Company Quick10K Filing
Spartan Motors
Price13.85 EPS0
Shares35 P/E28
MCap491 P/FCF79
Net Debt94 EBIT22
TEV585 TEV/EBIT27
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-07
10-K 2019-12-31 Filed 2020-03-16
10-Q 2019-09-30 Filed 2019-11-12
10-Q 2019-06-30 Filed 2019-08-01
10-Q 2019-03-31 Filed 2019-05-02
10-K 2018-12-31 Filed 2019-03-05
10-Q 2018-09-30 Filed 2018-10-31
10-Q 2018-06-30 Filed 2018-08-02
10-Q 2018-03-31 Filed 2018-05-03
10-K 2017-12-31 Filed 2018-03-01
10-Q 2017-09-30 Filed 2017-11-01
10-Q 2017-06-30 Filed 2017-08-02
10-Q 2017-03-31 Filed 2017-05-04
10-K 2016-12-31 Filed 2017-03-03
10-Q 2016-09-30 Filed 2016-11-03
10-Q 2016-06-30 Filed 2016-08-04
10-Q 2016-03-31 Filed 2016-05-04
10-K 2015-12-31 Filed 2016-03-09
10-Q 2015-09-30 Filed 2015-11-06
10-Q 2015-06-30 Filed 2015-08-05
10-Q 2015-03-31 Filed 2015-05-05
10-K 2014-12-31 Filed 2015-03-05
10-Q 2014-09-30 Filed 2014-11-04
10-Q 2014-06-30 Filed 2014-08-05
10-Q 2014-03-31 Filed 2014-05-07
10-K 2013-12-31 Filed 2014-03-13
10-Q 2013-09-30 Filed 2013-11-07
10-Q 2013-06-30 Filed 2013-08-07
10-Q 2013-03-31 Filed 2013-05-08
10-K 2012-12-31 Filed 2013-03-14
10-Q 2012-09-30 Filed 2012-11-08
10-Q 2012-06-30 Filed 2012-08-08
10-Q 2012-03-31 Filed 2012-05-08
10-K 2011-12-31 Filed 2012-03-14
10-Q 2011-09-30 Filed 2011-11-08
10-Q 2011-06-30 Filed 2011-08-08
10-K 2010-12-31 Filed 2011-03-15
8-K 2020-07-20 Officers
8-K 2020-06-19
8-K 2020-06-01
8-K 2020-05-20
8-K 2020-05-07
8-K 2020-03-30
8-K 2020-03-17
8-K 2020-03-12
8-K 2020-02-19
8-K 2020-01-31
8-K 2020-01-21
8-K 2019-10-31
8-K 2019-09-23
8-K 2019-09-09
8-K 2019-08-05
8-K 2019-08-01
8-K 2019-06-17
8-K 2019-06-13
8-K 2019-05-22
8-K 2019-05-07
8-K 2019-05-02
8-K 2019-04-10
8-K 2019-02-28
8-K 2019-01-14
8-K 2018-12-17
8-K 2018-12-17
8-K 2018-12-11
8-K 2018-11-07
8-K 2018-10-31
8-K 2018-08-08
8-K 2018-08-02
8-K 2018-07-13
8-K 2018-06-30
8-K 2018-06-08
8-K 2018-06-01
8-K 2018-05-29
8-K 2018-05-23
8-K 2018-05-14
8-K 2018-05-03
8-K 2018-04-06
8-K 2018-03-12
8-K 2018-03-01
8-K 2017-07-26

SPAR 10Q Quarterly Report

Item 1. Financial Statements
Note 1 - Nature of Operations and Basis of Presentation
Note 3 - Acquisition Activities
Note 4 - Inventories
Note 5 - Debt
Note 6 - Revenue
Note 7 - Property, Plant and Equipment
Note 8 - Leases
Note 9 - Commitments and Contingent Liabilities
Note 10 - Taxes on Income
Note 11 - Business Segments
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II. Other Information
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits.
EX-31.1 ex_182088.htm
EX-31.2 ex_182089.htm
EX-32 ex_182090.htm

Spartan Motors Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
51541230920610302012201420172020
Assets, Equity
29023017011050-102012201420172020
Rev, G Profit, Net Income
905316-21-58-952012201420172020
Ops, Inv, Fin

10-Q 1 spar20200331_10q.htm FORM 10-Q spar20200331_10q.htm

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

 


 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020.

 

OR

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

 

Commission File Number 001-33582

 

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

 

Michigan
(State or Other Jurisdiction of 
Incorporation or Organization)

 

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

41280 Bridge Street
Novi, Michigan
(Address of Principal Executive Offices)

 


48375
(Zip Code)

 

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

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $.01 par value

SPAR

NASDAQ Global Select Market

 

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

 

Yes

 

No

 

 

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

 

Yes

 

No

 

 

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller Reporting Company

Emerging Growth Company

     

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Exchange Act).             Yes ☐       No ☒     

 

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

 

Class

Outstanding at April 30, 2020

Common stock, $.01 par value

35,163,399 shares

 

 

SPARTAN MOTORS, INC.

 

INDEX
 


 

 

Page

 

   

FORWARD-LOOKING STATEMENTS

3

 

 

   

PART I.  FINANCIAL INFORMATION

   
 

 

 

   
 

Item 1.

Financial Statements:

   
         
   

Condensed Consolidated Balance Sheets – March 31, 2020 and December 31, 2019 (Unaudited)

4

 
   

 

   
   

Condensed Consolidated Statements of Operations – Three Months Ended March 31, 2020 and 2019 (Unaudited)

5

 
   

 

   
   

Condensed Consolidated Statements of Cash Flows – Three Months Ended March 31, 2020 and 2019 (Unaudited)

6

 
         
   

Condensed Consolidated Statement of Shareholders’ Equity – Three Months Ended March 31, 2020 and 2019 (Unaudited)

7

 
   

 

   
   

Notes to Condensed Consolidated Financial Statements

8

 
   

 

   
 

Item 2.

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

21

 
 

 

 

   
 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30

 
 

 

 

   
 

Item 4.

Controls and Procedures

30

 
 

 

 

   

PART II.  OTHER INFORMATION

   
         
 

Item 1A.

Risk Factors

31

 
         
 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

 
         

 

Item 6.

Exhibits

33

 

 

 

 

   

SIGNATURES

34

 

 

 

 

FORWARD-LOOKING STATEMENTS

 

This Form 10-Q contains some statements that are not historical facts. These statements are called “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements involve important known and unknown risks, uncertainties and other factors and can be identified by phrases using “estimate,” “anticipate,” “believe,” “project,” “expect,” “intend,” “predict,” “potential,” “future,” “may,” “will”, “should” and similar expressions or words. Spartan Motors, Inc.’s (the “Company”, “we”, “us”, or “our”) future results, performance or achievements may differ materially from the results, performance or achievements discussed in the forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“Risk Factors”) that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements.

 

Risk Factors include the risk factors listed and more fully described in Part I, Item 1A – Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission on March 16, 2020, subject to any changes and updates disclosed in Part II, Item 1A – Risk Factors below. Those risk factors include all known risks our management believes could materially affect the potential results described by forward-looking statements contained in this Form 10-Q. However, those risks may not be the only ones we face. Our business, operations, and financial performance could also be affected by additional factors that are not presently known to us or that we currently consider to be immaterial to our operations. In addition, new Risk Factors may emerge from time to time that may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, although we believe that the forward-looking statements contained in this Form 10-Q are reasonable, we cannot provide you with any guarantee that the results described in those forward-looking statements will be achieved. All forward-looking statements in this Form 10-Q are expressly qualified in their entirety by the cautionary statements contained in this section, and investors should not place undue reliance on forward-looking statements as a prediction of actual results. We do not undertake any obligation to update or revise any forward-looking statements to reflect developments or information obtained after the date this Form 10-Q is filed with the Securities and Exchange Commission.

 

 

 

Item 1.

Financial Statements

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

(In thousands, except par value) 

 

   

March 31,

2020

   

December 31,

2019

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 40,903     $ 19,349  

Accounts receivable, less allowance of $181 and $228

    70,836       58,874  

Contract assets

    14,645       10,898  

Inventories, net

    59,289       59,456  

Other receivables – chassis pool agreements

    8,832       8,162  

Other current assets

    9,503       5,344  

Current assets held for sale

    -       90,725  

Total current assets

    204,008       252,808  

Property, plant and equipment, net

    40,524       40,074  

Right of use assets operating leases

    30,664       32,147  

Goodwill

    43,632       43,632  

Intangible assets, net

    53,359       54,061  

Other assets

    2,237       2,295  

Net deferred tax asset

    14,124       25,520  

TOTAL ASSETS

  $ 388,548     $ 450,537  
                 

LIABILITIES AND SHAREHOLDERS' EQUITY

               

Current liabilities:

               

Accounts payable

  $ 63,480     $ 54,713  

Accrued warranty

    5,155       5,694  

Accrued compensation and related taxes

    9,704       15,841  

Deposits from customers

    1,091       2,640  

Operating lease liability

    5,634       5,162  

Other current liabilities and accrued expenses

    8,652       15,967  

Short-term debt – chassis pool agreements

    8,832       8,162  

Current portion of long-term debt

    220       177  

Current liabilities held for sale

    -       49,601  

Total current liabilities

    102,768       157,957  

Other non-current liabilities

    3,811       4,922  

Long-term operating lease liability

    25,510       27,241  

Long-term debt, less current portion

    74,646       88,670  

Total liabilities

    206,735       278,790  

Commitments and contingent liabilities

               

Shareholders' equity:

               

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

    -       -  

Common stock, $0.01 par value; 80,000 shares authorized; 35,475 and 35,343 outstanding

    354       353  

Additional paid in capital

    87,335       85,148  

Retained earnings

    94,575       86,764  

Total Spartan Motors, Inc. shareholders’ equity

    182,264       172,265  

Non-controlling interest

    (451 )     (518 )

Total shareholders’ equity

    181,813       171,747  

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

  $ 388,548     $ 450,537  

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

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

(In thousands, except per share data)

 

   

Three Months Ended March 31,

 
   

2020

   

2019

 
                 

Sales

  $ 176,948     $ 172,206  

Cost of products sold

    140,647       151,486  

Gross profit

    36,301       20,720  
                 

Operating expenses:

               

Research and development

    1,541       1,226  

Selling, general and administrative

    21,400       13,541  

Total operating expenses

    22,941       14,767  
                 

Operating income

    13,360       5,953  
                 

Other income (expense):

               

Interest expense

    (731 )     (374 )

Interest and other income (expense)

    (510 )     332  

Total other expense

    (1,241 )     (42 )
                 

Income from continuing operations before income taxes

    12,119       5,911  

Income tax expense

    377       1,076  

Income from continuing operations

    11,742       4,835  

Loss from discontinued operations, net of income taxes

    (3,864 )     (3,298 )

Net income

    7,878       1,537  

Less: net income attributable to non-controlling interest

    67       140  
                 

Net income attributable to Spartan Motors Inc.

  $ 7,811     $ 1,397  
                 

Basic net earnings per share

               

Continuing operations

  $ 0.33     $ 0.13  

Discontinued operations

    (0.11 )     (0.09 )

Basic earnings per share

  $ 0.22     $ 0.04  
                 

Diluted net earnings per share

               

Continuing operations

  $ 0.33     $ 0.13  

Discontinued operations

    (0.11 )     (0.09 )

Diluted earnings per share

  $ 0.22     $ 0.04  
                 

Basic weighted average common shares outstanding

    35,401       35,265  

Diluted weighted average common shares outstanding

    35,664       35,265  

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

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

(In thousands)

 

   

Three Months Ended March 31,

 
   

2020

   

2019

 

Cash flows from operating activities:

               

Net income

  $ 7,878     $ 1,537  

Adjustments to reconcile net income to net cash used in operating activities:

               

Depreciation and amortization

    2,801       2,525  
Accruals for warranty, net of cash paid     (538 )     392  
Deferred income taxes     11,396       (564 )
Non-cash stock based compensation expense     2,132       860  
Loss on sale of business     2,138       -  
Changes in accounts receivable and contract assets      (16,380 )      (5,626 )
Changes in inventories      (3,686 )      (14,464 )
Changes in accounts payable     472        11,480  
Changes in accrued compensation and related taxes      (6,140 )      (1,266 )
Change in other assets and liabilities      (17,141 )      2,723  

Total adjustments

    (24,946 )     (3,940 )

Net cash used in operating activities

    (17,068 )     (2,403 )
                 

Cash flows from investing activities:

               

Purchases of property, plant and equipment

    (2,433 )     (1,934 )

Proceeds from sale of business

    55,000       -  

Net cash provided by (used in) investing activities

    52,567       (1,934 )
                 

Cash flows from financing activities:

               

Proceeds from long-term debt

    16,000       -  

Payments on long-term debt

    (30,000 )     (19 )

Purchase and retirement of common stock

    -       (793 )

Net cash provided by (used in) the exercise and vesting of stock incentive awards

    55       (922 )

Net cash used in financing activities

    (13,945 )     (1,734 )
                 

Net increase (decrease) in cash and cash equivalents

    21,554       (6,071 )

Cash and cash equivalents at beginning of period

    19,349       27,439  

Cash and cash equivalents at end of period

  $ 40,903     $ 21,368  

 

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

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (Unaudited)

(In thousands)

 

   

Number of

Shares

   

Common

Stock

   

Additional

Paid In

Capital

   

Retained

Earnings

   

Non-

Controlling

Interest

   

Total

Shareholders'

Equity

 

Balance at December 31, 2019

    35,344     $ 353     $ 85,148     $ 86,764     $ (518 )   $ 171,747  

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

    4       -       55       -       -       55  

Issuance of restricted stock, net of cancellation

    127       1       -       -       -       1  

Non-cash stock based compensation expense

    -       -       2,132       -       -       2,132  

Net income

    -       -       -       7,811       67       7,878  

Balance at March 31, 2020

    35,475     $ 354     $ 87,335     $ 94,575     $ (451 )   $ 181,813  

 

 

   

Number of

Shares

   

Common

Stock

   

Additional

Paid In

Capital

   

Retained

Earnings

   

Non-

Controlling

Interest

   

Total

Shareholders'

Equity

 

Balance at December 31, 2018

    35,321     $ 353     $ 82,816     $ 103,571     $ (658 )   $ 186,082  

Transition adjustment for adoption of new lease standard

    -       -       -       (113 )     -       (113 )

Balance at December 31, 2018, adjusted

    35,321       353       82,816       103,458       (658 )     185,969  

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

    9       -       (922 )     -       -       (922 )

Issuance of restricted stock, net of cancellation

    121       1       (1 )     -       -       -  

Purchase and retirement of common stock

    (101 )     (1 )     (236 )     (556 )     -       (793 )

Non-cash stock based compensation expense

    -       -       860       -       -       860  

Net income

    -       -       -       1,397       140       1,537  

Balance at March 31, 2019

    35,350     $ 353     $ 82,517     $ 104,299     $ (518 )   $ 186,651  

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

 

 

NOTE 1 NATURE OF OPERATIONS AND BASIS OF PRESENTATION

 

For a description of key accounting policies followed, refer to the notes to the Spartan Motors, Inc. (the “Company”, “we”, “us” or “our”) consolidated financial statements for the year ended December 31, 2019, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2020.

 

Nature of Operations

 

We are a niche market leader in specialty vehicle manufacturing and assembly for the commercial vehicle (including last-mile delivery, specialty service and vocation-specific upfit segments) and recreational vehicle industries. Our products include walk-in vans and truck bodies used in e-commerce/parcel delivery, upfit equipment used in the mobile retail and utility trades, luxury Class A diesel motor home chassis, military vehicles, and contract manufacturing and assembly services. We also supply replacement parts and offer repair, maintenance, field service and refurbishment services for the vehicles that we manufacture. Our operating activities are conducted through our wholly-owned operating subsidiary, Spartan Motors USA, Inc., with locations in Charlotte, Michigan; Ephrata, Pennsylvania; Pompano Beach, Florida; Bristol, Indiana; North Charleston, South Carolina; Kansas City, Missouri; Montebello, Carson, Sacramento and Union City, California; Mesa, Arizona; Dallas and Weatherford, Texas; and Saltillo, Mexico.

 

Our Bristol, Indiana location manufactures vehicles used in the parcel delivery, mobile retail and trades and construction industries, and supplies related aftermarket parts and services under the Utilimaster brand name. Our Kansas City, Missouri; Pompano Beach, Florida; North Charleston, South Carolina; Montebello California; and Saltillo, Mexico locations sell and install equipment used in commercial and fleet vehicles. Our Charlotte, Michigan location manufactures heavy-duty chassis and vehicles, and supplies aftermarket parts and accessories under the Spartan Chassis and Spartan brand names. Our Carson, Sacramento and Union City, California; Mesa, Arizona; and Dallas and Weatherford, Texas locations manufacture service truck bodies and accessories under the Royal Truck Body brand name.

 

The accompanying unaudited interim condensed consolidated financial statements reflect all normal and recurring adjustments that are necessary for the fair presentation of our financial position as of March 31, 2020, the results of operations and cash flows for the three-month periods ended March 31, 2020. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2019. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results expected for the full year.

 

Recent Developments

 

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus (“COVID-19”). On March 11, 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The pandemic has had a significant impact on macroeconomic conditions. To limit the spread of COVID-19, governments have taken various actions including the issuance of stay-at-home orders and social distancing guidelines. While the Company’s plants are continuing to operate as essential businesses, starting March 23, 2020 certain of our manufacturing facilities were temporarily suspended or cut back on operating levels and shifts as a result of government orders. As of early May 2020, several of these facilities reopened and we have restored a significant portion of our operating capacity. We expect our manufacturing facilities to be back to full operations by the end of May 2020, however, additional suspensions and cutbacks may occur as the impacts from COVID-19 and related responses continue to develop within our global supply chain and customer base. The Company is taking a variety of measures to maintain operations with as minimal impact as possible to promote the safety and security of our employees, including increased frequency of cleaning and disinfecting of facilities, social distancing, remote working when possible, travel restrictions and limitations on visitor access to facilities. We are also working to align operations and spending across our business with current conditions. This includes temporary salary reductions for executive management and the Board of Directors, furloughs of a portion of our workforce, freezing employee requisitions and minimizing capital expenditures to critical investments.

 

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

 

The full impact of the COVID-19 outbreak continues to evolve as of the date of this filing. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the impact of the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2020. 


On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. As a result, the Company recorded an income tax benefit of $2,610 in the quarter (see Note 10 – Taxes on Income) and has also made provision to defer the employer side social security payments for the remaining portion of 2020, to be paid in two equal installment payments in 2021 and 2022. We will continue to examine the potential impacts of the CARES Act on our business, results of operations, financial condition and liquidity.

 

In 2019, we performed a quantitative assessment and concluded each of our reporting units and indefinite life intangible assets had excess fair value over their carrying value. However, as of March 31, 2020, we observed negative macroeconomic indicators resulting from the COVID-19 pandemic, which could have a direct impact on our business. We determined this constituted a triggering event that required an assessment to determine if an impairment loss may have occurred. Therefore, we qualitatively assessed whether it was more likely than not that goodwill and indefinite life intangible assets were impaired as of March 31, 2020. We reviewed our previous forecasts and assumptions based on our current projections, which are subject to various risks and uncertainties, including projected revenue, projected operational profit, terminal growth rates, and the cost of capital. Based on our interim impairment assessment as of March 31, 2020, we have determined that our goodwill and indefinite life intangible assets are not impaired. The Company’s assumptions about future conditions important to its assessment of potential impairment of its goodwill and indefinite life intangible assets, including the impacts of the COVID-19 pandemic, are subject to uncertainty, and the Company will continue to monitor these conditions in future periods as new information becomes available, and will update its analyses accordingly.

 

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

 

On September 9, 2019, the Company completed its acquisition of Fortress Resources, LLC D/B/A Royal Truck Body (“Royal”). Royal is a leading California-based designer, manufacturer and installer of service truck bodies and accessories. Royal manufactures and assembles truck body options for various trades, service truck bodies, stake body trucks, contractor trucks, and dump bed trucks. Royal is the largest service body company in the western United States with its principal facility in Carson, California. Royal has additional manufacturing, assembly, and service space in branch locations in Sacramento and Union City, California; Mesa, Arizona; and Dallas and Weatherford, Texas. This acquisition allowed us to quickly expand our footprint in the western United States supporting our strategy of coast-to-coast manufacturing and distribution. Royal is part of our Specialty Chassis and Vehicle segment.

 

Recently Adopted Accounting Standards

 

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 is intended to introduce a revised approach to the recognition and measurement of credit losses, emphasizing an updated model based on expected losses rather than incurred losses. The provisions of this standard are effective for reporting periods beginning after December 15, 2019. The Company adopted ASU 2016-13 in the first quarter of 2020 and it had no material impact on our consolidated financial position, results of operations or cash flows.

 

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

 

Accounting Standards Not Yet Adopted

 

In December 2019, the FASB issued Accounting Standards Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 is intended to simplify the accounting for income taxes by removing certain exceptions to the general principles of Topic 740 and improving consistent application of Generally Accepted Accounting Principles ("GAAP") for other areas of Topic 740 by clarifying and amending existing guidance. The provisions of this standard are effective for reporting periods beginning after December 15, 2020 and early adoption is permitted. The adoption of the provisions of ASU 2019-12 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

 

 

NOTE 2 – DISCONTINUED OPERATIONS

 

On February 1, 2020, we completed the sale of our ERV business for $55,000 in cash, subject to certain post-closing adjustments, and recognized a loss on sale of $2,138, which is a portion of the Loss from discontinued operations, net of tax in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2020. The ERV business included the emergency response chassis operations in Charlotte, Michigan, and the Spartan apparatus operations in Brandon, South Dakota; Snyder and Neligh, Nebraska; and Ephrata, Pennsylvania. The ERV business met the accounting criteria for held for sale classification as of December 31, 2019. The results of the ERV business have been reclassified to Loss from discontinued operations, net of tax in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019.

 

The loss from discontinued operations presented in the Condensed Consolidated Statement of Operations for the three month periods ended March 31, 2020 and 2019 is as follows:

 

   

Three Months Ended

March 31,

 
   

2020

   

2019

 
                 

Sales

  $ 19,167     $ 61,757  

Cost of products sold

    18,678       57,950  

Gross profit

    489       3,807  

Operating expenses

    4,123       8,171  

Operating loss

    (3,634

)

    (4,364

)

Other income (expense)

    (2,138

)

    3  

Loss from discontinued operations before taxes

    (5,772

)

    (4,361

)

Income tax benefit

    1,908       1,063  

Net loss from discontinued operations

  $ (3,864

)

  $ (3,298

)

 

In the annual goodwill and intangible assets impairment test as of October 1, 2019, we determined that the fair value of our ERV business and Smeal trade name were less than their carrying values due to under-performance in 2019 which was expected to continue in future periods. As a result, we recorded impairment expense of $13,856 to write off the goodwill and indefinite lived intangible assets. In conjunction with the classification of the ERV business as held for sale as of December 31, 2019, we recorded a loss of $39,275 to write down the carrying values of the associated assets and liabilities to their fair values less estimated costs to sell of $3,604. The assets and liabilities of the discontinued operations are presented separately under the captions “Current assets held for sale” and “Current liabilities held for sale” in the Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019. Subsequent adjustments may be necessary based on the post-closing net working capital adjustment, which is in process. As of March 31, 2020, due to the sale of the ERV business, there were no assets or liabilities related to discontinued operations on the Condensed Consolidated Balance Sheets.

 

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) 

 

Assets and Liabilities held for sale in the Condensed Consolidated Balance Sheet were as follows:

 

   

December 31,

 
   

2019

 

Assets:

       

Accounts receivable, net

  $ 30,760  

Contract assets

    36,740  

Inventories

    32,329  

Other current assets

    1,142  

Property, plant and equipment

    21,967  

Right of use assets – operating leases

    5,960  

Intangible assets

    1,050  

Other noncurrent assets

    52  

Impairment of carrying value

    (39,275 )

Total current assets held for sale

  $ 90,725  
         

Liabilities:

       
Accounts payable   $ 4,213  
Accrued warranty     11,347  
Accrued compensation and related taxes     3,047  
Deposits from customers     21,409  
Operating lease liability     727  

Other current liabilities

    3,495  
Long-term operating lease liability     5,363  
Total current liabilities held for sale   $ 49,601  

 

Total depreciation and amortization and capital expenditures for the discontinued operations for the three months ended March 31, 2020 and March 31, 2019:

 

   

Three Months Ended

March 31,

 
   

2020

   

2019

 
                 

Depreciation and amortization

  $ 284     $ 1,213  

Capital expenditures

  $ 84     $ 826

 

 

 

NOTE 3 – ACQUISITION ACTIVITIES

 

On September 9, 2019, the Company completed the acquisition of Fortress Resources, LLC D/B/A Royal Truck Body (“Royal”) pursuant to which the Company acquired all the outstanding equity interests of Royal. The Company paid $89,369 in cash. The acquisition was financed using $89,369 borrowed from our existing line of credit, as described in Note 5 – Debt.

 

Purchase Price Allocation

 

This acquisition was accounted for using the acquisition 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 customer relationships, trade names and trademarks, patented technology and non-competition agreements. The preliminary excess of the purchase price over the estimated fair values of the net tangible and intangible assets acquired of $27,476 was recorded as goodwill, which is expected to be deductible for tax purposes.

 

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) 

 

The fair value of the net assets acquired was based on a preliminary valuation and the estimates and assumptions are subject to change within the measurement period. In April of 2020, the Company finalized all working capital adjustments with the seller. The Company will finalize the purchase price allocation as soon as practicable within the measurement period, but in no event later than one year following the acquisition date.

 

As of March 31, 2020, the preliminary allocation of purchase price to assets acquired and liabilities assumed is as follows:

 

Cash and cash equivalents

  $ 431  

Accounts receivable, less allowance

    5,019  

Contract assets

    1,499  

Inventory

    6,453  

Other receivables – chassis pool agreements

    10,424  

Property, plant and equipment, net

    4,980  

Right of use assets-operating leases

    12,767  

Intangible assets, net

    47,150  

Goodwill

    27,476  

Total assets acquired

    116,199  
         

Accounts payable

    (1,658 )

Customer prepayments

    (255 )

Accrued warranty

    (98 )

Operating lease liabilities

    (1,693 )

Accrued compensation and related taxes

    (569 )

Other current liabilities and accrued expenses

    (30 )

Short-term debt – chassis pool agreements

    (10,424 )

Long-term operating lease liability

    (11,074 )

Long-term debt, less current portion

    (1,029 )

Total liabilities assumed

    (26,830 )
         

Total purchase price

  $ 89,369  

 

Goodwill Assigned

 

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

 

   

Amount

 

Useful Life

Customer relationships

  $ 30,000  

15 Years

Trade names and trademarks

    13,000  

Indefinite

Patented technology

    2,200  

8 Years

Non-competition agreements

    1,950  

5 Years

    $ 47,150    

 

The Company plans to amortize the customer relationships utilizing an accelerated approach and plans to amortize patented technology and non-competition agreements assets utilizing a straight-line approach. Amortization expense, including the intangible assets preliminarily recorded from the Royal acquisition, is $666 for the quarter ended March 31, 2020.

 

Goodwill consists of operational synergies that are expected to be realized in both the short and long-term and the opportunity to enter into new markets which will enable us to increase value to our customers and shareholders. Key areas of expected cost savings include an expanded dealer network, complementary product portfolios and manufacturing and supply chain work process improvements.

 

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

 

NOTE 4 – INVENTORIES

 

Inventories are summarized as follows:

 

   

March 31,

2020

   

December 31,
2019

 

Finished goods

  $ 5,697     $ 4,764  

Work in process

    2,650       1,773  

Raw materials and purchased components

    54,550       57,679  

Reserve for slow-moving inventory

    (3,608

)

    (4,760

)

Total inventories, net

  $ 59,289     $ 59,456  

 

 

NOTE 5 DEBT

 

Short-term debt consists of the following:

 

   

March 31,
2020

   

December 31,
2019

 

Chassis pool agreements

  $ 8,832     $ 8,162  

Total short-term debt

  $ 8,832     $ 8,162  

 

Chassis Pool Agreements

 

The Company obtains certain vehicle chassis for its walk-in vans, truck bodies and specialty vehicles directly from the chassis manufacturers under converter pool agreements. Chassis are obtained from the manufacturers based on orders from customers, and in some cases, for unallocated orders. The agreements generally state that the manufacturer will provide a supply of chassis to be maintained at the Company’s facilities with the condition that we will store such chassis and will not move, sell, or otherwise dispose of such chassis except under the terms of the agreement. In addition, the manufacturer typically retains the sole authority to authorize commencement of work on the chassis and to make certain other decisions with respect to the chassis including the terms and pricing of sales of the chassis to the manufacturer’s dealers. The manufacturer also does not transfer the certificate of origin to the Company nor permit the Company to sell or transfer the chassis to anyone other than the manufacturer (for ultimate resale to a dealer). Although the Company is party to related finance agreements with manufacturers, the Company has not historically settled any related obligations in cash, nor does it expect to do so in the future. Instead, the obligation is settled by the manufacturer upon reassignment of the chassis to an accepted dealer, and the dealer is invoiced for the chassis by the manufacturer. Accordingly, as of March 31, 2020 and December 31, 2019, the Company’s outstanding chassis converter pool with manufacturers totaled $8,832 and $8,162, respectively. The Company has included this financing agreement on the Company’s Condensed Consolidated Balance Sheets within Other receivables – chassis pool agreements and Short-term debt – chassis pool agreements. Typically, chassis are converted and delivered to customers within 90 days of the receipt of the chassis by the Company. The chassis converter pool is a non-cash arrangement and is offsetting between Current assets and Current liabilities on the Company’s Condensed Consolidated Balance Sheets.

 

Long-term debt consists of the following:

 

   

March 31,
2020

   

December 31,
2019

 

Line of credit revolver

  $ 73,400     $ 87,400  
                 

Finance lease obligation

    569       496  

Other

    897       951  

Total debt

    74,866       88,847  

Less current portion of long-term debt

    (220

)

    (177

)

Total long-term debt

  $ 74,646     $

88,670

 

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

 

Line of credit revolver

 

On August 8, 2018, we entered into a Credit Agreement (the "Credit Agreement") by and among us and certain of our subsidiaries as borrowers, Wells Fargo Bank, National Association ("Wells Fargo"), as administrative agent, and the lenders party thereto consisting of Wells Fargo, JPMorgan Chase Bank, N.A. and PNC Bank National Association (the "Lenders"). Subsequently, the Credit Agreement was amended on May 14, 2019, September 9, 2019 and September 25, 2019 and certain of our other subsidiaries executed guaranties guarantying the borrowers' obligations under the Credit Agreement. Concurrent with the close of the sale of the ERV business and effective January 31, 2020, the Credit Agreement was further amended by a fourth amendment, which released certain of our subsidiaries that were sold as part of the ERV business. The substantive business terms of the Credit Agreement remain in place and were not changed by the fourth amendment.

 

As a result, at March 31, 2020, under the Credit Agreement, as amended, we may borrow up to $175,000 from the Lenders under a secured revolving credit facility which matures August 8, 2023. We may also request an increase in the facility of up to $50,000 in the aggregate, subject to customary conditions. The credit facility is also available for the issuance of letters of credit of up to $20,000 and swing line loans of up to $30,000, subject to certain limitations and restrictions. This revolving credit facility carries an interest rate of either (i) the highest of prime rate, the federal funds effective rate from time to time plus 0.5%, or the one month adjusted LIBOR plus 1.0%; or (ii) adjusted LIBOR, in each case plus a margin based upon our ratio of debt to earnings from time to time. The applicable borrowing rate including margin was 2.34% (or one-month LIBOR plus 1.50%) at March 31, 2020. The credit facility is secured by security interests in, and liens on, all assets of the borrowers and guarantors, other than real property and certain other excluded assets.

 

Under the terms of our Credit Agreement, we have the ability to issue letters of credit totaling $20,000. At March 31, 2020 and December 31, 2019, we had outstanding letters of credit totaling $525 related to our worker's compensation insurance.

 

Under the terms of our Credit Agreement, we are required to maintain certain financial ratios and other financial covenants, which limited our available borrowings (exclusive of outstanding borrowings) under our line of credit to a total of approximately $74,499 and $60,499 at March 31, 2020 and December 31, 2019, respectively. The Credit Agreement also prohibits us from incurring additional indebtedness; limits certain acquisitions, investments, advances or loans; limits our ability to pay dividends in certain circumstances; and restricts substantial asset sales, all subject to certain exceptions and baskets. At March 31, 2020 and December 31, 2019, we were in compliance with all covenants in our credit agreement.

 

In the first quarter of 2020, the Company used proceeds from the sale of the ERV business to pay down $30,000 on the revolver and subsequently drew $16,000 on the revolver to obtain additional liquidity in response to the market uncertainty caused by the coronavirus outbreak.

 

 

NOTE 6 – REVENUE

 

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

 

   

March 31,

2020

   

March 31,

2019

 

Contract Assets

               

Contract assets, beginning of period

  $ 10,898     $ 9,229  

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

    (10,623

)

    (9,229

)

Contract assets recognized, net of reclassification to receivables

    14,370       8,608  

Contract assets, end of period

  $ 14,645     $ 8,608  
                 

Contract Liabilities

               

Contract liabilities, beginning of period

  $ 2,640     $ 871  

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

    (2,384

)

    (871

)

Cash received in advance and not recognized as revenue

    835       565  

Contract liabilities, end of period

  $ 1,091     $

565

 

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

 

The aggregate amount of the transaction price allocated to remaining performance obligations in existing contracts that are yet to be completed in the Fleet Vehicles and Services (“FVS”) and Specialty Chassis and Vehicles (“SCV”) segments are $302,236 and $42,419 respectively, with substantially all revenue expected to be recognized within one year as of March 31, 2020.

 

In the following tables, revenue is disaggregated by primary geographical market and timing of revenue recognition for the three months ended March 31, 2020 and 2019. The tables also include a reconciliation of the disaggregated revenue with the reportable segments.

 

   

Three Months Ended

March 31, 2020

 
   

FVS

   

SCV

   

Total

Reportable

Segments

   

Other

   

Total

 

Primary geographical markets

                                       

United States

  $ 132,897     $ 41,075     $ 173,972     $ -     $ 173,972  

Other

    2,791       185       2,976       -       2,976  

Total sales

  $ 135,688     $ 41,260     $ 176,948     $ -     $ 176,948  
                                         

Timing of revenue recognition

                                       

Products transferred at a point in time

  $ 22,257     $ 24,734     $ 46,991     $ -     $ 46,991  

Products and services transferred over time

    113,431       16,526       129,957       -       129,957  

Total sales

  $ 135,688     $ 41,260     $ 176,948     $ -     $ 176,948  

 

 

   

Three Months Ended

March 31, 2019

 
   

FVS

   

SCV

   

Total

Reportable

Segments

   

Other

   

Total

 

Primary geographical markets

                                       

United States

  $ 117,818     $ 51,663     $ 169,481     $ (2,128

)

  $ 167,353  

Other

    4,831       22       4,853       -       4,853  

Total sales

  $ 122,649     $ 51,685     $ 174,334     $ (2,128

)

  $ 172,206  
                                         

Timing of revenue recognition

                                       

Products transferred at a point in time

  $ 9,336     $ 42,546     $ 51,882     $ (2,128

)

  $ 49,754  

Products and services transferred over time

    113,313       9,139       122,452       -       122,452  

Total sales

  $ 122,649     $ 51,685     $ 174,334     $ (2,128

)

  $ 172,206  

   

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

 
NOTE 7PROPERTY, PLANT AND EQUIPMENT

 

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

 

   

March 31,

2020

   

December 31,

2019

 

Land and improvements

  $ 8,707     $ 8,692  

Buildings and improvements

    38,614       38,653  

Plant machinery and equipment

    33,669       33,348  

Furniture and fixtures

    21,893       21,416  

Vehicles

    1,970       1,872  

Construction in process

    4,947       3,527  

Subtotal

    109,800       107,508  

Less accumulated depreciation

    (69,276

)

    (67,434

)

Total property, plant and equipment, net

  $ 40,524     $ 40,074  

 

We recorded depreciation expense of $1,814 and $1,387 during the three months ended March 31, 2020 and 2019.

 

 

NOTE 8 – LEASES

 

We have operating and finance leases for land, buildings and certain equipment. Our leases have remaining lease terms of one year to 17 years, some of which include options to extend the leases for up to 10 years. As of March 31, 2020, assets recorded under finance leases were immaterial (See Note 5 – Debt).

 

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

 

   

Three Months Ended

March 31,

 
   

2020

   

2019

 

Operating leases

  $ 1,596     $ 622  

Short-term leases(1)

 

16

   

8

 

Total lease expense

  $ 1,612     $ 630  

 

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

 

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

 

   

Three Months Ended

March 31,

   

2020

   

2019

 

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

    8.3       6.3  

Weighted average discount rate of operating leases

    3.8 %     4.8 %

 

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

 

Supplemental cash flow information related to leases was as follows:

 

   

Three Months Ended

March 31,

 
   

2020

   

2019

 

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

               

Operating cash flow for operating leases

  $ 1,641     $ 841  
                 

Right of use assets obtained in exchange for lease obligations:

               

Finance leases

  $ 136     $ -  

 

Maturities of operating lease liabilities as of March 31, 2020 are as follows:

 

Years ending December 31:

       
2020(1)   $ 4,403  

2021

    5,055  

2022

    4,614  

2023

    4,619  

2024

    4,390  

Thereafter

    13,337  

Total lease payments

    36,418  

Less: imputed interest

    5,274  

Total lease liabilities

  $ 31,144  

 

(1)Excluding the three months ended March 31, 2020.

 

 

NOTE 9 – COMMITMENTS AND CONTINGENT LIABILITIES

 

Under the terms of the Credit Agreement we have the ability to issue letters of credit totaling $20,000. We had outstanding letters of credit totaling $525 at March 31, 2020 and 2019 related to our worker's compensation insurance.

 

At March 31, 2020, we and our subsidiaries were parties, both as plaintiff and defendant, to a number of lawsuits and claims arising out of the normal course of our businesses. In the opinion of management, our financial position, future operating results or cash flows will not be materially affected by the final outcome of these legal proceedings.

 

Warranty Related

 

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

 

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

 

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

 

Changes in our warranty liability during the three months ended March 31, 2020 and 2019 were as follows:

 

   

2020

   

2019

 

Balance of accrued warranty at January 1

  $ 5,694     $ 4,407  

Warranties issued during the period

    565       1,017  

Cash settlements made during the period

    (548

)

    (574

)

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

    (556

)

    (281

)

Balance of accrued warranty at March 31

  $ 5,155     $ 4,569  

 

Spartan-Gimaex Joint Venture

 

In February 2015, the Company and Gimaex Holding, Inc. mutually agreed to begin discussions regarding the dissolution of the Spartan-Gimaex joint venture. In June 2015, the Company 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. In late 2019, the Company initiated additional court proceedings to dissolve and liquidate the joint venture. In April of 2020, as a result of a default judgment, the Company was appointed as liquidating trustee of the Gimaex joint venture, but 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 terms. In accordance with accounting guidance, the costs we have accrued so far represent the low end of the range of the estimated total charges that we believe we may incur related to the wind-down. While we are unable to determine the final cost of the wind-down with certainty at this time, we may incur additional charges, depending on the final terms of the dissolution. Such charges are not expected to be material to our future operating results.

  

 

NOTE 10 – TAXES ON INCOME

 

Our effective income tax rate was 3.1% and 18.2% for the three months ended March 31, 2020 and 2019, respectively

 

The effective tax rate for the three months ended March 31, 2020 reflects the favorable impact of certain provisions of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act upon the income tax expense as computed based on current statutory income tax rates. Enacted on March 27, 2020, the CARES Act amended certain provisions of the tax code to allow the five-year carryback of tax basis net operation losses (“NOL”) incurred in the years 2018 through 2020. The closing of the sale of the ERV business during the first quarter of 2020 put the Company into a tax basis NOL position for the year as a result of the reversal of deferred tax assets that were recorded in 2019. Under the CARES Act the Company will carry the NOL back to offset taxable income incurred in years prior to 2018 when the federal corporate income tax rate was 35%, as compared to the 21% tax rate at which the deferred tax assets were originally recorded. Based upon current accounting guidance, the Company recorded a $2,610 current period tax benefit resulting from the rate difference as a component of Income tax expense.

 

Our effective income tax rate of 18.2% for the three months ended March 31, 2019, was favorably impacted by the recording of a discrete tax benefit related to additional state tax credits from prior years becoming available for utilization in future tax returns, with a net reduction in Income tax expense of $296.

 

 

NOTE 11 – BUSINESS SEGMENTS

 

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

 

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

 

We evaluate the performance of our reportable segments based on Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) and it is calculated by excluding items that we believe to be infrequent or not indicative of our continuing operating performance. We define Adjusted EBITDA as income from continuing operations before interest, income taxes, depreciation and amortization, as adjusted to eliminate the impact of restructuring charges, acquisition related expenses and adjustments, non-cash stock-based compensation expenses, and other gains and losses not reflective of our ongoing operations. Adjusted EBITDA for all prior periods presented have been recast to conform to the current presentation.

 

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

 

Three Months Ended March 31, 2020

 

   

Segment

 
   

FVS

   

SCV

   

Eliminations

and Other

   

Consolidated

 
                                 

Fleet vehicle sales

  $ 123,973     $ -     $ -     $ 123,973  

Motor home chassis sales

    -       22,602       -       22,602  

Other specialty vehicle sales

    -       16,786       -       16,786  

Aftermarket parts and accessories sales

    11,715       1,872       -       13,587  

Total sales

  $ 135,688     $ 41,260     $ -     $ 176,948  
                                 

Depreciation and amortization expense

  $ 800     $ 1,190     $ 527     $ 2,517  

Adjusted EBITDA

    21,736       3,721       (7,081 )     18,376  

Segment assets

    154,897       130,844       102,807       388,548  

Capital expenditures

    890       1,130       329       2,349  

 

 Three Months Ended March 31, 2019

 

   

Segment

 
   

FVS

   

SCV

   

Eliminations

and Other

   

Consolidated

 
                                 

Fleet vehicle sales

  $ 96,319     $ 2,128     $ (2,128 )   $ 96,319  

Motor home chassis sales

    -       40,286       -       40,286  

Other specialty vehicle sales

    -       6,858       -       6,858  

Aftermarket parts and accessories sales

    26,330       2,413       -       28,743  

Total sales

  $ 122,649     $ 51,685     $ (2,128 )   $ 172,206  
                                 

Depreciation and amortization expense

  $ 598     $ 353     $ 361     $ 1,312  

Adjusted EBITDA

    6,975       4,948       (3,547 )     8,376  

Segment assets

    129,726       41,845       82,904       254,475  

Capital expenditures

    146       232       730       1,108  

 

 
   

Three Months Ended

 
   

March 31,

 
   

2020

   

2019

 

Income from continuing operations

  $ 11,742     $ 4,835  

Net (income) loss attributable to non-controlling interest

    (67 )     (140 )

Add (subtract):

               

Interest expense

    731       374  

Depreciation and amortization expense

    2,517       1,312  

Income tax expense

    377       1,076  

Restructuring and other related charges

    992       27  

Acquisition related expenses and adjustments

    93       45  

Non-cash stock based compensation expense

    1,991       847  

Adjusted EBITDA

  $ 18,376     $ 8,376  

 

 

Item 2.

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

 

Spartan Motors, Inc. (the “Company”, “we”, “us” or “our”) was organized as a Michigan corporation on September 18, 1975, and is headquartered in Novi, Michigan. We began development of its first product that same year and shipped its first fire truck chassis in October 1975.

 

We are a niche market leader in specialty vehicle manufacturing and assembly for the commercial vehicle (including last-mile delivery, specialty service and vocation-specific upfit segments) and recreational vehicle industries. Our products include walk-in vans and truck bodies used in e-commerce/parcel delivery, upfit equipment used in the mobile retail and utility trades, luxury Class A diesel motor home chassis, military vehicles, and contract manufacturing and assembly services. We also supply replacement parts and offer repair, maintenance, field service and refurbishment services for the vehicles that we manufacture. Our operating activities are conducted through our wholly-owned operating subsidiary, Spartan Motors USA, Inc., with locations in Charlotte, Michigan; Ephrata, Pennsylvania; Pompano Beach, Florida; Bristol, Indiana; North Charleston, South Carolina; Kansas City, Missouri; Montebello, Carson, Sacramento and Union City, California; Mesa, Arizona; Dallas and Weatherford, Texas; and Saltillo, Mexico.

 

Our vehicles, parts and services are sold to commercial users, original equipment manufacturers (OEMs), dealers, individual end users, and municipalities and other governmental entities. Our product portfolio gives us access to multiple differentiated markets and corresponding customer bases which helps to mitigate the impact of business cycles. Our diversification across several sectors provides numerous opportunities while reducing overall risk as the various markets we serve tend to have different cyclicality. We have an innovative team focused on building lasting relationships with our customers by designing and delivering market leading specialty vehicles, vehicle components, and services. Additionally, our business structure provides the agility to quickly respond to market needs, take advantage of strategic opportunities when they arise and correctly size and scale operations to ensure stability and growth. Our expansion of equipment upfit services in our Fleet Vehicles and Services segment, and the growing opportunities that we have capitalized on in last mile delivery as a result of the rapidly changing e-commerce market, are excellent examples of our ability to generate growth and profitability by quickly fulfilling customer needs.

 

Recent Developments

 

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus (“COVID-19”). On March 11, 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The pandemic has had a significant impact on macroeconomic conditions. To limit the spread of COVID-19, governments have taken various actions including the issuance of stay-at-home orders and social distancing guidelines. While the Company’s plants are continuing to operate as essential businesses, certain of our manufacturing facilities were temporarily suspended or cut back on operating levels and shifts as a result of government orders during the month of March. As of March 31, 2020 approximately 40% of our facilities were at full or modified production levels. This increased to approximately 80% of our facilities as of early May 2020. We expect our manufacturing facilities to be back to full operations by the end of May 2020, however, additional suspensions and cutbacks may occur as the impacts from COVID-19 and related responses continue to develop within our global supply chain and customer base. The Company is taking a variety of measures to maintain operations with as minimal impact as possible to promote the safety and security of our employees, including increased frequency of cleaning and disinfecting of facilities, social distancing, remote working when possible, travel restrictions and limitations on visitor access to facilities. We are also working to align operations and spending across our business with current conditions. This includes temporary salary reductions for executive management and the Board of Directors, furloughs of a portion of our workforce, freezing employee requisitions and minimizing capital expenditures to critical investments.

 

The full impact of the COVID-19 outbreak continues to evolve as of the date of this filing. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the impact of the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2020. 


On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. As a result, the Company recorded an income tax benefit of $2,610 in the quarter (see Note 10 – Taxes on Income) and has also made provision to defer the employer side social security payments for the remaining portion of 2020, to be paid in two equal installment payments in 2021 and 2022. We will continue to examine the potential impacts of the CARES Act on our business, results of operations, financial condition and liquidity.

 

 

On February 1, 2020, the Company completed its sale of the Emergency Response and Vehicle (“ERV”) business for $55.0 million in cash, subject to certain post-closing adjustments. The ERV business consisted of the emergency response cab-chassis and apparatus operations in Charlotte, Michigan, and the Spartan apparatus operations in Brandon, South Dakota; Snyder and Neligh, Nebraska; and Ephrata, Pennsylvania. The divestiture will allow us to further focus on accelerating growth and profitability in our commercial, fleet, delivery and specialty vehicles markets. As a result of this divestiture, the ERV business is accounted for as a discontinued operation for all periods presented. See “Note 2 – Discontinued Operations” of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for further discussion of this transaction.

 

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

 

Executive Overview

 

 

Revenue of $176.9 million in the first quarter of 2020, an increase of 2.8% compared to $172.2 million in the first quarter of 2019.

 

Gross Margin of 20.5% in the first quarter of 2020, compared to 12.0% in the first quarter of 2019.

 

Operating expense of $22.9 million, or 13.0% of sales in the first quarter of 2020, compared to $14.8 million, or 8.6% of sales in the first quarter of 2019.

 

Operating income of $13.4 million in the first quarter of 2020, compared to $6.0 million in the first quarter of 2019.

 

Income tax expense of $0.4 million in the first quarter of 2020, compared to $1.1 million in the first quarter of 2019.

 

Income from continuing operations of $11.7 million in the first quarter of 2020, compared to $4.8 million in the first quarter of 2019.

 

Earnings per share from continuing operations of $0.33 in the first quarter of 2020, compared to $0.04 in the first quarter of 2019.

 

Order backlog of $344.7 million at March 31, 2020, an increase of $127.0 million or 58.3% from our backlog of $217.7 million at March 31, 2019.

 

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

 

 

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

 

 

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

 

 

Our continued expansion into the equipment upfit 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.

 

 

The introduction of our refrigeration technology, which demonstrates 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 upfitted to optimally preserve cold cargo quality while offering customizations such as removable bulkheads and optional thermal curtains. The multi-temperature solution requires no additional fuel source, so it can serve a wide variety of categories from food and grocery to time and temperature sensitive healthcare deliveries.

 

 

 

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

 

 

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

 

 

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

 

 

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

 

The following section provides a narrative discussion about our financial condition and results of operations. Certain amounts in the narrative may not sum due to rounding. The comments should be read in conjunction with our Condensed Consolidated Financial Statements and related Notes thereto included in Item 1 of this Form 10-Q and in conjunction with our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2020.

 

23

 

RESULTS OF OPERATIONS

 

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

 

   

Three Months Ended

March 31,

 
   

2020

   

2019

 

Sales

    100.0       100.0  

Cost of products sold

    79.5       88.0  

Gross profit

 

20.5

      12.0  

Operating expenses:

               

Research and development

    0.9       0.7  

Selling, general and administrative

    12.1       7.9  

Operating income

    7.6       3.5  

Other income (expense), net

    (0.7 )     (0.1 )

Income from continuing operations before income taxes

    6.8       3.4  

Income tax expense

    0.2       0.6  

Income from continuing operations

    6.6       2.8  

Loss from discontinued operations, net of income taxes

    (2.2 )     (1.9 )

Non-controlling interest

    0.0       0.1  

Net income attributable to Spartan Motors, Inc.

    4.4       0.8  

 

Quarter Ended March 31, 2020 Compared to the Quarter Ended March 31, 2019

 

Sales

 

For the quarter ended March 31, 2020, we reported consolidated sales of $176.9 million, compared to $172.2 million for the first quarter of 2019, an increase of $4.7 million or 2.8%. This increase reflects sales volume increases of $45.7 million in our Fleet Vehicles and Services segment. These increases were partially offset by a $10.4 million decrease in sales volume for our Specialty Chassis and Vehicles and Chassis segment and a $32.7 million decrease in pass through Chassis revenue. Please refer to our segment discussion below for further information about segment sales.

 

Cost of Products Sold

 

Cost of products sold was $140.6 million in the first quarter of 2020, compared to $151.5 million in the first quarter of 2019, a decrease of $10.9 million or 7.2%. Cost of products sold increased by $28.6 million due to the higher unit sales volumes and were offset by $5.8 million due to favorable product mix, $32.7 million in lower USPS pass through Chassis material and $0.9 million due to lower supplier and other costs. As a percentage of sales, cost of products sold decreased to 79.5% in the first quarter of 2020, compared to 88.0% in the first quarter of 2019, driven by favorable product mix impacting the first quarter of 2020.

 

Gross Profit

 

Gross profit was $36.3 million for the first quarter of 2020, compared to $20.7 million for the first quarter of 2019, an increase of $15.6 million, or 75.2%. The increase was due to favorable volume of $6.4 million, favorable product mix of $8.2 million and decreased supplier and other costs of $1.0 million. Gross margin increased to 20.5% from 12.0% over the same period.

 

Operating Expenses

 

Operating expense was $22.9 million for the first quarter of 2020, compared to $14.8 million for the first quarter of 2019, an increase of $8.2 million or 55.4%. Research and development expense in the first quarter of 2020 was $1.5 million, compared to $1.2 million in the first quarter of 2019, an increase of $0.3 million, or 25.7% due to slightly higher spending on new product development projects in 2020. Selling, general and administrative expense was $21.4 million in the first quarter of 2020, compared to $13.5 million for the first quarter of 2019, an increase of $7.9 million or 58.4%. This increase was primarily due to $4.8 million in additional salaried employees, higher spending on professional services, annual merit increases and incentive compensation and increased severance costs in 2020 related to the realignment of the Company after the sale of the ERV business. The remaining increase of $1.8 million related to the expansion of locations.

 

Other Income/(Expense)

 

Interest expense was $0.7 million for the first quarter of 2020, compared to $0.4 million for the first quarter of 2019, driven by higher borrowing that occurred in the first quarter of 2020 to support acquisition activity. Other expense was $0.5 million in the first quarter of 2020 driven by costs associated with a transition service agreement, compared to other income of $0.3 million for the first quarter of 2019.

 

Income Tax Expense

 

Our effective income tax rate was 3.1% in the first quarter of 2020, compared to 18.2% in the first quarter of 2019. Our effective income tax rate in 2020 compares favorably to 2019 due to an adjustment recorded in 2020 as a result of provisions of the CARES Act allowing the carryback of tax net operating losses (“NOL”) incurred in the years 2018 through 2020 for five years. The sale of our ERV business during the first quarter placed the Company into a tax NOL position because of the reversal of certain deferred tax assets recorded in 2019. As a result, we will carry this NOL back to offset taxable income in years when the federal corporate income tax rate was 35%, as opposed to the 21% rate in effect at the time the deferred tax assets were recorded. The resultant favorable tax rate differential allowed us to record a $2.6 million current year tax benefit as a discrete item. Our effective income tax rate in 2019 was favorably impacted by a discrete tax benefit related to additional state tax credits from prior years becoming available for utilization in future tax returns, with a net reduction in income tax expense of $0.3 million.

 

Income from Continuing Operations

 

Income from continuing operations for the quarter ended March 31, 2020 increased by $6.9 million, or 142.9%, to $11.7 million compared to $4.8 million for the quarter ended March 31, 2019. On a diluted per share basis, income from continuing operations increased $0.20 to $0.33 in the first quarter of 2020 compared to $0.13 per share in the first quarter of 2019. Driving this increase were the factors noted above.

 

Loss from Discontinued Operations

 

Loss from discontinued operations, net of income taxes for the quarter ended March 31, 2020 increased by $0.6 million, or 17.2%, to $3.9 million compared to $3.3 million for the quarter ended March 31, 2019.

 

Adjusted EBITDA

 

Our consolidated Adjusted EBITDA in the first quarter of 2020 was $18.4 million, compared to $8.4 million for the first quarter of 2019, an increase of $10.0 million or 119.4%.

 

The table below describes the changes in Adjusted EBITDA for the three months ended March 31, 2020 compared to the same period of 2019 (in millions):

 

Adjusted EBITDA three months ended March 31, 2019

  $ 8.4  

Sales volume

    6.5  

Sales pricing/mix

    8.3  

Supplier and other cost decreases

    1.0  

General and administrative costs and other

    (5.8 )

Adjusted EBITDA three months ended March 31, 2020

  $ 18.4  

 

Order Backlog

 

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

 

   

March 31,

2020

   

March 31,

2019

 

Fleet Vehicles and Services

  $ 302,236     $ 188,528  

Specialty Chassis and Vehicles

    42,419       29,137  

Total consolidated

  $ 344,655     $ 217,665  

 

 

Our Fleet Vehicles and Services backlog increased by $113.7 million, or 60.3%, which reflects strong demand for vehicles across the Company’s entire product portfolio. Our Specialty Chassis and Vehicles segment backlog increased by $13.3 million, or 45.6%, due to the acquisition of Royal.

 

The segment backlog at March 31, 2020, totaled $344.7 million, up 58.3%, compared to $217.7 million at March 31, 2019, which reflects strong demand for vehicles across the Company’s entire product portfolio.

 

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

 

Reconciliation of Non-GAAP Financial Measures

 

This report contains Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization), which is a non-GAAP financial measure. This non-GAAP measure is calculated by excluding items that we believe to be infrequent or not indicative of our continuing operating performance. We define Adjusted EBITDA as income from continuing operations before interest, income taxes, depreciation and amortization, as adjusted to eliminate the impact of restructuring charges, acquisition related expenses and adjustments, non-cash stock-based compensation expenses, and other gains and losses not reflective of our ongoing operations. Adjusted EBITDA for all prior periods presented has been recast to conform to the current presentation.

 

We present the non-GAAP measure Adjusted EBITDA because we consider it to be an important supplemental measure of our performance. The presentation of Adjusted EBITDA enables investors to better understand our operations by removing items that we believe are not representative of our continuing operations and may distort our longer-term operating trends. We believe this measure to be useful to improve the comparability of our results from period to period and with our competitors, as well as to show ongoing results from operations distinct from items that are infrequent or not indicative of our continuing operating performance. We believe that presenting this non-GAAP measure is useful to investors because it permits investors to view performance using the same tools that management uses to budget, make operating and strategic decisions, and evaluate our historical performance. We believe that the presentation of this non-GAAP measure, when considered together with the corresponding GAAP financial measures and the reconciliations to that measure, provides investors with additional understanding of the factors and trends affecting our business than could be obtained in the absence of this disclosure.

 

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

 

The following table reconciles Income from continuing operations to Adjusted EBITDA for the periods indicated.

 

Financial Summary (Non-GAAP)

Consolidated

(In thousands, Unaudited)

 

   

Three Months Ended

 
   

March 31,

 
   

2020

   

2019

 

Income from continuing operations

  $ 11,742     $ 4,835  

Net (income) loss attributable to non-controlling interest

    (67 )     (140 )

Add (subtract):

               

Interest expense

    731       374  

Depreciation and amortization expense

    2,517       1,312  

Income tax expense

    377       1,076  

Restructuring and other related charges

    992       27  

Acquisition related expenses and adjustments

    93       45  

Non-cash stock based compensation expense

    1,991       847  

Adjusted EBITDA

  $ 18,376     $ 8,376  

 .

 

Our Segments

 

We identify our reportable segments based on our management structure and the financial data utilized by our chief operating decision maker to assess segment performance and allocate resources among our operating units. We have two reportable segments: Fleet Vehicles and Services ("FVS") and Specialty Chassis and Vehicles ("SCV").

 

For certain financial information related to each segment, see Note 11 – Business Segments, of the Notes to Condensed Consolidated Financial Statements appearing in Item 1 of this Form 10-Q.

 

Fleet Vehicles and Services

 

   

Financial Data

 
   

(Dollars in Thousands)

 
   

Three Months Ended

March 31,

 
   

2020

   

2019

 
   

Amount

   

Percentage

   

Amount

   

Percentage

 
                                 

Sales

  $ 135,688       100.0 %   $ 122,649       100.0 %

Adjusted EBITDA

    21,736       16.0 %     6,975       5.7 %

 

Comparison of the Three-Month Periods Ended March 31, 2020 and 2019

 

Sales in our FVS segment were $135.7 million for the first quarter of 2020, compared to $122.6 million for the first quarter of 2019, an increase of $13.1 million or 10.6%, driven by increased vehicle sales of $45.8 million offset by a decrease of $32.7 million in pass through chassis revenue.

 

Adjusted EBITDA in our FVS segment for the first quarter of 2020 was $21.7 million compared to $7.0 million in the first quarter of 2019, an increase of $14.7 million. Higher unit sales volume drove a $6.6 million increase, favorable product mix added $8.5 million and reduction in supplier costs added $0.7 million. These increases were partially offset by a $1.1 million increase in marketing and administrative costs related growth and initiatives.

 

Specialty Chassis and Vehicles

 

   

Financial Data

 
   

(Dollars in Thousands)

 
   

Three Months Ended

March 31,

 
   

2020

   

2019

 
   

Amount

   

Percentage

   

Amount

   

Percentage

 
                                 

Sales

  $ 41,260       100.0 %   $ 51,685       100.0 %

Adjusted EBITDA

    3,721       9.0 %     4,948       9.6 %

 

Comparison of the Three-Month Periods Ended March 31, 2020 and 2019

 

Sales in our SCV segment were $41.3 million in the first quarter of 2020, compared to $51.7 million in 2019, a decrease of $10.4 million or 20.2%. This decrease was driven by a decrease of $17.7 million in motor home chassis sales and $4.0 million in other specialty chassis and vehicles due to lower unit volume. This decrease was partially offset by sales attributable to the Royal acquisition of $11.3 million.

 

Adjusted EBITDA for our SCV segment for the first quarter of 2020 was $3.7 million, compared to $4.9 million in the same period of 2019, a decrease of $1.2 million, or 24.8%. This decrease was driven by a decrease of $1.2 million in motor home chassis and $1.7 million in other specialty chassis and vehicles. This decrease was partially offset by a $1.6 million increase in EBITDA attributable to new business.

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash Flows

 

Cash and cash equivalents increased by $21.6 million to $40.9 million at March 31, 2020, compared to $19.3 million at December 31, 2019. These funds, in addition to cash generated from future operations and available credit facilities, are expected to be sufficient to finance the Company’s foreseeable liquidity and capital needs.

 

Cash Flow from Operating Activities

 

We used $17.1 million of cash for operating activities during the three months ended March 31, 2020, a decrease of $14.7 million from $2.4 million of cash used for operations during the three months ended March 31, 2019. Cash flow from operating activities decreased due to a $35.7 million decrease in the change in net working capital (primarily driven by the net change in receivables, payables, inventories and contract assets) partially offset by a $21.0 million increase in higher net income adjusted for non-cash charges to operations.

 

See the Financial Condition section contained in Item 2 of this Form 10-Q for further information regarding balance sheet line items that drove cash flows for the three-month period ended March 31, 2020.  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 generated $52.6 million of cash from investing activities during the three months ended March 31, 2020, primarily attributable to the sale of the ERV business. This is a $54.5 million increase compared to the $1.9 million used during the three months ended March 31, 2019.

 

Cash Flow from Financing Activities

 

We used $13.9 million of cash for financing activities during the three months ended March 31, 2020, compared to $1.7 million used during the three months ended March 31, 2019. This increase in cash used is mainly due to a net reduction in borrowing on the line of credit revolver.

 

Contingent Obligations

 

Spartan-Gimaex joint venture

 

In February 2015, the Company and Gimaex Holding, Inc. mutually agreed to begin discussions regarding the dissolution of the Spartan-Gimaex joint venture. In June 2015, the Company 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. In late 2019, the Company initiated additional court proceedings to dissolve and liquidate the joint venture. In April of 2020, as a result of a default judgment, the Company was appointed as liquidating trustee of the Gimaex joint venture, but 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 terms. In accordance with accounting guidance, the costs we have accrued so far represent the low end of the range of the estimated total charges that we believe we may incur related to the wind-down. While we are unable to determine the final cost of the wind-down with certainty at this time, we may incur additional charges, depending on the final terms of the dissolution. Such charges are not expected to be material to our future operating results.

 

Debt

 

On August 8, 2018, we entered into a Credit Agreement (the "Credit Agreement") by and among us and certain of our subsidiaries as borrowers, Wells Fargo Bank, National Association ("Wells Fargo"), as administrative agent, and the lenders party thereto consisting of Wells Fargo, JPMorgan Chase Bank, N.A. and PNC Bank National Association (the "Lenders"). Subsequently, the Credit Agreement was amended on May 14, 2019, September 9, 2019 and September 25, 2019 and certain of our other subsidiaries executed guaranties guarantying the borrowers' obligations under the Credit Agreement. Concurrent with the close of the sale of the ERV business and effective January 31, 2020, the Credit Agreement was further amended by a fourth amendment, which released certain of our subsidiaries that were sold as part of the ERV business pursuant to the Asset Purchase Agreement. The substantive business terms of the Credit Agreement remain in place and were not changed by the fourth amendment.

 

As a result, at March 31, 2020, under the Credit Agreement, as amended, we may borrow up to $175 million from the Lenders under a secured revolving credit facility which matures August 8, 2023. We may also request an increase in the facility of up to $50 million in the aggregate, subject to customary conditions. The credit facility is also available for the issuance of letters of credit of up to $20 million and swing line loans of up to $30 million subject to certain limitations and restrictions. This revolving credit facility carries an interest rate of either (i) the highest of prime rate, the federal funds effective rate from time to time plus 0.5%, or the one month adjusted LIBOR plus 1.0%; or (ii) adjusted LIBOR, in each case plus a margin based upon our ratio of debt to earnings from time to time. The applicable borrowing rate including margin was 2.34% (or one-month LIBOR plus 1.50%) at March 31, 2020. The credit facility is secured by security interests in, and liens on, all assets of the borrowers and guarantors, other than real property and certain other excluded assets.

 

Under the terms of our Credit Agreement, we have the ability to issue letters of credit totaling $20 million. At March 31, 2020 and December 31, 2019, we had outstanding letters of credit totaling $0.5 million related to our worker's compensation insurance.

 

Under the terms of our Credit Agreement, we are required to maintain certain financial ratios and other financial covenants, which limited our available borrowings (exclusive of outstanding borrowings) under our line of credit to a total of approximately $74.5 million and $60.5 million at March 31, 2020 and December 31, 2019, respectively. The Credit Agreement also prohibits us from incurring additional indebtedness; limits certain acquisitions, investments, advances or loans; limits our ability to pay dividends in certain circumstances; and restricts substantial asset sales, all subject to certain exceptions and baskets. At March 31, 2020 and December 31, 2019, we were in compliance with all covenants in our credit agreement.

 

In the first quarter of 2020, the Company used proceeds from the sale of the ERV business to pay down $30 million on the revolver and subsequently drew $16 million on the revolver to obtain additional liquidity in response to the market uncertainty caused by the coronavirus outbreak.

 

Equity Securities

 

On April 28, 2016, our Board of Directors authorized the repurchase of up to 1.0 million shares of our common stock in open market transactions. At March 31, 2020 there were 0.8 million shares remaining under this repurchase authorization. If we were to repurchase the remaining 0.8 million shares of stock under the repurchase program, it would cost us approximately $11.4 million based on the closing price of our stock on April 30, 2020. 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 dividends are subject to earnings, financial condition, liquidity, capital requirements and such other factors as our Board of Directors deems relevant. We declared dividends on our outstanding common shares in 2019 as shown in the table below.

 

Date dividend declared

 

Record date

 

Payment date

 

Dividend per share ($)

 

Nov. 4, 2019

 

Nov. 14, 2019

 

Dec. 16, 2019

  $ 0.05  

May 6, 2019

 

May 17, 2019

 

June 17, 2019

  $ 0.05  

 

 

EFFECT OF INFLATION

 

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

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

 

Interest Rate Risk

 

We are exposed to market risks related to changes in interest rates and the effect of such a change on outstanding variable rate short-term and long-term debt. At March 31, 2020, we had $73.4 million in debt outstanding under our variable rate short-term and long-term debt agreements. An increase of 100 basis points in interest rates would result in additional interest expense of $0.7 million on an annualized basis for our floating rate debt. We believe that we have sufficient financial resources to accommodate this hypothetical increase in interest rates. We do not enter into market-risk-sensitive instruments for trading or other purposes.

 

Commodities Risk

 

We are also exposed to changes in the prices of raw materials, primarily steel and aluminum, along with components that are made from these raw materials. We generally do not enter into derivative instruments for the purpose of managing exposures associated with fluctuations in steel and aluminum prices. We do, from time to time, engage in pre-buys of components that are impacted by changes in steel, aluminum and other commodity prices in order to mitigate our exposure to such price increases and align our costs with prices quoted in specific customer orders. We also actively manage our material supply sourcing and may employ various methods to limit risk associated with commodity cost fluctuations due to normal market conditions and other factors including tariffs. Changes in input costs have impacted our results for the three months ended March 31, 2020 and may continue to do so during the remainder of 2020 and beyond. See Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part 1, Item 2 of this Form 10-Q for information on the impacts of changes in input costs during the three months ended March 31, 2020.

 

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

 

 

Item 4.

Controls and Procedures.

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation 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 amended (the “Exchange Act”), as of March 31, 2020. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer, concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective due to a material weakness in our internal control over financial reporting that was disclosed in the Annual Report on Form 10-K for the year ended December 31, 2019.

 

Notwithstanding the identified material weakness, management has concluded that the condensed consolidated financial statements included in this Form 10-Q fairly present in all material respects our financial condition, results of operations and cash flows as of and for the periods presented in accordance with U.S. generally accepted accounting principles.

 

Remediation

 

We are executing against the remediation plan previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2019. The material weakness will not be considered remediated until the applicable control operates for a sufficient period of time and management has concluded, through testing, that the control objective is achieved. We are currently tracking to our action plan for remediation of this material weakness prior to the end of fiscal 2020.

 

Changes in Internal Control over Financial Reporting

 

Other than the remediation efforts discussed above, there have been no changes in our internal control over financial reporting that occurred during the first quarter of fiscal 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II.  OTHER INFORMATION

 

Item 1A.

Risk Factors

 

We have included in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019, 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, 2019 with respect to the Risk Factors except as set forth below. Investors should consider the Risk Factors prior to making an investment decision with respect to our stock.

 

Our results of operations are likely to be adversely affected by the circumstances relating to the COVID-19 pandemic.

 

We have manufacturing and other operations in locations subject to public health crises. Our suppliers and customers also have operations in locations exposed to similar dangers. A public health event could disrupt our operations, or our customers’ or suppliers’ operations and could adversely affect our results of operations and financial condition.

 

Our global suppliers of raw materials expose us to risks associated with public health crises, such as pandemics and epidemics, which could harm our business and cause operating results to suffer. For example, the ongoing coronavirus outbreak at the beginning of 2020 may impact our suppliers’ ability to provide raw materials. An extended plant shut-down or supply chain disruption due to the coronavirus outbreak may also impact our ability to fulfill orders.

 

At this point, the extent to which the coronavirus may impact our liquidity, financial condition, and results of operations is uncertain.

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

Issuer Purchases of Equity Securities

 

On April 28, 2016, our Board of Directors authorized the repurchase of up to 1.0 million shares of our common stock in open market transactions. During the quarter ended March 31, 2020, no shares were repurchased under this authorization.

 





Period

 


Total
Number of
Shares
Purchased

 

 



Average
Price Paid
per Share

 

 

Total Number

of
Shares

Purchased
as Part of

Publicly
Announced

Plans or
Programs

 

 


Number of

Shares

that
May Yet Be

Purchased
Under the

Plans or

Programs(1)

 

January 1 to January 31

 

 

-

 

 

$

-

 

 

 

-

 

 

 

808,994

 

February 1 to February 29

 

 

-

 

 

 

-

 

 

 

-

 

 

 

808,994

 

March 1 to March 31

 

 

-

 

 

 

-

 

 

 

-

 

 

 

808,994

 

Total

 

 

-

 

 

$

-

 

 

 

-

 

 

 

808,994

 

 

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

 

During the quarter ended March 31, 2020, 106,484 shares were delivered by associates in satisfaction of tax withholding obligations that occurred upon the vesting of restricted shares.

 

 

Item 6.

Exhibits.

 

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

 

Exhibit No.

 

Document

 

 

 

10.1   Employment Offer Letter dated January 21, 2020 from Spartan Motors, Inc. to Jonathan C. Douyard (incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K filed March 16, 2020).*
     
10.2   Fourth Amendment to Credit Agreement, dated January 31, 2020, by and among the Company and its affiliates, Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K filed March 16, 2020).
     
10.3   Asset Purchase Agreement dated January 31, 2020, by and among Spartan Motors, Inc., Spartan Motors USA, Inc., Spartan Fire, LLC and REV Group, Inc. (incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K filed March 16, 2020).
     

31.1

 

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

 

 

 

31.2

 

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

 

 

 

32

 

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

     

101.INS

 

XBRL Instance Document

     

101.SCH

 

XBRL Schema Document

     

101.CAL

 

XBRL Calculation Linkbase Document

     

101.DEF

 

XBRL Definition Linkbase Document

     

101.LAB

 

XBRL Label Linkbase Document

     

101.PRE

 

XBRL Presentation Linkbase Document

 

*Management contract or compensatory plan or arrangement.

 

SIGNATURES

 

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

 

Date:  May 7, 2020

SPARTAN MOTORS, INC.

 

 

 

 

 

 

 

By

/s/ Jonathan C. Douyard

 

 

Jonathan C. Douyard
Chief Financial Officer

 

34