility to Stock based compensation, and negative evidence when determining whether it is more likely than not thata state net operating loss carryforward.

At December 31, 2019 and 2018, we had state deferred income tax assets are realizable.related to state tax net operating loss carry-forwards, of $569 and $915, which begin expiring in 2020. Also, as of December 31, 2019 and 2018, we had deferred income tax assets related to state tax credit carry-forwards of $1,300 and $640, which begin expiring in 2021. Due to accumulated losses in a certain state jurisdiction, we had recorded valuation allowances against certain deferred income tax assets of $0 and $20 at December 31, 2019 and 2018.

 


58

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

 

At December31,2017 and 2016, we had state deferred income tax assets related to state tax net operating loss carry-forwards, of $1,207 and $1,560, which begin expiring in 2019. Also, as of December 31,2017 and 2016, we had deferred income tax assets related to state tax credit carry-forwards of $402 and $4,846, which begin expiring in 2026. Due to accumulated losses in several state jurisdictions, we had recorded valuation allowances against certain deferred income tax assets aggregating $58 and $4,228 at December 31, 2017 and 2016.

During 2017 certain state NOL and credit carry-forwards were forfeited due to the dissolution of a dormant, wholly-owned subsidiary. As of December 31, 2016, we had recorded a 100% valuation allowance against these carry-forwards. Therefore, the resultant adjustment to deferred tax assets of $3,039 was fully offset by a reduction in the valuation allowance.

 

A reconciliation of the change in the unrecognized tax benefits (“UTB”) for the three years ended December 31, 2017,20162019, 2018 and 20152017 is as follows:

 

 

2017

  

2016

  

2015

  

2019

  

2018

  

2017

 

Balance at January 1,

 $345  $349  $481  $827  $565  $345 

Increase (decrease) related to prior year tax positions

  168   (24

)

  (73

)

  103   35   168 

Increase related to current year tax positions

  118   20   91   578   319   118 

Settlement

  -   -   (110

)

Expiration of statute

  (66

)

  -   (40

)

  (238

)

  (92

)

  (66

)

Balance at December 31,

 $565  $345  $349  $1,270  $827  $565 

 

As of December31,2017, 2019, we had an ending UTB balance of $565$1,270 along with $279$213 of interest and penalties, for a total liability of $847, with $117 recorded as a current liability and $730$1,483 recorded as a non-current liability based on the applicable statutes of limitations.liability. The change in interest and penalties amounted to an increase of $94 in 2017, an increase of $133 in 2016, and a decrease of $30$209 in 2015,2019, and increases of $143 in 2018, and $94 in 2017, which were reflected in Income tax expense within our Consolidated Statements of Operations.

 

As of December 31, 2017, 2019, we are no longer subject to examination by federal taxing authorities for 20132015 and earlier years. 

 

We also file tax returns in a number ofseveral states and those jurisdictions remain subject to audit in accordance with relevant state statutes. These audits can involve complex issues that may require an extended period of time to resolve and may cover multiple years. To the extent we prevail in matters for which reserves have been established or are required to pay amounts in excess of our reserves, our effective income tax rate in a given fiscal period could be impacted. However, we do not expect such impacts to be material to our financial statements. An unfavorable tax settlement would require use of our cash and could result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement could result in a reduction in our effective income tax rate in the period of resolution. We do not expect the total amount of unrecognized tax benefits to significantly increase or decrease over the next twelve months.

 

 

NOTE 9 -11 – TRANSACTIONS WITH MAJOR CUSTOMERS

 

Major customers are defined as those with sales greater than 10 percent of consolidated sales in a given year. There were no customers that accounted for 10 percent or greater of consolidated sales in 2017.

We had one customer classified as a major customer in 2016 and 2015, which was a customercertain customers whose sales individually represented 10% or more of the Specialty Chassis and Vehicles segment. Information about our major customer isCompany's total sales as follows:

 

2016

  

2015

 



Sales

  

Accounts
Receivable
(at year end)

  



Sales

  

Accounts
Receivable
(at year end)

 
               
$70,954  $7,169  $78,749  $8,512 


SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

Year Number of major customers Combined percentage of consolidated sales Segment
2019 2 37.9%FVS
2018 4 51.7%FVS and SCV
2017 2 29.3%SCV
 

NOTE 101 -2 – 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 December 31,2017 and 2016, we$20,000. We had outstanding letters of credit totaling $754$525 at December 31, 2019 and $1,5992018 related to certain emergency response vehicle contracts and our workersworker's compensation insurance.

 

At December31,2017, 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 business. 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.

 

Spartan-Gimaex joint ventureJoint Venture

 

In February2015, 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. NoIn late 2019, Spartan USA initiated additional court proceedings to dissolve and liquidate the joint venture, but no dissolution terms have been determined as of the date of this Form 10-Q.10-K. Costs associated with the wind-down will be impacted by the final dissolution agreement. In accordance with accounting guidance, the costs we have accrued so far represent the low end of the range of the estimated total charges that we believe we may incur related to the wind-down. While we are unable to determine the final cost of the wind-down with certainty at this time, we may incur additional charges, depending on the final terms of the dissolution, and such charges couldare not expected to be material to our future operating results.

National Highway Traffic Safety Administration (“NHTSA”) penalty

In July 2015, we entered into a settlement agreement We recorded charges totaling $216 to write down certain inventory items associated with the NHTSA pertainingthis joint venture to our early warning and defect reporting. Under the terms of the agreement we will pay a fine of $1,000 in equal installments over three years, and will complete performance obligations including compliance and regulatory practice improvements, industry outreach, and recalls to remedy safety defects in certain of our chassis. The following table presents the charges recorded in the Condensed Consolidated Statement of Operationstheir estimated fair values during the year ended December 31, 2015 as a result of this agreement:

Cost of products sold

 $1,269 

Selling, general and administrative

  1,000 
  $2,269 

Chassis Agreements

Our Fleet Vehicles and Services segment assembles van and truck bodies onto original equipment manufacturer (“OEM”) chassis. The majority of such OEM chassis are purchased directly by our customers from the OEM and drop-shipped to our facilities. We are a bailee of most other chassis under converter pool agreements with the OEMs, as described below. Chassis possessed under converter pool agreements are invoiced to the customer by the OEM or its affiliated financial institution based upon the terms of the converter pool agreements. On an annual basis, we purchase and take title to an immaterial number of chassis that ultimately are recorded as sales and cost of sales. Converter pool chassis obtained from the OEMs are based upon estimated future requirements and, to a lesser extent, confirmed orders from customers. Although each manufacturer’s agreement has different terms and conditions, the agreements generally provide that the manufacturer will provide a supply of chassis to be maintained at our production facility under the conditions that we will store such chassis, will not make any additions or modifications to such chassis and will not move, sell or otherwise dispose of such chassis, except under the terms of the agreement. The manufacturer does not transfer the certificate of origin to us and, accordingly, we account for the chassis in our possession as bailed inventory belonging to the manufacturer.2019.

 


59

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

 

We are party to chassis bailment inventory agreements with General Motors Company (“GM”) and Chrysler Group, LLC (“Chrysler”) which allow GM and Chrysler to draw up to $10,000 against our revolving credit line for chassis placed at our facilities. As a result of these agreements, there was $57 and $784 outstanding on our revolving credit line at December 31, 2017 and 2016. Under the terms of the bailment inventory agreements, these chassis never become our property, and the amount drawn against the credit line will be repaid by a GM or Chrysler dealer at the time an order is placed for one of our bodies, utilizing a GM or Chrysler chassis. As such, the chassis, and the related draw on the line of credit, are not reflected in the accompanying Consolidated Balance Sheets. See Note 12Debt, for further information on our revolving line of credit.

 

Warranty Related

We provide limited warranties against assembly/construction defects for periods generally ranging from two years to the life of the product.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.

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 provision and liability to reflect actual experience. The amount of warranty liability accrued reflects our best estimate 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. Our estimates are based on historical experience, the number of units involved and the extent of features and components included in product models.

 

Certain warranty and other related claims involve matters of dispute that ultimately are resolved by negotiation, arbitration or litigation. MaterialInfrequently, a material warranty issuesissue can arise which areis 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 years ended December 31,2017 2019 and 20162018 were as follows:

 

  

2017

  

2016

 

Balance of accrued warranty at January 1

 $19,334  $16,610 

Warranties issued during the period

  7,539   5,705 

Cash settlements made during the period

  (13,854

)

  (10,265

)

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

  1,560   7,284 

Assumed warranties outstanding at Smeal on January 1, 2017

  3,689   - 

Balance of accrued warranty at December 31

 $18,268  $19,334 
  

2019

  

2018

 

Balance of accrued warranty at January 1

 $4,407  $4,340 

Provisions for current period sales

  4,383   2,537 

Cash settlements

  (3,489

)

  (3,013

)

Changes in liability for pre-existing warranties

  295   543 

Acquisitions

  98   - 

Balance of accrued warranty at December 31

 $5,694  $4,407 

 

 

NOTE 113 - COMPENSATION INCENTIVEDEFINED CONTRIBUTION PLANS

 

We sponsor defined contribution retirement plans which cover all associates who meet length of service and minimum age requirements. Our matching contributions vest over 5 years and were $1,055,$796$1,654, $1,606 and $707$676 in 2017,20162019, 2018 and 2015.2017. These amounts are expensed as incurred.

The Spartan Motors, Inc. Incentive Compensation Plan encompasses a quarterly and an annual bonus program. The quarterly program covers certain of our full-time employees. The cash bonuses paid under the quarterly program are equal for all participants. Amounts expensed for the quarterly bonus were $2,193,$3,298 and $1,898 for 2017,2016 and 2015.

The annual bonus provides that executive officers and certain designated managers may earn cash bonuses based on our achievement of pre-defined financial and operational objectives. Amounts expensed for the annual bonus were $4,890,$6,470 and $1,789 for 2017,2016 and 2015.


 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

 

NOTE 12-4 – DEBT

 

Long-termShort-term debt consists of the following:

 

  

December 31,
2017

  

December 31,
2016

 

Line of credit revolver (1):

 $17,800  $-- 

Capital lease obligations (See Note 7 Leases)

  189   139 

Total debt

  17,989   139 

Less current portion of long-term debt

  (64

)

  (65

)

Total long-term debt

 $17,925  $74 
  

December 31,
2019

  

December 31,
2018

 

Chassis pool agreements

 $8,162  $- 

Total short-term debt

 $8,162  $- 

 

(1)

On December 1, 2017, we entered into a First Amendment to the Second Amended and Restated Credit Agreement (the "Credit Agreement") by and among us, certain of our subsidiaries, Wells Fargo Bank, National Association, as administrative agent ("Wells Fargo"), and the lenders party thereto consisting of Wells Fargo, JPMorgan Chase Bank, N.A. and PNC Bank (the "Lenders"). Under the Credit Agreement, we may borrow up to $100,000 from the Lenders

Chassis Pool Agreements

The Company obtains certain vehicle chassis for its walk-in vans, truck bodies and specialty vehicles directly from the chassis manufacturers under converter pool agreements. Chassis are obtained from the manufacturers based on orders from customers, and in some cases, for unallocated orders. The agreements generally state that the manufacturer will provide a supply of chassis to be maintained at the Company’s facilities with the condition that we will store such chassis and will not move, sell, or otherwise dispose of such chassis except under a three-year unsecured revolving credit facility.  The credit facility matures October 31, 2019, following which we have the option to renew the credit facility, subject to lender approval, for two successive one-year periods with an ultimate maturity date of October 31, 2021.  We may also request an increase in the facility of up to $35,000 in the aggregate, subject to customary conditions. This line carries 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. In January 2017, we borrowed $32,800 from our credit line to fund our acquisition of Smeal.  At December 31, 2017 we had outstanding borrowings of $17,800 against our credit line.  We had no drawings against this credit line as of December 31, 2016. During the year ended December 31, 2017, and in future years, our revolving credit facility was utilized, and will continue to be utilized, to finance commercial chassis received under chassis bailment inventory agreements with GM and Chrysler.  This funding is reflected as a reduction of the revolving credit facility available to us equal to the amount drawn by GM and Chrysler.  See Note 10,Commitments and Contingent Liabilities for further details about these chassis bailment inventory agreements.  The applicable borrowing rate including margin was 3.0% (or one-month LIBOR plus 1.5%) at December 31,2017.

Under the terms of the primary lineagreement. In addition, the manufacturer typically retains the sole authority to authorize commencement of credit agreement, as amended, we are requiredwork on the chassis and to maintainmake certain financial ratiosother decisions with respect to the chassis including the terms and pricing of sales of the chassis to the manufacturer’s dealers. The manufacturer also does not transfer the certificate of origin to the Company nor permit the Company to sell or transfer the chassis to anyone other financial conditions, which limited our available borrowings under our line of creditthan the manufacturer (for ultimate resale to a totaldealer). Although the Company is party to related finance agreements with manufacturers, the Company has not historically settled, nor expects to in the future settle, any related obligations in cash. Instead, the obligation is settled by the manufacturer upon reassignment of approximately $66,400 and $73,600 at the chassis to an accepted dealer, and the dealer is invoiced for the chassis by the manufacturer. Accordingly, as of December 31, 2017 and 2016. 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 December 31,2017 and 2016, we were in compliance2019, the Company’s outstanding chassis converter pool with all covenants in our credit agreement.

NOTE 13 - STOCK BASED COMPENSATION

We have stock incentive plans covering certain employees and non-employee directors. Shares reserved for stock awards under these plans total 2,856,250. Total shares remaining available for stock incentive grants under these plansmanufacturers totaled 2,057,290 at December 31,2017. We are currently authorized to grant new stock options, restricted stock, restricted stock units, stock appreciation rights and common stock under our Stock Incentive Plan of 2016.

Stock Options and Stock Appreciation Rights. Granted options and Stock Appreciation Rights (SARs) are generally exercisable for a period of 10 years from the grant date. The exercise price for all options$8,162 and the base price for all SARs granted have been equalCompany has included this financing agreement on the Company’s Consolidated Balance Sheets within Other receivables – chassis pool agreements and Short-term debt – chassis pool agreements. Typically, chassis are converted and delivered to the market price at the date of grant. Dividends are not paid on unexercised options or SARs. SARs have historically been settled with shares of common stock upon exercise. 

We receive a tax deduction for certain stock option exercises during the period the options are exercised, generally for the excesscustomers within 90 days of the fair valuereceipt of the stock on the date of exercise over the exercise price of the options. As required, we report any excess tax benefits in our Consolidated Statement of Cash Flows as operating cash flows. Excess tax benefits derive from the difference between the tax deduction and the fair market value of the option as determinedchassis by the Black-Scholes valuation model.Company. The chassis converter pool is a non-cash arrangement and is offsetting between current assets and current liabilities on the Company’s Consolidated Balance Sheets.

 


60

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

 

No options were granted in 2017,2016 or 2015, and there was no related compensation expense nor income tax benefit recognized in

Long-term debt consists of the corresponding income statements. We have had no outstanding options since December 31, 2015. The total intrinsic value of options exercised during years ended December 31,2017,2016 and 2015, were $0,$0 and $0.following:

  

December 31,
201
9

  

December 31,
201
8

 

Line of credit revolver (1):

 $87,400  $25,460 

Finance lease obligations

  496   147 

Other

  951   - 

Total debt

  88,847   25,607 

Less current portion of long-term debt

  (177

)

  (60

)

Total long-term debt

 $88,670  $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, National Association ("Wells Fargo"), as administrative agent, and the lenders party thereto consisting of Wells Fargo, JPMorgan Chase Bank, N.A. and PNC Bank National Association (the "Lenders"). Subsequently, the Credit Agreement was amended on May 14, 2019, September 9, 2019 and September 25, 2019 and certain of our other subsidiaries executed guaranties guarantying the borrowers' obligations under the Credit Agreement.

As a result, at December 31, 2019, under the Credit Agreement, as amended, we may borrow up to $175,000 from the Lenders under a secured revolving credit facility which matures August 8, 2023. We may also request an increase in the facility of up to $50,000 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 $30,000, subject to certain limitations and restrictions. This revolving credit facility 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, in each case plus a margin based upon our ratio of debt to earnings from time to time. The applicable borrowing rate including margin was 3.7500% (or one-month LIBOR plus 1.25%) at December 31, 2019. The credit facility is secured by security interests in, and liens on, all assets of the borrowers and guarantors, 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 $20,000. At December 31, 2019 and 2018, we had outstanding letters of credit totaling $525 related to our worker's 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 (exclusive of outstanding borrowings) under our line of credit to a total of approximately $60,499 and $86,410 at December 31, 2019 and 2018, respectively. The Credit 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, all subject to certain exceptions and baskets. At December 31, 2019 and December 31, 2018, we were in compliance with all covenants in our credit agreement.

Concurrent with the close of the sale of the ERV business and effective January 31, 2020, the Credit Agreement was further amended by a fourth amendment, which released certain of our subsidiaries that were sold as part of the ERV business pursuant to the Asset Purchase Agreement.  The substantive business terms of the Credit Agreement remain in place and were not changed by the fourth amendment.

NOTE 15 – STOCK BASED COMPENSATION

 

SARs activityWe have stock incentive plans covering certain employees and non-employee directors. Shares reserved for the year ended stock awards under these plans total 2,856,250. Total shares remaining available for stock incentive grants under these plans totaled 1,412,446 at December31,2017 is as follows:

  


Total Number
of SARs

(000)

  


Weighted
Average
Grant Date
Fair Value

  



Total
Intrinsic
Value

  

Weighted
Average
Remaining
Contractual
Term (Years)

 

SARs outstanding and exercisable at December 31, 2016

  93  $3.20         

Granted and vested

  -   -         

Exercised

  (61

)

  3.20         

Cancelled

  (32

)

  3.20         

SARs outstanding and exercisable at December 31, 2017

  -  $-  $-   - 

No SARs were granted in 2017,2016 or 2015, 2019. We are currently authorized to grant new stock options, restricted stock, restricted stock units, stock appreciation rights and there was no related compensation expense nor income tax benefit recognized in the corresponding income statements. The total intrinsic valueperformance stock units under our Stock Incentive Plan of SARs exercised during the years ended December 31,2017,2016 and 2015 was $305,$14 and $0.2016.

 

Restricted Stock Awards.

We issue restricted stock, at no cash cost, to our directors, officers and key employees. Shares awarded entitle the shareholder to all rights of common stock ownership except that the shares are subject to the risk of forfeiture and may not be sold, transferred, pledged, exchanged or otherwise disposed of during the vesting period, which is generally three to five years. The unearned stock-based compensation related to restricted stock awards, using the market price on the date of grant, is being amortized to compensation expense over the applicable vesting periods. Cash dividends are paid on unvested restricted stock grants and all such dividends vest immediately.

 

We receive an excess tax benefit or liability during the period the restricted shares vest. The excess tax benefit (liability) is determined by the excess (shortfall) of the market price of the stock on date of vesting over (under) the grant date market price used to amortize the awards to compensation expense. As required, any excess tax benefits or liabilities are reported in the Consolidated Statements of Cash Flows as operating cash flows.

Restricted stock activity for the year ended December31,2017, is as follows:

  


Total
Number of
Non
-vested
Shares

(000)

  


Weighted
Average
Grant Date
Fair Value

  

Weighted
Average
Remaining
Vesting Life
(Years)

 

Non-vested shares outstanding at December 31, 2016

  666  $4.25     

Granted

  822   7.65     

Vested

  (299

)

  4.53     

Forfeited

  (61

)

  6.60     

Non-vested shares outstanding at December 31, 2017

  1,128   6.53   0.89 

The weighted-average grant date fair value of non-vested shares granted was $7.65,$4.01 and $4.86 for the years ended December 31,2017,2016 and 2015.

 


61

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

 

Restricted stock activity for the year ended December 31, 2019, is as follows:

  

Total
Number of
Non-vested
Shares

(000)

  


Weighted
Average
Grant Date
Fair Value

  

Weighted
Average
Remaining
Vesting Life
(Years)

 

Non-vested shares outstanding at December 31, 2018

  977  $7.97     

Granted

  279   9.38     

Vested

  (467

)

  7.50     

Forfeited

  (78

)

  12.13     

Non-vested shares outstanding at December 31, 2019

  711  $8.58   0.9 

The weighted-average grant date fair value of non-vested shares granted was $9.38, $9.96 and $7.65 for the years ended December 31, 2019, 2018 and 2017. During 2017,20162019, 2018 and 2015,2017, we recorded compensation expense, net of cancellations, of $3,536,$1,536$3,983, $4,027 and $1,198,$3,536, related to restricted stock awards and direct stock grants. The total income tax benefit recognized in the Consolidated Statements of Operations related to restricted stock awards was $1,238,$538$759, $846 and $419$1,238 for 2017,20162019, 2018 and 2015.2017. For the years ended December 31, 2017, 20162019, 2018 and 2015,2017, restricted shares vested with a fair market value of $1,356,$1,248$3,507, $4,318 and $1,528. When the fair value of restricted shares is lower on the date of vesting than that previously expensed for book purposes, an excess tax liability is booked.$1,356. As of December 31,2017, 2019, we had unearned stock-based compensation of $4,399$3,413 associated with these restricted stock grants, which will be recognized over a weighted average of 0.891.1 years.

 

Performance Stock Units

During the year ended December 31, 2019, we granted 218,148 performance stock units ("PSUs") to certain employees, which are earned over a three-year service period.

After completion of the performance period, the number of performance units earned will be issued as shares of Common Stock. The aggregate number of shares of Common Stock that ultimately may be issued under performance units where the performance period has not been completed can range from 0% to 200% of the target amount. The awards will generally be forfeited if a participant leaves the Company for reasons other than retirement, disability or death

A dividend equivalent is calculated based on the actual number of units earned at the end of the performance period equal to the dividends that would have been payable on the earned units had they been held during the entire performance period as Common Stock. At the end of the performance period, the dividend equivalents are paid in the form of additional shares of Common Stock based on the then-current market value of the Common Stock.

87,260 of the performance units granted in 2019 are earned based on our three-year cumulative GAAP net income, subject to such adjustments as approved by the Company’s Human Resources and Compensation Committee in its sole discretion (Net Income PSUs), which is a performance condition. The number of shares that may be earned under the Net Income PSUs can range from 0% to 200% of the target amount. The Net Income PSUs are expensed and recorded in Additional paid-in capital on the Consolidated Balance Sheets over the performance period based on the probability that the performance condition will be met. The expense recorded will be adjusted as the estimate of the total number of Net Income PSUs that will ultimately be earned changes. The grant date fair value per share of Net Income PSUs granted was $8.99. The grant date fair value per unit is equal to the closing price of the Company’s stock on the date of grant.

130,888 of the performance units granted in 2019 are earned based on achievement of certain total shareholder return results relative to a comparison group of companies ("TSR PSUs"), which is a market condition. The number of shares that may be earned under the TSR PSUs can range from 0% to 200% of the target amount. The TSR PSUs are expensed and recorded in Additional paid-in capital on the Consolidated Balance Sheets over the performance period.

The fair value of the TSR PSUs was calculated using the Monte Carlo simulation model which resulted in the grant date fair value for these TSR PSUs of $13.71 per unit.

62

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

The Monte Carlo simulation was computed using the following assumptions:

Three-year risk-free interest rate (1)

2.37%

Expected term (in years)

2.7

Estimated volatility (2)

53.7%

(1)

Based on the U.S. government bond benchmark on the grant date.

(2)

Represents the historical price volatility of the Company’s common stock for the three-year period preceding the grant date.

The total PSU expense and associated tax benefit for all outstanding awards for the year ended December 31, 2019 was $642 and $93, respectively. There was no PSU expense or associated tax benefit in the years ended December 31, 2018 and 2017.

The PSU activity for the year ended December 31, 2019 is as follows:

  

 

 

 

Total

  

Weighted-

Average

Grant Date

Fair Value

per Unit

 

Non-vested as of December 31, 2018

  -  $- 

Granted

  218,148   11.82 

Non-vested as of December 31, 2019

  218,148  $11.82 

As of December 31, 2019, there was $1,936 of remaining unrecognized compensation cost related to non-vested PSUs, which is expected to be recognized over a remaining weighted-average period of 2.0 years.

Restricted Stock Units

During the year ended December 31, 2019, we awarded 182,333 restricted stock units ("RSUs") to certain employees and Board members. These RSUs vest ratably over three years after the date of grant for employees and vest one year after date of grant for Board members, at which time the units will be issued as unrestricted shares of Common Stock. RSUs are expensed and recorded in Additional paid-in capital on the Consolidated Balance Sheets over the requisite service period based on the value of the underlying shares on the date of grant. At the time any RSUs vest and are settled through the issuance of Common Stock, the value of the dividends that would have been payable on the shares of Common Stock issued upon settlement of the vested RSUs had such shares been held during the entire vesting period will be paid to the employee or director in cash or, in the discretion of the Human Resources and Compensation Committee, in shares of Common Stock based on the then-current market value of the Common Stock.

The RSU expense and associated tax benefit for all outstanding awards for the year ended December 31, 2019 was $656 and $130, respectively. There was no RSU expense or associated tax benefit in the years ended December 31, 2018 and 2017.

As of December 31, 2019, there was $981 of remaining unrecognized compensation cost related to non-vested RSUs, which is expected to be recognized over a weighted-average period of 1.2 years.

The RSU activity for the year ended December 31, 2019 is as follows:

  

 

 

 

Total

  

Weighted-

Average

Grant Date

Fair Value

per Unit

 

Non-vested as of December 31, 2018

  -  $- 

Granted

   182,333   8.98 

Non-vested as of December 31, 2019

  182,333  $8.98 

Employee Stock Purchase Plan.

We instituted an employee stock purchase plan (“ESPP”) beginning on October 1, 2011 whereby essentially all employees who meet certain service requirements can purchase our common stock on quarterly offering dates at 95%90% of the fair market value of the shares on the purchase date. A maximum of 750,000 shares are authorized for purchase until the ESPP termination date of February 24, 2021, or earlier termination of the ESPP. During the years ended December 31, 2017 2019, 2018 and 2016,2017, we received proceeds of $98$231, $214 and $86$98 for the purchase of 9,00022,000, 20,000 and 13,0009,000 shares under the ESPP.

63

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

 

 

 

NOTE 146 – SHAREHOLDERS EQUITY

 

In October 2011, On April 28, 2016, our Board of Directors authorized the repurchase of up to 1one million shares of the Company’s common stock. In April 2016, our Board of Directors authorized the repurchase of up to 1 million additional shares of our common stock and terminated the October 2011 authorization effective June 30, 2016.in open market transactions.

 

The following table represents our purchases of our common stock during the years ended December 31, 2017 2019 and 20162018 under thesethe share repurchase programs.program. 

 

Share purchase programs

  

2017

  

2016

     

Authorized

amount

(shares)

(000)

 

Date

approved by

board

 

Program

termination
date

  

Shares

purchased

(000)

  

Purchase

value

  

Shares

purchased

(000)

  

Purchase

value

  

Remaining shares

allowable to be

purchased

 
1,000 

October, 2011

 

 

June 30, 2016   -  $-   422  $2,000   - 
1,000 

April, 2016

  N/A   -  $-   -  $-   1,000 

Year Ended

December, 31

 

Shares

purchased

(000)

  

Purchase

value

  

Remaining shares

allowable to be

purchased

 

2018

  90  $656   910 

2019

  101  $793   809 

 

 

NOTENOTE 1157 – EARNINGS PER SHARE

 

The table below reconciles basic weighted average common shares outstanding to diluted weighted average shares outstanding for 2017,20162019, 2018 and 20152017 (in thousands). The stock awards noted as antidilutive were not included in the diluted (in the case of stock options) or basic (in the case of unvested restricted stock awards) weighted average common shares outstanding. Although these stock awards were not included in our calculation of basic or diluted earnings per share (“EPS”), they may have a dilutive effect on the EPS calculation in future periods if the price of our common stock increases.

 

Year Ended December 31,

2017

2016

2015

Basic weighted average common shares outstanding

34,94934,40533,826

Diluted weighted average common shares outstanding

34,94934,40533,826

Antidilutive stock awards:

Unvested restricted stock awards

--403
  

Year Ended December 31,

 
  

2019

  

2018

  

2017

 

Basic weighted average common shares outstanding

  35,318   35,187   34,949 

Plus dilutive effect of Restricted Stock Units and Performance Stock Units

  98   -   - 

Diluted weighted average common shares outstanding

  35,416   35,187   34,949 
             

Antidilutive stock awards:

            

Unvested restricted stock awards

  -   -   - 

 

 

NOTE 16 -8 – BUSINESS SEGMENTS

 

We identify our reportable segments based on our management structure and the financial data utilized by our chief operating decision makersmaker to assess segment performance and allocate resources among our operating units. We have threetwo reportable segments: Fleet Vehicles and Services Emergency Response Vehicles, and Specialty Chassis and Vehicles. 


SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

As a result of a realignment of our operating segments completed during the second quarter of 2017, certain fleet vehicles are now manufactured by our Specialty Chassis and Vehicles segment and sold via intercompany transactions to our Fleet Vehicles and Services segment, which then sells the vehicles to the final customer. Segment results from prior periods are shown reflecting the estimated impact of this realignment as if it had been in place for those periods. Another realignment of our operating segments was completed during the second quarter of 2016, whereby aftermarket parts and accessories related to emergency response vehicles, which were formerly reported under the Specialty Chassis and Vehicles segment, are now included in theThe Emergency Response Vehicles segment. Segment results from 2015 are shown reflectingsegment met the change. Appropriate expense amounts are allocated to the threeheld-for-sale criteria at December 31, 2019. Thus it is no longer considered a reportable segmentssegment and are included in theiris reported operating income or loss.as a discontinued operation instead.

 

Beginning in 2017, weWe evaluate the performance of our reportable segments based on Adjusted EBITDA. Adjustedadjusted EBITDA is defined as earnings(earnings before interest, taxes, depreciation and amortization), which is a non-GAAP financial measure. This non-GAAP measure is calculated by excluding items that we believe to be infrequent or not indicative of our continuing operating performance. In the fourth quarter of 2019, in connection with the divestiture of our ERV business, we refined the definition of adjusted EBITDA as income from continuing operations before interest, income taxes, depreciation and amortization, as adjusted by other adjustments made in order to present comparable results from period to period. These adjustments include restructuring charges and items related to our acquisition of Smeal, such as expenses incurred to complete the acquisition,eliminate the impact of fair valuerestructuring charges, acquisition related expenses and adjustments, to inventory acquired from Smeal,non-cash stock-based compensation expenses, and the impact on the timingother gains and losses not reflective of the recognition of gross profit for our chassis that are utilized by our recently acquired Smealongoing operations. We exclude these items from earnings when presenting our Adjusted EBITDA measure because we believe they will be incurred infrequently and/or are otherwise not indicative of a segment's regular, ongoing operating performance. For those reasons, Adjusted EBITDA is also used as a performance metric for our executive compensation program, as discussed in our proxy statement for our 2017 annual meeting of shareholders, which proxy statement was filed withall prior years presented have been recast to conform to the SEC on April 13, 2017.current presentation. 

 

Our Fleet Vehicles and ServicesFVS segment consists of our operations at our Bristol, Indiana location, and beginning in 2018 certain operationsoperations at our Ephrata, Pennsylvania location along with our operations at our up-fitupfit centers in Kansas City, MissouriMissouri; North Charleston, South Carolina; Pompano Beach, Florida; Montebello, California and Saltillo, Mexico andMexico. The segment focuses on designing and manufacturing walk-in vans for the parcel delivery, mobile retail, and trades and construction industries, and the production of commercial truck bodies, and distributesthe 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; Delavan, Wisconsin; and Ephrata, Pennsylvania locations, along with our Spartan-Gimaex joint venture. This segment engineers and manufactures emergency response chassis and apparatus and distributes related aftermarket parts and accessories.

Our Specialty Chassis and Vehicles SCV 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. In addition, beginning in September 2019 with the acquisition of Royal, the SCV segment includes operations in Carson and Union City, California; Mesa, Arizona; and Dallas and Weatherford, Texas. Royal is a leading California-based designer, manufacturer and installer of service truck bodies and accessories.

64

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO 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 "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”. 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.

 

Sales to customers outside the United States were $81,157,$31,716$21,361, $21,204 and $40,058$13,392 for the years ended December 31,2017,2016 2019, 2018 and 2015,2017, or 11.5%2.8%,5.4% 3.7% and 7.3%3.3%, respectively, of sales for those years. All of our long-lived assets are located in the United States.

  

Sales and other financial information by business segment are as follows:

 

Year Ended December31,20179

 

Segment

      

Segment

 
 

Fleet

Vehicles and

Services

  

Emergency

Response

Vehicles

  

Specialty

Chassis

and

Vehicles

  

Other

  

Consolidated

  

FVS

  

SCV

  

Eliminations

and Other

  

Consolidated

 

Fleet vehicles sales

 $207,666  $-  $5,657  $(5,657) $207,666  $504,023  $5,278  $(5,278

)

 $504,023 

Emergency response vehicles sales

  -   293,559   -   -   293,559 

Motor home chassis sales

  -   -   124,584   -   124,584   -   127,130   -   127,130 

Other specialty vehicles sales

  -   -   18,416   -   18,416   -   43,067   -   43,067 

Aftermarket parts and accessories sales

  43,429   9,291   10,153   -   62,873   71,871   10,451   -   82,322 

Total sales

 $251,095  $302,850  $158,810  $(5,657) $707,098  $575,894  $185,926  $(5,278

)

 $756,542 
                

Depreciation and amortization expense

 $3,361  $2,342  $1,314  $2,920  $9,937  $2,466  $2,104  $1,503  $6,073 

Adjusted EBITDA

  26,958   3,192   14,058   (12,881)  31,327   60,663   20,716   (17,334

)

  64,045
 

Segment assets

  60,550   133,546   33,700   73,368   301,164   154,138   137,777   67,897   359,812 

Capital expenditures

  562   1,364   386   3,028   5,340   2,851   2,220   2,525   7,596 

Year Ended December 31, 2018

  

Segment

 
  

FVS

  

SCV

  

Eliminations

and Other

  

Consolidated

 

Fleet vehicles sales

 $297,627  $10,221  $(10,221

)

 $297,627 

Motor home chassis sales

  -   149,533   -   149,533 

Other specialty vehicles sales

  -   22,570   -   22,570 

Aftermarket parts and accessories sales

  89,922   10,875   -   100,797 

Total sales

 $387,549  $193,199  $(10,221

)

 $570,527 
                 

Depreciation and amortization expense

 $2,401  $1,495  $2,318  $6,214 

Adjusted EBITDA

  26,680   18,620   (9,915

)

  35,385 

Segment assets

  117,508   17,335   82,264   217,107 

Capital expenditures

  1,859   116   2,678   4,653 

 


65

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

 

Year Ended December31,2016

  

Segment

     
  

Fleet

Vehicles and

Services

  

Emergency

Response

Vehicles

  

Specialty

Chassis

and

Vehicles

  

Other

  

Consolidated

 

Fleet vehicles sales

 $206,248  $-  $5,347  $(5,347) $206,248 

Emergency response vehicles sales

  -   175,730   -   -   175,730 

Motor home chassis sales

  -   -   97,999   -   97,999 

Other specialty vehicles sales

  -   -   21,074   -   21,074 

Aftermarket parts and accessories sales

  72,141   7,251   10,334   -   89,726 

Total sales

 $278,389  $182,981  $134,754  $(5,347) $590,777 

Depreciation and amortization expense

 $3,185  $1,143  $789  $2,786  $7,903 

Adjusted EBITDA

  31,237   (7,542)  8,334   (9,159)  22,870 

Segment assets

  65,277   77,887   28,825   71,305   243,294 

Capital expenditures

  2,011   1,558   6,842   2,999   13,410 

 

Year Ended December31, 20172015

  

Segment

     
  

Fleet

Vehicles and

Services

  

Emergency

Response

Vehicles

  

Specialty

Chassis

and

Vehicles

  

Other

  

Consolidated

 

Fleet vehicles sales

 $193,772  $-  $2,996  $(2,996) $193,772 

Emergency response vehicles sales

  -   187,127   -   -   187,127 

Motor home chassis sales

  -   -   103,264   -   103,264 

Other specialty vehicles sales

  -   -   13,849   -   13,849 

Aftermarket parts and accessories sales

  33,911   6,093   12,398   -   52,402 

Total sales

 $227,683  $193,220  $132,507  $(2,996) $550,414 

Depreciation and amortization expense

 $3,308  $914  $730  $2,485  $7,437 

Adjusted EBITDA

  17,569   (8,689)  8,833   (5,538)  12,175 

Segment assets

  70,491   76,030   24,032   60,118   230,671 

Capital expenditures

  1,323   1,010   859   1,703   4,895 

 


  

Segment

 
  

FVS

  

SCV

  

Eliminations

and Other

  

Consolidated

 

Fleet vehicles sales

 $207,666  $5,657  $(5,657

)

 $207,666 

Motor home chassis sales

  -   124,584   -   124,584 

Other specialty vehicles sales

  -   18,416   -   18,416 

Aftermarket parts and accessories sales

  43,429   10,153   -   53,582 

Total sales

 $251,095  $158,810  $(5,657

)

 $404,248 
                 

Depreciation and amortization expense

 $3,361  $1,314  $1,357  $6,032 

Adjusted EBITDA

  26,958   14,058   (9,344

)

  31,762 

Segment assets

  60,550   21,445   76,439   158,434 

Capital expenditures

  562   386   3,028   3,976 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

 

The table below presents the reconciliation of our consolidated income from continuing operations 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.

 

  

Year Ended

December 31,

2017

  

Year Ended

December 31,

2016

  

Year Ended

December 31,

2015

 

Total segment adjusted EBITDA

 $44,208  $32,029  $17,713 

Add (subtract):

            

Interest expense

  (864)  (410)  (365)

Depreciation and amortization expense

  (9,937)  (7,903)  (7,437)

Restructuring expense

  (1,252)  (1,095)  (2,855)

Acquisition expense

  (1,354)  (882)  - 

Impact of intercompany chassis shipments to Smeal

  (2,073)  -   - 

Recall expense

  368   (3,457)  (8,600)

Impact of inventory fair value step-up

  (189)  -   - 

Joint venture expenses

  (2)  (14)  (1,015)

Asset impairment

  -   (406)  (2,234)

NHTSA settlement

  -   -   (2,269)

Unallocated corporate expenses

  (12,881)  (9,159)  (5,538)

Consolidated income (loss) before taxes

 $16,024  $8,703  $(12,600)
  

Year Ended

December 31,

2019

  

Year Ended

December 31,

2018

  

Year Ended

December 31,

2017

 

Income from continuing operations before income taxes

 $47,145  $21,450  $19,853 

Net (income) loss attributable to non-controlling interest

  (140)  -   1 

Interest expense

  109   481   156 

Depreciation and amortization expense

  4,570   3,896   4,675 

Restructuring and other related charges

  82   176   746 

Unallocated corporate expenses

  29,613   19,297   15,585 

Total segment adjusted EBITDA

 $81,379  $45,300  $41,016 

 

 

NOTE 1719 – RELATED PARTY TRANSACTIONS

 

On January 1, 2017, we completed the acquisition of substantially all of the assets and certain liabilities of Smeal Fire Apparatus Co., Smeal Properties, Inc., Ladder Tower Co., and U.S. Tanker Co. pursuant to an Asset Purchase Agreement dated December 12,2016 (see Note 2,Acquisition Activities for further information). As of December 31, 2016, the total amount of receivables due from the former owners of Smeal was $7,391. This balance was forgiven as part of the acquisition on January 1, 2017. Sales to the former owners of Smeal were $30,748 and $32,600 in 2016 and 2015.

John Forbes, who retired from Spartan Motors on June 30, 2017, served as the President of our Fleet Vehicles and Services segment as well as on the Board of Directors of Patrick Industries, Inc. During the year ended December 31, 2016, we made purchases of $4,009 from subsidiaries of Patrick Industries, Inc. for parts used in the manufacture of our products. These purchases were made through a competitive bid process at arms-length. Purchases made from Patrick Industries, Inc. during John Forbes employment at Spartan Motors during 2017 were immaterial.

Richard Dauch,Angela Freeman, who serves on the Spartan Motors Board of Directors effective August 5, 2019, is the Chief Human Resources Officer at C.H. Robinson. The Company engaged C.H. Robinson for transportation and logistics services through a competitive bid process in December 2018.  During the period August 5, 2019 through December 31, 2019, the Company utilized C.H. Robinson for services totaling $6,723.

Richard Dauch, who serves on the Spartan Motors Board of Directors, was the Chief Executive Officer of Accuride, Inc. through January 6, 2019. During the years ended December 31, 2017 2018 and 2016,2017, we made purchases of $698$799 and $836$698 from Accuride Distributing, a subsidiary of Accuride, Inc., for parts used in the manufacture of our products. These purchases were made through a competitive bid process at arms-length.process. Purchases made in 2019 through January 6, 2019 were not material.

NOTE 20 – SUBSEQUENT EVENT

Effective February 1, 2020, the Company completed the sale of its ERV business pursuant to the terms and conditions set forth in the Asset Purchase Agreement entered into by and among the Company, the buyer and certain parties, and received cash of $55,000, subject to a post-closing adjustment. In connection with the closing of the sale, the Company and the buyer have entered into a transition services agreement, pursuant to which the parties will provide certain transition services for a specified period following the closing.

 


66

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

 

 

NOTE 18 -21 – QUARTERLY FINANCIAL DATA (UNAUDITED)

 

Summarized quarterly financial data for the years ended December31,2017 2019 and 20162018 is as follows (fullfollows. As discussed in "Note 2 – Acquisition Activities" effective February 1, 2020, we completed the sale of our ERV business. The results of the ERV business have been classified as discontinued operations for all periods presented. Full year amounts may not sum due to rounding):rounding.

 

  

2017 Quarter Ended

  

2016 Quarter Ended

 
  

Mar 31

  

June 30

  

Sept 30

  

Dec 31

  

Mar 31

  

June 30

  

Sept 30

  

Dec 31

 

Sales

 $167,075  $169,739  $189,215  $181,068  $133,726  $162,537  $148,664  $145,850 
                                 

Gross profit

  16,394   19,501   28,651   24,689   15,820   20,807   18,010   17,890 
                                 

Restructuring charges

  642   325   232   52   339   227   304   224 
                                 

Net earnings (loss) attributable to Spartan Motors, Inc.

  (1,098)  1,124   13,470   2,439   543   4,379   2,745   942 
                                 

Basic net earnings (loss) per share

  (0.03)  0.03   0.38   0.07   0.02   0.13   0.08   0.03 
                                 

Diluted net earnings (loss) per share

  (0.03)  0.03   0.38   0.07   0.02   0.13   0.08   0.03 
  

2019 Quarter Ended

  

2018 Quarter Ended

 
  

Mar 31

  

June 30

  

Sept 30

  

Dec 31

  

Mar 31

  

June 30

  

Sept 30

  

Dec 31

 

Sales

 172,206  179,673  224,703  179,960  106,325  124,366  165,920  173,916 
                                 

Gross profit

  20,720   20,859   38,029   37,419   14,775   19,407   19,828   19,134 
                                 

Operating expenses

  14,767   14,608   20,915   19,123   12,124   13,812   11,438   13,252 
                                 

Income from continuing operations

  4,835   4,544   13,126   14,285   3,866   2,706   7,128   4,416 
                                 

(Loss) income from discontinued operations, net of income taxes

  (3,298)  (1,255)  (2,711)  (41,952)  328   1,034   (1,885)  (2,581)
                                 
Net income (loss) attributable to Spartan Motors, Inc.  1,397   3,504   10,354   (27,821)  4,194   3,740   5,243  ��1,835 
                                 

Basic earnings (loss) per share

                                

Continuing operations

  0.13   0.14   0.37   0.40   0.11   0.08   0.20   0.12 

Discontinued operations

  (0.09)  (0.04)  (0.08)  (1.19)  0.01   0.03   (0.05)  (0.07)
Basic earnings per share  0.04   0.10   0.29   (0.79)  0.12   0.11   0.15   0.05 

Diluted earnings (loss) per share

                                

Continuing operations

  0.13   0.14   0.37   0.40   0.11   0.08   0.20   0.12 

Discontinued operations

  (0.09)  (0.04)  (0.08)  (1.18)  0.01   0.03   (0.05)  (0.07)
Diluted earnings per share  0.04   0.10   0.29   (0.78)  0.12   0.11   0.15   0.05 

 


67

 

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

None.

 

Item 9A.

Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures.

 

An evaluation was performed under the supervision andOur management, with the participation of our management, including the Chief Executive Officer (“CEO”) and our Chief Financial Officer of(“CFO”), evaluated the effectiveness of the design and operation of our disclosure controls and procedures (asas of December 31, 2019. The term “disclosure controls and procedures,” as defined in RuleRules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934)1934, as of December 31, 2017. Based on and as of the time of such evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosureamended (the “Exchange Act”), means controls and other procedures were effective as of the end of the period covered by this reporta company that are designed to ensure that information required to be disclosed by us in the reports that we fileit files or submit issubmits under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’sSEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by usa company in the reports that we fileit files or submitsubmits under the Securities Exchange Act of 1934 is accumulated and communicated to ourthe company’s management, including our Chief Executive Officerits principal executive officer and Chief Financial Officer,principal financial officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

Management’sAs of the end of the period covered by this Annual Report on Internal Control Over Financial Reporting.

Management is responsibleForm 10-K for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Underthe fiscal year ended December 31, 2019 (this “Form 10-K”), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive OfficerCEO and ChiefCFO, of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act. Based upon that evaluation, our CEO and CFO have concluded that, as of the end of the period covered by this Form 10-K, our disclosure controls and procedures were not effective because of the material weakness in internal control over financial reporting described below.

Management’s Report on Internal Control Over Financial Officer, we conducted an evaluationReporting.

Management is responsible for establishing and maintaining adequate “internal control over financial reporting,” as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of its inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017, based on2019 using the framework in Internal Control - Integrated Framework (2013)issuedcriteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission.Commission in Internal Control-Integrated Framework (2013). As permitted by Securities and Exchange Commission guidance, management excluded from its assessment internal control over financial reporting for Royal, which was acquired on September 9, 2019, which accounted for 24.5% of consolidated total assets and 2.3% of consolidated sales as of and for the year ended December 31, 2019. Based on that evaluationits assessment, our management, including our CEO and CFO, has concluded that our internal control over financial reporting was not effective as of December 31, 2017. The effectiveness2019 due to a material weakness in our internal control over financial reporting described below.

Management’s assessment of ourthe Company’s internal control over financial reporting as of December 31, 2017 has2019 determined that certain of the Company’s processes for recognizing revenue within its FVS business unit had been audited by BDO USA, LLP, an independent registered public accounting firm, as stated in its attestation report, which is included in Item 8ineffectively designed, implemented, and is incorporated into this Item 9A by reference.operated. Specifically:

 

Changes in Internal Control Over Financial Reporting.

There was insufficient management review to prevent and detect inaccurate and/or non-existent sales orders, including orders entered without appropriate supporting documentation and orders that were not properly updated to reflect price changes agreed to by customers. 

Our controls were insufficient to accurately verify the existence, completeness, and accuracy of transactions resulting in recognition of revenue, including evidence of contracts with a customer and Company acceptance and approval of those contracts, revenue recognition agreement with contracted terms, and quarterly cut-off errors. 

 

No changesThese control deficiencies create a reasonable possibility that a material misstatement to the consolidated financial statements will not be prevented or detected on a timely basis, and therefore, we concluded that the deficiencies represent a material weakness in our internal control over financial reporting, were identified as having occurred during the quarter ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect,and our internal control over financial reporting was not effective as of December 31, 2019.

Notwithstanding such material weakness in internal control over financial reporting, our management, including our CEO and CFO, has concluded that our consolidated financial statements present fairly, in all material respects, our financial position, results of our operations and our cash flows for the periods presented in this Form 10-K, in conformity with GAAP.

Our independent registered public accounting firm, BDO LLP, who audited the consolidated financial statements included in this annual report, has expressed an adverse report on the operating effectiveness of the Company's internal control over financial reporting. BDO LLP’s report appears on page 34 of this annual report on Form 10-K.

68

Remediation Plan

We have identified and have begun to implement several steps at the FVS business unit, as further described below, to remediate the material weakness described in this Item 9A and to enhance our overall control environment.  We are committed to ensuring that our internal controls over financial reporting are designed and operating effectively. Our remediation process includes, but is not limited to:

Strengthening our contract management and revenue controls with improved documentation standards, technical oversight and training;

Implementing new or revised transaction level controls to ensure all transactions have supporting documentation and the sales order entry process is monitored;

Enhancing the automation of processes and controls to allow for the timely completion and enhanced review of the controls and surrounding financial information;

Implementing and enhancing additional management review controls; and

Increasing accounting personnel to devote additional time and internal control resources.

We believe that these actions will remediate the material weakness. The weakness will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed prior to the end of fiscal 2020.

  

 

Item 9B.

Other Information.

 

None.

69

PART III

 

Item 10.

Directors, Executive Officers, and Corporate Governance.

 

The information required by this item, with respect to directors, executive officers, audit committee, and audit committee financial experts of the Company and Section 16(a) beneficial ownership reporting compliance is contained under the captions “Spartan Motors’ Board of Directors and Executive Officers” and “Section“Delinquent Section 16(a) Beneficial Ownership Reporting Compliance”Reports” in our definitive proxy statement for our annual meeting of shareholders to be held on May 23, 2018,20, 2020, to be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2017,2019, and is incorporated herein by reference.

 

We have adopted a Code of Ethics that applies to our principal executive officer, principal financial officer and principal accounting officer. This Code of Ethics is posted under “Code of Ethics” on our website at www.spartanmotors.com. We have also adopted a Code of Ethics and Compliance applicable to all directors, officers and associates, which is posted under “Code of Conduct” on our website at www.spartanmotors.com. Any waiver from or amendment to a provision of either code will be disclosed on our website.


 

Item 11.

Executive Compensation.

 

The information required by this item is contained under the captions “Executive Compensation,” “Compensation of Directors,” “Compensation Committee Report” and “Compensation Committee Interlocks and Insider Participation” in our definitive proxy statement for our annual meeting of shareholders to be held on May 23, 2018,20, 2020, to be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2017,2019, and is incorporated herein by reference.

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Stockholder Matters.

 

The information required by this item (other than that set forth below) is contained under the caption “Ownership of Spartan Motors Stock” in our definitive proxy statement for our annual meeting of shareholders to be held on May 23, 2018,20, 2020, to be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2017,2019, and is incorporated herein by reference.

 

The following table provides information about our equity compensation plans regarding the number of securities to be issued under these plans upon the exercise of outstanding options, the weighted-average exercise prices of options outstanding under these plans, and the number of securities available for future issuance as of December 31, 2017.2019.

 

Equity Compensation Plan Information

Plan category

Number of

securities to
be issued upon

exercise
of outstanding

options,
warrants and

rights

Weighted average
exercise price of
outstanding options,
warrants and rights

Number of securities
remaining available for
future issuance under

equity compensation

plans (excluding

securities reflected in

column (a)) (3)

(a)

(b)

(c)

Equity compensation plans approved by security holders (1)

--N/A1,356,196

Equity compensation plans not approved by security holders (2)

--N/A56,250

Total

--N/A1,412,446 

Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights

Weighted average
exercise price of
outstanding options,
warrants and rights

Number of securities
remaining available for
future issuance under equity compensation plans (excluding securities reflected in column (a)) (3)

(a)

(b)

(c)

Equity compensation plans approved by security holders (1)

--N/A2,001,040

Equity compensation plans not approved by security holders (2)

--N/A56,250

Total

--N/A2,057,290 

 

(1)

Consists of the Spartan Motors, Inc. Stock Incentive Plan of 2016 (the “2016 Plan”).

(2)

70

Consists of the Spartan Motors, Inc. Directors

(2)

Consists of the Spartan Motors, Inc. Directors’ Stock Purchase Plan. This plan provides that non-employee directors of the Company may elect to receive at least 25% and up to 100% of their “director’s fees” in the form of the Company’s common stock. The term “director’s fees” means the amount of income payable to a non-employee director for his or her service as a director of the Company, including payments for attendance at meetings of the Company’s Board of Directors or meetings of committees of the board, and any retainer fee paid to such persons as members of the board. A non-employee director who elects to receive Company common stock in lieu of some or all of his or her director’s fees will, on or shortly after each “applicable date,” receive a number of shares of common stock (rounded down to the nearest whole share) determined by dividing (1) the dollar amount of the director’s fees payable to him or her on the applicable date that he or she has elected to receive in common stock by (2) the market value of common stock on the applicable date. The term “applicable date” means any date on which a director’s fee is payable to the participant. To date, no shares have been issued under this plan.

(3)

Each of the plans reflected in the above table contains customary anti-dilution provisions that are applicable in the event of a stock split or certain other changes in the Company’s capitalization. Furthermore, the 2016 Plan provides that if a stock option is canceled, surrendered, modified, expires or is terminated during the term of the plan but before the exercise of the option, the shares subject to the option will be available for other awards under the plan.

The numbers of shares reflected in column (c) in the table above with respect to the 2016 Plan (2,001,040 shares) represent new shares that may be granted by the Company, and not shares issuable upon the exercise of an existing option, warrant or right.


Item 13.

Certain Relationships and Related Transactions, and Director Independence.

The information required by this item is contained under the captions “Transactions with Related Persons” and “Spartan Motors’ Board of Directors and Executive Officers” in our definitive proxy statement for our annual meeting of shareholders to be held on May 23, 2018, to be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2017, and is incorporated herein by reference.

Item 14.

Principal Accounting Fees and Services.

The information required by this item is contained under the caption “Independent Auditor Fees” in our definitive proxy statement for our annual meeting of shareholders to be held on May 23, 2018, to be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2017, and is incorporated herein by reference.

PART IV

Item 15.

Exhibits, Financial Statement Schedules.

Item 15(a)(1).

List of Financial Statements.

The following consolidated financial statements of the Company and its subsidiaries, and reports of our registered independent public accounting firm, are filed as a part of this report under Item 8 - Financial Statements and Supplementary Data:

Independent Registered Public Accounting Firm’s Report on Consolidated Financial Statements – Years Ended December 31, 2017, 2016 and 2015

Independent Registered Public Accounting Firm’s Report on Internal Control Over Financial Reporting – December 31, 2017

Consolidated Balance Sheets - December 31, 2017 and December 31, 2016

Consolidated Statements of Operations - Years Ended December 31, 2017, 2016 and 2015

Consolidated Statements of Shareholders’ Equity - Years Ended December 31, 2017, 2016 and 2015

Consolidated Statements of Cash Flows - Years Ended December 31, 2017, 2016 and 2015

Notes to Consolidated Financial Statements

  
(3)Each of the plans reflected in the above table contains customary anti-dilution provisions that are applicable in the event of a stock split or certain other changes in the Company’s capitalization. In addition, the 2016 Plan provides that if a stock option is canceled, surrendered, modified, expires or is terminated during the term of the plan but before the exercise of the option, the shares subject to the option will be available for other awards under the plan.
The numbers of shares reflected in column (c) in the table above with respect to the 2016 Plan (1,356,196 shares) represent new shares that may be granted by the Company, and not shares issuable upon the exercise of an existing option, warrant or right.

Item 13.

Certain Relationships and Related Transactions, and Director Independence.

 

The information required by this item is contained under the captions “Transactions with Related Persons” and “Spartan Motors’ Board of Directors and Executive Officers” in our definitive proxy statement for our annual meeting of shareholders to be held on May 20, 2020, to be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2019, and is incorporated herein by reference.

 

Item 15(a)(2)

Item 14.

Principal Accounting Fees and Services.

The information required by this item is contained under the caption “Independent Auditor Fees” in our definitive proxy statement for our annual meeting of shareholders to be held on May 20, 2020, to be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2019, and is incorporated herein by reference.

PART IV

Item 15.

Exhibits, Financial Statement Schedules.. Attached as Appendix A.

 

The following consolidated financial statement scheduleItem 15(a)(1).

List of Financial Statements.

The following consolidated financial statements of the Company and its subsidiaries, and reports of our registered independent public accounting firm, are filed as a part of this report under Item 8 - Financial Statements and Supplementary Data:

Independent Registered Public Accounting Firm’s Report on Consolidated Financial Statements – Years Ended December 31, 2019, 2018 and its subsidiaries is filed2017
Independent Registered Public Accounting Firm’s Report on Internal Control Over Financial Reporting – December 31, 2019
Consolidated Balance Sheets – December 31, 2019 and December 31, 2018
Consolidated Statements of Operations – Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Shareholders’ Equity – Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows – Years Ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements

71

Item 15(a)(2).

Financial Statement Schedules. Attached as part of this report:Appendix A.

 

The following consolidated financial statement schedule of the Company and its subsidiaries is filed as part of this report:

 

Schedule II-Valuation and Qualifying Accounts

 

All other financial statement schedules are not required under the related instructions or are inapplicable and therefore have been omitted.

   


Item 15(a)(3).

List of Exhibits. The following exhibits are filed as a part of this report:

Exhibit
Number


Document

3.1

Spartan Motors, Inc. Restated Articles of Incorporation, as amended to date. Previously filed as Exhibit 3.1 to the Company’s Form 10-Q Quarterly Report for the period ended June 30, 2017 (Commission File No. 001-33582), and incorporated herein by reference.

3.2

Spartan Motors, Inc. Bylaws, as amended to date.

4.1

Spartan Motors, Inc. Restated Articles of Incorporation. See Exhibit 3.1 above.

4.2

Spartan Motors, Inc. Bylaws. See Exhibit 3.2 above.

 

Exhibit
Number

72

 


Document

3.1

Spartan Motors, Inc. Restated Articles of Incorporation, as amended to date. Previously filed as an exhibit to the Company’s Form 10-Q Quarterly Report for the period ended June 30, 2007 (Commission File No. 001-33582), and incorporated herein by reference.

3.2

Spartan Motors, Inc. Bylaws, as amended to date. Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed on February 27, 2013 (Commission File No. 001-33582), and incorporated herein by reference.

4.1

Spartan Motors, Inc. Restated Articles of Incorporation. See Exhibit 3.1 above.

4.2

Spartan Motors, Inc. Bylaws. See Exhibit 3.2 above.

4.3

Form of Stock Certificate. Previously filed as an exhibit to the Registration Statement on Form S-18 (Registration No. 2-90021-C) filed on March 19, 1984, and incorporated herein by reference.

4.4

Rights Agreement dated July 7, 2007, between Spartan Motors, Inc. and American Stock Transfer and Trust Company, which includes the form of Certificate of Designation, Preferences and Rights of Series B Preferred Stock as Exhibit A, the form of Rights Certificate as Exhibit B and the Summary of Rights to Purchase Series B Preferred Stock as Exhibit C. Previously filed as Exhibit 1 to the Company’s Form 8-A (Commission File No. 001-33582) filed on July 10, 2007, and incorporated herein by reference.

4.5

The Registrant has several classes of long-term debt instruments outstanding, none of which represents an authorized amount of debt exceeding 10% of the Company’s total consolidated assets, except as furnished under Exhibit 10.1 to this Form 10-K below. The Company agrees to furnish copies of any other agreements defining the rights of holders of other such long-term indebtedness to the Securities and Exchange Commission upon request.

Exhibit

Number

4.3Description of Registrant's Common Stock
4.4

Form of Stock Certificate. Previously filed as an exhibit to the Registration Statement on Form S-18 (Registration No. 2-90021-C) filed on March 19, 1984 and incorporated herein by reference.

4.5

The Registrant has several classes of long-term debt instruments outstanding, none of which represents an authorized amount of debt exceeding 10% of the Company’s total consolidated assets, except as furnished under Exhibit 10.10 to this Form 10-K below. The Company agrees to furnish copies of any other agreements defining the rights of holders of other such long-term indebtedness to the Securities and Exchange Commission upon request.

10.1

Spartan Motors, Inc. Stock Incentive Plan of 2016. Previously filed as Appendix A to the Company’s definitive proxy statement on Schedule 14A filed with the SEC on April 8, 2016 (Commission File No. 001-33582), and incorporated herein by reference.*

10.2

Spartan Motors, Inc. Stock Incentive Plan of 2007, as amended. Previously filed as Appendix A to the Company’s 2007 Proxy Statement filed April 23, 2007 (Commission File No. 000-13611) and incorporated herein by reference.*

10.3

Spartan Motors, Inc. Leadership Team Compensation Plan dated April 15, 2019. Previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed April 16, 2019 and incorporated herein by reference.*

10.4

Spartan Motors, Inc. Directors’ Stock Purchase Plan. Previously filed as an exhibit to the Company’s Form S-8 Registration Statement (Registration No. 333-98083) filed on August 14, 2002, and incorporated herein by reference.*

10.5

Form of Stock Appreciation Rights Agreement. Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the period ended December 31, 2007 (Commission File No. 001-33582) and incorporated herein by reference.*

10.6

Form of Restricted Stock Agreement. Previously filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2009 (Commission File No. 001-33582), and incorporated herein by reference.*

10.7

Form of Indemnification Agreement. Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the period ended December 31, 2005 (Commission File No. 000-13611), and incorporated herein by reference.*

10.8

Supplemental Executive Retirement Plan. Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the period ended December 31, 2007 (Commission File No. 001-33582), and incorporated herein by reference. *

10.9

Spartan Motors, Inc. Stock Incentive Plan of 2012. Previously filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed May 15, 2012 (Commission File No. 001-33582), and incorporated herein by reference.*

 

 

 

10.1

 

Employment Letter Agreement dated October 23, 2015, between the Company and John W. Slawson. Previously filed as Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the period ended December 31, 2015 (Commission File No. 001-33582) and incorporated herein by reference.*

Exhibit

Number

10.10

Credit Agreement dated August 8, 2018 by and among the Company, Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto. Previously filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2018 (Commission File No. 001-33582), and incorporated herein by reference.

10.11

Employment Offer Letter dated July 22, 2014, from Spartan Motors, Inc. to Daryl M. Adams. Previously filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2014 (Commission File No. 001-33582), and incorporated herein by reference.*

10.12

Employment Offer Letter dated September 15, 2015, from Spartan Motors, Inc. to Frederick J. Sohm. Previously filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2015 (Commission File No. 001-33582), and incorporated herein by reference.*

10.13

Employment Offer Letter dated December 23, 2014 from Spartan Motors, Inc. to Steve Guillaume. Previously filed as Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the period ended December 31, 2015 (Commission File No. 001-33582) and incorporated herein by reference.*

10.14

Employment Offer Letter dated May 11, 2015 from Spartan Motors, Inc. to Steve Guillaume. Previously filed as Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the period ended December 31, 2015 (Commission File No. 001-33582) and incorporated herein by reference.*

10.15

Employment Offer Letter dated July 14, 2014 from Spartan Motors, Inc. to Thomas C. Schultz. Previously filed as Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the period ended December 31, 2016 (Commission File No. 001-33582) and incorporated herein by reference.*

10.16

Spartan Motors Inc. Management Severance Plan dated as of July 26, 2017. Previously filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2018, and incorporated herein by reference.*

10.17

Form of Spartan Motors, Inc. Performance Share Unit Agreement. Previously filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed April 2016, 2019 and incorporated herein by reference.*

10.18

Form of Spartan Motors, Inc. Restricted Stock Unit Agreement. Previously filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed April 2016, 2019 and incorporated herein by reference.*

10.19

Employment Offer Letter dated May 31, 2019 from Spartan Motors, Inc. to Todd A. Heavin. Previously filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2019 (Commission File No. 001-33582) and incorporated herein by reference.*

10.20

Unit Purchase Agreement dated as of September 9, 2019, by and among Spartan Motors USA, Inc., Fortress Resources, LLC D/B/A Royal Truck Body, the owners of Fortress Resources, LLC, and Dudley D. DeZonia. Previously filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2019 (Commission File No. 001-33582) and incorporated herein by reference.

10.21

Second Amendment to Credit Agreement, dated September 9, 2019, by and among the Company and its affiliates, Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto. Previously filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2019 (Commission File No. 001-33582) and incorporated herein by reference.

10.22

Third Amendment to Credit Agreement, dated September 25, 2019, by and among the Company and its affiliates, Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto. Previously filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2019 (Commission File No. 001-33582) and incorporated herein by reference.

74

 

Exhibit

Number

10.23

Fourth Amendment to Credit Agreement, dated January 31, 2020, by and among the Company and its affiliates, Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto.

10.24

Asset Purchase Agreement dated January 31, 2020, by and among Spartan Motors, Inc., Spartan Motors USA, Inc., Spartan Fire, LLC and REV Group, Inc.

10.25Employment Offer Letter dated January 21, 2020 from Spartan Motors, Inc. to Jonathan C. Douyard.*

21

Subsidiaries of Registrant

23

Consent of BDO USA, LLP, Independent Registered Public Accounting firm.

31.1

Certification of 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 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.

The Company will furnish a copy of any exhibit listed above to any shareholder of the Company without charge upon written request to: Chief Financial Officer, Spartan Motors, Inc., 41280 Bridge Street, Novi, Michigan 48375.

 

Item 16.

Form 10-K Summary

10.2

Spartan Motors, Inc. Stock Incentive Plan of 2016. Previously filed as Appendix A to the Company’s definitive proxy statement on Schedule 14A filed with the SEC on April 8, 2016 (Commission File No. 001-33582), and incorporated herein by reference.*

10.3

Spartan Motors, Inc. Stock Incentive Plan of 2007, as amended. Previously filed as Appendix A to the Company’s 2007 Proxy Statement filed April 23, 2007 (Commission File No. 000-13611) and incorporated herein by reference.*

10.4

Spartan Motors, Inc. Leadership Team Compensation Plan. Previously filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2015 (Commission File No. 001-33582), and incorporated herein by reference.*

10.5

Spartan Motors, Inc. Directors’ Stock Purchase Plan. Previously filed as an exhibit to the Company’s Form S-8 Registration Statement (Registration No. 333-98083) filed on August 14, 2002, and incorporated herein by reference.*


None.

75

 

Exhibit
Number
Document

10.6

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Form of Stock Appreciation Rights Agreement. Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the period ended December 31, 2007 (Commission File No. 001-33582) and incorporated herein by reference.*

 

SPARTAN MOTORS, INC.

March 16, 2020

By

/s/ Frederick J. Sohm

Frederick J. Sohm
Chief Financial Officer

(Principal Financial and Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

March 16, 2020

By

/s/ Daryl M. Adams

10.7

Form of Restricted Stock Agreement. Previously filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2009 (Commission File No. 001-33582), and incorporated herein by reference.*

10.8

Form of Indemnification Agreement. Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the period ended December 31, 2005 (Commission File No. 000-13611), and incorporated herein by reference.*

10.9

Supplemental Executive Retirement Plan. Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the period ended December 31, 2007 (Commission File No. 001-33582), and incorporated herein by reference. *

10.10

Spartan Motors, Inc. Stock Incentive Plan of 2012. Previously filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed May 15, 2012 (Commission File No. 001-33582), and incorporated herein by reference.*

10.11

Lease agreement dated February 13, 2012 between the Company and Fruit Hills Investments, LLC. Previously filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2012 (Commission File No. 001-33582) and incorporated herein by reference.

10.12

Second Amended and Restated Credit Agreement, dated October 31, 2016, by and among the Company, Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto. Previously filed as Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the period ended December 31, 2016 (Commission File No. 001-33582), and incorporated herein by reference.

10.13

Employment Letter Agreement dated July 22, 2014, between Spartan Motors, Inc. and Daryl M. Adams. Previously filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2014 (Commission File No. 001-33582), and incorporated herein by reference.*

10.14

Employment Letter Agreement dated September 15, 2015, between Spartan Motors, Inc. and Frederick J. Sohm. Previously filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2015 (Commission File No. 001-33582), and incorporated herein by reference.*

10.15

Employment Letter Agreement Dated January 6, 2005 between Spartan Motors, Inc. and Arthur D. Ickes. Previously filed as Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the period ended December 31, 2015 (Commission File No. 001-33582) and incorporated herein by reference.*

10.16

Employment Letter Agreement dated October 30, 2008 between Spartan Motors, Inc. and Thomas T. Kivell. Previously filed as Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the period ended December 31, 2015 (Commission File No. 001-33582) and incorporated herein by reference.*

 


 

Exhibit
Number
Document

10.17

Employment Agreement dated May 7, 2009, between Utilimaster Holdings, Inc. and John A. Forbes. Previously filed as Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the period ended December 31, 2015 (Commission File No. 001-33582) and incorporated herein by reference.*

10.18

Employment Letter Agreement dated December 23, 2014 between Spartan Motors, Inc. and Steve Guillaume. Previously filed as Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the period ended December 31, 2015 (Commission File No. 001-33582) and incorporated herein by reference.*

10.19

Employment Letter Agreement dated May 11, 2015 between Spartan Motors, Inc. and Steve Guillaume. Previously filed as Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the period ended December 31, 2015 (Commission File No. 001-33582) and incorporated herein by reference.*

10.20

Employment Letter Agreement dated July 14, 2014 between Spartan Motors, Inc. and Thomas C. Schultz. Previously filed as Exhibit 10.20 to the Company’s Annual Report on Form 10-K for the period ended December 31, 2016 (Commission File No. 001-33582) and incorporated herein by reference.*

10.21

Asset Purchase Agreement, dated as of December 12, 2016, by and among Spartan Motors USA, Inc., Smeal Fire Apparatus Co., Smeal Properties, Inc., Ladder Tower Co., U.S. Tanker Co., and Rodney Cerny, as Representative. Previously filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 5, 2017, and incorporated herein by reference.

10.22

First Amendment to the Second Amended and Restated Credit Agreement, dated December 1, 2017, by and among the Company, Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto.

21

Subsidiaries of Registrant.

Daryl M. Adams

Director, President and Chief Executive Officer
(Principal Executive Officer)

March 16, 2020

By

/s/ Frederick J. Sohm

Frederick J. Sohm
Chief Financial Officer

(Principal Financial and Accounting Officer)

March 16, 2020

By

/s/ James A. Sharman

James A. Sharman, Director

March 16, 2020

By

/s/ Thomas R. Clevinger

Thomas R. Clevinger, Director

March 16, 2020

By

/s/ Richard F. Dauch

Richard F. Dauch, Director

March 16, 2020

By

/s/ Ronald E. Harbour

Ronald E. Harbour, Director

March 16, 2020

By

/s/ Angela K. Freeman

Angela K. Freeman, Director

March 16, 2020

By

/s/ Paul A. Mascarenas

Paul A. Mascarenas, Director

March 16, 2020

By

/s/ Dominic Romeo

Dominic Romeo, Director

March 16, 2020

By

/s/ Andrew M. Rooke

Andrew M. Rooke, Director

 

 

 

23

Consent of BDO USA, LLP, Independent Registered Public Accounting firm.

24

Limited Powers of Attorney.

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, Secretary and Treasurer pursuant to Section 302 of the Sarbanes-Oxley Act.

32

Certification 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.

The Company will furnish a copy of any exhibit listed above to any shareholder of the Company without charge upon written request to: Chief Financial Officer, Spartan Motors, Inc., 1541 Reynolds Road, Charlotte, Michigan 48813.

 

Item 16.

Form 10-K Summary

None.


76

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 APPENDIX A

SPARTAN MOTORS, INC.

March 1, 2018

By

/s/ Frederick J. Sohm

Frederick J. Sohm
Chief Financial Officer

(Principal Financial and Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

March 1, 2018

By

/s/ Daryl M. Adams

Daryl M. Adams

Director, President and Chief Executive Officer
(Principal Executive Officer)

March 1, 2018

By

/s/ Frederick J. Sohm

Frederick J. Sohm
Chief Financial Officer

(Principal Financial and Accounting Officer)

March 1, 2018

By

*

James A. Sharman, Director

March 1, 2018

By

*

Richard R. Current, Director

 

 

 March 1, 2018

SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
SPARTAN MOTORS, INC. AND SUBSIDIARIES

Column A

 

Column B

  

Column C

  

Column D

  

Column E

 
                     





Description

 



Balance at
Beginning
of Period

  


Additions
Charged to
Costs and
Expenses

  

Additions
Charged to
Other
Accounts
(Acquisition)

  





Deductions

  



Balance
at End
of Period

 
                     

Year ended December 31, 2019:

                    
                     

Allowance for doubtful accounts

 $99  $415  $-  $(286

)

 $228 
                     
                     

Year ended December 31, 2018:

                    
                     

Allowance for doubtful accounts

 $98  $32  $-  $(31

)

 $99 
                     
                     

Year ended December 31, 2017:

                    
                     

Allowance for doubtful accounts

 $420  $78  $-  $(400

)

 $98 

77

By

*

Richard F. Dauch, Director

 March 1, 2018

By

*

Ronald E. Harbour, Director

March 1, 2018

By

*

James C. Orchard, Director

March 1, 2018

By

*

Dominic Romeo, Director 

March 1, 2018

By

*

Andrew M. Rooke, Director

March 1, 2018

By

* /s/ Frederick J. Sohm

Frederick J. Sohm

Attorney-in-Fact


 

APPENDIX A

SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
SPARTAN MOTORS, INC. AND SUBSIDIARIES

Column A

 

Column B

  

Column C

  

Column D

  

Column E

 
��                    





Description

 



Balance at
Beginning
of Period

  


Additions
Charged to
Costs and
Expenses

  

Additions
Charged to
Other
Accounts
(Acquisition)

  





Deductions

  



Balance
at End
of Period

 
                     

Year ended December 31, 2017:

                    
                     

Allowance for doubtful accounts

 $487  $109  $-  $(457

)

 $139 
                     

Year ended December 31, 2016:

                    
                     

Allowance for doubtful accounts

 $130  $368  $-  $(11

)

 $487 
                     

Year ended December 31, 2015:

                    
                     

Allowance for doubtful accounts

 $144  $12  $-  $(26

)

 $130