UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 10-Q10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
OR | ||
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
Commission File Number 000-13611001-33582
SPARTAN MOTORS, INCINC..
(Exact Name of Registrant as Specified in Its Charter)
Michigan |
| 38-2078923 |
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Registrant’sRegistrant’s Telephone Number, Including Area Code: (517) 543-6400
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes | X | No |
Indicate by check mark whether the registrant has submitted electronically 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 |
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company,, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☒ | |
Non-accelerated filer | ☐ | Smaller Reporting Company | ☐ | |
Emerging Growth Company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2)12b-2 of the Exchange Act).
Yes | No | X |
Indicate the number of shares outstanding of each of the issuer’sissuer’s classes of common stock, as of the latest practicable date.
| Outstanding at |
Common stock, $.01 par value |
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INDEX
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Item 4. |
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Item 1A. |
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Item 2. |
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There are certain statements within this Report that are not historical facts. These statements are called “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements involve important known and unknown risks, uncertainties and other factors and can be identified by phrases using “estimate,” “anticipate,” “believe,” “project,” “expect,” “intend,” “predict,” “potential,” “future,” “may,” “will”, “should” and similar expressions or words. Our future results, performance or achievements may differ materially from the results, performance or achievements discussed in the forward-looking statements. There are numerous factors that could cause actual results to differ materially from the results discussed in forward-looking statements, including, among others:
● | Changes in economic conditions, including changes in interest rates, credit availability, financial market performance and our industries can have adverse effects on its earnings and financial condition, as well as our customers, dealers and suppliers. |
● | Changes in relationships with major customers and suppliers could significantly affect our revenues and profits. |
● | Constrained government budgets may have a negative effect on our business and its operations. |
● | The integration of businesses or assets we have acquired or may acquire in the future involves challenges that could disrupt our business and harm our financial condition. |
● | When we introduce new products, we may incur expenses that we did not anticipate, such as start-up and recall expenses, resulting in reduced earnings. |
● | Amendments of the laws and regulations governing our businesses, or the promulgation of new laws and regulations, could have a material impact on our operations. |
● | We source components from a variety of domestic and global suppliers who may be subject to disruptions from natural or man-made causes. Disruptions in our supply of components could have a material and adverse impact on our results of operations or financial position. |
● | Changes in the markets we serve may, from time to time, require us to re-configure our production lines or re-locate production of products between buildings or to new locations in order to maximize the efficient utilization of our production capacity. Costs incurred to effect these re-configurations may exceed our estimates and efficiencies gained may be less than anticipated. |
This list provides examples of factors that could affect the results described by forward-looking statements contained in this Report. However, this list is not intended to be all inclusive.all-inclusive. The risk factors disclosed in Item 1A “Risk Factors” of Part II of this Quarterly Report on Form 10-Q and in Part I – Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016,2017, include all known risks our management believes could materially affect the results described by forward-looking statements contained in this Report. However, those risks may not be the only risks we face. Our business, operations, and financial performance could also be affected by additional factors that are not presently known to us or that we currently consider to be immaterial to our operations. In addition, new risks may emerge from time to time that may cause actual results to differ materially from those contained in any forward-looking statements. We believe that the forward-looking statements contained in this Report are reasonable. However, given these risks and uncertainties, we cannot provide you with any guarantee that the anticipated results will be achieved. All forward-looking statements in this Report are expressly qualified in their entirety by the cautionary statements contained in this Section and you are cautioned not to place undue reliance on the forward-looking statements contained in this Report as a prediction of actual results. We disclaim any obligation to update or revise information contained in any forward-looking statement to reflect developments or information obtained after the date this Report is filed with the Securities and Exchange Commission.
Financial Statements |
SPARTAN MOTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
(Unaudited)
September 30, 2017 | December 31, | |||||||
(Unaudited) | 2016 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 21,855 | $ | 32,041 | ||||
Accounts receivable, less allowance of $191 and $487 | 93,682 | 65,441 | ||||||
Inventories | 95,070 | 58,896 | ||||||
Income taxes receivable | - | 1,287 | ||||||
Other current assets | 4,482 | 4,526 | ||||||
Total current assets | 215,089 | 162,191 | ||||||
Property, plant and equipment, net | 55,984 | 53,116 | ||||||
Goodwill | 27,489 | 15,961 | ||||||
Intangible assets, net | 9,642 | 6,385 | ||||||
Other assets | 2,872 | 2,331 | ||||||
Net deferred tax assets | 9,790 | 3,310 | ||||||
TOTAL ASSETS | $ | 320,866 | $ | 243,294 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 55,000 | $ | 31,336 | ||||
Accrued warranty | 19,786 | 19,334 | ||||||
Accrued compensation and related taxes | 12,043 | 13,188 | ||||||
Deposits from customers | 26,950 | 16,142 | ||||||
Other current liabilities and accrued expenses | 12,461 | 7,659 | ||||||
Current portion of long-term debt | 49 | 65 | ||||||
Total current liabilities | 126,289 | 87,724 | ||||||
Long-term debt, less current portion | 22,840 | 74 | ||||||
Other non-current liabilities | 5,103 | 2,544 | ||||||
Total liabilities | 154,232 | 90,342 | ||||||
Commitments and contingencies | ||||||||
Shareholders' equity: | ||||||||
Preferred stock, no par value: 2,000 shares authorized (none issued) | - | - | ||||||
Common stock, $0.01 par value; 80,000 shares authorized; 35,087 and 34,383 outstanding | 351 | 344 | ||||||
Additional paid in capital | 78,773 | 76,837 | ||||||
Retained earnings | 88,168 | 76,428 | ||||||
Total Spartan Motors, Inc. shareholders’ equity | 167,292 | 153,609 | ||||||
Non-controlling interest | (658 | ) | (657 | ) | ||||
Total shareholders’ equity | 166,634 | 152,952 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 320,866 | $ | 243,294 | ||||
See Accompanying Notes to Condensed Consolidated Financial Statements.
June 30, | December 31, | |||||||
2018 | 2017 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 21,664 | $ | 33,523 | ||||
Accounts receivable, less allowance of $141 and $139 | 92,556 | 83,147 | ||||||
Contract assets | 46,418 | - | ||||||
Inventories | 64,613 | 77,692 | ||||||
Other current assets | 4,441 | 4,425 | ||||||
Total current assets | 229,692 | 198,787 | ||||||
Property, plant and equipment, net | 54,630 | 55,177 | ||||||
Goodwill | 27,417 | 27,417 | ||||||
Intangible assets, net | 9,019 | 9,427 | ||||||
Other assets | 2,614 | 3,072 | ||||||
Net deferred tax asset | 6,312 | 7,284 | ||||||
TOTAL ASSETS | $ | 329,684 | $ | 301,164 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 78,574 | $ | 40,643 | ||||
Accrued warranty | 16,194 | 18,268 | ||||||
Accrued compensation and related taxes | 10,800 | 13,264 | ||||||
Deposits from customers | 15,067 | 25,422 | ||||||
Other current liabilities and accrued expenses | 8,680 | 12,071 | ||||||
Current portion of long-term debt | 57 | 64 | ||||||
Total current liabilities | 129,372 | 109,732 | ||||||
Other non-current liabilities | 4,782 | 5,238 | ||||||
Long-term debt, less current portion | 17,896 | 17,925 | ||||||
Total liabilities | 152,050 | 132,895 | ||||||
Commitments and contingencies | ||||||||
Shareholders' equity: | ||||||||
Preferred stock, no par value: 2,000 shares authorized (none issued) | - | - | ||||||
Common stock, $0.01 par value; 80,000 shares authorized; 35,194 and 35,097 outstanding | 352 | 351 | ||||||
Additional paid in capital | 79,239 | 79,721 | ||||||
Retained earnings | 98,701 | 88,855 | ||||||
Total Spartan Motors, Inc. shareholders’ equity | 178,292 | 168,927 | ||||||
Non-controlling interest | (658 | ) | (658 | ) | ||||
Total shareholders’ equity | 177,634 | 168,269 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 329,684 | $ | 301,164 | ||||
SPARTAN MOTORS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Sales | $ | 189,215 | $ | 148,664 | $ | 526,029 | $ | 444,927 | ||||||||
Cost of products sold | 160,564 | 130,571 | 461,327 | 390,206 | ||||||||||||
Restructuring charges | - | 83 | 156 | 83 | ||||||||||||
Gross profit | 28,651 | 18,010 | 64,546 | 54,638 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 1,598 | 1,377 | 5,265 | 4,408 | ||||||||||||
Selling, general and administrative | 17,057 | 13,820 | 48,160 | 41,782 | ||||||||||||
Restructuring charges | 232 | 221 | 1,044 | 788 | ||||||||||||
Total operating expenses | 18,887 | 15,418 | 54,469 | 46,978 | ||||||||||||
Operating income | 9,764 | 2,592 | 10,077 | 7,660 | ||||||||||||
Other income (expense): | ||||||||||||||||
Interest expense | (189 | ) | (112 | ) | (582 | ) | (314 | ) | ||||||||
Interest and other income | 159 | 151 | 438 | 305 | ||||||||||||
Total other income (expense) | (30 | ) | 39 | (144 | ) | (9 | ) | |||||||||
Income before taxes | 9,734 | 2,631 | 9,933 | 7,651 | ||||||||||||
Taxes | (3,736 | ) | (113 | ) | (3,561 | ) | (11 | ) | ||||||||
Net income | 13,470 | 2,744 | 13,494 | 7,662 | ||||||||||||
Less: net loss attributable to non-controlling interest | - | (1 | ) | (1 | ) | (6 | ) | |||||||||
Net income attributable to Spartan Motors, Inc. | $ | 13,470 | $ | 2,745 | $ | 13,495 | $ | 7,668 | ||||||||
Basic net earnings per share | $ | 0.38 | $ | 0.08 | $ | 0.39 | $ | 0.22 | ||||||||
Diluted net earnings per share | $ | 0.38 | $ | 0.08 | $ | 0.39 | $ | 0.22 | ||||||||
Basic weighted average common shares outstanding | 35,105 | 34,439 | 34,882 | 34,406 | ||||||||||||
Diluted weighted average common shares outstanding | 35,105 | 34,439 | 34,882 | 34,406 | ||||||||||||
See Accompanying Notes to Condensed Consolidated Financial Statements.
SPARTAN MOTORS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 13,494 | $ | 7,662 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 7,335 | 5,742 | ||||||
(Gain)/loss on disposal of assets | - | (24 | ) | |||||
Impairment of assets | - | 406 | ||||||
Accruals for warranty | 6,799 | 9,790 | ||||||
Deferred income taxes | (6,493 | ) | (2,670 | ) | ||||
Stock based compensation related to stock awards | 2,578 | 1,280 | ||||||
Decrease (increase) in operating assets: | ||||||||
Accounts receivable | (29,110 | ) | (13,865 | ) | ||||
Inventories | 26,194 | (7,402 | ) | |||||
Income taxes receivable | 1,287 | 1,059 | ||||||
Other assets | 1,038 | 462 | ||||||
Increase (decrease) in operating liabilities: | ||||||||
Accounts payable | 19,729 | 16,822 | ||||||
Cash paid for warranty repairs | (10,036 | ) | (7,727 | ) | ||||
Accrued compensation and related taxes | (2,751 | ) | 3,533 | |||||
Deposits from customers | (32,121 | ) | 4,451 | |||||
Other current liabilities and accrued expenses | 258 | 876 | ||||||
Other long term liabilities | 1,811 | - | ||||||
Taxes on income | 2,106 | 58 | ||||||
Total adjustments | (11,376 | ) | 12,791 | |||||
Net cash provided by operating activities | 2,118 | 20,453 | ||||||
Cash flows from investing activities: | ||||||||
Purchases of property, plant and equipment | (3,762 | ) | (9,299 | ) | ||||
Proceeds from sale of property, plant and equipment | - | 25 | ||||||
Acquisition of business, net of cash acquired | (28,903 | ) | - | |||||
Net cash used in investing activities | (32,665 | ) | (9,274 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from long-term debt | 32,800 | 10 | ||||||
Payments on long-term debt | (10,049 | ) | (42 | ) | ||||
Purchase and retirement of common stock | - | (2,000 | ) | |||||
Payment of dividends | (1,755 | ) | (1,725 | ) | ||||
Net cash used in the exercise, vesting or cancellation of stock incentive awards | (635 | ) | (137 | ) | ||||
Net cash provided by (used in) financing activities | 20,361 | (3,894 | ) | |||||
Net increase (decrease) in cash and cash equivalents | (10,186 | ) | 7,285 | |||||
Cash and cash equivalents at beginning of period | 32,041 | 32,701 | ||||||
Cash and cash equivalents at end of period | $ | 21,855 | $ | 39,986 | ||||
See Accompanying Notes to Condensed Consolidated Financial Statements.
SPARTAN MOTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF SHAREHOLDERS’ EQUITYOPERATIONS
(In thousands)thousands, except per share data)
(Unaudited)(Unaudited)
Number of | Common | Additional Paid In | Retained | Non-Controlling | Total Shareholders' | |||||||||||||||||||
Shares | Stock | Capital | Earnings | Interest | Equity | |||||||||||||||||||
Balance at December 31, 2016 | 34,383 | $ | 344 | $ | 76,837 | $ | 76,428 | $ | (657 | ) | $ | 152,952 | ||||||||||||
Issuance of common stock and the tax impact of stock incentive plan transactions | 7 | - | (635 | ) | - | - | (635 | ) | ||||||||||||||||
Issuance of restricted stock, net of cancellation | 697 | 7 | (7 | ) | - | - | - | |||||||||||||||||
Dividends declared ($0.05 per share) | - | - | - | (1,755 | ) | - | (1,755 | ) | ||||||||||||||||
Stock based compensation expense related to restricted stock | - | - | 2,578 | - | - | 2,578 | ||||||||||||||||||
Net income (loss) | - | - | - | 13,495 | (1 | ) | 13,494 | |||||||||||||||||
Balance at September 30, 2017 | 35,087 | $ | 351 | $ | 78,773 | $ | 88,168 | $ | (658 | ) | $ | 166,634 | ||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Sales | $ | 183,981 | $ | 169,739 | $ | 357,019 | $ | 336,814 | ||||||||
Cost of products sold | 157,612 | 150,232 | 308,492 | 300,763 | ||||||||||||
Restructuring charges | - | 6 | - | 156 | ||||||||||||
Gross profit | 26,369 | 19,501 | 48,527 | 35,895 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 1,817 | 1,524 | 3,205 | 3,666 | ||||||||||||
Selling, general and administrative | 19,040 | 16,503 | 36,911 | 31,104 | ||||||||||||
Restructuring charges | 797 | 319 | 817 | 812 | ||||||||||||
Total operating expenses | 21,654 | 18,346 | 40,933 | 35,582 | ||||||||||||
Operating income | 4,715 | 1,155 | 7,594 | 313 | ||||||||||||
Other income (expense): | ||||||||||||||||
Interest expense | (270 | ) | (129 | ) | (592 | ) | (393 | ) | ||||||||
Interest and other income | 832 | 190 | 2,425 | 280 | ||||||||||||
Total other income (expense) | 562 | 61 | 1,833 | (113 | ) | |||||||||||
Income before taxes | 5,277 | 1,216 | 9,427 | 200 | ||||||||||||
Taxes | 1,537 | 92 | 1,490 | 175 | ||||||||||||
Net income | 3,740 | 1,124 | 7,937 | 25 | ||||||||||||
Less: net loss attributable to non-controlling interest | - | - | - | (1 | ) | |||||||||||
Net income attributable to Spartan Motors Inc. | $ | 3,740 | $ | 1,124 | $ | 7,937 | $ | 26 | ||||||||
Basic net earnings per share | $ | 0.11 | $ | 0.03 | $ | 0.23 | $ | 0.00 | ||||||||
Diluted net earnings per share | $ | 0.11 | $ | 0.03 | $ | 0.23 | $ | 0.00 | ||||||||
Basic weighted average common shares outstanding | 35,260 | 35,127 | 35,177 | 34,768 | ||||||||||||
Diluted weighted average common shares outstanding | 35,260 | 35,127 | 35,177 | 34,768 | ||||||||||||
See Accompanying Notes to Condensed Consolidated Financial Statements.
SPARTAN MOTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30, | ||||||||
2018 | 2017 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 7,937 | $ | 25 | ||||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
Depreciation and amortization | 5,038 | 4,690 | ||||||
Loss on disposal of assets | - | 1 | ||||||
Accruals for warranty | 3,323 | 4,909 | ||||||
Expense from changes in fair value of contingent consideration | (693 | ) | - | |||||
Deferred income taxes | 3 | 63 | ||||||
Stock based compensation related to stock awards | 2,189 | 1,513 | ||||||
(Increase) decrease in operating assets: | ||||||||
Accounts receivable | (9,409 | ) | (17,379 | ) | ||||
Contract assets | (15,859 | ) | - | |||||
Inventories | (19,854 | ) | 32,904 | |||||
Income taxes receivable | - | 618 | ||||||
Other assets | (16 | ) | 110 | |||||
Increase (decrease) in operating liabilities: | ||||||||
Accounts payable | 37,931 | 6,740 | ||||||
Cash paid for warranty repairs | (5,397 | ) | (7,059 | ) | ||||
Accrued compensation and related taxes | (2,464 | ) | (4,890 | ) | ||||
Deposits from customers | (3,121 | ) | (25,410 | ) | ||||
Other current liabilities and accrued expenses | (414 | ) | 1,146 | |||||
Other long term liabilities | (173 | ) | 1,898 | |||||
Taxes on income | (1,631 | ) | 88 | |||||
Total adjustments | (10,547 | ) | (58 | ) | ||||
Net cash used in operating activities | (2,610 | ) | (33 | ) | ||||
Cash flows from investing activities: | ||||||||
Purchases of property, plant and equipment | (4,083 | ) | (2,438 | ) | ||||
Proceeds from sale of property, plant and equipment | - | - | ||||||
Acquisition of business, net of cash acquired | - | (28,915 | ) | |||||
Net cash used in investing activities | (4,083 | ) | (31,353 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from long-term debt | - | 32,800 | ||||||
Payments on long-term debt | (36 | ) | (10,033 | ) | ||||
Payment of contingent consideration on acquisitions | (701 | ) | - | |||||
Payment of dividends | (1,759 | ) | (1,755 | ) | ||||
Net cash used in the exercise, vesting or cancellation of stock incentive awards | (2,670 | ) | (427 | ) | ||||
Net cash (used in) provided by financing activities | (5,166 | ) | 20,585 | |||||
Net decrease in cash and cash equivalents | (11,859 | ) | (10,801 | ) | ||||
Cash and cash equivalents at beginning of period | 33,523 | 32,041 | ||||||
Cash and cash equivalents at end of period | $ | 21,664 | $ | 21,240 | ||||
See Accompanying Notes to Condensed Consolidated Financial Statements.
SPARTAN MOTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(In thousands)
(Unaudited)
Number of | Common | Additional Paid In | Retained | Non- Controlling | Total Shareholders' | |||||||||||||||||||
Shares | Stock | Capital | Earnings | Interest | Equity | |||||||||||||||||||
Balance at December 31, 2017 | 35,097 | $ | 351 | $ | 79,721 | $ | 88,855 | $ | (658 | ) | $ | 168,269 | ||||||||||||
Issuance of common stock and the tax impact of stock incentive plan transactions | 5 | - | (2,670 | ) | - | - | (2,670 | ) | ||||||||||||||||
Issuance of restricted stock, net of cancellation | 92 | 1 | (1 | ) | - | - | - | |||||||||||||||||
Dividends declared ($0.05 per share) | - | - | - | (1,759 | ) | - | (1,759 | ) | ||||||||||||||||
Stock based compensation expense related to restricted stock | - | - | 2,189 | - | - | 2,189 | ||||||||||||||||||
Transition adjustment for adoption of new revenue recognition standard | - | - | - | 3,668 | - | 3,668 | ||||||||||||||||||
Net income | - | - | - | 7,937 | - | 7,937 | ||||||||||||||||||
Balance at June 30, 2018 | 35,194 | $ | 352 | $ | 79,239 | $ | 98,701 | $ | (658 | ) | $ | 177,634 | ||||||||||||
See Accompanying Notes to Condensed Consolidated Financial Statements.
SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
NOTE 1 - GENERAL AND SUMMARY OF ACCOUNTING POLICIES
For a description of key accounting policies followed,, refer to the notes to the Spartan Motors, Inc. (the “Company”, “we”, “our” or “us”) consolidated financial statements for the year ended December 31, 2016, 2017, included in our Annual Report on Form 10-K10-K filed with the Securities and Exchange Commission on March 3, 2017. There have been no changes1,2018. Refer to the Adoption of Revenue Recognition Accounting Policy section below for the adoption of a new revenue recognition standard in such accounting policies asthe first quarter of the date of this report.2018.
Spartan Motors, Inc. isWe are a custom engineerniche market leader in the engineering and manufacturermanufacturing of specialized motor vehicle chassis and bodies. Our principal chassis markets are emergency response vehicles, motor homes and otherheavy-duty, purpose-built specialty vehicles. We also manufactureOur products include walk-in vans and truck bodies for various markets including emergency response vehicles and vehicles used in e-commerce/parcel delivery, up-fit equipment used in the mobile retail, and utility trades, fire trucks and construction industries.
Ourfire truck chassis, luxury Class A diesel motor home chassis, military vehicles, and contract manufacturing and assembly services. We also supply replacement parts and offer repair, maintenance, field service and refurbishment services for the vehicles that we manufacture. We conduct our operating activities are conducted through our wholly-ownedwholly owned operating subsidiary, Spartan Motors USA, Inc. (“Spartan USA”), with locations in Charlotte, Michigan; Brandon, South Dakota; Ephrata, Pennsylvania; Bristol, Indiana; Snyder and Neligh, Nebraska; and Delavan, Wisconsin; Ephrata, Pennsylvania; Bristol, Indiana;Wisconsin, along with contract manufacturing in Kansas City, Missouri;Missouri and Saltillo, Mexico.
Our Charlotte, Michigan location manufactures heavy duty chassis and vehicles and supplies aftermarket parts and accessories under the Spartan Chassis and Spartan ER brand names. Our Brandon, South Dakota; Snyder and Neligh, Nebraska; Delavan, Wisconsin; and Ephrata, Pennsylvania locations manufacture emergency response vehicles under the Spartan ER, Smeal, US Tanker and Ladder Tower Company brand names. 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. 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 provideOur Brandon, South Dakota, Snyder and Neligh, Nebraska, Delavan, Wisconsin, and Ephrata, Pennsylvania locations manufacture emergency response vehicles forunder the domesticSpartan, Smeal, US Tanker 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-Q.
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.,Company brand names. In June 2018, we implemented a plan to close our Delavan, Wisconsin facility and U.S. Tanker Co. When used in this Quarterly Report on Form 10-Q, “Smeal” refers toconsolidate production with our Brandon, South Dakota facility. Our Charlotte, Michigan location manufactures heavy-duty chassis and vehicles, and supplies aftermarket parts and accessories under the assets, liabilities,Spartan Chassis 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.Spartan brand names.
The accompanying unaudited interim condensed consolidated financial statements reflect all normal and recurring adjustments that are necessary for the fair presentation of our financial position as of SeptemberJune 30, 2017, 2018, the results of operations for the three and nine monthsix-month periods ended SeptemberJune 30, 2017 2018 and the cash flows for the nine monthsix-month period ended SeptemberJune 30, 2017, and2018. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in our Annual Report on Form 10-K10-K for the year ended December 31, 2016.2017.
The results of operations for the three and ninesix months ended SeptemberJune 30, 2017 2018 are not necessarily indicative of the results to be expected for the full year.
We are required to disclose the fair value of our financial instruments in accordance with Financial Accounting Standards Board (“FASB”) Codification relating to “Disclosures about Fair Values of Financial Instruments.” The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and our variable rate debt instruments approximate their fair value at SeptemberJune 30, 2017 2018 and December 31, 2016.2017.
Certain immaterial amounts in the prior periods’periods’ financial statements have been reclassified to conform to the current period’s presentation. These reclassifications had no impact on previously reported Net income (loss) or Total shareholders’ equity.
New Accounting Standards
In June 2018, the FASB issued Accounting Standards Update No.2018-07,Compensation-Stock Compensation (Topic 718) (“ASU 2018-07”). ASU 2018-07 is intended to provide guidance for share-based payment transactions for acquiring goods and services from non-employees. ASU 2018-07 is effective for reporting periods beginning after December 15, 2018 and early adoption is permitted. We are currently evaluating the impact of our pending adoption of ASU 2018-07 on our financial statements, but do not expect any resulting changes to have a material impact on our consolidated financial position, results of operations or cash flows.
In March 2018, the FASB issued Accounting Standards Update No.2018-05,Income Taxes (Topic 740) (“ASU 2018-05”). ASU 2018-05 is intended to provide guidance on the recognition of taxes payable or refundable for the current year and the recognition of deferred tax liabilities and deferred tax assets for the future tax consequences of events that have been recognized in our financial statements in the reporting period in which the Tax Cuts and Jobs Act was enacted. ASU 2018-05 went into effect when the Tax Cuts and Jobs Act was enacted on December 22, 2017 and includes a one-year remeasurement period. We are currently evaluating the impact that the enactment of the Tax Cuts and Jobs Act will have on our financial statements, but do not expect any resulting changes to have a material impact on our consolidated financial position, results of operations or cash flows.
SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
New Accounting Standards
In February 2017, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update No. 2017-05,2017-05, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20)610-20) (“ASU 2017-05”2017-05”). ASU 2017-052017-05 is intended to provide guidance for when gains and losses on nonfinancial assets should be applied to a financial asset by defining the term “nonfinancial asset”. ASU 2017-05 will go into effect when2017-05 became effective for us beginning in the revenue standard issued in ASU 2014-09 becomes effective. We believe that thefirst quarter of 2018. The adoption of the provisions of ASU 2017-05 will not have a material impact on our consolidated financial position, results of operations or cash flows.
In January 2017 the FASB issued Accounting Standards Update No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-4”). ASU 2017-4 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. 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. We believe that the adoption of the provisions of ASU 2017-04 will not have a material 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. We believe that the adoption of the provisions of ASU 2017-01 will not have a material 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-05 did not have an impact on our consolidated financial position, results of operations or cash flows through September 30, 2017.flows.
In June 2016, the FASB issued Accounting Standards Update 2016-13,2016-13, Financial Instruments – 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 the adoption of the provisions of ASU 2016-132016-13 will not 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. The impact of our adoption of ASU 2016-09 for the year ending December 31, 2017 will depend on market factors and the timing and intrinsic value of future stock based compensation award vesting. Our adoption of ASU 2016-09 did not have a material impact on our consolidated financial position, results of operations or cash flows through September 30, 2017.
SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, -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 forwith capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently evaluating the impact of our pending adoption of ASU 2016-022016-02 on our consolidated financial position, results of operations orand 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, January 2018, the FASB issued Accounting Standards Update 2015-11, No.2018-01,InventoryLeases (Topic 330) – Simplifying842) (“ASU 2018-01”). The new standard provides an optional transition practical expedient to not evaluate existing or expired land easements under Topic 842 that were not previously accounted for as leases under the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 requires entities that measure inventory using the FIFO or average cost methodscurrent leases guidance in Topic 840. We expect to measure inventory at the lower of cost or net realizable valueapply this practical expedient, which we do not expect 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 had nohave a material impact on our consolidated financial position, results of operations or cash flows.
In May 2014, the FASB issued Accounting Standards Update 2014-09, 2014-09,Revenue from Contracts with Customers (Topic 606) ((“ASU 2014-09”2014-09” or “ASC 606”). 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 (ASU 2014-09), Principal versus Agent Considerations (Reporting Revenue Gross versus Net); No.2016-10,Revenue from Contracts with Customers (ASU 2014-09), Identifying Performance Obligations and Licensing; and No.2016-12,Revenue from Contracts with Customers (ASU 2014-09), Narrow-Scope Improvements and Practical Expedients.ASU 2014-092014-09, 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 2014-092014-09 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. We have undertaken a detailed analysisadopted ASU 2014-09 as of our various contracts with customers and revenue streams. We are currently in the process of evaluating aspects of revenue recognition for certain of our contracts with customers and expect to complete this evaluation in the fourth quarter of 2017. While our evaluation is not yet complete, based on our analysis to date we currently believe that our revenue recognition will be mostly consistent under both the current and new standard, with performance obligations being satisfied under the majority of our contracts with customers upon delivery of our products. 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 liabilties. We currently expect to adopt the new standard January 1, 2018 using the modified retrospective approach, under whichapproach. See the cumulative effect“Adoption of Revenue Recognition Accounting Policy” section below for a description of the initial applicationimpact of the new standard will be recognized as an adjustment toadoption of the opening balanceprovisions of retained earnings,ASU 2014-09 on our consolidated financial position, results of operations and cash flows.
SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in the first quarter of 2018.thousands, except per share data)
In March 2016, the FASB issued Accounting Standards Update No. 2016-08, 2016-08,Revenue from Contracts with Customers (Topic 606)(ASU 2014-09), Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”2016-08”). ASU 2016-082016-08 clarifies the implementation guidance for principal-versus-agent considerations in the revenue recognition standard. A principal-versus-agent consideration applies to sales that involve two or more suppliers to a customer. Each participant in the sale must determine whether they control the good or service and are entitled to the gross amount of the transaction or are acting as an agent and should collect only a fee or commission for arranging the sale. ASU 2016-082016-08 will go into effect when the revenue standard issued in ASU 2014-092014-09 becomes effective. We adopted ASU 2014-09 as of January 1, 2018 using the modified retrospective approach. See the “Adoption of Revenue Recognition Accounting Policy” section below for a description of the impact of the adoption of the provisions of ASU 2014-09 on our consolidated financial position, results of operations and cash flows.
In April 2016, the FASB issued Accounting Standards Update No. 2016-10, 2016-10,Revenue from Contracts with Customers (Topic 606)(ASU 2014-09), Identifying Performance Obligations and Licensing (“ASU 2016-10”2016-10”). ASU 2016-102016-10 clarifies the implementation guidance in Topic 606ASU 2014-09 for identifying performance obligations and determining when to recognize revenue on licensing agreements for intellectual property. ASU 2016-102016-10 removes the requirement to assess whether promised goods or services are performance obligations if they are immaterial to the contract with the customer and allows an entity to elect to account for shipping and handling activities that occur after the customer has obtained control of a good as an activity to fulfill the promise to transfer the good rather than as an additional promised service. ASU 2016-102016-10 also includes implementation guidance on determining whether a license granted by an entity provides a customer with a right to use the intellectual property, which is satisfied at a point in time, or a right to access the intellectual property, which is satisfied over time. ASU 2016-102016-10 will go into effect when the revenue standard issued in ASU 2014-092014-09 becomes effective. We adopted ASU 2014-09 as of January 1, 2018 using the modified retrospective approach. See the “Adoption of Revenue Recognition Accounting Policy” section below for a description of the impact of the adoption of the provisions of ASU 2014-09 on our consolidated financial position, results of operations and cash flows.
In May 2016, the FASB issued Accounting Standards Update No.2016-12,Revenue from Contracts with Customers (ASU 2014-09), Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”). ASU 2016-12 clarifies the implementation guidance on assessing collectability, presentation of sales taxes, non-cash consideration and completed contracts and contract modifications at transition. ASU 2016-12 will go into effect when the revenue standard issued in ASU 2014-09 becomes effective. We adopted ASU 2014-09 as of January 1, 2018 using the modified retrospective approach. See the “Adoption of Revenue Recognition Accounting Policy” section below for a description of the impact of the adoption of the provisions of ASU 2014-09 on our consolidated financial position, results of operations and cash flows.
Adoption of Revenue Recognition Accounting Policy
Except for the changes below, we have consistently applied the accounting policies to all periods presented in these condensed consolidated financial statements. We adopted ASC 606 with a date of initial application of January 1, 2018. As a result, we changed our accounting policy for revenue recognition as detailed below.
We applied ASC 606 using the cumulative effect method by recognizing the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of retained earnings at January 1, 2018. Therefore, the comparative information has not been adjusted and continues to be reported under prior revenue recognition guidance. The details of the significant changes and quantitative impact of the changes are set out below.
Essentially all of our revenue is generated through contracts with our customers. We may recognize revenue over time or at a point in time when or as obligations under the terms of a contract with our customer are satisfied, depending on the terms and features of the contract and the products supplied. Our contracts generally do not have any significant variable consideration. The collectability of consideration on the contract is reasonably assured before revenue is recognized. On certain vehicles, payment may be received in advance of us satisfying our performance obligations. Such payments are recorded in Customer deposits on the Condensed Consolidated Balance Sheets. The corresponding performance obligations are generally satisfied within one year of the contract inception. In such cases, we have elected to apply the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component. Financing impact on contracts that contain performance obligations that are not expected to be satisfied within one year are expected to be immaterial to our financial statements. We have elected to utilize the practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred because the amortization period for the prepaid costs that would have otherwise been deferred and amortized is one year or less.Revenue recognized in a current period from performance obligations satisfied in a prior period, if any, is immaterial to our financial statements. We use an observable price to allocate the stand-alone selling price to separate performance obligations within a contract or a cost-plus margin approach when an observable price is not available. The estimated costs to fulfill our base warranties are recognized as expense when the products are sold (see “Note 5 – 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.
SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
In May 2016,Revenue for parts sales for all segments is recognized at the FASB issued Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers (Topic 606), Narrow-Scope Improvementstime that control and Practical Expedients (“ASU 2016-12”). ASU 2016-12 clarifiesrisk of ownership has passed to the implementation guidance on assessing collectability, presentation of sales taxes, non-cash consideration and completed contracts and contract modifications at transition. ASU 2016-12 will go into effectcustomer, 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 standard issuedat the time that they are received.
For certain of our vehicles and chassis, we sell separately priced service contracts that provide roadside assistance or extend certain warranty coverage beyond our base warranty agreements. These separately priced contracts range from 1 to 6 years from the date of the shipment of the related vehicle or chassis. We receive payment with the shipment of the related vehicle or at the inception of the extended service contract, if later, and recognize revenue over the coverage term of the agreement, generally on a straight-line basis, which approximates the pattern of costs expected to be incurred in ASU 2014-09 becomes effective.satisfying the obligations under the contract.
Distinct revenue recognition policies for our segments are as follows:
Fleet Vehicles and Services
Our Walk-in vans and truck bodies are generally built on a chassis that is owned and controlled by the customer. Due to the customer ownership of the chassis, the performance obligation for these walk-in vans and truck bodies is satisfied as the vehicles are built. Accordingly, the revenue and corresponding cost of products sold associated with these contracts are recognized over time based on the inputs completed for a given performance obligation during the reporting period. Certain contracts will specify that a walk-in van or truck body is to be built on a chassis that we purchase and subsequently sell to the customer. The revenue on these contracts is recognized at the time that the performance obligation is satisfied and control and risk of ownership has passed to the customer, which is generally upon shipment of the vehicle from our manufacturing facility to the customer or receipt of the vehicle by the customer, depending on contract terms. We have elected to treat shipping and handling costs subsequent to transfer of control as fulfillment activities and, accordingly, recognize these costs as the revenue is recognized.
Revenue for up-fit and field service contracts is recognized over time, as equipment is installed in the customer’s vehicle or as repairs and enhancements are made to the customer’s vehicles. Revenue and the corresponding cost of products sold is estimated based on the inputs completed for a given performance obligation. Our performance obligation for up-fit and field service contracts is satisfied when the equipment installation or repairs and enhancements of the customer’s vehicle has been completed.
Payment on our fleet vehicles and services performance obligations is received an average of 35 days after revenue is recognized.
NOTE 2 – ACQUISITION ACTIVITIESEmergency Response Vehicles
On January 1, 2017, we completedOur emergency response chassis and apparatuses are generally manufactured to order based on customer-supplied specifications. Due to the acquisition of substantially allcustom nature of the assetsproducts and certain liabilitiesthe attributes of Smeal pursuant to an Asset Purchase Agreement dated December 12, 2016.
This acquisition will bring significant scale tothe contracts, we do not have a ready alternative use for our Emergency Response Vehicles segment, expand the geographic reach of our dealer network and add complementary products to our existing emergency response product portfolio.
Saleschassis and operating income included in our results sinceapparatuses and we have an enforceable right to payment on the January 1, 2017 acquisitioncontracts. Accordingly, performance obligations for these custom ordered chassis and apparatuses are satisfied as follows:
Three Months Ended September 30, 2017 | Nine Months Ended September 30, 2017 | |||||||
Net sales | $ | 26,408 | $ | 102,878 | ||||
Operating income | 1,859 | 850 | ||||||
The above operating income amounts include a one-time charge tothe apparatuses and chassis are built. We recognize revenue and the corresponding cost of products sold on these contracts over time based on the inputs completed for a given performance obligation during the reporting period. We have elected to treat shipping and handling costs subsequent to transfer of $0control as fulfillment activities and, $189accordingly, recognize these costs as the revenue is recognized. Payment is received an average of 48 days following the recognition of revenue for chassis and 103 days for complete apparatuses.
Revenue on certain emergency response chassis and apparatuses that are sold from stock or utilized as demonstration units is recognized at the three and nine months ended September 30, 2017point in time that the contract is received. Revenue related to modifications made to trucks sold from stock or that were utilized as demonstration units is recognized over time as the fair value step-upmodifications are completed. Payment is received an average of inventories acquired from Smeal and sold during60 days following the period.
Pro forma Resultsrecognition of Operation (Unaudited)
The following table provides unaudited pro forma net sales and results of operationsrevenue for the three and nine months ended September 30, 2017 and 2016, as if Smeal had been acquired on January 1 of 2016. The unaudited pro forma results reflect certain adjustments related to the acquisition, such as changes in the depreciation 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 synergiesstock or other effects of the planned 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.demonstrator units.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2017 | September 30, 2016 | September 30, 2017 | September 30, 2016 | |||||||||||||
Net sales | $ | 189,215 | $ | 165,304 | $ | 526,029 | $ | 493,806 | ||||||||
Net earnings attributable to Spartan Motors, Inc. | $ | 13,589 | $ | 1,745 | $ | 16,310 | $ | 5,729 | ||||||||
Diluted net earnings per share | $ | 0.39 | $ | 0.05 | $ | 0.47 | $ | 0.17 | ||||||||
SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
Purchase Price AllocationSpecialty Chassis and Vehicles
The total purchase price paid for our acquisition of Smeal was $42,489, subject to a net working capital adjustmentWe recognize revenue and the tax gross-up payment described below. The consideration paid consistedcorresponding cost of $28,903 in cash, netproducts sold on the sale of cash acquiredmotor home chassis when the performance obligation is completed and control and risk of $3,825,ownership of the chassis has passed to our customer, which is generally upon shipment of the chassis to the customer.
Revenue and the forgivenesscorresponding cost of certain liabilities owed byproducts sold associated with other specialty chassis is recognized over time based on the former ownersinputs completed for a given performance obligation during the reporting period. The performance obligations for other specialty chassis contracts are satisfied as the products are assembled. Payment is received an average of Smeal to24 days following the Company in the amountrecognition of $7,391. Pursuant to the purchase agreement, the sellers may receive additional consideration in the form of a tax gross-up payment, which is payable no later than April 1, 2018, and is not expected to exceed $2,400. The consideration paid is subject to certain post-closing adjustments, including a net working capital adjustment that we expect to finalize in the fourth quarter of 2017. 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 Smeal and us.
This acquisition was accountedrevenue for using the purchase method of accounting 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 preliminary excess of the purchase price over the estimated fair values of the net tangible and intangible assets acquired of $11,528 was recorded as goodwill. During the nine months ended September 30, 2017, the Company made certain adjustments to its purchase price allocation to adjust inventory, other current assets, accrued warranty and other liabilities, which resulted in a $1,666 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 $2,370.specialty chassis.
The preliminary allocationtables below present the impacts of purchase price to assets acquired and liabilities assumed is as follows:
Cash | $ | 3,825 | ||
Accounts receivable | 6,523 | |||
Inventory | 62,368 | |||
Other current assets | 932 | |||
Property, plant and equipment | 5,773 | |||
Intangible assets | 3,900 | |||
Goodwill | 11,528 | |||
Total assets acquired | 94,849 | |||
Accounts payable | 3,935 | |||
Customer prepayments | 42,929 | |||
Accrued warranty | 3,689 | |||
Other liabilities | 1,807 | |||
Total liabilities assumed | 52,360 | |||
Total purchase price | $ | 42,489 |
Contingent Consideration
Pursuant to the purchase agreement, the former owners of Smeal may receive additional consideration in the form of a tax gross-up payment. The purchase agreement specifies that Spartan will make a payment to the former owners of Smeal to cover certain state and federal tax liabilities for the tax year ending December 31, 2017 that result from the transaction. The payment is expected to be between $0 and $2,400 and will be based on state and federal income tax regulations in effect at the timeour adoption of the payment for the tax year ending December 31, 2017. Under tax rules in effect as of the filing of this Form 10-Q, the additional consideration would be approximately $2,400. In accordance with accounting guidance for business combinations, the value of the future consideration was recorded based upon tax rules in effect at the time of the acquisition, discounted to January 1, 2017 using a risk free discount rate of 1%. Changes in this estimate, other than changes in its present value, will be reflected as adjustments to the purchase price for a period of up to one year after the closing. Changes in the present value of the contingent consideration will be reflected in operatingnew revenue standard on our income in the period of such change.
Goodwill Assigned
The acquisition resulted in the recognition, on a preliminary basis, of $11,528 of goodwill, which is expected to be deductible for tax purposes. The goodwill recognized is subject to a final net working capital adjustmentstatement and any necessary adjustment to the contingent consideration.
Goodwill consists of expected synergies resulting from the acquisition and the estimated value of the workforce employed. Key areas of expected cost savings include an expanded dealer network; complementary product portfolios; manufacturing and supply chain work process improvements; and the elimination of redundant corporate overhead.balance sheet.
Three Months Ended June 30, 2018 | ||||||||||||
As Reported | Balances Without Adoption of ASC 606 |
Effect of Change Higher/(Lower) | ||||||||||
Income Statement | ||||||||||||
Sales | $ | 183,981 | $ | 178,249 | $ | 5,732 | ||||||
Cost of products sold | 157,612 | 152,568 | 5,044 | |||||||||
Taxes | 1,537 | 1,370 | 167 | |||||||||
Net income | 3,740 | 3,219 | 521 | |||||||||
Six Months Ended June 30, 2018 | ||||||||||||
As Reported | Balances Without Adoption of ASC 606 |
Effect of Change Higher/(Lower) | ||||||||||
Income Statement | ||||||||||||
Sales | $ | 357,019 | $ | 357,716 | $ | (697 | ) | |||||
Cost of products sold | 308,492 | 310,251 | (1,760 | ) | ||||||||
Taxes | 1,490 | 1,245 | 245 | |||||||||
Net income | 7,937 | 7,119 | 818 | |||||||||
June 30, 2018 | ||||||||||||
As Reported | Balances Without Adoption of ASC 606 |
Effect of Change Higher/(Lower) | ||||||||||
Balance Sheet | ||||||||||||
Assets | ||||||||||||
Contract assets | $ | 46,418 | $ | - | $ | 46,418 | ||||||
Inventories | 64,613 | 114,872 | (50,259 | ) | ||||||||
Net deferred tax asset | 6,312 | 7,209 | (897 | ) | ||||||||
Liabilities | ||||||||||||
Deposits from customers | 15,067 | 24,831 | (9,764 | ) | ||||||||
Other current liabilities and accrued expenses | 8,680 | 8,138 | 542 | |||||||||
Equity | ||||||||||||
Retained earnings | 98,701 | 94,217 | 4,484 | |||||||||
SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
FinancingThe table below presents the cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the Acquisitionadoption of ASC 606.
Our acquisition of Smeal was financed using $32,800 borrowed from our existing $100,000 line of credit, as set forth
December 31, 2017 | Transition adjustments | January 1, 2018 | ||||||||||
Assets | ||||||||||||
Contract assets | $ | - | $ | 30,559 | $ | 30,559 | ||||||
Inventory | 77,692 | (32,933 | ) | 44,759 | ||||||||
Net deferred tax asset | 7,284 | (897 | ) | 6,387 | ||||||||
Liabilities | ||||||||||||
Deposits from customers | 25,422 | (7,234 | ) | 18,188 | ||||||||
Other current liabilities and accrued expenses | 12,071 | 295 | 12,366 | |||||||||
Equity | ||||||||||||
Retained earnings | 88,855 | 3,668 | 92,523 | |||||||||
Contract assets and liabilities
The tables below disclose changes in the Second Amendedcontract assets and Restated Credit Agreement, datedliabilities as of October 31, 2016, by and among us and our affiliates, as borrowers; 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 the three and nine months ended September 30, 2017, we recorded pretax charges totaling $11 and $742 for legal expenses and other transaction costs related to the acquisition. During the three and nine months ended September 30, 2016, we recorded pretax charges totaling $159 and $159 for legal expenses and other transaction costs 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” column in the business segment table in Note 9, Business Segments.periods indicated.
Contract assets | ||||
Opening balance (January 1, 2018) | $ | 30,559 | ||
Reclassification of the beginning contract assets to receivables, as the result of rights to consideration becoming unconditional | (28,198 | ) | ||
Contract assets recognized, net of reclassification to receivables | 44,057 | |||
Net change | 15,859 | |||
Ending balance (June 30, 2018) | $ | 46,418 |
NOTE 3 – INVENTORIES
Contract liabilities | ||||
Opening balance (January 1, 2018) | $ | 18,188 | ||
Reclassification of the beginning contract liabilities to revenue, as the result of performance obligations satisfied | (11,587 | ) | ||
Cash received in advance and not recognized as revenue | 8,466 | |||
Net change | (3,121 | ) | ||
Ending balance (June 30, 2018) | $ | 15,067 |
InventoriesThe aggregate amount of the transaction price allocated to remaining performance obligations in existing contracts that are summarizedyet to be completed are expected to be recognized as follows:
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
Finished goods | $ | 17,790 | $ | 12,743 | ||||
Work in process | 24,623 | 14,063 | ||||||
Raw materials and purchased components | 55,620 | 35,458 | ||||||
Reserve for slow-moving inventory | (2,963 | ) | (3,368 | ) | ||||
Total inventory | $ | 95,070 | $ | 58,896 | ||||
We have a number of demonstration units used as part of our sales program. These demonstration units are includedrevenue in the “Finished goods” line item above. The net carrying amount was $7,726 and $3,558 at September 30, 2017 and December 31, 2016.
NOTE 4 – GOODWILL AND INTANGIBLE ASSETS
Goodwill
As described in Note 2 - Acquisition Activities, we 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. Due to the short period of time that has elapsed since the acquisition of Smeal, it is our assessment that the goodwill at Smeal is not impaired. The goodwill at Smeal will be evaluated as part of the nextfollowing annual assessment which will occur as of October 1, 2017, unless there is a triggering event that would necessitate 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.time-periods:
1-12 Months (1) | 13 Months and beyond(1) | Total | ||||||||||
Revenue expected to be recognized as of June 30, 2018: | ||||||||||||
Fleet Vehicles and Services | $ | 283,167 | $ | 30,207 | $ | 313,374 | ||||||
Emergency Response Vehicles | 170,187 | 6,703 | 176,890 | |||||||||
Specialty Chassis and Vehicles | 35,158 | 36 | 35,194 | |||||||||
Total | $ | 488,512 | $ | 36,946 | $ | 525,458 | ||||||
(1) | Revenue above includes amounts related to extended warranties and roadside assistance contracts of $210 and $35 for one to 12 months and $1,077 and $36 for 13 months and beyond, respectively. |
SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
Changes in the carrying amount of goodwill, by reportable segment,For performance obligations that are as follows:
Emergency Response Vehicles | Fleet Vehicles & Services | Specialty Chassis & Vehicles | Total | |||||||||||||
Balance as of December 31, 2016 | $ | - | $ | 15,961 | $ | - | $ | 15,961 | ||||||||
Acquisition of Smeal | 11,528 | - | - | 11,528 | ||||||||||||
Reassignment of goodwill | - | (638 | ) | 638 | - | |||||||||||
Balance as of September 30, 2017 | $ | 11,528 | $ | 15,323 | $ | 638 | $ | 27,489 | ||||||||
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 unpatented technology and various trade names. The unpatented technology will be amortized using the straight-line methodsatisfied over its estimated remaining useful life of 10 years, consistent with the pattern of economic benefits estimated to be received. The trade names 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.
The following table provides information regarding our other intangible assets:
As of September 30, 2017 | As of December 31, 2016 | |||||||||||||||||||||||
Gross carrying amount | Accumulated amortization | Net | Gross carrying amount | Accumulated amortization | Net | |||||||||||||||||||
Customer and dealer relationships | $ | 6,170 | $ | 3,619 | $ | 2,551 | $ | 6,170 | $ | 3,348 | $ | 2,822 | ||||||||||||
Acquired product development project | 1,860 | 1,427 | 433 | 1,860 | 1,167 | 693 | ||||||||||||||||||
Unpatented technology | 1,500 | 112 | 1,388 | - | - | - | ||||||||||||||||||
Non-compete agreements | 400 | 400 | - | 400 | 400 | - | ||||||||||||||||||
Backlog | 320 | 320 | - | 320 | 320 | - | ||||||||||||||||||
Trade Names | 5,270 | - | 5,270 | 2,870 | - | 2,870 | ||||||||||||||||||
| $ | 15,520 | $ | 5,878 | $ | 9,642 | $ | 11,620 | $ | 5,235 | $ | 6,385 | |||||||||||||
We recorded intangible asset amortization expense of $214 and $177 during the three months ended September 30, 2017 and 2016 and $643 and $531 during the nine months ended September 30, 2017 and 2016.
The estimated remaining amortization associated with finite-lived intangible assetstime, revenue is expected to be expensed as follows:recognized evenly over the time period to complete the contract due to the assembly line nature of the business operations. For performance obligations that are satisfied at a point in time, revenue is expected to be recognized when the customer obtains control of the product, which is generally upon shipment from our facility. No amounts have been excluded from the transaction prices above related to the guidance on constraining estimates of variable consideration.
Amount | ||||
2017 | $ | 190 | ||
2018 | 816 | |||
2019 | 449 | |||
2020 | 423 | |||
2021 | 399 | |||
Thereafter | 2,095 | |||
Total | $ | 4,372 | ||
In the following tables, revenue is disaggregated by primary geographical market and timing of revenue recognition for the three and six months ended June 30, 2018. The tables also include a reconciliation of the disaggregated revenue with the reportable segments.
Three Months Ended June 30, 2018 | ||||||||||||||||||||||||
Fleet Vehicles and Services | Emergency Response Vehicles | Specialty Chassis and Vehicles | Total Reportable Segments | Other | Total | |||||||||||||||||||
| Primary geographical markets | ||||||||||||||||||||||||
United States | $ | 75,818 | $ | 54,149 | $ | 47,431 | $ | 177,398 | $ | (1,528 | ) | $ | 175,870 | |||||||||||
Other | 2,597 | 5,466 | 48 | 8,111 | - | 8,111 | ||||||||||||||||||
Total sales | $ | 78,415 | $ | 59,615 | $ | 47,479 | $ | 185,509 | $ | (1,528 | ) | $ | 183,981 | |||||||||||
Timing of revenue recognition | ||||||||||||||||||||||||
Products transferred at a point in time | $ | 22,611 | $ | 4,232 | $ | 40,203 | $ | 67,046 | $ | - | $ | 67,046 | ||||||||||||
Products and services transferred over time | 55,804 | 55,383 | 7,276 | 118,463 | (1,528 | ) | 116,935 | |||||||||||||||||
Total sales | $ | 78,415 | $ | 59,615 | $ | 47,479 | $ | 185,509 | $ | (1,528 | ) | $ | 183,981 | |||||||||||
Six Months Ended June 30, 2018 | ||||||||||||||||||||||||
Fleet Vehicles and Services | Emergency Response Vehicles | Specialty Chassis and Vehicles | Total Reportable Segments | Other | Total | |||||||||||||||||||
| Primary geographical markets | ||||||||||||||||||||||||
United States | $ | 134,339 | $ | 112,698 | $ | 95,577 | $ | 342,614 | $ | (3,129 | ) | $ | 339,485 | |||||||||||
Other | 3,767 | 13,630 | 137 | 17,534 | - | 17,534 | ||||||||||||||||||
Total sales | $ | 138,106 | $ | 126,328 | $ | 95,714 | $ | 360,148 | $ | (3,129 | ) | $ | 357,019 | |||||||||||
Timing of revenue recognition | ||||||||||||||||||||||||
Products transferred at a point in time | $ | 27,793 | $ | 10,608 | $ | 81,470 | $ | 119,871 | $ | - | $ | 119,871 | ||||||||||||
Products and services transferred over time | 110,313 | 115,720 | 14,244 | 240,277 | (3,129 | ) | 237,148 | |||||||||||||||||
Total sales | $ | 138,106 | $ | 126,328 | $ | 95,714 | $ | 360,148 | $ | (3,129 | ) | $ | 357,019 | |||||||||||
SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
NOTE 2 – INVENTORIES
Inventories are summarized as follows:
June 30, | December 31, | |||||||
2018 | 2017 | |||||||
Finished goods | $ | 12,939 | $ | 15,539 | ||||
Work in process | 7,337 | 15,980 | ||||||
Raw materials and purchased components | 47,519 | 49,159 | ||||||
Reserve for slow-moving inventory | (3,182 | ) | (2,986 | ) | ||||
Total inventory | $ | 64,613 | $ | 77,692 | ||||
We also have a number of demonstration units as part of our sales and training program. These demonstration units are included in the “Finished goods” line item above, and amounted to $6,340 and $7,435 at June 30, 2018 and December 31, 2017. When the demonstration units are sold, the cost related to the demonstration unit is included in Cost of products sold on our Condensed Consolidated Statements of Operations.
5NOTE 3 - DEBT
Long-term debt consists of the following:
September 30, | December 31, | June 30, | December 31, | |||||||||||||
Line of credit revolver (1): | $ | 22,800 | $ | - | ||||||||||||
Line of credit revolver (1) | $ | 17,800 | $ | 17,800 | ||||||||||||
Capital lease obligations | 89 | 139 | 153 | 189 | ||||||||||||
Total debt | 22,889 | 139 | 17,953 | 17,989 | ||||||||||||
Less current portion of long-term debt | (49 | ) | (65 | ) | (57 | ) | (64 | ) | ||||||||
Total long-term debt | $ | 22,840 | $ | 74 | $ | 17,896 | $ | 17,925 | ||||||||
| On |
Under the terms of the primary line of credit agreement, as amended, we are required to maintain certain financial ratios and other financial conditions, which limited our available borrowings under our line of credit to a total of approximately $45,500$93,000 and $73,600$66,400 at SeptemberJune 30, 2017 2018 and December 31, 2016, net of borrowings outstanding.2017, respectively. The agreement also prohibits us from incurring additional indebtedness; limits certain acquisitions, investments, advances or loans; limits our ability to pay dividends in certain circumstances; and restricts substantial asset sales. At SeptemberJune 30, 2017 2018 and December 31, 2016,2017, we were in compliance with all debt covenants.
NOTE 6–RESTRUCTURING
During the three and nine months ended September 30, 2017, we incurred restructuring charges related to a company-wide initiative to streamline operations and integrate our Smeal acquisition.
During the three and nine months ended September 30, 2016, we incurred restructuring charges related to efforts undertaken to upgrade production processes at our Brandon, South Dakota and Ephrata, Pennsylvania locations.
Restructuring charges includedcovenants in our Consolidated Statements of Operations for the three and nine months ended September 30, 2017, broken down by segment, are as follows:credit agreement.
Three Months Ended September 30, 2017 | ||||||||||||||||||||
Emergency Response Vehicles | Fleet Vehicles and Services | Specialty Chassis and Vehicles | Other | Total | ||||||||||||||||
Cost of products sold | ||||||||||||||||||||
Accrual for severance | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
General and Administrative | ||||||||||||||||||||
Accrual for severance | - | 232 | - | - | 232 | |||||||||||||||
Total restructuring | $ | - | $ | 232 | $ | - | $ | - | $ | 232 | ||||||||||
SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
Nine Months Ended September 30, 2017 | ||||||||||||||||||||
Emergency Response Vehicles | Fleet Vehicles and Services | Specialty Chassis and Vehicles | Other | Total | ||||||||||||||||
Cost of products sold | ||||||||||||||||||||
Accrual for severance | $ | 43 | $ | 97 | $ | 16 | $ | - | $ | 156 | ||||||||||
General and Administrative | ||||||||||||||||||||
Accrual for severance | 367 | 547 | 79 | 51 | 1,044 | |||||||||||||||
Total restructuring | $ | 410 | $ | 644 | $ | 95 | $ | 51 | $ | 1,200 | ||||||||||
NOTE 4 – RESTRUCTURING
During the three and six months ended June 30, 2018, we incurred restructuring charges related to a company-wide initiative to streamline operations and consolidate our Delavan, Wisconsin production into our Brandon, South Dakota operations.
During the three and six months ended June 30, 2017, we incurred restructuring charges related to a company-wide initiative to streamline operations and integrate our Smeal acquisition.
Restructuring charges for the three and nine months ended September 30, 2016 reflected within Operating expenseincluded in our Condensed Consolidated Statements of Operations were $304for the three and $871 six months ended June 30, 2018 and related to manufacturing process reengineering. All2017, broken down by segment, are as follows:
Three Months Ended June 30, 2018 | ||||||||||||||||||||
Fleet Vehicles and Services | Emergency Response Vehicles | Specialty Chassis and Vehicles | Other | Total | ||||||||||||||||
Selling, general and administrative | ||||||||||||||||||||
Accrual for severance | $ | - | $ | 322 | $ | - | $ | 475 | $ | 797 | ||||||||||
Six Months Ended June 30, 2018 | ||||||||||||||||||||
Fleet Vehicles and Services | Emergency Response Vehicles | Specialty Chassis and Vehicles | Other | Total | ||||||||||||||||
Selling, general and administrative | ||||||||||||||||||||
Accrual for severance | $ | - | $ | 339 | $ | 3 | $ | 475 | $ | 817 | ||||||||||
Three Months Ended June 30, 2017 | ||||||||||||||||||||
Fleet Vehicles and Services | Emergency Response Vehicles | Specialty Chassis and Vehicles | Other | Total | ||||||||||||||||
Cost of products sold | ||||||||||||||||||||
Accrual for severance | $ | - | $ | 6 | $ | - | $ | - | $ | 6 | ||||||||||
Selling, general and administrative | ||||||||||||||||||||
Accrual for severance | 307 | 4 | - | 8 | 319 | |||||||||||||||
Total restructuring | $ | 307 | $ | 10 | $ | - | $ | 8 | $ | 325 | ||||||||||
Six Months Ended June 30, 2017 | ||||||||||||||||||||
Fleet Vehicles and Services | Emergency Response Vehicles | Specialty Chassis and Vehicles | Other | Total | ||||||||||||||||
Cost of products sold | ||||||||||||||||||||
Accrual for severance | $ | 97 | $ | 43 | $ | 16 | $ | - | $ | 156 | ||||||||||
Selling, general and administrative | ||||||||||||||||||||
Accrual for severance | 315 | 367 | 79 | 51 | 812 | |||||||||||||||
Total restructuring | $ | 412 | $ | 410 | $ | 95 | $ | 51 | $ | 968 | ||||||||||
SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
The following table provides a summary of the compensation related charges incurred during the three and ninesix months ended SeptemberJune 30, 2017 2018 as part of our restructuring initiatives, along with the related outstanding balances to be paid in relation to those expenses, which is reflected within Accrued compensation and related taxes on our Condensed Consolidated Balance Sheets.
Severance | ||||
Balance January 1, 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 | 116 | |||
Payments and adjustments made in period | (250 | ) | ||
Balance September 30, 2017 | $ | 93 | ||
There were no compensation related charges incurred during the three and nine months ended September 30, 2016.
Severance | ||||
Balance January 1, 2018 | $ | 11 | ||
Accrual for severance | 20 | |||
Payments and adjustments made in period | (27 | ) | ||
Balance March 31, 2018 | 4 | |||
Accrual for severance | 797 | |||
Payments and adjustments made in period | (4 | ) | ||
Balance June 30, 2018 | $ | 797 | ||
NOTE 75 - 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.$20,000. At SeptemberJune 30, 2017 2018 and December 31, 2016, 2017, we had outstanding letters of credit totaling $906$842 and $1,599$754 related to certain emergency response vehicle contracts and our workers compensation insurance.
At SeptemberJune 30, 2017, 2018, we and our subsidiaries were parties, both as plaintiff and defendant, to a number of lawsuits and claims arising out of the normal course of our businesses. In the opinion of management, our financial position, future operating results or cash flows will not be materially affected by the final outcome of these legal proceedings.
Chassis Agreements
We are party to chassis bailment inventory agreements with General Motors Company (“GM”) and Chrysler Group, LLC (“Chrysler”) which allow GM and Chrysler to draw up to $10,000$10,000 against our revolving credit line for chassis placed at our facilities. As a result of these agreements, there was $144$1,005 and $784$57 outstanding on our revolving credit line at SeptemberJune 30, 2017 2018 and December 31, 2016. 2017. Under the terms of the bailment inventory agreements, these chassis never become our property and the amount drawn against the credit line will be repaid by a GM or Chrysler dealer at the time an order is placed for one of our bodies, utilizing a GM or Chrysler chassis. As such, the chassis, and the related draw on the line of credit, are not reflected in the accompanying Condensed Consolidated Balance Sheets.
Warranty Related
We provide limited warranties against assembly/construction defects. These warranties generally provide for the replacement or repair of defective parts or workmanship for a specified period following the date of sale. The end users also may receive limited warranties from suppliers of components that are incorporated into our chassis and vehicles.
SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
Certain warranty and other related claims involve matters of dispute that ultimately are resolved by negotiation, arbitration or litigation. Infrequently, a material warranty issue can arise which is beyond the scope of our historical experience. We provide for any such warranty issues as they become known and are estimable. It is reasonably possible that additional warranty and other related claims could arise from disputes or other matters beyond the scope of our historical experience.
Changes in our warranty liability during the ninesix months ended SeptemberJune 30, 2017 2018 and 20162017 were as follows:
2017 | 2016 | 2018 | 2017 | |||||||||||||
Balance of accrued warranty at January 1 | $ | 19,334 | $ | 16,610 | $ | 18,268 | $ | 19,334 | ||||||||
Warranties issued during the period | 5,717 | 3,733 | 3,168 | 3,839 | ||||||||||||
Cash settlements made during the period | (10,036 | ) | (7,727 | ) | (5,397 | ) | (7,059 | ) | ||||||||
Changes in liability for pre-existing warranties during the period, including expirations | 1,082 | 6,057 | ) | 155 | 1,070 | ) | ||||||||||
Assumed warranties outstanding at Smeal on January 1, 2017 | 3,689 | - | - | 1,900 | ||||||||||||
Balance of accrued warranty at September 30 | $ | 19,786 | $ | 18,673 | ||||||||||||
Balance of accrued warranty at June 30 | $ | 16,194 | $ | 19,084 | ||||||||||||
SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
Spartan-Gimaex joint ventureJoint Venture
Spartan USA is 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 Spartan-Gimaex joint venture. In June 2015, Spartan USA and Gimaex Holding, Inc. entered into court proceedings to determine the terms of the dissolution. In February 2017, by agreement of the parties, the court proceeding was dismissed with prejudice and the judge entered an order to this effect as the parties agreed to seek a dissolution plan on their own. No dissolution terms have been determined as of the date of this Form 10-Q. Costs associated with the wind-down will be impacted by the final dissolution agreement. 10-Q.
In accordance with accounting guidance, the costs we have accrued so far representestimated costs representing the low end of the range of the estimated total charges that we believe we may incur related to the wind-down. While we are unable to determine the final cost of the wind-down with certainty at this time, we may incur additional charges, depending on the final terms of the dissolution, and such charges could be material to our future operating results. There were no further wind-down charges recorded during the six months ended June 30, 2018.
NOTE 8NOTE 6 – TAXES
Our effective income tax rate was -38.4%29.1% and -35.9%15.8% for the three and ninesix months ended SeptemberJune 30, 20172018 compared to 7.5% and was -4.3% and -0.1%87.5% for the three and ninesix months ended SeptemberJune 30, 2016. 2017.
Our effective tax rates during 2017 and 2016 wererate for the three months ended June 30, 2018 was unfavorably impacted by an adjustment due to a change in expected full year financial performance. During thesecond quarter of 2018 we recorded additional income tax expense of $170 to increase the balance of the tax expense recorded for the first half of 2018 to the Company’s current estimated full year effective tax rate of 27.3% before discrete items. The effective tax rate for the six months ended June 30, 2018 was favorably impacted by a $1,333 discrete tax benefit related to the difference in stock compensation expense recognized for book purposes and tax purposes upon vesting, partially offset by $249 of increases for other discrete items.
Our effective tax rate for the three and six months ended June 30, 2017 was impacted by our deferred tax asset valuation allowance, recorded in 2015. Based upon an assessment of the available positive and negative evidence as of September 30, 2017, we determined that it was more likely than not that a significant portion of the valuation allowance recorded against our deferred tax assets was no longer necessary. A major portion of such positive evidence included cumulative profits incurred over the three year period ended September 30, 2017 as well as forecasted future profits. Our remaining valuation allowance at September 30, 2017 of $3,164 offsets deferred tax assets for certain state net operating loss and tax credit carryforwards, based upon an assessment of anticipated future taxable income apportionable to those states. Taxes of $(3,736) and $(3,561) recorded during the three and nine months ended September 30, 2017 reflects the reversal of $6,577 of the valuation allowance originally recorded in 2015. The valuation allowancewhich resulted in a tax rate applied to 2016current earnings of 0% due to ourthe ability to offset the current period tax liability against our recorded valuation allowance. TaxesTax expense of $(113)$92 and $(11)$175 recorded duringin the three and ninesix months ended SeptemberJune 30, 2016 result2017 resulted from certainvarious discrete adjustments, including adjustmentsadjustments.
In December 2017, the 2017 Tax Act was enacted. The 2017 Tax Act includes a number of changes to previous U.S. tax laws that impact us, most notably a reduction of the U.S. corporate income tax rate from 35 percent to 21 percent for uncertain tax positionsyears beginning after December 31, 2017. We recognized the income tax effects of the 2017 Tax Act in the financial statements included in our 2017 Annual Report on Form 10-K in accordance with Staff Accounting Bulletin No.118, which provides SEC staff guidance for the application of ASC Topic 740, Income Taxes, in the reporting period in which the 2017 Tax Act was signed into law. During the six months ended June 30, 2018, we did not recognize any changes to the provisional amounts recorded in our 2017 Annual Report on Form 10-K in connection with the 2017 Tax Act as we are continuing to collect the information necessary to complete those calculations. We expect to finalize our analysis in the second half of the year as we complete our federal and a true-up of certain prior provisions for various state tax liabilities to the amounts reported on the actual tax filings.returns.
NOTE 97- BUSINESS SEGMENTS
We identify our reportable segments based on our management structure and the financial data utilized by our chief operating decision makers to assess segment performance and allocate resources among our operating units. We have three reportable segments: Emergency Response Vehicles, Fleet Vehicles and Services, 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.
SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
Beginning in 2017, weWe evaluate the performance of our reportable segments based on Adjusted EBITDA. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization, and other adjustments made in order to present comparable results from period to period. These adjustments includeinclude: restructuring chargescharges; accruals and adjustments to prior accruals for product recalls; and items related to our acquisition of Smeal, such as expenses incurred to complete the acquisition the impact of fair value adjustments to inventory acquired from Smeal, and the impact on the timing of the recognition of gross profit for our chassisother purchase accounting related items that are utilized by our recently acquired Smeal operations.impacted current period operating income. We exclude these items from earnings because we believe they will be incurred infrequently and/or are otherwise not indicative of a segment's regular, ongoing operating performance. 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 20172018 annual meeting of shareholders, which proxy statement was filed with the SEC on April 13, 2017.12, 2018.
SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
Our Fleet Vehicles and Services segment consists of our operations at our Bristol, Indiana location and, beginning in 2018, certain operations at our Ephrata, Pennsylvania location along with our operations at our up-fit centers in Kansas City, Missouri and Saltillo, Mexico. 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 distributes 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 vehicles.
Our Fleet Vehicles and Services segment consists of our operations at our Bristol and Wakarusa, Indiana locations, along with our operations at our up-fit centers in Kansas City, Missouri and Saltillo, Mexico and focuses on designing and manufacturing walk-in vans for the delivery and service market and the production of commercial truck bodies along with related aftermarket parts and assemblies.
Our Specialty Chassis and Vehicles segment consists of our Charlotte, Michigan operations that engineer and manufacture motor home chassis, defense vehicles and other specialty chassis and distribute related aftermarket parts and assemblies.
Appropriate expense amounts are allocated to the three reportable segments and are included in their reported operating income or loss.
The accounting policies of the segments are the same as those described, or referred to, in Note 1 - General and Summary of Accounting Policies. Assets and related depreciation expense in the column labeled “Eliminations and other” pertain to capital assets maintained at the corporate level. Eliminations for inter-segment sales are shownincluded 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.
Three Months Ended June 30, 2018September 30, 2017
Emergency Response Vehicles | Fleet Vehicles and Services | Specialty Chassis and Vehicles | Eliminations and Other | Consolidated | Fleet Vehicles and Services | Emergency Response Vehicles | Specialty Chassis and Vehicles | Eliminations and Other | Consolidated | |||||||||||||||||||||||||||||||
| Fleet vehicle sales | $ | 53,107 | $ | - | $ | 1,528 | $ | (1,528 | ) | $ | 53,107 | |||||||||||||||||||||||||||||
Emergency response vehicle sales | $ | 63,369 | $ | - | $ | - | $ | - | $ | 63,369 | - | 56,935 | - | - | 56,935 | |||||||||||||||||||||||||
Fleet vehicle sales | - | 66,850 | 4,312 | (4,312 | ) | 66,850 | ||||||||||||||||||||||||||||||||||
Motor home chassis sales | - | - | 37,034 | - | 37,034 | - | - | 37,184 | - | 37,184 | ||||||||||||||||||||||||||||||
Other specialty vehicle sales | - | - | 4,738 | - | 4,738 | - | - | 5,748 | - | 5,748 | ||||||||||||||||||||||||||||||
Aftermarket parts and accessories sales | 2,503 | 11,787 | 2,934 | - | 17,224 | 25,308 | 2,680 | 3,019 | - | 31,007 | ||||||||||||||||||||||||||||||
Total sales | $ | 65,872 | $ | 78,637 | $ | 49,018 | $ | (4,312 | ) | $ | 189,215 | $ | 78,415 | $ | 59,615 | $ | 47,479 | $ | (1,528 | ) | $ | 183,981 | ||||||||||||||||||
Depreciation and amortization expense | $ | 575 | $ | 856 | $ | 368 | $ | 846 | $ | 2,645 | $ | 570 | $ | 628 | $ | 369 | $ | 1,019 | $ | 2,586 | ||||||||||||||||||||
Adjusted EBITDA | 2,501 | 8,785 | 5,149 | (3,541 | ) | 12,894 | 8,374 | 193 | 4,391 | (4,073 | ) | 8,885 | ||||||||||||||||||||||||||||
Segment assets | 131,806 | 78,766 | 32,770 | 77,524 | 320,866 | 103,812 | 111,255 | 31,772 | 82,845 | 329,684 | ||||||||||||||||||||||||||||||
Capital expenditures | 499 | 66 | 28 | 731 | 1,324 | 761 | 29 | 41 | 1,215 | 2,046 | ||||||||||||||||||||||||||||||
SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
Three Months Ended June 30, 2017September 30, 2016
Emergency Response Vehicles | Fleet Vehicles and Services | Specialty Chassis and Vehicles | Eliminations and Other | Consolidated | Fleet Vehicles and Services | Emergency Response Vehicles | Specialty Chassis and Vehicles | Eliminations and Other | Consolidated | |||||||||||||||||||||||||||||||
| Fleet vehicle sales | $ | 44,186 | $ | - | $ | 427 | $ | (427 | ) | $ | 44,186 | |||||||||||||||||||||||||||||
Emergency response vehicle sales | $ | 40,185 | $ | - | $ | - | $ | - | $ | 40,185 | - | 78,757 | - | - | 78,757 | |||||||||||||||||||||||||
Fleet vehicle sales | - | 57,422 | 2,244 | (2,244 | ) | 57,422 | ||||||||||||||||||||||||||||||||||
Motor home chassis sales | - | - | 22,344 | - | 22,344 | - | - | 28,162 | - | 28,162 | ||||||||||||||||||||||||||||||
Other specialty vehicle sales | - | - | 4,091 | - | 4,091 | - | - | 4,193 | - | 4,193 | ||||||||||||||||||||||||||||||
Aftermarket parts and accessories sales | 1,934 | 20,537 | 2,151 | - | 24,622 | 9,344 | 2,091 | 3,006 | - | 14,441 | ||||||||||||||||||||||||||||||
Total sales | $ | 42,119 | $ | 77,959 | $ | 30,830 | $ | (2,244 | ) | $ | 148,664 | $ | 53,530 | $ | 80,848 | $ | 35,788 | $ | (427 | ) | $ | 169,739 | ||||||||||||||||||
Depreciation and amortization expense | $ | 217 | $ | 813 | $ | 186 | $ | 962 | $ | 2,178 | $ | 887 | $ | 584 | $ | 263 | $ | 631 | $ | 2,365 | ||||||||||||||||||||
Adjusted EBITDA | (1,166 | ) | 10,118 | 1,330 | (2,909 | ) | 7,373 | 6,174 | (652 | ) | 2,765 | (3,339 | ) | 4,948 | ||||||||||||||||||||||||||
Segment assets | 75,086 | 76,080 | 33,129 | 76,953 | 261,248 | 77,254 | 126,459 | 22,051 | 70,580 | 296,344 | ||||||||||||||||||||||||||||||
Capital expenditures | 387 | 140 | 2,439 | 539 | 3,505 | 27 | 535 | 218 | 303 | 1,083 | ||||||||||||||||||||||||||||||
NineSix Months Ended June 30, 2018September 30, 2017
Emergency Response Vehicles | Fleet Vehicles and Services | Specialty Chassis and Vehicles | Eliminations and Other | Consolidated | ||||||||||||||||
Emergency response vehicle sales | $ | 220,112 | $ | - | $ | - | $ | - | $ | 220,112 | ||||||||||
Fleet vehicle sales | - | 154,178 | 4,739 | (4,739 | ) | 154,178 | ||||||||||||||
Motor home chassis sales | - | - | 91,280 | - | 91,280 | |||||||||||||||
Other specialty vehicle sales | - | - | 13,753 | - | 13,753 | |||||||||||||||
Aftermarket parts and accessories sales | 6,810 | 31,909 | 7,987 | - | 46,706 | |||||||||||||||
Total sales | $ | 226,922 | $ | 186,087 | $ | 117,759 | $ | (4,739 | ) | $ | 526,029 | |||||||||
Depreciation and amortization expense | $ | 1,711 | $ | 2,618 | $ | 942 | $ | 2,064 | $ | 7,335 | ||||||||||
Adjusted EBITDA | 510 | 21,203 | 9,415 | (9,098 | ) | 22,030 | ||||||||||||||
Segment assets | 131,806 | 78,766 | 32,770 | 77,524 | 320,866 | |||||||||||||||
Capital expenditures | 1,216 | 342 | 270 | 1,934 | 3,762 | |||||||||||||||
Nine Months Ended September 30, 2016
Emergency Response Vehicles | Fleet Vehicles and Services | Specialty Chassis and Vehicles | Eliminations and Other | Consolidated | Fleet Vehicles and Services | Emergency Response Vehicles | Specialty Chassis and Vehicles | Eliminations and Other | Consolidated | |||||||||||||||||||||||||||||||
| Fleet vehicle sales | $ | 102,932 | $ | - | $ | 3,129 | $ | (3,129 | ) | $ | 102,932 | |||||||||||||||||||||||||||||
Emergency response vehicle sales | $ | 130,080 | $ | - | $ | - | $ | - | $ | 130,080 | - | 121,043 | - | - | 121,043 | |||||||||||||||||||||||||
Fleet vehicle sales | - | 154,774 | 3,680 | (3,680 | ) | 154,774 | ||||||||||||||||||||||||||||||||||
Motor home chassis sales | - | - | 73,254 | - | 73,254 | - | - | 76,751 | - | 76,751 | ||||||||||||||||||||||||||||||
Other specialty vehicle sales | - | - | 16,722 | - | 16,722 | - | - | 11,115 | - | 11,115 | ||||||||||||||||||||||||||||||
Aftermarket parts and accessories sales | 5,555 | 56,292 | 8,250 | - | 70,097 | 35,174 | 5,285 | 4,719 | - | 45,178 | ||||||||||||||||||||||||||||||
Total sales | $ | 135,635 | $ | 211,066 | $ | 101,906 | $ | (3,680 | ) | $ | 444,927 | $ | 138,106 | $ | 126,328 | $ | 95,714 | $ | (3,129 | ) | $ | 357,019 | ||||||||||||||||||
Depreciation and amortization expense | $ | 636 | $ | 2,379 | $ | 570 | $ | 2,157 | $ | 5,742 | $ | 1,176 | $ | 1,252 | $ | 735 | $ | 1,875 | $ | 5,038 | ||||||||||||||||||||
Adjusted EBITDA | (4,532 | ) | 23,555 | 6,456 | (7,038 | ) | 18,441 | 12,961 | 1,435 | 7,513 | (7,418 | ) | 14,491 | |||||||||||||||||||||||||||
Segment assets | 75,086 | 76,080 | 33,129 | 76,953 | 261,248 | 103,812 | 111,255 | 31,772 | 82,845 | 329,684 | ||||||||||||||||||||||||||||||
Capital expenditures | 1,070 | 1,760 | 4,690 | 1,779 | 9,299 | 1,565 | 154 | 97 | 2,267 | 4,083 | ||||||||||||||||||||||||||||||
SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
Six Months Ended June 30, 2017
Fleet Vehicles and Services | Emergency Response Vehicles | Specialty Chassis and Vehicles | Eliminations and Other | Consolidated | ||||||||||||||||
| Fleet vehicle sales | $ | 87,328 | $ | - | $ | 427 | $ | (427 | ) | $ | 87,328 | |||||||||
| Emergency response vehicle sales | - | 156,742 | - | - | 156,742 | |||||||||||||||
Motor home chassis sales | - | - | 54,246 | - | 54,246 | |||||||||||||||
Other specialty vehicle sales | - | - | 9,015 | - | 9,015 | |||||||||||||||
Aftermarket parts and accessories sales | 20,122 | 4,308 | 5,053 | - | 29,483 | |||||||||||||||
Total sales | $ | 107,450 | $ | 161,050 | $ | 68,741 | $ | (427 | ) | $ | 336,814 | |||||||||
Depreciation and amortization expense | $ | 1,763 | $ | 1,136 | $ | 573 | $ | 1,218 | $ | 4,690 | ||||||||||
Adjusted EBITDA | 12,417 | (1,990 | ) | 4,266 | (5,557 | ) | 9,136 | |||||||||||||
Segment assets | 77,254 | 126,459 | 22,051 | 70,580 | 296,344 | |||||||||||||||
Capital expenditures | 276 | 718 | 242 | 1,202 | 2,438 | |||||||||||||||
The table below presentspresents the reconciliation of our consolidated income before taxes to total segment Adjusted EBITDA to net income.EBITDA. Adjusted EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income. Adjusted EBITDA may have limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. In addition, although we have excluded certain charges in calculating Adjusted EBITDA, we may in the future incur expenses similar to these adjustments, despite our assessment that such expenses are infrequent and/or not indicative of our regular, ongoing operating performance. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or infrequent items.
Three Months Ended September 30, 2017 | Three Months Ended September 30, 2016 | Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2016 | |||||||||||||
Net income | $ | 13,470 | $ | 2,744 | $ | 13,494 | $ | 7,662 | ||||||||
Add: | ||||||||||||||||
Interest expense | 189 | 112 | 582 | 314 | ||||||||||||
Taxes | (3,736 | ) | (113 | ) | (3,561 | ) | (11 | ) | ||||||||
Depreciation and amortization expense | 2,645 | 2,178 | 7,335 | 5,742 | ||||||||||||
EBITDA | 12,568 | 4,921 | 17,850 | 13,707 | ||||||||||||
Add: | ||||||||||||||||
Restructuring expense | 232 | 304 | 1,200 | 871 | ||||||||||||
Acquisition expense | 354 | - | 1,085 | - | ||||||||||||
Asset impairment | - | 406 | - | 406 | ||||||||||||
Recall expense | (368 | ) | 1,742 | (368 | ) | 3,457 | ||||||||||
Impact of inventory fair value step-up | - | - | 189 | - | ||||||||||||
Impact of chassis shipments to Smeal | 108 | - | 2,073 | - | ||||||||||||
Adjusted EBITDA | $ | 12,894 | $ | 7,373 | $ | 22,029 | $ | 18,441 | ||||||||
Three Months Ended June 30, 2018 | Three Months Ended June 30, 2017 | Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 | |||||||||||||
Total segment adjusted EBITDA | $ | 12,958 | $ | 8,287 | $ | 21,909 | $ | 14,693 | ||||||||
Add (subtract): | ||||||||||||||||
Interest expense | (270 | ) | (129 | ) | (592 | ) | (393 | ) | ||||||||
Depreciation and amortization expense | (2,586 | ) | (2,365 | ) | (5,038 | ) | (4,690 | ) | ||||||||
Restructuring expense | (797 | ) | (325 | ) | (817 | ) | (968 | ) | ||||||||
Acquisition expense | (373 | ) | (60 | ) | (535 | ) | (731 | ) | ||||||||
Recall expense | 443 | - | 443 | - | ||||||||||||
| Long-term strategic planning expense | (718 | ) | - | (718 | ) | - | ||||||||||
Impact of acquisition on timing of chassis revenue recognition | - | (853 | ) | - | (1,965 | ) | ||||||||||
Impact of step-up in inventory value resulting from acquisition | - | - | - | (189 | ) | |||||||||||
Impact of acquisition adjustments for net working capital and contingent liability | 693 | - | 2,193 | - | ||||||||||||
Unallocated corporate expenses | (4,073 | ) | (3,339 | ) | (7,418 | ) | (5,557 | ) | ||||||||
Consolidated income before taxes | $ | 5,277 | $ | 1,216 | $ | 9,427 | $ | 200 | ||||||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Spartan Motors, Inc. was organized as a Michigan corporation on September 18, 1975, and is headquartered in Charlotte, Michigan. Spartan Motors began development of its first product that same year and shipped its first fire truck chassis in October 1975.
We are known as a leading, niche market engineer and manufacturer in the heavy-duty, custom vehicles marketplace. Our operating activities are conducted through our wholly-owned operating subsidiary, Spartan Motors USA, Inc. (“Spartan USA”), with locations in Charlotte, Michigan; Brandon, South Dakota; Ephrata, Pennsylvania; Snyder and Neligh, Nebraska; Delavan, Wisconsin; Bristol, Indiana; Kansas City, Missouri; and Saltillo, Mexico. Spartan USA was formerly known as Crimson Fire, Inc.
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 dutyheavy-duty chassis and vehicles, and supplies aftermarket parts and accessories under the Spartan Chassis and Spartan ER brand names. Our Brandon, South Dakota; Snyder and Neligh, Nebraska; Delavan, Wisconsin; and Ephrata, Pennsylvania locations manufacture emergency response vehicles under the Spartan ER, Smeal, US Tanker and Ladder Tower Company brand names. Our Bristol, Indiana location manufactures vehicles used in the parcel delivery, mobile retailIn June 2018, we implemented a plan to close our Delavan, Wisconsin facility 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.consolidate production with our Brandon, South Dakota facility. 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-Q.
Our business strategy is to furtherexpand and diversify product lines and develop innovative design, engineering and manufacturing expertise in order to be the best value producer of specialtycustom vehicle products. We have an innovative team focused on building lasting relationships with our customers. This is accomplished by striving to deliver premium specialty chassis and vehicles, vehicle components, and services that inspire customer loyalty. Our diversification across several sectors createsprovides numerous opportunities while minimizingreducing overall risk. Additionally, our business model provides the agility to quickly respond to market needs, take advantage of strategic opportunities when they arise and correctly size operations to ensure stability and growth.
Recent Acquisition
On January 1, 2017, we completedWe have an innovative team focused on building lasting relationships with our acquisition of essentially all of the assets and certain liabilities of Smeal Fire Apparatus Co., Smeal Properties, Inc., Ladder Tower Co., and U.S. Tanker Co. (collectively, “Smeal”) pursuantcustomers. This is accomplished by striving to an Asset Purchase Agreement dated December 12, 2016. The assets acquired consist of the assets used by Smeal in the operation of its business designing, manufacturing, and distributingdeliver premium custom vehicles, vehicle components, and apparatus for the fire service industry. This acquisition will bring significant scale toservices. We believe we can best carry out our Emergency Response Vehicles segment, expand the geographic reachlong-term business plan and obtain optimal financial flexibility by using a combination of borrowings under our dealer network and add complementary products to our existing emergency response product portfolio. Please see Note 2 - Acquisition Activities,credit facilities, as well as internally or externally generated equity capital, as sources of the Notes to Condensed Consolidated Financial Statements appearing in Item 1 of this Form 10-Q for more information regarding this acquisition.expansion capital.
Executive Overview
● | Revenue of |
● | Gross profit of |
● | Gross Margin of |
● | Operating expense of |
● | Operating income of |
● | Net income of |
● |
|
● | Order backlog of |
We believe we are well positioned to take advantage of long-term opportunities, and continue our efforts to bring product innovations to each of the markets that we serve. Some of our recent innovations and strategic developments include:
● | Our diversified business model. We believe the major strength of our business model is market diversity and customization. Our Fleet Vehicles and Specialty Chassis and Vehicles segments serve mainly business and consumer markets, effectively diversifying our company and complementing our Emergency Response Vehicles segment, which primarily serves governmental entities. Additionally, the fleet vehicle market is an early-cycle industry, complementary to the late-cycle emergency response vehicle industry. We intend to continue to pursue additional areas that build on our core competencies | |
● | Our |
● | Our expansion into the equipment up-fit market for vehicles used in the parcel delivery, trades and construction industries. This rapidly expanding market offers an opportunity to add value to current and new customers for our fleet vehicles and vehicles produced by other original equipment manufacturers. |
● | Spartan introduced its refrigeration technology to demonstrate our ability to apply the latest technical advancements with our unique understanding of last-mile delivery optimization. Utilimaster's Work-Driven Design™ process provides best-in-class conversion solutions in walk-in vans, truck bodies, and cargo van vehicles. The refrigerated van is up-fitted to optimally preserve cold cargo quality while offering customizations such as removable bulkheads and optional thermal curtains. The multi-temperature solution requires no additional fuel source, so it can serve a wide variety of categories from food and grocery to time and temperature sensitive healthcare deliveries. |
● | The | |
● |
| |
● | Spartan Connected | |
● | The introduction of the Velocity, a new delivery 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. | |
|
The expansion of our alliance with Isuzu to include 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 plan for improving performance.
● | 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 discussion may not sum due to rounding. The comments should be read in conjunction with our Condensed Consolidated Financial Statements and related Notes thereto included in Item 1 of this Form 10-Q and in conjunction with our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 3, 2017.1, 2018.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the components of the Company’sCompany’s Condensed Consolidated Statements of Operations as a percentage of sales (percentages may not sum due to rounding):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Sales | 100.0 | 100.0 | 100.0 | 100.0 | ||||||||||||
Cost of products sold | 85.7 | 88.5 | 86.4 | 89.3 | ||||||||||||
Restructuring charge | 0.0 | 0.0 | 0.0 | 0.0 | ||||||||||||
Gross profit | 14.3 | 11.5 | 13.6 | 10.7 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 1.0 | 0.9 | 0.9 | 1.0 | ||||||||||||
Selling, general and administrative | 10.4 | 9.7 | 10.4 | 9.2 | ||||||||||||
Restructuring charge | 0.4 | 0.2 | 0.2 | 0.2 | ||||||||||||
Operating income | 2.5 | 0.7 | 2.1 | 0.1 | ||||||||||||
Other income (expense), net | 0.3 | 0.0 | 0.5 | 0.0 | ||||||||||||
Income before taxes | 2.8 | 0.7 | 2.6 | 0.1 | ||||||||||||
Taxes | 0.8 | 0.1 | 0.4 | 0.1 | ||||||||||||
Net income | 2.0 | 0.7 | 2.2 | 0.0 | ||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Sales | 100.0 | 100.0 | 100.0 | 100.0 | ||||||||||||
Cost of products sold | 84.9 | 87.8 | 87.7 | 87.7 | ||||||||||||
Restructuring charge | 0.0 | 0.1 | 0.0 | 0.0 | ||||||||||||
Gross profit | 15.1 | 12.1 | 12.3 | 12.3 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 0.8 | 0.9 | 1.0 | 1.0 | ||||||||||||
Selling, general and administrative | 9.0 | 9.3 | 9.2 | 9.4 | ||||||||||||
Restructuring charge | 0.1 | 0.1 | 0.2 | 0.2 | ||||||||||||
Operating income | 5.2 | 1.7 | 1.9 | 1.7 | ||||||||||||
Other income (expense), net | 0.0 | 0.0 | 0.0 | 0.0 | ||||||||||||
Income before taxes | 5.1 | 1.8 | 1.9 | 1.7 | ||||||||||||
Taxes | (2.0 | ) | (0.1 | ) | (0.7 | ) | 0.0 | |||||||||
Net earnings | 7.1 | 1.8 | 2.6 | 1.7 | ||||||||||||
We adopted Accounting Standards Update 2014-09, Revenue from Contracts with Customers (“ASU 2014-09” or “ASC 606”) on January 1, 2018. Our adoption of ASC 606 resulted in changes to our revenue recognition policy whereby we now recognize revenue on certain of our products as they are produced rather than at the time of shipment to the customer, among certain other changes. Please see Note 1, General and Summary of Accounting Policies, in the Notes to Condensed Consolidated Financial Statements appearing in Item 1 of this Form 10-Q for further information regarding our adoption of ASC 606.
Quarter Ended SeptemberJune 30,, 2017 2018 Compared to the Quarter Ended June 30, 2017September 30, 2016
Sales
For the quarter ended SeptemberJune 30, 2017,2018, we reported consolidated sales of $189.2$184.0 million, compared to $148.7$169.7 million for the thirdsecond quarter of 20162017 an increase of $40.5$14.3 million or 27.2%8.4%. This increase reflects sales increases of $24.9 million in our Fleet Vehicles and Services segment and $11.7 million in our Specialty Vehicles and Chassis segment, which were partially offset by a $23.8$21.2 million sales increasedecrease in our Emergency Response Vehicles segment driven by our acquisition of Smeal on January 1, 2017,and an $18.2 million increase in sales in our Specialty Chassis and Vehicles segment driven by higher motor home unit volume and a $0.6 million increase in sales in our Fleet Vehicles and Services segment. The increase in our Specialty Chassis and Vehicles segment sales includes a $4.3 million increase in inter-segment sales, which are eliminated upon consolidation.intersegment eliminations of $1.1 million. Please refer to our segment discussion below for morefurther information about sales within our segments.segment sales.
Cost of Products Sold
Cost of products sold was $160.6$157.6 million in the thirdsecond quarter of 2018, compared to $150.2 million in the second quarter of 2017, compared to $130.7 million in the third quarter of 2016, an increase of $29.9$7.4 million or 22.9%4.9%. Cost of products sold increased by $34.6$21.7 million due to the higher vehicleunit sales volumes which wasin 2018 and $1.0 million due to the impact of commodity cost increases in the second quarter of 2018. Our adoption of ASC 606 on January 1, 2018 resulted in a $5.0 million increase in cost of products sold recorded during the quarter compared to what would have been recorded under previous guidance, mainly due to the timing of vehicle production and shipments. These increases were partially offset by decreasesa decrease of $3.0$16.4 million due to lower warrantythe mix of products sold in 2018, which included fewer aerials in our Emergency Response Vehicles segment and recall chargesa change in the mix of walk-in vans and $1.7truck bodies in our Fleet Vehicles and Services segment. Cost of products sold also decreased by $3.9 million due to increased operational efficiencyand organizational improvements enacted in 2017.2018, mainly in our Emergency Response Vehicles segment. As a percentage of sales, cost of products sold decreased to 84.9%85.7% in the thirdsecond quarter of 2018, compared to 88.5% in the second quarter of 2017, compared to 87.9% indriven by operational and organizational improvements impacting the thirdsecond quarter of 2016. 140 basis points of the decrease was due to lower warranty and recall charges recorded in 2017 in our Emergency Response Vehicles segment, and 100 basis points was due to the pricing changes in our Emergency Response Vehicles segment. The remainder was driven by increased operational efficiency in 2017.2018.
Gross Profit
Gross profit was $28.7$26.4 million for the thirdsecond quarter of 2018, compared to $19.5 million for the second quarter of 2017, compared to $18.0 million for the third quarter of 2016, an increase of $10.7$6.9 million, or 59.4%,35.2%. Increased unit sales volume resulted in a $3.8 million increase, while operational and organizational improvements that impacted 2018 accounted for $3.9 million of the increase, and pricing changes realized in 2018 contributed $1.0 million to the increase. Our adoption of ASC 606 on January 1, 2018 resulted in a $0.7 million increase in gross profit compared to what would have been recorded under previous guidance, mainly due to the higher sales volumestiming of vehicle production and shipments. These increases were partially offset by decreases of $1.5 million due to the product mix experienced in 2017.2018 and $1.0 million due to the impact of commodity cost increases in the second quarter of 2018. Gross margin increased to 15.1%14.3% from 12.1%11.5% over the same time period, mainly due to operational and organizational improvements that impacted the increased operational efficiency, lower warranty and recall charges and pricing increases in 2017 as discussed above.second quarter of 2018.
Operating Expenses
Operating expense was $18.9$21.7 million for the thirdsecond quarter of 2018, compared to $18.3 million for the second quarter of 2017, compared to $15.4 million for the third quarter of 2016, an increase of $3.5$3.4 million or 22.7%18.6%. Research and development expense in the thirdsecond quarter of 2018 was $1.8 million, compared to $1.5 million in the second quarter of 2017, was $1.6 million, compared to $1.4 million in the third quarter of 2016, an increase of $0.2$0.3 million, or 14.3%20.0%, due to higher project spending on new product development projects in 2017, mainly in our Emergency Response Vehicles segment.2018. Selling, general and administrative expense was $17.1$19.0 million in the thirdsecond quarter of 2018, compared to $16.5 million for the second quarter of 2017, compared to $13.8 million for the third quarter of 2016, an increase of $3.3$2.5 million or 23.9%, $1.215.2%. $1.4 million of this increase was due to the acquisition of Smeal in January of 2017,costs related to operational improvement projects, while $1.0$0.9 million was due to higher incentive compensation expense in 2017information system related projects and $0.3 million was due to a bad debt recoveryincreased stock compensation charges in 2016 that did not reoccur. The remainder was driven by higher consulting and acquisition related expenses in 2017.2018. Restructuring charges were $0.2increased by $0.5 million in the thirdsecond quarter of 2018, compared to the same period of 2017, due to charges incurred for projects related to a company-wide initiative to streamline operations and consolidate our Delavan, Wisconsin production into our Brandon, South Dakota operations.
Other income/ (expense)
Interest expense was $0.3 million for the second quarter of 2018, compared to $0.1 million for the second quarter of 2017, flat withan increase of $0.2 million or 200.0%, driven by interest expense related to pool chassis in our Fleet Vehicles and Services segment. Interest and other income was $0.8 million in the thirdsecond quarter of 2016.2018, compared to $0.2 million for the second quarter of 2017, an increase of $0.6 million or 300.0%, driven by the partial reversal of a contingent liability recorded as a result of our acquisition of Smeal in 2017.
Taxes
Our effective income tax rate was -38.4%29.1% in the thirdsecond quarter of 2017,2018, compared to -4.3%7.5% in the thirdsecond quarter of 2016.2017. Our effective tax rates for the third quarters of 2017 and 2016 wererate in 2018 was impacted by a deferred$0.2 million of additional tax asset valuation allowanceexpense recorded in 2015. Thethe quarter because of a change in our expectations for our full year financial performance. Our effective tax rate for the thirdsecond quarter of 2017 was impacted by the reversal of $6.6 million of the valuation allowance. Based upon an assessment of the available positive and negative evidence as of September 30, 2017, we determined that it was more likely than not that a significant poriton of the valuation allowance recorded against our deferred tax assets was no longer necessary. A major portion of such positive evidence included cumulative profits incurred over the three year period ended September 30, 2017 as well as forecasted future profits. For the nine months ended September 30, 2016, theasset valuation allowance, which resulted in a tax rate applied to the second quarter 2017 earnings of 0% applied to earnings due to ourthe ability to offset current periodthat period’s tax liability against our recorded valuation allowance. Tax expense of $0.1 million recorded in the thirdsecond quarter of 2016 resulted from certain discrete adjustments, including2017 consisted of adjustments for uncertain tax positions and a true-up of certain prior provisions for various state tax liabilities to the amounts reported on the actual tax filings. See Note 8, Taxes in the Notes to Condensed Consolidated financial Statements contained in Item 1 of this Form 10-Q for further details on our taxes.discrete items.
Net EarningsIncome
We recorded net earningsincome of $13.5$3.7 million or $0.38$0.11 per share for the thirdsecond quarter of 2017,2018, compared to net earningsincome of $2.7$1.1 million, or $0.08$0.03 per share, for the thirdsecond quarter of 2016.2017. Driving the increase in net income for the three months ended SeptemberJune 30, 20172018 compared with the prior year were the factors discussed above.
Adjusted EBITDA
Our consolidated adjusted EBITDA in the second quarter of 2018 was $8.9 million, compared to $4.9 million for the second quarter of 2017, an increase of $4.0 million or 81.6%. This increase was due to increases of $3.9 million due to operational and organizational improvements that impacted 2018, $2.9 million due to higher unit sales volume in 2018, and $1.0 million due to pricing changes that impacted 2018. Our adoption of ASC 606 on January 1, 2018 resulted in a $0.7 million increase in adjusted EBITDA compared to what would have been recorded under previous guidance, mainly due to the timing of vehicle production and shipments. These increases were partially offset by decreases of $1.5 million due to the product mix experienced in 2018, $1.0 million due to commodity cost increases that impacted 2018, $0.7 million due to costs related to operational improvement projects in 2018, $0.9 million due to information systems related projects and $0.3 million due to higher stock compensation charges in 2018. The change in unit sales volume of $2.9 million differs from the corresponding change in gross profit due to a $0.8 million adjustment for the impact of intercompany chassis sales made to the 2017 GAAP amount. The change in costs related to operational improvement projects differs from the corresponding change in operating expenses due to a $0.7 million adjustment for consulting expense related to strategic planning made to the 2018 GAAP amount.
Adjusted net income
Our consolidated adjusted net income in the second quarter of 2018 was $4.3 million, compared to $2.4 million for the second quarter of 2017, an increase of $1.9 million or 79.2%. This increase was due to the factors impacting adjusted EBITDA described above, which were partially offset by a $1.5 million increase in income tax expense in 2018, as 2017 income tax was largely offset by concurrent reductions in a deferred tax asset valuation allowance, along with a $0.2 million increase in depreciation expense and a $0.2 million increase in interest expense.
Order Backlog
Our order backlog by reportable segment is summarized in the following table (in thousands).
September 30, 2017 | September 30, 2016 | June 30, 2018 | June 30, 2017 | |||||||||||||
Fleet Vehicles and Services | $ | 313,374 | $ | 131,280 | ||||||||||||
Emergency Response Vehicles | $ | 213,334 | $ | 149,753 | 175,603 | 214,794 | ||||||||||
Fleet Vehicles and Services | 292,540 | 102,218 | ||||||||||||||
Specialty Chassis and Vehicles | 31,873 | 20,126 | 35,123 | 26,715 | ||||||||||||
Total consolidated | $ | 537,747 | $ | 272,097 | $ | 524,100 | $ | 372,789 | ||||||||
Our backlog at September 30, 2017 includes $83.4 million related to our acquisition of Smeal in January of 2017. Excluding the Smeal addition, our Emergency Response Vehicles backlog decreased by $19.8 million, due to a reduction in order intake resulting from a more selective bid process established in 2016 as part of our turnaround strategy. Our Fleet Vehicles and Services backlog increased by $190.3$182.1 million, or 138.7%, mainly due to the award of a $214.3 million contract to supply truck bodies to the United States Postal Service we received in September 2017.2017 to supply delivery vehicles, which will be fulfilled through 2019. Our Emergency Response Vehicles backlog decreased by $39.2 million, or 22.3%, primarily due to our adoption of ASC 606 which resulted in changes to our revenue recognition policy whereby we now recognize revenue on certain of our products as they are produced rather than at the time of shipment to the customer. Our Specialty VehiclesChassis and ChassisVehicles segment backlog increased by $11.7$8.4 million, or 31.5%, due to increasedstrong motor home chassis backlogorder intake driven by new model introductions and pricing adjustments enacted in 2016.2017. We anticipate filling our current backlog orders for our Emergency Response Vehicles segment over the next 1312 months, for our Fleet Vehicles and Services segment over the next 10 months and our Specialty Chassis and Vehicles segment over the next 3 months, and for our Fleet Vehicles and Services segment over the next 4 months, except for the USPS truck body order which will be fulfilled throughout 2018 and 2019.months.
While orders in the backlog are subject to modification, cancellation or rescheduling by customers, this has not been a major factor in the past. Although the backlog of unfilled orders is one of many indicators of market demand, several factors, such as changes in production rates, available capacity, new product introductions and competitive pricing actions, may affect actual sales. Accordingly, a comparison of backlog from period-to-period is not necessarily indicative of eventual actual shipments.
NineSix Months Ended SeptemberJune 30, 20172018 Compared to the NineSix Months Ended SeptemberJune 30, 20162017
Sales
For the ninesix months ended SeptemberJune 30, 2017,2018, we reported consolidated sales of $526.0$357.0 million, compared to $444.9$336.8 million for the same period in 20162017, an increase of $81.1$20.2 million or 18.2%6.0%. This increase reflects a $91.3 million sales increase in our Emergency Response Vehicles segment driven by our acquisitionincreases of Smeal on January 1, 2017, as well as a $15.9 million sales increase in our Specialty Chassis and Vehicles segment driven by higher motor home chassis sales. These increases were partially offset by a decrease of $25.0$30.6 million in our Fleet Vehicles and Services segment drivenand $27.0 million in our Specialty Chassis and Vehicles segment. These increases were partially offset by a $34.7 million decrease in partsour Emergency Response Vehicles segment and accessories sales.intersegment eliminations of $2.7 million. Please refer to our segment discussion below for morefurther information about sales within our segments.segment sales.
Cost of Products Sold
Cost of products sold was $461.5$308.5 million in the ninesix months ended SeptemberJune 30, 2017,2018, compared to $390.3$300.9 million in the same period of 2016,2017, an increase of $71.2$7.6 million or 18.2%2.5%. Our costCost of products sold increased by $97.1$30.6 million due to the Smeal acquisition completedhigher sales volumes, $1.2 million due to start-up costs incurred at our truck body operations in January of 2017, which wasEphrata, Pennsylvania, and $1.0 million due to commodity cost increases in 2018. These increases were partially offset by decreases of $11.2$16.7 million due to lower unit volume, $5.3the product mix in 2018 and $6.6 million due to product mix, $5.1operational and organizational improvements in 2018. Our adoption of ASC 606 on January 1, 2018 resulted in a $1.8 million decrease in cost of products sold recorded during the first half of 2018 compared to what would have been recorded under previous guidance, mainly due to reduced warrantythe timing of vehicle production and recall accruals and $4.3 million due to increased operational efficiency in 2017.shipments. As a percentage of sales, cost of products sold fordecreased to 86.4% in the ninesix months ended SeptemberJune 30, 2017 was flat with2018, compared to 89.3% in the same period of 2016 at 87.7% as benefits from lower warranty2017. Approximately 200 basis points of the increase was due to operational and recall costs, increased operational efficiency and favorableorganizational improvements enacted in 2018, while 100 basis points was due to pricing changes that impacted 2018. Favorable product mix in our Emergency Response Vehicles segment2018 added approximately 30 basis points. These increases were partially offset by product mix.a 40 basis point decrease due to the start-up costs incurred at our truck body operations in Ephrata, Pennsylvania.
Gross Profit
Gross profit was $64.5$48.5 million for the ninesix months ended SeptemberJune 30, 2017,2018, compared to $54.6$35.9 million for the same period of 2016,2017, an increase of $9.9$12.6 million, or 18.1%, mainly35.1%. Operational and organizational improvements accounted for $6.6 million of this increase, while $3.7 million was due to increased sales volumes. Pricing changes that impacted 2018 added $2.6 million and favorable product mix added $0.8 million to the increase. Our adoption of ASC 606 on January 1, 2018 resulted in a $1.1 million increase in gross profit recorded during the first half of 2018 compared to what would have been recorded under previous guidance. These increases were partially offset by decreases of $1.2 million due to start-up costs incurred in our Ephrata truck body operations and $1.0 million due to commodity cost increases in 2018. Gross margin increased to 13.6% from 10.7% over the same period, with 220 basis points of the increase due to operational and organizational improvements that impacted 2018, 120 basis points due to pricing changes that impacted 2018, and 30 basis points due to favorable product mix in 2018. These increases were partially offset by decreases of 40 basis points due to the higher sales volume experiencedstart-up costs incurred in 2017. Gross margin was flat at 12.3% over the same time period,our Ephrata truck body operations and 40 basis points due to the factors discussed above.commodity cost increases in 2018.
Operating Expenses
Operating expense was $54.5$40.9 million for the ninesix months ended SeptemberJune 30, 2017,2018, compared to $47.0$35.6 million for the same period of 2016,2017, an increase of $7.5$5.3 million or 16.0%14.9%. Research and development expense for the ninesix months ended SeptemberJune 30, 20172018 was $5.3$3.2 million, compared to $4.4$3.7 million in the same period of 2016, an increase2017, a decrease of $0.9$0.5 million, or 20.5%13.5%, mainly due to increasedhigher spending on new product development projects mainly in our Emergency Response Vehicles segment.2017. Selling, general and administrative expense was $48.2$36.9 million in the six months ended June 30, 2018, compared to $31.1 million in the same period of 2017, an increase of $5.8 million or 18.6%. $2.7 million of this increase was due to costs related to operational improvement projects, while $1.7 million was due to increased compensation expense, approximately 40% of which was stock based compensation, in 2018. Also contributing to the overall increase were increases of $0.9 million for information system related projects and $0.6 million due to increased spending on marketing and trade shows in 2018. Restructuring charges remained constant at $0.8 million in the ninesix months ended SeptemberJune 30, 2018 and 2017, as projects to integrate our Smeal acquisition were completed and new projects to streamline operations and consolidate our Delavan, Wisconsin production into our Brandon, South Dakota operations were initiated.
Other income and expense
Interest expense for the six months ended June 30, 2018 was $0.6 million, compared to $41.8$0.4 million for the same period of 2016, an increase of $6.4 million or 15.3%, with $4.7 million of the increase due to the acquisition of Smeal in January of 2017, $0.9 million due to acquisition fees incurred in 2017 and $0.8 million due to higher stock compensation expense in 2017. Restructuring charges were $1.0 million for the nine months ended September 30, 2017, compared to $0.8 million in the same period of 2016, an increase of $0.2 million or 25.0%50.0%, as a resultmainly due to interest expense related to pool chassis in our Fleet Vehicles and Services segment. Interest and other income was $2.4 million in the six months ended June 30, 2018, compared to $0.3 million for the same period of 2017, an increase of $2.1 million or 700.0%. This increase was due to the receipt of a company-wide effort$1.5 million net working capital adjustment in March 2018, and the reversal of $0.7 million of a contingent liability in May 2018, both of which were related to streamline operations and integrate our Smeal acquisition beginningon January 1, 2017. Because the net working capital adjustment was received after the expiration of the measurement period for the acquisition, it was recognized in 2017.other income and expense rather than on the opening balance sheet for the acquisition.
Taxes
Our effective income tax rate was -35.9%15.8% for the ninesix months ended SeptemberJune 30, 2017,2018, compared to -0.1% in87.5% for the same period of 2016.2017. Our effective tax rates for the nine months ended September 30, 2017 and 2016 wererate in 2018 was favorably impacted by a deferred$1.3 million tax asset valuation allowance recordedbenefit related to the difference in 2015. Thestock compensation expense recognized for book purposes and tax purposes upon vesting, partially offset by $0.2 million of increases for other discrete items. Our effective tax rate for the ninesix months ended SeptemberJune 30, 2017 was impacted by the reversal of $6.6 million of the valuation allowance. Based upon an assessment of the available positive and negative evidence as of September 30, 2017, we determined that it was more likely than not that a significant portion of thedeferred tax asset valuation allowance, recorded against our deferred tax assets was no longer necessary. A major portion of such positive evidence included cumulative profits incurred over the three year period ended September 30, 2017 as well as forecasted future profits. For the nine months ended September 30, 2016, the valuation allowancewhich resulted in a tax rate applied to the earnings for the six months ended June 30, 2017 of 0% applied to earnings due to ourthe ability to offset current periodthat period’s tax liability against our recorded valuation allowance. See Note 8, Taxes inTax expense of $0.2 million recorded for the Notes to Condensed Consolidated financial Statements contained in Item 1six months ended June 30, 2017 consisted of this Form 10-Q for further details on our taxes.various discrete adjustments.
Net EarningsIncome
We recorded net earnings of $13.5$7.9 million or $0.39$0.23 per share for the ninesix months ended SeptemberJune 30, 2017,2018, compared to net earnings of $7.7 million, or $0.22 per share,a break even position for the same period of 2016.2017. Driving the increase in net income for the ninesix months ended SeptemberJune 30, 20172018 compared with the prior year were the factors discussed above.
Adjusted EBITDA
Our consolidated adjusted EBITDA for the six months ended June 30, 2018 was $14.5 million, compared to $9.1 million for the same period of 2017, an increase of $5.4 million or 59.3%. The table below describes the changes in Adjusted EBITDA for the six months ended June 30, 2018 compared to the same period of 2017 (in millions):
Adjusted EBITDA six months ended June 30, 2017 | $ | 9.1 | ||
Unit sales volume | 1.5 | |||
Sales mix | 0.8 | |||
Pricing changes impacting 2018 | 2.6 | |||
Truck body manufacturing start-up costs | (1.2 | ) | ||
Impact of adoption of ASC 606 | 1.1 | |||
| Commodity cost increases | (1.0 | ) | ||
Operational and organizational improvements | 6.3 | |||
Increase in new product development expense | 0.5 | |||
IT improvement projects | (0.9 | ) | ||
Increased marketing/trade show spending | (0.6 | ) | ||
Expense related to operational improvements | (2.0 | ) | ||
Higher compensation expense in 2018 | (1.7 | ) | ||
Adjusted EBITDA six months ended June 30, 2018 | $ | 14.5 |
The change in unit sales volume differs from that impacting gross profit due to adjustments of $2.0 million for the impact of the timing of intercompany chassis shipments to the newly acquired Smeal operations and $0.2 million for the impact of purchase accounting adjustments to inventory which were made to the 2017 GAAP amounts. The change in Operational and organizational improvements differs from that impacting gross profit due to an adjustment for credits related to recall accruals, which was made to the 2018 GAAP amount. The change in expense related to operational improvement projects differs from that impacting operating expenses due to a $0.7 million adjustment for consulting expense related to strategic planning made to the 2018 GAAP amount.
Adjusted net income
Our consolidated adjusted net income for the six months ended June 30, 2018 was $7.6 million, compared to $3.6 million for the same period of 2017, an increase of $4.0 million or 111.1%. The table below describes the changes in Adjusted net income for the six months ended June 30, 2018 compared to the same period of 2017 (in millions):
Adjusted net income six months ended June 30, 2017 | $ | 3.6 | ||
Unit sales volume | 1.5 | |||
Sales mix | 0.8 | |||
Pricing changes impacting 2018 | 2.6 | |||
Truck body manufacturing start-up costs | (1.2 | ) | ||
Impact of adoption of ASC 606 | 1.1 | |||
| Commodity cost increases | (1.0 | ) | ||
Operational and organizational improvements | 6.3 | |||
Increase in new product development expense | 0.5 | |||
IT improvement projects | (0.9 | ) | ||
Increased marketing/trade show spending | (0.6 | ) | ||
Expense related to operational improvements | (2.0 | ) | ||
Higher compensation expense in 2018 | (1.7 | ) | ||
Taxes | (1.3 | ) | ||
Adjusted net income six months ended June 30, 2018 | $ | 7.6 |
The change in unit sales volume differs from that impacting Gross profit due to adjustments of $2.0 million for the impact of the timing of intercompany chassis shipments to the newly acquired Smeal operations and $0.2 million for the impact of purchase accounting adjustments to inventory which were made to the 2017 GAAP amounts. The change in Operational and organizational improvements differs from that impacting gross profit due to an adjustment for credits related to recall accruals, which was made to the 2018 GAAP amount. The change in expense related to operational improvements differs from that impacting operating expenses due to a $0.7 million adjustment for consulting expense related to strategic planning made to the 2018 GAAP amount.
Reconciliation of Non-GAAP Financial Measures
This Form 10-Q contains adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) and adjusted net income, which are both non-GAAP financial measures. These non-GAAP financial measures are calculated by excluding items that we believe to be infrequent or not indicative of our continuing operating performance. For the periods covered by this Form 10-Q, such items include expenses associated with restructuring actions taken to improve the efficiency and profitability of certain of our manufacturing operations, various items related to business acquisition and strategic planning activities, and the impact that our deferred tax asset valuation allowance that we recorded in 2015 has had on our tax expense and net income in 2017.
We present the non-GAAP financial measures adjusted EBITDA and adjusted net income because we consider them to be important supplemental measures of our performance. The presentation of adjusted EBITDA enables investors to better understand our operations by removing items that we believe are not representative of our continuing operations and may distort our longer term operating trends. The presentation of adjusted net income enables investors to better understand our operations by removing the impact of tax adjustments, including the impact that our deferred tax asset valuation allowance that we recorded in 2015 has had on our tax expense and net income in 2017, and other items that we believe are not indicative of our longer term operating trends. We believe these measures to be useful to improve the comparability of our results from period to period and with our competitors, as well as to show ongoing results from operations distinct from items that are infrequent or not indicative of our continuing operating performance. We believe that presenting these non-GAAP financial measures is useful to investors because it permits investors to view performance using the same tools that management uses to budget, make operating and strategic decisions, and evaluate our historical performance. We believe that the presentation of these non-GAAP financial measures, when considered together with the corresponding GAAP financial measures and the reconciliations to those measures, provides investors with additional understanding of the factors and trends affecting our business than could be obtained in the absence of these disclosures.
Our management uses adjusted EBITDA to evaluate the performance of and allocate resources to our segments. In addition, non-GAAP measures are used by management to review and analyze our operating performance and, along with other data, as internal measures for setting annual budgets and forecasts, assessing financial performance, and comparing our financial performance with our peers. Adjusted EBITDA is also used, along with other financial and non-financial measures, for purposes of determining annual and long-term incentive compensation for our management team.
Financial Summary (Non-GAAP) Consolidated (In thousands, Unaudited) |
Three Months Ended June 30, 2018 | Three Months Ended June 30, 2017 | Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 | |||||||||||||
Net income attributable to Spartan Motors, Inc. | $ | 3,740 | $ | 1,124 | $ | 7,937 | $ | 26 | ||||||||
Add (subtract): | ||||||||||||||||
Restructuring charges | 797 | 325 | 817 | 968 | ||||||||||||
Acquisition related expenses | 373 | 60 | 535 | 731 | ||||||||||||
Recall expense | (443 | ) | - | (443 | ) | - | ||||||||||
| Long-term strategic planning expense | 718 | - | 718 | - | ||||||||||||
Impact of acquisition on timing of chassis revenue recognition | - | 853 | - | 1,965 | ||||||||||||
Impact of step-up in inventory value resulting from acquisition | - | - | - | 189 | ||||||||||||
Impact of acquisition adjustments for net working capital and contingent liability | (693 | ) | - | (2,193 | ) | - | ||||||||||
Joint venture expenses | - | - | - | (1 | ) | |||||||||||
Deferred tax asset valuation allowance | - | - | 74 | 466 | ||||||||||||
Tax effect of adjustments | (178 | ) | - | 137 | (719 | ) | ||||||||||
Adjusted net income attributable to Spartan Motors, Inc. | $ | 4,314 | $ | 2,362 | $ | 7,582 | $ | 3,625 | ||||||||
Net income attributable to Spartan Motors, Inc. | $ | 3,740 | $ | 1,124 | $ | 7,937 | $ | 26 | ||||||||
Add (subtract): | ||||||||||||||||
Interest expense | 270 | 129 | 592 | 393 | ||||||||||||
Depreciation and amortization | 2,586 | 2,365 | 5,038 | 4,690 | ||||||||||||
Taxes on income | 1,537 | 92 | 1,490 | 175 | ||||||||||||
Restructuring charges | 797 | 325 | 817 | 968 | ||||||||||||
Acquisition related expenses | 373 | 60 | 535 | 731 | ||||||||||||
Recall expense | (443 | ) | - | (443 | ) | - | ||||||||||
| Long-term strategic planning expense | 718 | - | 718 | - | ||||||||||||
Impact of acquisition on timing of chassis revenue recognition | - | 853 | - | 1,965 | ||||||||||||
Impact of step-up in inventory value resulting from acquisition | - | - | - | 189 | ||||||||||||
Impact of acquisition adjustments for net working capital and contingent liability | (693 | ) | - | (2,193 | ) | - | ||||||||||
Joint venture expenses | - | - | - | (1 | ) | |||||||||||
Adjusted EBITDA | $ | 8,885 | $ | 4,948 | $ | 14,491 | $ | 9,136 | ||||||||
Our Segments
We identify our reportable segments based on our management structure and the financial data utilized by our chief operating decision makers to assess segment performance and allocate resources among our operating units. We have three reportable segments: Emergency Response Vehicles, Fleet Vehicles and Services, Emergency Response Vehicles, and Specialty Chassis and Vehicles. As a result ofOur Specialty Chassis and Vehicles segment now manufactures certain fleet vehicles due to a realignment of our operating segments completed during the second quarter of 2017, certain fleet2017. These 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 reflectingreflect the estimated impact of this realignment as if it had been in place for those periods.
Beginning in 2017, weWe evaluate the performance of our reportable segments based on Adjusted EBITDA. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization, and other adjustments made in order to present comparable results from period to period. These adjustments include expenses associated with restructuring chargesactions taken to improve the efficiency and profitability of certain of our manufacturing operations, and various items related to ourbusiness acquisition of Smeal, such as expenses incurred to complete the acquisition, the impact of fair value adjustments to inventory acquired from Smeal, and the impact on the timing of the recognition of gross profit for our chassis that are utilized by our recently acquired Smeal operations.strategic planning activities. We exclude these items from earnings because we believe they will beare 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 20172018 annual meeting of shareholders, which proxy statement was filed with the SEC on April 13, 2017.12, 2018.
The table below presents the reconciliation of our consolidated income before taxes to total segment Adjusted EBITDA to net income (in thousands).EBITDA. Adjusted EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income. Adjusted EBITDA may have limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. In addition, although we have excluded certain charges in calculating Adjusted EBITDA, we may in the future incur expenses similar to these adjustments, despite our assessment that such expenses are infrequent and/or not indicative of our regular, ongoing operating performance. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or infrequent items.
Three Months Ended September 30, 2017 | Three Months Ended September 30, 2016 | Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2016 | |||||||||||||
Net income | $ | 13,470 | $ | 2,744 | $ | 13,494 | $ | 7,662 | ||||||||
Add: | ||||||||||||||||
Interest expense | 189 | 112 | 582 | 314 | ||||||||||||
Taxes | (3,736 | ) | (113 | ) | (3,561 | ) | (11 | ) | ||||||||
Depreciation and amortization expense | 2,645 | 2,178 | 7,335 | 5,742 | ||||||||||||
EBITDA | 12,568 | 4,921 | 17,850 | 13,707 | ||||||||||||
Add: | ||||||||||||||||
Restructuring expense | 232 | 304 | 1,200 | 871 | ||||||||||||
Acquisition expense | 354 | - | 1,085 | - | ||||||||||||
Asset impairment | - | 406 | - | 406 | ||||||||||||
Recall expense | (368 | ) | 1,742 | (368 | ) | 3,457 | ||||||||||
Impact of inventory fair value step-up | - | - | 189 | - | ||||||||||||
Impact of chassis shipments to Smeal | 108 | - | 2,073 | - | ||||||||||||
Adjusted EBITDA | $ | 12,894 | $ | 7,373 | $ | 22,029 | $ | 18,441 | ||||||||
Three Months Ended June 30, 2018 | Three Months Ended June 30, 2017 | Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 | |||||||||||||
Total segment adjusted EBITDA | $ | 12,958 | $ | 8,287 | $ | 21,909 | $ | 14,693 | ||||||||
Add (subtract): | ||||||||||||||||
Interest expense | (270 | ) | (129 | ) | (592 | ) | (393 | ) | ||||||||
Depreciation and amortization expense | (2,586 | ) | (2,365 | ) | (5,038 | ) | (4,690 | ) | ||||||||
Restructuring expense | (797 | ) | (325 | ) | (817 | ) | (968 | ) | ||||||||
Acquisition expense | (373 | ) | (60 | ) | (535 | ) | (731 | ) | ||||||||
Recall expense | 443 | - | 443 | - | ||||||||||||
| Long-term strategic planning expense | 718 | - | 718 | - | ||||||||||||
Impact of acquisition on timing of chassis revenue recognition | - | (853 | ) | - | (1,965 | ) | ||||||||||
Impact of step-up in inventory value resulting from acquisition | - | - | - | (189 | ) | |||||||||||
Impact of acquisition adjustments for net working capital and contingent liability | 693 | - | 2,193 | - | ||||||||||||
Unallocated corporate expenses | (4,791 | ) | (3,339 | ) | (7,418 | ) | (5,557 | ) | ||||||||
Consolidated income before taxes | $ | 5,277 | $ | 1,216 | $ | 9,427 | $ | 200 | ||||||||
Our Fleet Vehicles and Services segment consists of our operations at our Bristol, Indiana location, along with our operations at our up-fit centers in Kansas City, Missouri and Saltillo, Mexico. This segment focuses on designing and manufacturing walk-in vans for the parcel delivery, mobile retail, and trades and construction industries, and supplies related aftermarket parts and services under the Utilimaster brand name.
Our Emergency Response Vehicles segment consists of the emergency response chassis operations at our Charlotte, Michigan location and our operations at our Brandon, South Dakota; Snyder and Neligh, Nebraska; Delavan, Wisconsin; and Ephrata, Pennsylvania locations, along with our Spartan-Gimaex joint venture. This segment engineers and manufactures emergency response chassis and vehicles.
Our Fleet Vehicles and Services segment consists of our operations at our Bristol, Indiana location, along with our operations at our up-fit centers in Kansas City, Missouri and Saltillo, Mexico and focuses on designing and manufacturing walk-in vans for the parcel delivery, mobile retail, and trades and construction industries, and supplies related aftermarket parts and services under the Utilimaster brand name.
Our Specialty Chassis and Vehicles segment consists of our Charlotte, Michigan operations that engineer and manufacture motor home chassis, defense vehicles,, the Reach delivery van and other specialty chassis and distribute related aftermarket parts and accessories.
For certain financial information related to each segment, see Note 97 - Business Segments, of the Notes to Condensed Consolidated Financial Statements appearing in Item 1 of this Form 10-Q.
Emergency ResponseFleet Vehicles and Services
Financial Data | ||||||||||||||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||||||||||
Financial Data | ||||||||||||||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||||||||||
Three Months Ended September 30, | Three Months Ended June 30, | |||||||||||||||||||||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||||
Sales | $ | 65,872 | 100.0 | % | $ | 42,119 | 100.0 | % | $ | 78,415 | 100.0 | % | $ | 53,530 | 100.0 | % | ||||||||||||||||
Adjusted EBITDA | 2,501 | 3.8 | % | (1,166 | ) | (2.8 | )% | 8,374 | 10.7 | % | 6,174 | 11.5 | % | |||||||||||||||||||
Nine Months Ended September 30, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
Amount | % | Amount | % | |||||||||||||
Sales | $ | 226,922 | 100.0 | % | $ | 135,635 | 100.0 | % | ||||||||
Adjusted EBITDA | 510 | 0.2 | % | (4,532 | ) | (3.3 | )% | |||||||||
Segment assets | 131,806 | 75,086 | ||||||||||||||
Comparison of the Three Month Periods Ended September 30, 2017 and 2016
Sales in our Emergency Response Vehicles segment were $65.9 million in the third quarter of 2017, compared to $42.1 million in the same period of 2016, an increase of $23.8 million, or 56.5%, driven by the acquisition of Smeal in January of 2017. Pricing changes added approximately $2.0 million of additional revenue in 2017 compared to 2016.
Adjusted EBITDA for our Emergency Response Vehicles segment was $2.5 million in the third quarter of 2017, an increase of $3.7 million compared to $(1.2) million in the third quarter of 2016. The acquisition of Smeal added $2.2 million and pricing changes contributed $2.0 million to the increase in adjusted EBITDA, while lower warranty and recall related costs added $1.6 million to the increase. These increases were partially offset by decreases of $1.3 million due to product mix in 2017 and $0.8 million in higher selling, general and administrative expense in 2017 driven by higher healthcare and increased engineering project spending.
Six Months Ended June 30, | ||||||||||||||||
2018 | 2017 | |||||||||||||||
Amount | % | Amount | % | |||||||||||||
Sales | $ | 138,106 | 100.0 | % | $ | 107,450 | 100.0 | % | ||||||||
Adjusted EBITDA | 12,961 | 9.4 | % | 12,417 | 11.6 | % | ||||||||||
Segment assets | 103,812 | 77,254 | ||||||||||||||
Comparison of the NineMonth Periods Ended September 30, 2017 and 2016
Sales in our Emergency Response Vehicles segment were $226.9 million in the nine months ended September 30, 2017 compared to $135.6 million in the same period of 2016, an increase of $91.3 million, or 67.3%, driven by the acquisition of Smeal in January of 2017. Pricing changes resulted in a $3.0 million increase in revenue in 2017.
Adjusted EBITDA for our Emergency Response Vehicles segment was $0.5 million in the nine months ended September 30, 2017, an increase of $5.0 million compared to $(4.5) million in the same period of 2016. $3.0 million of the increase was driven by pricing changes, $1.8 million was attributable to the acquisition of Smeal in January 2017 and $1.6 million was due to reduced warranty and recall related charges in 2017. These increases were partially offset by a $1.4 million decrease related to the mix of products sold in 2017.
Fleet Vehicles and Services
Financial Data | ||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||
Three Months Ended September 30, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
Amount | % | Amount | % | |||||||||||||
Sales | $ | 78,637 | 100.0 | % | $ | 77,959 | 100.0 | % | ||||||||
Adjusted EBITDA | 8,785 | 11.2 | % | 10,118 | 13.0 | % | ||||||||||
Nine Months Ended September 30, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
Amount | % | Amount | % | |||||||||||||
Sales | $ | 186,087 | 100.0 | % | $ | 211,066 | 100.0 | % | ||||||||
Adjusted EBITDA | 21,203 | 11.4 | % | 23,555 | 11.2 | % | ||||||||||
Segment assets | 78,776 | 76,080 | ||||||||||||||
Comparison of the Three MonthThree-Month Periods Ended September30,June 30, 2018 and 2017 and 2016
Sales in our Fleet Vehicles and Services segment were $78.6$78.4 million for the thirdsecond quarter of 2018, compared to $53.5 million for the second quarter of 2017, compared to $78.0 million for the third quarter of 2016, an increase of $0.6$24.9 million or 0.8%46.5%, driven by increases of $9.4$10.7 million in vehicle sales due todriven by higher unit volume offset by decreases of $8.8and $16.0 million in parts sales as a result of lower revenuedue to higher volumes from our up-fit business. There wereOur adoption of ASC 606 on January 1, 2018 resulted in a $1.8 million decrease in revenue recognized during the quarter than would have been recognized under previous guidance, mainly due to the timing of vehicle production and shipments. Our Fleet Vehicles and Services segment had no changes in pricing of products sold by our Fleet Vehicles and Services segment that had a significant impact on our financial statements when comparing the thirdsecond quarter of 20172018 to the thirdsecond quarter of 2016.
Adjusted EBITDA in our Fleet Vehicles and Services segment for the third quarter of 2017 was $8.8 million compared to $10.1 million in the third quarter of 2016, a decrease of $1.3 million or 12.9%. This decrease was driven by a $6.6 million decrease due to product mix, partially offset by an increase of $3.9 million due to operational improvements in 2017, with the remainder due primarily to higher vehicle unit volumes.
Comparison of the NineMonth Periods Ended September 30, 2017 and 2016
Sales in our Fleet Vehicles and Services segment were $186.1 million for the nine months ended September 30, 2017, compared to $211.1 million for the same period of 2016, a decrease of $25.0 million or 11.8% driven by a $24.4 million decrease in aftermarket parts and accessories sales due to lower equipment up-fit volume, along with a $0.6 million decrease in vehicle sales due to lower overall unit volume. There were no changes in pricing of products sold by our Fleet Vehicles and Services segment that had a significant impact on our financial statements when comparing the first nine months of 2017 to the first nine months of 2016.2017.
Adjusted EBITDA in our Fleet Vehicles and Services segment for the nine months ended September 30, 2017second quarter of 2018 was $21.2$8.4 million compared to $23.6$6.2 million in the second quarter of 2017, an increase of $2.2 million or 35.5%. Higher unit sales volume resulted in a $2.0 million increase, while product mix in 2018 resulted in an additional $1.3 million of adjusted EBITDA. Commodity cost increases in the second quarter of 2018 resulted in a $1.0 million reduction to adjusted EBITDA, which was offset by operational and organizational improvements. Start up costs for truck body manufacturing operations in our Ephrata, Pennsylvania facility decreased 2018 adjusted EBITDA by $0.5 million. Our adoption of ASC 606 on January 1, 2018 resulted in a $0.6 million decrease in the adjusted EBITDA in the segment compared to what would have been recognized under our previous recognition policy primarily due to the timing of vehicle production and shipments.
Comparison of the Six-Month Periods Ended June 30, 2018 and 2017
Sales in our Fleet Vehicles and Services segment were $138.1 million for the six months ended June 30, 2018, compared to $107.5 million for the same period of 2016, a decrease2017, an increase of $2.4$30.6 million or 10.2%28.5%. This increase was driven by a $10.2$12.4 million increase in vehicle sales mainly due to higher unit volume and a $15.0 million increase in aftermarket parts and accessories sales mainly due to higher up-fit sales in 2018. Our adoption of ASC 606 on January 1, 2018 resulted in a $3.2 million increase in revenue recognized during the period than would have been recognized under previous guidance, mainly due to the timing of vehicle production and shipments.
Adjusted EBITDA in our Fleet Vehicles and Services segment for the six months ended June 30, 2018 was $13.0 million compared to $12.4 million for the same period of 2017, an increase of $0.6 million or 4.8%. Higher sales volumes in 2018 contributed $2.0 million to the overall increase. The mix of products sold in 2018 resulted in a $1.2 million decrease in adjusted EBITDA, while start up costs for truck body manufacturing operations in our Ephrata, Pennsylvania facility resulted in an additional $1.2 million decrease. Commodity cost increases in 2018 resulted in a $1.0 million reduction to adjusted EBITDA, which was offset by operational and organizational improvements. Our adoption of ASC 606 on January 1, 2018 resulted in a $1.0 million increase in adjusted EBITDA recorded during the period over what would have be recorded under previous guidance due to lower salesthe timing of production and shipments.
Emergency Response Vehicles
Financial Data | ||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||
Three Months Ended June 30, | ||||||||||||||||
2018 | 2017 | |||||||||||||||
Amount | % | Amount | % | |||||||||||||
Sales | $ | 59,615 | 100.0 | % | $ | 80,848 | 100.0 | % | ||||||||
Adjusted EBITDA | 193 | 0.3 | % | (652 | ) | (0.8 | )% | |||||||||
Six Months Ended June 30, | ||||||||||||||||
2018 | 2017 | |||||||||||||||
Amount | % | Amount | % | |||||||||||||
Sales | $ | 126,328 | 100.0 | % | $ | 161,050 | 100.0 | % | ||||||||
Adjusted EBITDA | 1,435 | 1.1 | % | (1,990 | ) | (1.2 | )% | |||||||||
Segment assets | 111,255 | 126,459 | ||||||||||||||
Comparison of the Three-Month Periods Ended June 30, 2018 and 2017
Sales in our Emergency Response Vehicles segment were $59.6 million in the second quarter of 2018, compared to $80.8 million in the same period of 2017, a decrease of $21.2 million or 26.2%. Lower unit volume and unfavorable product mix resulted in decreases of $18.7 million and $11.3 million in 2018 revenue. Revenue recognized in the second quarter of 2017 included $8.3 million for delayed shipments of Smeal trucks, which waswere nearly completed at the time of our acquisition on January 1, 2017. These decreases were partially offset by a $7.8$1.3 million increase due to pricing changes realized in 2018, while our adoption of ASC 606 on January 1, 2018 resulted in an increase of $7.5 million of revenue over what would have been recognized under previous guidance due to the timing of production and shipment of vehicles and chassis.
Adjusted EBITDA for our Emergency Response Vehicles segment was $0.2 million in the second quarter of 2018, compared to $(0.7) million in the second quarter of 2017, an increase of $0.9 million. This increase was driven by a $1.9 million increase due to operational improvements enacted in 2017.2018, along with a $1.3 million increase due to pricing changes realized in 2018. Our adoption of ASC 606 on January 1, 2018 resulted in a $1.3 million increase in adjusted EBITDA due to the higher revenue as discussed above. These increases were partially offset by decreases of $2.8 million due to the lower unit volume experienced in 2018 and $0.8 million due to the product mix in 2018, which included fewer aerial units.
Comparison of the Six-Month Periods Ended June 30, 2018 and 2017
Sales in our Emergency Response Vehicles segment were $126.3 million in the six months ended June 30, 2018 compared to $161.1 million in the same period of 2017, a decrease of $34.8 million or 21.6%. Lower unit sales volume, driven by revenue that was recognized in the first half of 2017 for delayed shipments of Smeal trucks, which were nearly completed at the time of our acquisition on January 1, 2017, accounted for $22.4 million of the decrease. An additional $11.4 million decrease in sales is attributable to an unfavorable product mix in 2018, which included fewer aerial units than 2017. Our adoption of ASC 606 on January 1, 2018 resulted in a decrease of $3.9 million of revenue in our Emergency Response Vehicles segment over what would have been recognized under previous guidance. These decreases were partially offset by an increase of $2.9 million due to pricing changes that impacted 2018.
Adjusted EBITDA for our Emergency Response Vehicles segment was $1.4 million in the six months ended June 30, 2018, compared to $(2.0) million in the same period of 2017, an increase of $3.4 million. $2.9 million of this increase is attributable to price changes that impacted 2018. Operational improvements resulted in an additional $4.1 million of adjusted EBITDA in 2018. Our adoption of ASC 606 on January 1, 2018 resulted in an increase of $0.1 million of adjusted EBITDA in our Emergency Response Vehicles segment over what would have been recognized under previous guidance. These increases were partially offset by decreases of $2.8 million due to lower unit volume in 2018 and $0.9 million due to an unfavorable product mix in 2018.
Specialty Chassis and Vehicles
Financial Data | ||||||||||||||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||||||||||
Financial Data | ||||||||||||||||||||||||||||||||
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Three Months Ended September 30, | Three Months Ended June 30, | |||||||||||||||||||||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||||
Sales | $ | 49,018 | 100.0 | % | $ | 30,830 | 100.0 | % | $ | 47,479 | 100.0 | % | $ | 35,788 | 100.0 | % | ||||||||||||||||
Adjusted EBITDA | 5,149 | 10.5 | % | 1,330 | 4.3 | % | 4,391 | 9.2 | % | 2,765 | 7.7 | % | ||||||||||||||||||||
Nine Months Ended September 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||||
Sales | $ | 117,759 | 100.0 | % | $ | 101,906 | 100.0 | % | $ | 95,714 | 100.0 | % | $ | 68,741 | 100.0 | % | ||||||||||||||||
Adjusted EBITDA | 9,415 | 8.0 | % | 6,456 | 6.3 | % | 7,513 | 7.8 | % | 4,266 | 6.2 | % | ||||||||||||||||||||
Segment assets | 32,770 | 33,129 | 31,772 | 22,051 | ||||||||||||||||||||||||||||
Comparison of the Three MonthThree-Month Periods Ended SeptemberJune 30, 20172018 and 20162017
Sales in our Specialty Chassis and Vehicles segment were $49.0$47.5 million in the thirdsecond quarter of 2017,2018, compared to $30.8$35.8 million in 2016,2017, an increase of $18.2$11.7 million or 59.1%32.7%. This increase was due todriven by an increase of $14.7$10.4 million in sales of motor home chassis driven by higher unit volumes in 2017, a $2.1 million increase in inter-segment sales of fleet vehicles, a $0.8 million increase in sales of aftermarket parts and accessories, and a $0.6 million increase in sales of other specialty vehicles due to higher unit volume, in 2017. There were no changes in pricingwhich was partially offset by a $1.4 million sales decrease due to the mix of products sold in 2018. Other specialty chassis and vehicles sales increased by $1.9 million due to higher unit volume, partially offset by a $0.3 million decrease due to pricing changes in 2018. Intercompany sales of fleet vehicles added $1.1 million in sales to the second quarter of 2018 compared to the prior year. Our adoption of ASC 606 in January 2018 had an immaterial impact on revenue in our Specialty Chassis and Vehicles segment that had a significant impact on our financial statements when comparing the third quarter of 2017 to the third quarter of 2016.segment.
Adjusted EBITDA for our Specialty Chassis and Vehicles segment for the thirdsecond quarter of 20172018 was $5.1$4.4 million, compared to $1.3$2.8 million in the same period of 2016,2017, an increase of $3.8$1.6 million, or 292.3%, mainly57.1%. Higher unit volume experienced in 2018 drove a $3.7 million increase. This increase was partially offset by decreases of $1.3 million due to the increaseproduct mix in sales volume2018, $0.3 million due to pricing changes realized in 2017.
2018 and $0.5 million due to higher marketing expense in 2018. Our adoption of ASC 606 in January 2018 had an immaterial impact on the adjusted EBITDA of our Specialty Chassis and Vehicles segment.
Comparison of the NineMonthSix-Month Periods Ended SeptemberJune 30, 20172018 and 20162017
Sales in our Specialty Chassis and Vehicles segment were $117.8were $95.7 million infor the ninesix months ended SeptemberJune 30, 2017,2018, compared to $101.9$68.7 million in the same period of 2016,2017, an increase of $15.9$27.0 million or 15.6%39.3%. This increase was due to an $18.0 million increase in sales of motorMotor home chassis drivensales increased by higher unit volumes in 2017 and a $1.1$23.9 million increase in fleet vehicle inter-segment sales due to higher unit volume in 2017.2018, which was partially offset by a $1.4 million reduction due to unfavorable sales mix. Intercompany sales of fleet vehicles increased by $2.7 million due to higher unit volume in 2018. Sales of other specialty vehicles increased by $2.4 million due to higher unit volume, which was partially offset by a $0.3 million decrease due to pricing changes enacted in 2018. These increases were partially offset by a $3.0 million decrease in other specialty vehicles driven primarily by a defense order that was fulfilled in 2016 and did not reoccur in 2017 and aof $0.3 million decrease in sales of aftermarket parts and accessories. There were no changesaccessories sales. Our adoption of ASC 606 in pricing of products sold byJanuary 2018 had an immaterial impact on revenue in our Specialty Chassis and Vehicles segment that had a significant impact on our financial statements when comparing the first nine months of 2017 to the first nine months of 2016.segment.
Adjusted EBITDA for our Specialty Chassis and Vehicles segment for the ninesix months ended SeptemberJune 30, 20172018 was $9.4$7.5 million, compared to $6.5$4.3 million in the same period of 2016,2017, an increase of $2.9$3.2 million or 44.6%. $1.9 million of this increase was74.4%, mainly due to the higher unit volumessales volume in 2017, with2018 as discussed above. Our adoption of ASC 606 in January 2018 had an additional increaseimmaterial impact on the adjusted EBITDA of $2.1 million due to operational improvements in 2017. These increases were partially offset by an increase in warranty related costs in 2017.our Specialty Chassis and Vehicles segment.
Financial Condition
Balance Sheet at September30, 2017June 30, 2018 compared to December 31, 2012017
For line items impacted by our adoption of the new revenue recognition standard on January 1, 2018, please see “6Note 1 – General and Summary of Accounting Policies” in the Notes to Condensed Consolidated Financial Statements contained in Part 1 of this Form 10-Q for further information regarding the impact of this new accounting standard.
Cash decreased by $10.1$11.8 million, or 31.6%35.2%, to $21.9$21.7 million at SeptemberJune 30, 20172018 from $32.0$33.5 million at December 31, 2016.2017. Please see the discussion of cash flow activity below for more information on our sources and uses of cash in the first ninesix months of 2017.2018.
Accounts receivable increased by $28.3$9.5 million, or 43.3%11.4%, to $93.7$92.6 million at SeptemberJune 30, 2017,2018, compared to $65.4$83.1 million at December 31, 2016.2017. The increase is mainly the result of increases of $22.9 million in Fleet Vehicles and Services and $3.4 million in Specialty Vehicles due to higher sales volume in the latter half of the thirdsecond quarter of 20172018 compared to sales in the latter half of the fourth quarter of 2016.2017. This increase was partially offset by a decrease of $16.8 million in our Emergency Response segment due to lower sales volume in the second quarter of 2018.
Inventory increaseddecreased by $36.2$13.1 million, or 61.5%16.9%, to $95.1$64.6 million at SeptemberJune 30, 20172018 compared to $58.9$77.7 million at December 31, 20162017 mainly due to the additiontransfer of Smeal inventoryin-process production to contract assets as a result of $25.8adopting the new revenue recognition standard on January 1, 2018. This decrease was offset by an increase at our Fleet Vehicles and Services segment of $22.5 million due to the ramp up of production primarily related to the USPS build.
Contract assets increased to $46.4 million at SeptemberJune 30, 2017 along with increased production activities in our Fleet and Specialty Vehicles segment.
Property, plant and equipment, net increased by $2.9 million, or 5.5%, to $56.0 million at September 30, 20172018 compared to $53.1 million$0 at December 31, 2016 mainly2017 due to adopting the acquisition of Smeal during the year.
Goodwill increased by $11.5 million, or 71.9%, to $27.5 million at September 30, 2017 compared to $16.0 million at December 31, 2016 duenew revenue recognition standard on January 1, 2018, whereby we now recognize a contract asset for performance obligations that have been completed but have not yet been invoiced to the Smeal acquisition.
Intangible assets increased by $3.2 million, or 50.0%, to $9.6 million at September 30, 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.customer.
Accounts payable increased by $23.7$38.0 million or 75.7%93.6% to $55.0$78.6 million at SeptemberJune 30, 20172018 compared to $31.3$40.6 million at December 31, 2016. $2.82017. $29.2 million of the increase was due to accounts payable assumed through our acquisitionramp-up of Smeal,production related to the USPS truck body build, with the remainder of the increase due to the timing of payments and the ramp up in other production following our traditional year-end shut down in December.
Accrued warranty decreased by $2.1 million or 11.5% to $16.2 million at June 30, 2018 compared to $18.3 million at December 31, 2017 due to payments for repairs made during the year of $5.4 million, partially offset by $3.3 million for accruals for new warranties.
Accrued compensation and related taxes decreased by $1.2$2.5 million or 9.1%18.8% to $12.0$10.8 million at SeptemberJune 30, 20172018 compared to $13.2$13.3 million at December 31, 20162017 due to the payout of accrued 20162017 incentive compensation in the first quarter offset by accruals established related to 2017 incentive compensation.of 2018.
Deposits from customers increaseddecreased by $10.9$10.3 million or 67.7%40.6% to $27.0$15.1 million at SeptemberJune 30, 20172018 compared to $16.1$25.4 million at December 31, 2016. The increase was due to prepayments2017 as a result of $14.1 million assumed through our acquisition of Smeal, partially offset by more prepayments applied to invoices than received during 2017 at our Emergency Response Vehicles segment.adopting ASC 606 in 2018, whereby the liability for deposits is reduced when the related performance obligation has been satisfied.
Other current liabilities and accrued expenses increaseddecreased by $4.8$3.4 million or 62.3%28.1%, to $12.5$8.7 million at SeptemberJune 30, 20172018 from $7.7$12.1 million at December 31, 2016, with $3.0 million of the increase2017, due to liabilities assumed through our acquisition of Smeal, and the remainder duea $1.4 million decrease related to the timingcontingent liability for the Smeal acquisition and a decrease of accruals for various expenses incurred but not yet invoiced.$1.6 million in accrued customer rebates.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
CashCash and cash equivalents decreased by $10.1$11.8 million to $21.9$21.7 million at SeptemberJune 30, 2017,2018, compared to $32.0$33.5 million at December 31, 2016.2017. These funds, in addition to cash generated from future operations and available credit facilities, are expected to be sufficient to finance the Company’s foreseeable liquidity and capital needs.
Cash Flow from Operating Activities
For the nine months ended September 30, 2017, we generated $2.1We utilized $2.6 million of cash from operating activities which representsduring the six months ended June 30, 2018, an $18.4increase of $2.6 million decrease from the $20.5$0.0 million of cash that was generated byfrom operations for the ninesix months ended SeptemberJune 30, 2016. The2017. Cash flow from operating activities decreased from 2017 due to a $38.3 million increase in cash utilized in the fulfilment of customer orders (including changes in accounts receivable, inventory, contract assets, and customer deposits). This decrease was partially offset by a $6.6 million increase in net income net of non-cash charges in 2018, and a $29.1 million increase in cash generated in 2017 results fromthrough changes in other working capital requirements, particularlyitems, mainly accounts receivable, inventory and deposits from customers.payable which was driven by the ramp-up of production for our truck body operation in Ephrata, Pennsylvania.
See the Financial Condition section contained in Item 2 of this Form 10-Q for further information regarding balance sheet line items that drove cash flows for the ninesix month period ended SeptemberJune 30, 2017.2018. Also see the Condensed Consolidated Statements of Cash Flows contained in Item 1 of this Form 10-Q for the other various factors that represented the remaining fluctuation of cash from operations between the periods.
Cash Flow from Investing Activities
We utilized $32.7$4.1 million in investing activities in the first ninesix months of 2017,2018, for acquisition of capital assets related to our operations, a $23.4$27.3 million increasedecrease compared to the $9.3$31.4 million utilized in the first ninesix months of 2016. This increase is mainly the result of2017, which included $28.9 million for our acquisition of Smeal during the year.Smeal.
During the remainder of 2017 2018, we expect to make additional cash capital investments of $2.0$7.0 million to $3.0$12.0 million, including capital spending for the replacement and upgrades of machinery and equipment used in operations and the implementation of our ERP system.
Cash Flow from Financing Activities
We generated $20.4utilized $5.2 million of cash through financing activities in the first ninesix months of 2017,2018, compared to $3.9$20.6 million utilizedgenerated in the first ninesix months of 2016.2017. This increasedecrease is mainly due to the financing of our acquisition of Smealdraw from our existing $100 million line of credit to fund our acquisition of Smeal on January 1, 2017 offset by a $10.0 million payment on this facility in May 2017.
Working Capital
Our working capital was as follows (in thousands):
September 30, 2017 | December 31, 2016 | Change | June 30, 2018 | December 31, 2017 | Change | |||||||||||||||||||
Current assets | $ | 215,089 | $ | 162,191 | $ | 52,898 | $ | 229,692 | $ | 198,787 | $ | 30,905 | ||||||||||||
Current liabilities | 126,289 | 87,724 | 38,565 | 129,372 | 109,732 | 19,640 | ||||||||||||||||||
Working capital | $ | 88,800 | $ | 74,467 | $ | 14,333 | $ | 100,320 | $ | 89,055 | $ | 11,265 | ||||||||||||
The increase in our working capital at SeptemberJune 30, 20172018 from December 31, 2016,2017, results from changes in accounts receivable, inventory and inventory,contract assets, and deposits from customers, which were partially offset by a decrease in cash and increasesan increase in accounts payable and deposits from customers.payable. Refer to the balance sheet discussion appearing above in Management’s Discussion and Analysis of Financial Condition and Results of Operations for an explanation of the causes of the material changes in working capital line items.
Contingent Obligations
Spartan-Gimaex joint venture
In February 2015, Spartan USA and Gimaex Holding, Inc. mutually agreed to begin discussions regarding the dissolution of the Spartan-Gimaex joint venture. In June 2015, Spartan USA and Gimaex Holding, Inc. entered into court proceedings to determine the terms of the dissolution. In February 2017, by agreement of the parties, the court proceeding was dismissed with prejudice and the judge entered an order to this effect as the parties agreed to seek a dissolution plan on their own. No dissolution terms have been determined as of the date of this Form 10-Q. In the fourth quarters of 2015 and 2014, we accrued charges totaling $1.0 million and $0.2 million to write down certain inventory items associated with this joint venture to their estimated fair values. Costs associated with the wind-down will be impacted by the final dissolution agreement. The costs we have accrued so far represent the low end of the range of the estimated total charges that we believe we may incur related to the wind-down. While we are unable to determine the final cost of the wind-down with certainty at this time, we may incur additional charges, depending on the final terms of the dissolution, and such charges could be material to our results.
Smeal contingent consideration
In connection with our acquisition of Smeal in January 2017, the former owners of Smeal may receivereceived additional consideration in the form of a tax gross-up payment. The purchase agreement specifiesspecified that Spartan willwas to make a payment to the former owners of Smeal to cover certain state and federal tax liabilities for the tax year ending December 31, 2017 that resultresulted from the transaction. The payment is expected to be between $0 and $2.4 million and will be based on state and federal income tax regulations in effect at the time of the paymenttransaction for the tax year ending December 31, 2017. Under tax rules in effect asA contingent liability for $1.4 million for the estimated amount of the filing of this Form 10-Q, the additional consideration would be approximately $2.4 million. In accordance with accounting guidance for business combinations, the value of the future considerationpayment was recorded based upon tax ruleswithin Other current liabilities on our Condensed Consolidated Balance Sheet at December 31, 2017. A payment of $0.7 million was made in effect atApril 2018 and the time of the acquisition, discountedremaining $0.7 million was reversed to January 1, 2017 using a risk-free discount rate of 1%. Changes in this estimate, other than changes in its present value, will be reflected as adjustments to the purchase price for a period of up to one year after the closing. Changes in the present value of the contingent consideration will be reflected in operating income in the periodsecond quarter of such change.2018, appearing within Interest and other income on the Condensed Consolidated Statement of Operations for the three and six month periods ended June 30, 2018.
Debt
On October 31, 2016,December 1, 2017, we entered into a secondFirst Amendment to our 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 million from the Lenders under a three-year unsecured revolving credit facility. We may also request an increase in the facility of up to $35 million in the aggregate, subject to customary conditions. The credit facility is available for the issuance of letters of credit of up to $20 million, swing line loans of up to $15 million and revolving loans, subject to certain limitations and restrictions. Interest rates on borrowings under the credit facility are based on either (i) the highest of the prime rate, the federal funds effective rate from time to time plus 0.5%0.50%, or the one month adjusted London interbank market rate ("LIBOR") plus 1.0%1.00%; or (ii) adjusted LIBOR 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,Smeal. At June 30, 2018 and repaid $10.0 million of this borrowing in May 2017. We had no drawings against this credit line as of December 31, 2016.2017, we had outstanding borrowings of $17.8 million against our credit line. During the quarter ended SeptemberJune 30, 2017,2018, and in future years,quarters, 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 7,5, Commitments and Contingent Liabilities, in the Notes to Condensed Consolidated Financial Statements appearing in Item 1 of this Form 10-Q for further details about these chassis bailment inventory agreements. The applicable borrowing rate including margin was 2.75%3.375% (or one-month LIBOR plus 1.50%) at SeptemberJune 30, 2017.2018.
Under the terms of our credit agreement with our banks, we have the ability to issue letters of credit totaling $20.0 million. At SeptemberJune 30, 20172018 and December 31, 2016,2017, we had outstanding letters of credit totaling $0.9$0.8 and $0.8 million, and $1.6 millionrespectively, related to certain emergency response vehicle contracts and our workers compensation insurance.
Under the terms of the primary line of credit and the term notes detailed above,agreement, as amended, we are required to maintain certain financial ratios and other financial conditions,, which limited our available borrowings under our line of credit to a total of approximately $45.5$93.0 million at SeptemberJune 30, 20172018 and $73.6$66.4 million at December 31, 2016, net of borrowings outstanding.2017. The agreements prohibit us from incurring additional indebtedness; limit certain acquisitions, investments, advances or loans; limit our ability to pay dividends in certain circumstances; and restrict substantial asset sales. At SeptemberJune 30, 2017,2018, we were in compliance with all debt covenants in our credit agreement, and based on our current outlook for 2017,2018, we expect to be able to meet these financial covenants over the next twelve months.
We had capital lease obligations outstanding of $0.1$0.2 million as of SeptemberJune 30, 2018 and December 31, 2017 due and payable over the next five years.
Equity Securities
On April 28, 2016, our Board of Directors authorized the repurchase of up to 1.0 million shares of our common stock in open market transactions. At SeptemberJune 30, 20172018 there were 1.0 million shares remaining under this repurchase authorization. If we were to repurchase the remaining 1.0 million shares of stock under the repurchase program, it would cost us approximately $16.4$15.0 million based on the closing price of our stock on October 27, 2017.July 26, 2018. We believe that we have sufficient resources to fund any potential stock buyback in which we may engage.
Dividends
The amounts or timing of any dividend distribution are subject to earnings, financial condition, liquidity, capital requirements and such other factors as our Board of Directors deems relevant. We declared dividends on our outstanding common shares in 2018 and 2017 as shown in the table below.
Date dividend declared | Record date | Payment date | Dividend per share ($) | Total dividend paid ($000) | ||||||||
May 2, 2018 | May 15, 2018 | June 15, 2018 | $ | 0.05 | $ | 1,759 | ||||||
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 | ||||||||
On October 24, 2017 our Board
CRITICAL ACCOUNTING POLICIES
The following discussion of critical accounting policies is intended to supplement Note 1 - General and Summary of Accounting Policies, of the Notes to Consolidated Financial Statements contained in Item 8 in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 3, 2017.2018. 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, statement, asset and/or liability amounts.
Revenue Recognition - We recognize revenue in accordance with authoritative guidelines, including those of the SEC. Accordingly, revenue is recognized when title to the product and risk of ownership passes to the buyer. 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 Customer deposits on the Condensed Consolidated Balance Sheets. The corresponding performance obligations are generally satisfied within one year of the contract inception. In such cases, we have elected to apply the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component. Financing impact on contracts that contain performance obligations that are not expected to be satisfied within one year are expected to be immaterial to our financial statements. We have elected to utilize the practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred because the amortization period for the prepaid costs that would have otherwise been deferred and amortized is one year or less.Revenue recognized in a current period from performance obligations satisfied in a prior period, if any, is immaterial to our financial statements. We use an observable price to allocate the stand-alone selling price to separate performance obligations within a contract or a cost-plus margin approach when an observable price is not available. The estimated costs to fulfill our base warranties are recognized as expense when the products are sold. Our contracts with customers do not contain a provision for product returns, except for contracts related to certain parts sales.
Revenue for parts sales for all segments is recognized at the time that control and risk of ownership has passed to the customer, which is generally, when the ordered part is shipped to the customer. Historical return rates on parts sales have been immaterial. Accordingly, no return reserve has been recorded. Instead, returns are recognized as a reduction of revenue at the time that they are received.
For certain of our vehicles and chassis, we sell separately priced service contracts that provide roadside assistance or extend certain warranty coverage beyond our base warranty agreements. These separately priced contracts range from 1 to 6 years from the date of the shipment of the related vehicle or chassis. We receive payment with the shipment of the related vehicle or at the inception of the extended service contract, if later, and recognize revenue over the coverage term of the agreement, generally on a straight-line basis, which approximates the pattern of costs expected to be incurred in satisfying the obligations under the contract.
See Note 1, General and Summary of Accounting Policies, of the Notes to Condensed Consolidated Financial Statements contained in Item 1 of this Form 10-Q for more information regarding our revenue recognition policies.
Distinct revenue recognition policies for our segments are as follows:
Fleet Vehicles and Services
Our Walk-in vans and truck bodies are generally built on a chassis that is owned and controlled by the customer. Due to the customer ownership of the chassis, the performance obligation for these walk-in vans and truck bodies is satisfied as the vehicles are built. Accordingly, the revenue and corresponding cost of products sold associated with these contracts are recognized over time based on the inputs completed for a given performance obligation during the reporting period. Certain contracts will specify that a walk-in van or truck body is to be built on a chassis that we purchase and subsequently sell to the customer. The revenue on these contracts is recognized at the time that the performance obligation is satisfied and control and risk of ownership has passed to the customer, which is generally upon shipment of the vehicle from our manufacturing facility to the customer or receipt of the vehicle by the customer, depending on contract terms. We have elected to treat shipping and handling costs subsequent to transfer of control as fulfillment activities and, accordingly, recognize these costs as the revenue is recognized.
Revenue for up-fit and field service contracts is recognized over time, as equipment is installed in the customer’s vehicle or repairs and enhancements are made to customer’s vehicles. Revenue and the corresponding cost of products sold is estimated based on the inputs completed for a given performance obligation. Our performance obligation for up-fit and field service contracts is satisfied when the equipment installation or repairs and enhancements of the customer’s vehicle has been completed.
Emergency Response Vehicles
Our emergency response chassis and apparatuses are generally manufactured to order based on customer-supplied specifications. Due to the custom nature of the products and the attributes of the contracts, we do not have a ready alternative use for our emergency response chassis and apparatuses and we have an enforceable right to payment on the contracts. Accordingly, performance obligations for these custom ordered chassis and apparatuses are satisfied as the apparatuses and chassis are built. We recognize revenue and the corresponding cost of products sold on these contracts over time based on the inputs completed for a given performance obligation during the reporting period. We have elected to treat shipping and handling costs subsequent to transfer of control as fulfillment activities and, accordingly, recognize these costs as the revenue is recognized.
Revenue on certain emergency response chassis and apparatuses that are sold from stock or utilized as demonstration units is recognized at the point in time that the contract is received. Revenue related to modifications made to trucks sold from stock or that were utilized as demonstration units is recognized over time as the modifications are completed.
Specialty Chassis and Vehicles
We recognize revenue and the corresponding cost of products sold on the sale of motor home chassis when the performance obligation is completed and control and risk of ownership of the chassis has passed to our customer, which is generally upon shipment of the chassis to the customer.
Revenue and the corresponding cost of products sold associated with other specialty chassis is recognized over time based on the inputs completed for a given performance obligation during the reporting period. The performance obligations for other specialty chassis contracts are satisfied as the products are assembled.
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:as general economic conditions, industry-specific economic conditions, historical and anticipated customer performance, historical experience with write-offs and the level of past-duepast due amounts from year to year. However, generally, our assumptions are consistent year-over-year and there has been little adjustment made to the percentages used. In addition, in the event there are certain known risk factors with an open account, we may increase the allowance to include estimated losses on such “specific” account balances. The “specific” reserves are identified by a periodic review of the aged accounts receivable. If there is an account in question, credit checks are made and there is communication with the customer, along with other means to try to assess if a specific reserve is required. The inclusion of the “specific” reserve has caused the greatest fluctuation in the allowance for doubtful accounts balance historically. Please see Note 1 - General and Summary of Accounting Policies, in the Notes to Consolidated Financial Statements contained in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 20162017 for further details.
Inventories - Our inventories are stated at the lower of first-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.
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 testingtest 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 SeptemberJune 30, 2018 and December 31, 2017, we reportedhad recorded goodwill inat our Fleet Vehicles and Services, Emergency Response Vehicles and Specialty Chassis and Vehicles reportable segments. The Fleet Vehicles and Services and Specialty Chassis andEmergency Response Vehicles segments. At December 31, 2016, all of our goodwill related to our Fleet Vehicles and Services reportable segment. Our reportable segments were also determined to be the reporting units for goodwill impairment testing, atwhile the reporting unit for the goodwill recorded in the Specialty Chassis and Vehicles segment was determined to be limited to the Reach Manufacturing component of that reportable segment. The goodwill recorded in these reporting units was evaluated for impairment as of October 1, 2016.2017 using a discounted cash flow valuation.
The date
We first assess qualitative factors including, but not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for our most recently completed annualproducts 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 testing was October 1, 2016. We performedassessment. 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 two-stepreporting unit is less than its carrying value, we perform an impairment test whereby the first step wasby comparing the fair value of thea reporting unit with its carrying amount, including goodwill. The fair value of the reporting unit wasis 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. Basedcapital (“WACC”). In determining the estimated future cash flows, we consider current and projected future levels of income based on the results of the first step of our two-step impairment test we determinedplans for that business; business trends, prospects and market and economic conditions; and market-participant considerations. If the fair value of our Fleet Vehicles and Servicesa reporting unit exceededexceeds its carrying costs, and accordingly, there was noamount, 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 goodwill at the annual testing date.goodwill.
We completedevaluate the recoverability of our most recent annual impairment testing for our indefinite-livedindefinite lived intangible asset,assets, which, consistedas of June 30, 2018, consisted of our Utilimaster and Smeal trade name, as of October 1, 2016names, by comparing the estimated fair value of the trade namenames with itstheir carrying value.values. We estimatedestimate the fair value of theour trade namenames based on estimates of future royalty payments that are avoided through our ownership of the trade name, discounted to their present value. BasedIn determining the estimated fair value of the trade names, we consider current and projected future levels of revenue based on our plans for Utilimaster and Smeal branded products, business trends, prospects and market and economic conditions.
Significant judgments inherent in these analyses include assumptions about appropriate sales growth rates, WACC and the resultsamount of our impairment testing, we determinedexpected 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 due to 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 namename.
In 2017, we elected to bypass the qualitative assessment and proceed to the quantitative goodwill impairment assessment for all of our reporting units. The estimated fair values of these reporting units exceeded itstheir carrying costvalues by 232%, 91% and 62%, respectively, as of October 1, 2017, the most recent annual assessment date. Based on the discounted cash flow valuations at October 1, 2016,2017, an increase in the WACC for the reporting units of 500 basis points would not result in impairment.
The acquired Utilimaster and accordingly,Smeal trade names have indefinite lives as it is anticipated that they will contribute to our cash flows indefinitely. The estimated fair values of our Utilimaster and Smeal trade names exceeded their associated carrying values of $2.9 million and $2.4 million by 545% and 141%, respectively, as of October 1, 2017. Accordingly, there was no impairment recorded on these trade names. Based on the discounted cash flow valuations at the annual testing date.
With our JanuaryOctober 1, 2017, acquisition of Smeal we acquired additional indefinite lived intangible assetsan increase in the formWACC used for these impairment analyses of various500 basis points would not result in impairment in the trade names.
Since October 1, 2016,2017, there have been no events or changes in circumstances that would more likely than not reduce the fair value of any of our Fleet Vehicles and Services, Emergency Response Vehicles, or Specialty Chassis and Vehicles reporting units or our indefinite-lived intangible assets below their respective carrying costs.
We cannot predict the occurrence of certain events or changes in circumstances that might adversely affect the carrying value of goodwill and indefinite-lived intangible assets. Such events may include, but are not limited to, the impact of the general economic environment; a material negative change in relationshipsrelationships with significant customers; strategic decisions made in response to economic and competitive conditions; and other risk factors as detailed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.2017.
See Note 1, General and Summary of Accounting Policies and Note 5, Goodwill and Intangible Assets, in the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2016 and Note 4, Goodwill and Intangible Assets in the Notes to Condensed Consolidated Financial Statements contained in Item 1 of this Form 10-Q2017 for further details on our accounting policies and other information regarding goodwill and indefinite-lived intangible assets.
Warranties - Our policy is to record a provision for the estimated cost of warranty-related claims at the time of the sale, and periodically adjust the warranty liability to reflect actual experience. The amount of warranty liability accrued reflects actual historical warranty cost, which is accumulated on specific identifiable units. From that point, there is a projection of the expected future cost of honoring our obligations under the warranty agreements. Historically, the cost of fulfilling our warranty obligations has principally involved replacement parts and labor for field retrofit campaigns and recalls, which increase the reserve. Our estimates are based on historical experience, the number of units involved and the extent of features and components included in product models. Over time, this method has been consistently applied and has proven to be an appropriate approach to estimating future costs to be incurred. See also Note 75 – Commitments and Contingent Liabilities,, of in the Notes to Condensed Consolidated Financial Statements contained in Item 1 of this Form 10-Q, for further information regarding warranties.
Provision for Income Taxes
- We account for income taxes under a method that requires deferred income tax assets and liabilities to be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. Authoritative guidance also requires deferred income tax assets, which include state tax credit carryforwards, operating loss carryforwards and deductible temporary differences, be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred income tax assets will not be realized.
We evaluate the likelihood of realizing our deferred income tax assets by assessing our valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization include our forecast of future taxable income, the projected reversal of temporary differences and available tax planning strategies that could be implemented to realize the net deferred income tax assets.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The determination is based on the technical merits of the position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. Although management believes the estimates are reasonable, no assurance can be given that the final outcome of these matters will not be different thanfrom what is reflected in the historical income tax provisions and accruals.
Interest and penalties attributable to income taxes are recorded as a component of income taxes.
EFFECT OF INFLATION
Inflation affects us in two principal ways. First, our revolving note payablecredit agreement is generally, tied to the prime and LIBOR interest rates so that increases in those interest rates would result inbe 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 more than twelveas 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.
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 SeptemberJune 30, 2017,2018, we had $22.9$17.8 million ofin debt outstanding under our variable rate short-term and long-term debt agreements. An increase of 1%100 basis points in interest rates would increase ourresult in additional interest expense by approximately $0.1of $0.2 million on an annualized basis for the remaining three monthsfloating rate debt that we incurred in January 2017 for the acquisition of 2017.Smeal. We believe that we have sufficient financial resources to accommodate this hypothetical increase in interest rates. We do not enter into market-risk-sensitive instruments for trading or other purposes.
We do not believe that there has been a material change in the nature or categories of the primary market risk exposures or the particular markets that present the primary risk of loss to us. 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 are primarily determined by market factors that are beyond our control. All information provided in response to this item consists of forward-looking statements. Reference is made to the section captioned “Forward-Looking Statements” before Part I of this Quarterly Report on Form 10-Q for a discussion of the limitations on our responsibility for such statements.
Commodities risk
We are also exposed to changes in the prices of raw materials, primarily steel and aluminum, along with components that are made from these raw materials. We generally do not enter into derivative instruments for the purpose of managing exposures associated with fluctuations in steel and aluminum prices. We do, from time to time, engage in pre-buys of components that are impacted by changes in steel, aluminum and other commodity prices in order to mitigate our exposure to such price increases and align our costs with prices quoted in specific customer orders. We also actively manage our material supply sourcing, and may employ various methods to limit risk associated with commodity cost fluctuations. Changes in input costs have impacted our results for the three and six months ended June 30, 2018, and may continue to do so during the remainder of 2018 and beyond. See Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part 1, Item 2 of this Form 10-Q for information on the impacts of changes in input costs during the three and six months ended June 30, 2018.
Controls and Procedures. |
An evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of SeptemberJune 30, 2017.2018. Based on and as of the time of such evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed by us in the reports that we file or submit is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
There have been noNo changes in our internal control over financial reporting were identified as having occurred during the quarter ended SeptemberJune 30, 20172018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Risk Factors |
We have included in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016,2017, a description of certain risks and uncertainties that could affect our business, future performance or financial condition (the “Risk Factors”). There have been no material changes from the disclosure provided in the Form 10-K for the year ended December 31, 20162017 with respect to the Risk Factors. Investors should consider the Risk Factors prior to making an investment decision with respect to our stock.
Unregistered Sales of Equity Securities and Use of Proceeds |
Issuer Purchases of Equity Securities
On April 28, 2016, our Board of Directors authorized the repurchase of up to 1.0 million shares of our common stock in open market transactions. During the quarter ended SeptemberJune 30, 2017,2018, no shares were repurchased under this authorization.
During the quarter ended SeptemberJune 30, 20172018, there were 11,1004,164 shares delivered by associates in satisfaction of tax withholding obligations that occurred upon the vesting of restricted shares. These shares are not repurchased pursuant to the Board of Directors authorization disclosed above.
|
|
| Total Number of |
| ||||||||||||
July 1 to July 31 | 1,719 | $ | 8.85 | - | 1,000,000 | |||||||||||
August 1 to August 31 | 9,260 | 8.90 | - | 1,000,000 | ||||||||||||
September 1 to September 30 | 121 | 9.35 | - | 1,000,000 | ||||||||||||
Total | 11,100 | $ | 8.90 | - | 1,000,000 | |||||||||||
|
|
| Total Number of |
that Purchased | ||||||||||||
April 1 to April 30 | - | $ | - | - | 1,000,000 | |||||||||||
May 1 to May 31 | - | - | - | 1,000,000 | ||||||||||||
June 1 to June 30 | 4,164 | 15.10 | - | 1,000,000 | ||||||||||||
Total | 4,164 | $ | 15.10 | - | 1,000,000 | |||||||||||
(1) | This column reflects the number of shares that may yet be purchased pursuant to the April 28, 2016 Board authorization described above. |
Exhibits. |
Exhibits. The following exhibits are filed as a part of this report on Form 10-Q: Exhibit No. Document 31.1 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act. 32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. § 1350. 101.INS XBRL Instance Document 101.SCH XBRL Schema Document 101.CAL XBRL Calculation Linkbase Document 101.DEF XBRL Definition Linkbase Document 101.LAB XBRL Label Linkbase Document 101.PRE XBRL Presentation Linkbase Document * Management contract or compensatory plan or arrangement Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 2, 2018 SPARTAN MOTORS, INC. By /s/ Matthew W. Long Matthew W. Long 44 (a) Exhibits. The following documents are filed as exhibits to(a) 31.1Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.31.210.1Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.32Certification of Chief Executive OfficerEmployment letter agreement between Spartan Motors, Inc. and Chief Financial Officer pursuant to 18 U.S.C. § 1350.Matthew W. Long dated June 4, 2018. * 101.INS10.2 XBRL Instance Document101.SCHXBRL Schema Document101.CALXBRL Calculation Linkbase Document101.DEFXBRL Definition Linkbase Document101.LABXBRL Label Linkbase Document101.PREXBRL Presentation Linkbase DocumentSIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.Date: NovemberConsulting agreement dated July 1, 2017SPARTAN MOTORS, INC.By/s/ Frederick J. SohmFrederick J. SohmChief Financial Officer2018 between Spartan Motors, Inc. and Treasurer(Principal Financial and Accounting Officer)EXHIBIT INDEXExhibit No.DocumentThomas T. Kivell. *
Interim Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)