FORWARD-LOOKING STATEMENTS

 

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

 

●	Changes in economic conditions, including changes in interest rates, credit availability, financial market performance and our industries can have adverse effects on its earnings and financial condition, as well as our customers, dealers and suppliers.
●	Changes in relationships with major customers and suppliers could significantly affect our revenues and profits.
●	Constrained government budgets may have a negative effect on our business and its operations.
●	The integration of businesses or assets we have acquired or may acquire in the future involves challenges that could disrupt our business and harm our financial condition.
●	When we introduce new products, we may incur expenses that we did not anticipate, such as start-up and recall expenses, resulting in reduced earnings.
●	Amendments of the laws and regulations governing our businesses, or the promulgation of new laws and regulations, could have a material impact on our operations.
●	We source components from a variety of domestic and global suppliers who may be subject to disruptions from natural or man-made causes. Disruptions in our supply of components could have a material and adverse impact on our results of operations or financial position.
●	Changes in the markets we serve may, from time to time, require us to re-configure our production lines or re-locate production of products between buildings or to new locations in order to maximize the efficient utilization of our production capacity. Costs incurred to effect these re-configurations may exceed our estimates and efficiencies gained may be less than anticipated.

 

This list provides examples of factors that could affect the results described by forward-looking statements contained in this Report. However, this list is not intended to be all-inclusive. The risk factors disclosed in Item 1A “Risk Factors” of Part II of this Quarterly Report on Form 10-Q and in Part I – Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017, include all known risks our management believes could materially affect the results described by forward-looking statements contained in this Report. However, those risks may not be the only risks we face. Our business, operations, and financial performance could also be affected by additional factors that are not presently known to us or that we currently consider immaterial to our operations. In addition, new risks may emerge from time to time that may cause actual results to differ materially from those contained in any forward-looking statements. We believe that the forward-looking statements contained in this Report are reasonable. However, given these risks and uncertainties, we cannot provide you with any guarantee that the anticipated results will be achieved. All forward-looking statements in this Report are expressly qualified in their entirety by the cautionary statements contained in this Section and you are cautioned not to place undue reliance on the forward-looking statements contained in this Report as a prediction of actual results. We disclaim any obligation to update or revise information contained in any forward-looking statement to reflect developments or information obtained after the date this Report is filed with the Securities and Exchange Commission.

 

 

Item 1.

Financial Statements

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value) 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 

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

(In thousands, except per share data)

(Unaudited)

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 

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

(In thousands)

(Unaudited)

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands, except per share data)

 

Item 2.

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

 

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

 

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

 

Our Bristol, Indiana location manufactures vehicles used in the parcel delivery, mobile retail and trades and construction industries, and supplies related aftermarket parts and services under the Utilimaster brand name. Our Kansas City, Missouri and Saltillo, Mexico locations sell and install equipment used in fleet vehicles. Our Charlotte, Michigan location manufactures heavy-duty chassis and vehicles, and supplies aftermarket parts and accessories under the Spartan Chassis and Spartan ER brand names. Our Brandon, South Dakota; Snyder and Neligh, Nebraska; Delavan, Wisconsin; and Ephrata, Pennsylvania locations manufacture emergency response vehicles under the Spartan ER, Smeal, US Tanker and Ladder Tower Company brand names. Spartan USA is also a participant in Spartan-Gimaex Innovations, LLC (“Spartan-Gimaex”), a 50/50 joint venture with Gimaex Holding, Inc. that was formed to provide emergency response vehicles for the domestic and international markets. Spartan-Gimaex is reported as a consolidated subsidiary of Spartan Motors, Inc. In February 2015, Spartan USA and Gimaex Holding, Inc. mutually agreed to begin discussions regarding the dissolution of the joint venture. In June 2015, Spartan USA and Gimaex Holding, Inc. entered into court proceedings to determine the terms of the dissolution. In February 2017, by agreement of the parties, the court proceeding was dismissed with prejudice and the judge entered an order to this effect as the parties agreed to seek a dissolution plan on their own. No dissolution terms have been determined as of the date of this Form 10-Q.

 

Our business strategy is to further diversify product lines and develop innovative design, engineering and manufacturing expertise in order to be the best value producer of custom vehicle products. Our diversification across several sectors provides numerous opportunities while reducing overall risk. Additionally, our business model provides the agility to quickly respond to market needs, take advantage of strategic opportunities when they arise and correctly size operations to ensure stability and growth.

 

We have an innovative team focused on building lasting relationships with our customers. This is accomplished by striving to deliver premium custom vehicles, vehicle components, and services. We believe we can best carry out our long-term business plan and obtain optimal financial flexibility by using a combination of borrowings under our credit facilities, as well as internally or externally generated equity capital, as sources of expansion capital.

 

 

Executive Overview

●

Revenue of $173.0 million in the first quarter of 2018, an increase of 3.5% compared to $167.1 million in the first quarter of 2017.

●

Gross profit of $22.2 million in the first quarter of 2018, an increase of 35.4% compared to $16.4 million in the first quarter of 2017.

●

Gross Margin of 12.8% in the first quarter of 2018, compared to 9.8% in the first quarter of 2017.

●

Operating expense of $19.3 million, or 11.0% of sales in the first quarter of 2018, compared to $17.2 million or 10.3% of sales in the first quarter of 2017.

●

Operating income of $2.9 million in the first quarter of 2018, compared to a loss of $0.8 million in the first quarter of 2017.

●

Net income of $4.2 million in the first quarter of 2018, compared to a net loss of $1.1 million in the first quarter of 2017.

●

Earnings per share of $0.12 in the first quarter of 2018, compared to a loss per share of $0.03 in the first quarter of 2017.

●

Order backlog of $554.6 million at March 31, 2018, an increase of $203.3 million, or 57.9% from our backlog of $351.3 million at March 31, 2017. $214.0 million of the backlog at March 31, 2018 relates to an order received from the United States Postal Service that will be fulfilled beginning in the second quarter of 2018 through 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 and strategic developments include:

 

	●	Our diversified business model. We believe the major strength of our business model is market diversity and customization.  Our Fleet Vehicles and Specialty Chassis and Vehicles segments serve mainly business and consumer markets, effectively diversifying our company and complementing our Emergency Response Vehicles segment, which primarily serves governmental entities.  Additionally, the fleet vehicle market is an early-cycle industry, complementary to the late-cycle emergency response vehicle industry.  We intend to continue to pursue additional areas that build on our core competencies in order to further diversify our business.
	●	Our alliance with Motiv Power Systems, a leading producer of all-electric chassis for walk-in vans, box trucks, work trucks, buses and other specialty vehicles that provides Spartan with exclusive access to Motiv’s EPICTM all-electric chassis in manufacturing Class 4 – Class 6 walk-in vans. This alliance demonstrates Spartan’s ability to innovate and advance the markets we serve, and places us ahead of the curve in the EV fleet market.
	●	Our expansion into the equipment up-fit market for vehicles used in the parcel delivery, trades and construction industries. This rapidly expanding market offers an opportunity to add value to current and new customers for our fleet vehicles and vehicles produced by other original equipment manufacturers.
	●	Our Spartan Select and 180 truck programs, designed to provide the custom apparatus that emergency response professionals need with unprecedented order-to-delivery cycle times as short as 180 days.
	●	Spartan Connected Coach, a technology bundle for our motor home chassis that includes a 15-inch digital dash displaying gauge functions, tire pressure monitoring, blind spot indicators, navigation, and other information. Connected Coach also offers passive keyless start and adjustable Adaptive Cruise Control, and brings proven automotive technology to the RV market.
	●	The introduction of the Velocity, a new delivery vehicle design that combines the productivity of a walk-in van for multi-stop deliveries with the superior fuel economy of the Ford Transit chassis.
	●	The expansion of our alliance with Isuzu to include the assembly of Isuzu’s new F-Series truck.  This expanded relationship demonstrates Isuzu’s confidence in Spartan’s quality, people, flexibility and expertise and provides another positive example of our successful execution of our multi-year plan for improving performance.
	●	The strength of our balance sheet, which includes robust working capital, low debt and access to credit through our revolving line of credit.

 

The following section provides a narrative discussion about our financial condition and results of operations. 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 1, 2018.

 

 

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,
		2018				2017
Sales			100.0				100.0
Cost of products sold			87.2				90.1
Restructuring charges			0.0				0.1
Gross profit			12.8				9.8
Operating expenses:
Research and development			0.8				1.3
Selling, general and administrative			10.3				8.7
Restructuring charges			0.0				0.3
Operating income (loss)			1.7				(0.5	)
Other income (expense), net			0.7				(0.1	)
Income (loss) before taxes			2.4				(0.6	)
Taxes			(0.0	)			0.0
Net income (loss)			2.4				(0.7	)

 

We adopted Accounting Standards Update 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) on January 1, 2018. Our adoption of ASU 2014-09 resulted in changes to our revenue recognition policy whereby we now recognize revenue on certain of our product as they are produced rather than at the time of shipment to the customer, among certain other changes. Please see Note 1, General and Summary of Accounting Policies, in the Notes to Condensed Consolidated Financial Statements appearing in Item 1 of this Form 10-Q for further information regarding our adoption of ASU 2014-09.

 

 

Quarter Ended March 31, 2018 Compared to the Quarter Ended March 31, 2017

 

Sales

For the quarter ended March 31, 2018, we reported consolidated sales of $173.0 million, compared to $167.1 million for the first quarter in 2017 an increase of $5.9 million or 3.5%. This increase reflects sales increases of $15.2 million in our Specialty Chassis and Vehicles segment and $5.8 million in our Fleet Vehicles and Services segment. These increases were partially offset by a $13.5 million decrease in sales in our Emergency Response Vehicles segment and intersegment eliminations of $1.6 million. Please refer to our segment discussion below for further information about segment sales.

 

Cost of Products Sold

Cost of products sold was $150.9 million in the first quarter of 2018, compared to $150.7 million in the first quarter of 2017, an increase of $0.2 million or 0.1%. Cost of products sold increased by $2.2 million due to the higher sales volume in 2018 and $0.7 million due to start-up costs incurred at our Ephrata truck body operations. These increases were partially offset by a decrease of $2.7 million due to operational improvements impacting the first quarter of 2018. As a percentage of sales, cost of products sold decreased to 87.3% in the first quarter of 2018, compared to 90.2% in the first quarter of 2017. 150 basis points of the increase was due to the operational improvements impacting the first quarter of 2018, while 100 basis points was due to product mix experienced in 2018 and 90 basis points was due to pricing changes impacting 2018. These increases were partially offset by a 40 basis point decrease due to the start-up costs incurred at our Ephrata truck body operations.

 

 

Gross Profit

Gross profit was $22.2 million for the first quarter of 2018, compared to $16.4 million for the first quarter of 2017, an increase of $5.8 million, or 35.4%. $2.7 million of this increase was due to operational improvements that impacted the first quarter of 2018, $2.2 million was due to favorable product mix in 2018 and $1.6 million was due to pricing changes that impacted 2018. These increases were partially offset by $0.7 million decrease due to start-up costs incurred in our Ephrata truck body operations. Gross margin increased to 12.8% from 9.8% over the same period, with 150 basis points of the increase due to the operational improvements impacting the first quarter of 2018, 100 basis points due to product mix experienced in 2018 and 90 basis points due to pricing changes impacting 2018. These increases were partially offset by a 40 basis point decrease due to the start-up costs incurred at our Ephrata truck body operations.   

 

Operating Expenses

Operating expense was $19.3 million for the first quarter of 2018, compared to $17.2 million for the first quarter of 2017, an increase of $2.1 million or 12.2%. Research and development expense in the first quarter of 2018 was $1.4 million, compared to $2.1 million in the first quarter of 2017, a decrease of $0.7 million, or 33.3%, mainly due to lower spending on product development and certification projects in our Emergency Response Vehicles segment. Selling, general and administrative expense was $17.9 million in the first quarter of 2018, compared to $14.6 million for the first quarter of 2017, an increase of $3.3 million or 22.6%. $1.4 million of this increase was due to higher compensation related costs in 2018, mainly stock compensation related charges. An additional $1.3 million of the increase was due to higher external consulting costs related to operational improvement projects and $0.6 million was due to higher spending on marketing and trade shows. Restructuring charges decreased by $0.5 million in the first quarter of 2018, compared to the same period of 2017 as projects related to a company-wide effort to streamline operations and integrate our Smeal acquisition were completed.

 

Taxes

Our effective income tax rate was (1.1)% in the first quarter of 2018, compared to (8.2)% in the first quarter of 2017. Our effective tax rate in 2018 was impacted by the recording of a discrete item related to the difference in stock compensation expense recognized for book purposes and tax purposes that reduced our tax expense by $1.4 million in the first quarter of 2018, partially offset by $0.2 million of increases for other discrete items. Our effective tax rate for the first quarter of 2017 was impacted by the deferred tax asset valuation allowance recorded in 2015, which resulted in a tax rate applied to first quarter 2017 earnings of 0% due to our ability to offset that period’s tax liability against our recorded valuation allowance. Tax expense of $0.1 million recorded in the first quarter of 2017 consisted of adjustments for uncertain tax positions, an adjustment in the valuation allowance, and the recognition of certain state minimum income taxes.

 

Interest and other income

Interest and other income was $1.6 million in the first quarter of 2018, compared to $0.1 million for the first quarter of 2017, an increase of $1.5 million or 1,500.0%, due to the receipt of a net working capital adjustment in March 2018 related to our acquisition of substantially all of the assets and certain liabilities of Smeal Fire Apparatus Co., Smeal Properties, Inc., Ladder Tower Co., and U.S. Tanker Co. (collectively “Smeal”) on January 1, 2017. Because this adjustment was received after the expiration of the adjustment period, it was recognized in other income and expense rather than on the opening balance sheet for Smeal.

 

Net Earnings (loss)

We recorded net earnings of $4.2 million or $0.12 per share for the first quarter of 2018, compared to a net loss of $1.1 million or $0.03 per share, for the first quarter of 2017. Driving the increase in net income for the three months ended March 31, 2018 compared with the prior year were the factors discussed above.

 

Adjusted EBITDA

Our consolidated adjusted EBITDA in the first quarter of 2018 was $5.6 million, compared to $4.2 million for the first quarter of 2017, an increase of $1.4 million or 33.3%. This increase was due to increases of $2.6 million due to operational improvements, $1.6 million due to pricing changes that impacted 2018, $0.9 million due to a favorable product mix in 2018 and $0.7 million due to reduced research and development spending. These increases were partially offset by decreases of $0.7 million due to start-up costs related to our Ephrata, Pennsylvania truck body manufacturing operations, $1.4 million due to higher compensation expense, $1.7 million due to higher external consulting costs and $0.6 million due to higher marketing spending in 2018. The change due to operational improvements presented for adjusted EBITDA excludes $0.1 million related to restructuring charges, while the change due to product mix excludes $1.3 million of impact of the timing difference of chassis sales and inventory value step-up related to our acquisition of Smeal in 2017, and the change related to consulting costs excludes $0.4 million related to acquisition charges, compared to the results presented in Cost of Products Sold and Operating Expenses above.

 

 

Adjusted net income

Our consolidated adjusted net income in the first quarter of 2018 was $3.3 million, compared to $1.3 million for the first quarter of 2017, an increase of $2.0 million or 153.8%. This increase was due to the factors impacting adjusted EBITDA described above, as well as a $1.4 million tax benefit resulting from the appreciation in value of equity based compensation that vested during the first quarter of 2018. These increases were partially offset by increases in tax expense in 2018 of $0.4 million related to adjustments to our deferred tax assets and $0.4 million due to the tax impact of the adjustments presented.

 

Reconciliation of Non-GAAP Financial Measures

This Form 10-Q contains adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) and adjusted net income, which are both non-GAAP financial measures. These non-GAAP financial measures are calculated by excluding items that we believe to be infrequent or not indicative of our continuing operating performance. For the periods covered by this Form 10-Q, such items include expenses associated with restructuring actions taken to improve the efficiency and profitability of certain of our manufacturing operations, expenses related to business acquisition activities, the impact of the step-up in inventory value associated with a recent business acquisition, the impact of the business acquisition on the timing of chassis revenue recognition, the impact of a net working capital adjustment that was finalized after the allowable adjustment period, and the impact that our deferred tax asset valuation allowance that we recorded in 2015 has had on our tax expense and net income in 2017.

 

We present the non-GAAP financial measures adjusted EBITDA and adjusted net income because we consider them to be important supplemental measures of our performance. The presentation of adjusted EBITDA enables investors to better understand our operations by removing items that we believe are not representative of our continuing operations and may distort our longer term operating trends. The presentation of adjusted net income enables investors to better understand our operations by removing the impact of tax adjustments, including the impact that our deferred tax asset valuation allowance that we recorded in 2015 has had on our tax expense and net income in 2017, and other items that we believe are not indicative of our longer term operating trends. We believe these measures to be useful to improve the comparability of our results from period to period and with our competitors, as well as to show ongoing results from operations distinct from items that are infrequent or not indicative of our continuing operating performance. We believe that presenting these non-GAAP financial measures is useful to investors because it permits investors to view performance using the same tools that management uses to budget, make operating and strategic decisions, and evaluate our historical performance. We believe that the presentation of these non-GAAP financial measures, when considered together with the corresponding GAAP financial measures and the reconciliations to those measures, provides investors with additional understanding of the factors and trends affecting our business than could be obtained in the absence of these disclosures.

 

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

 

 

Financial Summary (Non-GAAP) Consolidated (In thousands, Unaudited)

 

		2018				2017
Net income (loss) attributable to Spartan Motors, Inc.		$	4,194			$	(1,098	)
Add (subtract):
Restructuring charges			20				642
Impact of acquisition on timing of chassis revenue recognition			-				1,112
Impact of step-up in inventory value resulting from acquisition			-				189
Impact of acquisition adjustment for net working capital			(1,500	)			-
Acquisition related expenses			162				672
Deferred tax asset valuation allowance			74				466
Tax effect of adjustments			315				(719	)
Adjusted net income attributable to Spartan Motors, Inc.		$	3,265			$	1,264
Net income (loss) attributable to Spartan Motors, Inc.		$	4,194			$	(1,098	)
Add (subtract):
Depreciation and amortization			2,452				2,325
Taxes on income			(48	)			83
Interest expense			323				264
Restructuring charges			20				642
Impact of acquisition on timing of chassis revenue recognition			-				1,112
Impact of step-up in inventory value resulting from acquisition			-				189
Acquisition related expenses			162				672
Impact of acquisition adjustment for net working capital			(1,500	)			-
Adjusted EBITDA		$	5,603			$	4,189

 

 

Order Backlog

A summary of our order backlog by reportable segment is in the following table (in thousands).

 

		March 31, 2018				March 31, 2017
Fleet Vehicles and Services		$	335,325			$	113,960
Emergency Response Vehicles			189,627				214,463
Specialty Chassis and Vehicles			29,663				22,847
Total consolidated		$	554,615			$	351,270

 

Our Fleet Vehicles and Services backlog increased by $221.3 million, or 194.1%, mainly due to a $214.3 million contract received in September, 2017 to supply delivery vehicles, which will be fulfilled through 2019. Our Emergency Response Vehicles backlog decreased by $24.9 million, or 11.6%, primarily due to a reduction in order intake resulting from a more selective bid process established in 2016 as part of our turnaround strategy. Our Specialty Chassis and Vehicles segment backlog increased by $6.9 million, or 30.3%, due to strong motor home chassis order intake driven by new model introductions and pricing adjustments enacted in 2017. We anticipate filling our current backlog orders for our Emergency Response Vehicles segment over the next 12 months, for our Fleet Vehicles and Services segment over the next 6 months and our Specialty Chassis and Vehicles segment over the next 3 months.

 

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

 

 

Our Segments

 

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

 

We evaluate the performance of our reportable segments based on Adjusted EBITDA. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization, and other adjustments made in order to present comparable results from period to period. These adjustments include restructuring charges and items related to our acquisition of Smeal, such as expenses incurred to complete the acquisition, the impact of fair value adjustments to inventory acquired from Smeal, and the impact on the timing of the recognition of gross profit for our chassis that are utilized by our recently acquired Smeal operations. We exclude these items from earnings because we believe they are incurred infrequently and/or are otherwise not indicative of a segment's regular, ongoing operating performance. For those reasons, Adjusted EBITDA is also used as a performance metric for our executive compensation program, as discussed in our proxy statement for our 2018 annual meeting of shareholders, which proxy statement was filed with the SEC on April 12, 2018.

 

 

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

 

		Three Months Ended March 31, 2018				Three Months Ended March 31, 2017
Total segment adjusted EBITDA		$	8,953			$	6,440
Add (subtract):
Interest expense			(323	)			(264	)
Depreciation and amortization expense			(2,452	)			(2,325	)
Restructuring expense			(20	)			(642	)
Acquisition expense			(162	)			(672	)
Impact of intercompany chassis shipments to Smeal			-				(1,112	)
Impact of step-up in inventory value resulting from acquisition			-				(189	)
Impact of acquisition adjustment for net working capital			1,500				-
Joint venture expenses			-				(1	)
Unallocated corporate expenses			(3,350	)			(2,251	)
Consolidated income (loss) before taxes		$	4,146			$	(1,016	)

 

 

Our Fleet Vehicles and Services segment consists of our operations at our Bristol, Indiana location, along with our operations at our up-fit centers in Kansas City, Missouri and Saltillo, Mexico. This segment focuses on designing and manufacturing walk-in vans for the parcel delivery, mobile retail, and trades and construction industries, and supplies related aftermarket parts and services under the Utilimaster brand name.

 

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

 

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

 

For certain financial information related to each segment, see Note 6 - 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,
		2018								2017
		Amount				%				Amount				%
Sales		$	59,691				100.0	%		$	53,920				100.0	%
Adjusted EBITDA			4,590				7.7	%			6,244				11.6	%
Segment assets			79,584								63,516

 

 

Comparison of the Three-Month Periods Ended March 31, 2018 and 2017

 

Sales in our Fleet Vehicles and Services segment were $59.7 million for the first quarter of 2018, compared to $53.9 million for the first quarter of 2017, an increase of $5.8 million or 10.7% driven by a $4.8 million increase in vehicle unit volume in the first quarter of 2018 along with a $1.0 million increase driven by a more favorable product mix in 2018. Our adoption of ASU 2014-09 on January 1, 2018 resulted in the recognition of an additional $5.0 million of revenue in our Fleet Vehicles and Services segment than would have been recognized under previous guidance. There were no changes in pricing of products sold by our Fleet Vehicles and Services segment that had a significant impact on our financial statements when comparing the first quarter of 2018 to the first quarter of 2017.

 

Adjusted EBITDA in our Fleet Vehicles and Services segment for the first quarter of 2018 was $4.6 million compared to $6.2 million in the first quarter of 2017, a decrease of $1.6 million or 25.8%. $0.9 million of the decrease was due to the sales mix experienced in 2018, with the remainder of the decrease due to start-up costs incurred at our Ephrata, Pennsylvania truck body operations. Our adoption of ASU 2014-09 on January 1, 2018 resulted in an increase in the adjusted EBITDA in our Fleet Vehicles and Services segment of $1.6 million compared to the adjusted EBITDA that would have been recognized under our previous recognition policy primarily due to the timing of revenue recognized on certain of our equipment up-fit contracts.

 

Emergency Response Vehicles 

 

Financial Data

(Dollars in thousands)

		Three Months Ended March 31,
		2018								2017
		Amount				%				Amount				%
Sales		$	66,712				100.0	%		$	80,202				100.0	%
Adjusted EBITDA			1,242				1.9	%			(1,337	)			(1.7	)%
Segment assets			112,142								149,059

 

Comparison of the Three-Month Periods Ended March 31, 2018 and 2017

 

Sales in our Emergency Response Vehicles segment were $66.7 million in the first quarter of 2018, compared to $80.2 million in the same period of 2017, a decrease of $13.5 million, or 16.8%, driven by a decrease in sales related to our Smeal acquisition, which experienced an unusually high shipment volume in the first quarter of 2017. This decrease was partially offset by a $1.6 million increase due to pricing changes realized in 2018. Our adoption of ASU 2014-09 on January 1, 2018 resulted in the recognition of $11.4 million less revenue in our Emergency Response Vehicles segment than would have been recognized under previous guidance.

  

Adjusted EBITDA for our Emergency Response Vehicles segment was $1.2 million in the first quarter of 2018, an increase of $2.5 million compared to $(1.3) million in the first quarter of 2017. $1.6 million of this increase was due to the pricing increases realized in the first quarter of 2018, with the remainder mainly due to operational improvements impacting the first quarter of 2018. Our adoption of ASU 2014-09 on January 1, 2018 resulted in a decrease in the adjusted EBITDA in our Emergency Response Vehicles segment of $1.2 million compared to the adjusted EBITDA that would have been recognized under our previous revenue recognition policy. This decrease is primarily due to chassis that were recorded as part of work-in process inventory at December 31, 2017. As a result of the change in revenue recognition guidance, we were not able to recognize revenue and income on these chassis, but instead recorded the impact directly to retained earnings through the transition adjustment.

 

 

Specialty Chassis and Vehicles

 

Financial Data
(Dollars in thousands)
		Three Months Ended March 31,
		2018								2017
		Amount				%				Amount				%
Sales		$	48,236				100.0	%		$	32,953				100.0	%
Adjusted EBITDA			3,121				6.5	%			1,533				4.7	%
Segment assets			29,323								31,074

 

Comparison of the Three-Month Periods Ended March 31, 2018 and 2017

 

Sales in our Specialty Chassis and Vehicles segment were $48.2 million in the first quarter of 2018, compared to $33.0 million in 2017, an increase of $15.2 million or 46.4%. $13.5 million of the increase was due to higher motor home chassis sales resulting from higher unit volumes. Intercompany sales of fleet vehicles added $1.6 million in sales to the first quarter of 2018. Sales of other specialty vehicles increased by $0.5 million due to higher unit volumes in our contract manufacturing operations. A $0.4 million decrease in parts sales partially offset these increases. Our adoption of ASU 2014-09 in January, 2018 had an immaterial impact on revenue in our Specialty Chassis and Vehicles segment. There were no changes in pricing of products sold by our Specialty Chassis and Vehicles segment that had a significant impact on our financial statements when comparing the first quarter of 2018 to the first quarter of 2017.

 

Adjusted EBITDA for our Specialty Chassis and Vehicles segment for the first quarter of 2018 was $3.1 million, compared to $1.5 million in the same period of 2017, an increase of $1.6 million or 106.7%. The increase was driven, in approximately equal parts, by the increase in motor home chassis sales volume and the mix of products sold in the first quarter of 2018. Our adoption of ASU 2014-09 in January, 2018 had an immaterial impact on the adjusted EBITDA of our Specialty Chassis and Vehicles segment.

 

 

 

Financial Condition

 

Balance Sheet at March 31, 2018 compared to December 31, 2017

 

For line items impacted by our adoption of the new revenue recognition standard on January 1, 2018, please see “Note 1 – General and Summary of Accounting Policies” in the Notes to Condensed Consolidated Financial Statements contained in Part 1 of this Form 10-Q for further information regarding the impact of this new accounting standard.

 

Cash decreased by $4.1 million, or 12.2%, to $29.4 million at March 31, 2018 from $33.5 million at December 31, 2017. Please see the discussion of cash flow activity below for more information on our sources and uses of cash in the first quarter of 2018.

 

Inventory decreased by $29.2 million, or 37.6%, to $48.5 million at March 31, 2018 compared to $77.7 million at December 31, 2017 mainly due to the transfer of in-process production to contract assets as a result of adopting the new revenue recognition standard on January 1, 2018. This decrease was offset by an increase at our Fleet Vehicles and Services segment of $12.1 million due to the ramp up of production.

 

Contract assets increased to $41.1 million at March 31 2018 compared to $0 at December 31 2017 as a result of adopting the new revenue recognition standard on January 1, 2018, whereby we now recognize a contract asset for performance obligations that have been completed but have not yet been invoiced to the customer.

 

Net deferred tax assets decreased by $1.0 million or 13.7% to $6.3 million at March 31 2018 from $7.3 million at December 31, 2017 as a result of adopting the new revenue recognition standard.

 

Accounts payable increased by $9.4 million or 23.2% to $50.0 million at March 31, 2018 compared to $40.6 million at December 31, 2017 due to the timing of payments and the ramp up in production following our traditional year-end shut down in December.

 

Accrued compensation and related taxes decreased by $4.3 million or 32.3% to $9.0 million at March 31, 2018 compared to $13.3 million at December 31, 2017 due to the payout of accrued 2017 incentive compensation in the first quarter of 2018.

 

Deposits from customers decreased by $5.1 million or 20.1% to $20.3 million at March 31, 2018 compared to $25.4 million at December 31, 2017 due to a $7.2 million decrease as a result of adopting the new revenue recognition standard, whereby the liability for deposits is reduced when the related performance obligation has been satisfied. This decrease was partially offset by a $2.1 million increase due to more prepayments received than applied to invoices during the first quarter of 2018 in our Emergency Response Vehicles segment.

 

 

Other current liabilities and accrued expenses increased by $1.6 million, or 13.2%, to $13.7 million at March 31, 2018 from $12.1 million at December 31, 2017 due to the timing of accruals for various expenses incurred but not paid.

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash Flows

 

Cash and cash equivalents decreased by $4.1 million to $29.4 million at March 31, 2018, compared to $33.5 million at December 31, 2017. These funds, in addition to cash generated from future operations and available credit facilities, are expected to be sufficient to finance the Company’s foreseeable liquidity and capital needs.

 

 

Cash Flow from Operating Activities

 

We generated $0.4 million of cash from operating activities during the three months ended March 31, 2018, a decrease of $0.9 million from $1.3 million of cash generated from operating activities for the three months ended March 31, 2017. Cash flow from operating activities decreased from 2017 due to a $14.7 million increase in cash utilized in the fulfilment of customer orders (including changes in accounts receivable, inventory, contract assets, and customer deposits). This decrease was partially offset by a $5.2 million increase in net income net of non-cash charges in 2018 and an $8.6 million increase in cash generated through changes in other working capital items, mainly accounts payable and compensation related accruals.

 

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, 2018.  Also see the Condensed Consolidated Statements of Cash Flows contained in Item 1 of this Form 10-Q for the other various factors that represented the remaining fluctuation of cash from operations between the periods.

 

 

Cash Flow from Investing Activities

 

We utilized $2.0 million in investing activities in the first quarter of 2018, mainly for acquisition of capital assets related to our operations, a $28.2 million decrease compared to the $30.2 million utilized in the first quarter of 2017, which included our acquisition of Smeal.

 

During the remainder of 2018, we expect to make additional cash capital investments of $10.0 million to $15.0 million, including capital spending for the replacement and upgrades of machinery and equipment used in operations and the implementation of our ERP system.

 

 

Cash Flow from Financing Activities

 

We utilized $2.5 million of cash through financing activities in the first quarter of 2018, compared to $32.3 million generated in the first quarter of 2017. This decrease is due to the draw from our existing $100 million line of credit to fund our acquisition of Smeal on January 1, 2017.

 

 

Working Capital

 

Our working capital was as follows (in thousands):

 

 

		March 31, 2018				December 31, 2017				Change
Current assets		$	207,185			$	198,787			$	8,398
Current liabilities			110,479				109,732				747
Working capital		$	96,706			$	89,055			$	7,651

 

 

The increase in our working capital at March 31, 2018 from December 31, 2017, results from changes in cash, inventory and contract assets, which were partially offset by increases in accounts payable and deposits from customers. Refer to the balance sheet discussion appearing above in Management’s Discussion and Analysis of Financial Condition and Results of Operations for an explanation of the causes of the material changes in working capital line items.

 

 

Contingent Obligations

 

Spartan-Gimaex joint venture

In February 2015, Spartan USA and Gimaex Holding, Inc. mutually agreed to begin discussions regarding the dissolution of the Spartan-Gimaex joint venture. In June 2015, Spartan USA and Gimaex Holding, Inc. entered into court proceedings to determine the terms of the dissolution. In February 2017, by agreement of the parties, the court proceeding was dismissed with prejudice and the judge entered an order to this effect as the parties agreed to seek a dissolution plan on their own. No dissolution terms have been determined as of the date of this Form 10-Q. In the fourth quarters of 2015 and 2014, we accrued charges totaling $1.0 million and $0.2 million to write down certain inventory items associated with this joint venture to their estimated fair values. Costs associated with the wind-down will be impacted by the final dissolution agreement. The costs we have accrued so far represent the low end of the range of the estimated total charges that we believe we may incur related to the wind-down. While we are unable to determine the final cost of the wind-down with certainty at this time, we may incur additional charges, depending on the final terms of the dissolution, and such charges could be material to our results.

 

Smeal contingent consideration

In connection with our acquisition of Smeal in January 2017, the former owners of Smeal may receive additional consideration in the form of a tax gross-up payment. The purchase agreement specifies that Spartan will make a payment to the former owners of Smeal to cover certain state and federal tax liabilities for the tax year ending December 31, 2017 that result from the transaction. $1.4 million for the estimated amount of the payment was recorded as a contingent liability appearing within Other current liabilities on our Condensed Consolidated Balance Sheets at December 31, 2017 and March 31, 2018.

 

 

Debt

 

On December 1, 2017, we entered into a First Amendment to our Second Amended and Restated Credit Agreement (the "Credit Agreement") by and among us, certain of our subsidiaries, Wells Fargo Bank, National Association, as administrative agent ("Wells Fargo"), and the lenders party thereto consisting of Wells Fargo, JPMorgan Chase Bank, N.A. and PNC Bank (the "Lenders"). Under the Credit Agreement, we may borrow up to $100 million from the Lenders under a three-year unsecured revolving credit facility. We may also request an increase in the facility of up to $35 million in the aggregate, subject to customary conditions. The credit facility is available for the issuance of letters of credit of up to $20 million, swing line loans of up to $15 million and revolving loans, subject to certain limitations and restrictions. Interest rates on borrowings under the credit facility are based on either (i) the highest of the prime rate, the federal funds effective rate from time to time plus 0.5%, or the one month adjusted London interbank market rate ("LIBOR") plus 1.00%; or (ii) adjusted LIBOR plus a margin based upon our ratio of debt to earnings from time to time. The Credit Agreement contains certain customary representations and covenants, including performance-based financial covenants on our part. The credit facility matures October 31, 2019, following which we have the option to renew the credit facility, subject to lender approval, for two successive one-year periods with an ultimate maturity date of October 31, 2021. Commitment fees range from 17.5 to 32.5 basis points on the unused portion of the line. In January 2017, we borrowed $32.8 million from our credit line to fund our acquisition of Smeal. At March 31, 2018 and December 31, 2017, we had outstanding borrowings of $17.8 million against our credit line. During the quarter ended March 31, 2018, and in future quarters, our revolving credit facility was utilized, and will continue to be utilized, to finance commercial chassis received under chassis bailment inventory agreements with General Motors Company (“GM”) and Chrysler Group, LLC (“Chrysler”). This funding is reflected as a reduction of the revolving credit facility available to us equal to the amount drawn by GM and Chrysler. See Note 4, Commitments and Contingent Liabilities, in the Notes to Condensed Consolidated Financial Statements appearing in Item 1 of this Form 10-Q for further details about these chassis bailment inventory agreements. The applicable borrowing rate including margin was 3.375% (or one-month LIBOR plus 1.50%) at March 31, 2018.

 

Under the terms of our credit agreement with our banks, we have the ability to issue letters of credit totaling $20.0 million. At March 31, 2018 and December 31, 2017, we had outstanding letters of credit totaling $0.8 million and $0.8 million, respectively, related to certain emergency response vehicle contracts and our workers compensation insurance.

 

Under the terms of the primary line of credit agreement, as amended, we are required to maintain certain financial ratios and other financial conditions, which limited our available borrowings under our line of credit to a total of approximately $77.5 million at March 31, 2018 and $66.4 million at December 31, 2017. The agreements prohibit us from incurring additional indebtedness; limit certain acquisitions, investments, advances or loans; limit our ability to pay dividends in certain circumstances; and restrict substantial asset sales. At March 31, 2018, we were in compliance with all covenants in our credit agreement, and, based on our outlook for 2018, we expect to be able to meet these covenants over the next twelve months.

 

We had capital lease obligations outstanding of $0.2 million as of March 31, 2018 and December 31, 2017 due and payable over the next five years.

 

 

Equity Securities

 

On April 28, 2016, our Board of Directors authorized the repurchase of up to 1.0 million shares of our common stock in open market transactions. At March 31, 2018 there were 1.0 million shares remaining under this repurchase authorization. If we were to repurchase the remaining 1.0 million shares of stock under the repurchase program, it would cost us approximately $17.3 million based on the closing price of our stock on April 26, 2018. We believe that we have sufficient resources to fund any potential stock buyback in which we may engage.

 

 

Dividends

 

The amounts or timing of any dividend distribution are subject to earnings, financial condition, liquidity, capital requirements and such other factors as our Board of Directors deems relevant. We declared dividends on our outstanding common shares in 2018 and 2017 as shown in the table below.

 

Date dividend declared

Record date

Payment date

Dividend per share ($)

Total dividend paid ($000)

May 2, 2018

May 15, 2018

June 15, 2018

$

0.05

$

N/A

Oct. 24, 2017

Nov. 15, 2017

Dec. 15, 2017

0.05

1,753

May 2, 2017

May 15, 2017

June 15, 2017

0.05

1,755

 

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The following discussion of critical accounting policies and estimates is intended to supplement Note 1, General and Summary of Accounting Policies, of the Notes to Consolidated Financial Statements contained in Item 8 in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 3, 2018. These policies were selected because they are broadly applicable within our operating units and they involve additional management judgment due to the sensitivity of the methods, assumptions and estimates necessary in determining the related statement of income, asset and/or liability amounts.

 

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

 

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

 

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

 

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

 

Distinct revenue recognition policies for our segments are as follows:

 

Fleet Vehicles and Services

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

 

 

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

 

 

Emergency Response Vehicles 

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

 

Revenue on certain emergency response chassis and apparatuses that are sold from stock or utilized as demonstration units is recognized at the point in time that the contract is received. Revenue related to modifications made to trucks sold from stock or that were utilized as demonstration units is recognized over time as the modifications are completed.

 

Specialty Chassis and Vehicles

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

 

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

 

 

Accounts Receivable - We maintain an allowance for customer accounts that reduces receivables to amounts that are expected to be collected. In estimating the allowance for doubtful accounts, we make certain assumptions regarding the risk of uncollectable open receivable accounts. This risk factor is applied to the balance on accounts that are aged over 90 days: generally, this reserve has an estimated range from 10-25%. The risk percentage applied to the aged accounts may change based on conditions such as general economic conditions, industry-specific economic conditions, historical and anticipated customer performance, historical experience with write-offs and the level of past due amounts from year to year. However, generally, our assumptions are consistent year-over-year and there has been little adjustment made to the percentages used. In addition, in the event there are certain known risk factors with an open account, we may increase the allowance to include estimated losses on such “specific” account balances. The “specific” reserves are identified by a periodic review of the aged accounts receivable. If there is an account in question, credit checks are made and there is communication with the customer, along with other means to try to assess if a specific reserve is required. The inclusion of the “specific” reserve has caused the greatest fluctuation in the allowance for doubtful accounts balance historically. Please see Note 1 - General and Summary of Accounting Policies, in the Notes to Consolidated Financial Statements contained in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2017 for further details.

 

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

 

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

 

 

At March 31, 2018 and December 31, 2017, we had recorded goodwill at our Fleet Vehicles and Services, Emergency Response Vehicles and Specialty Chassis and Vehicles reportable segments. The Fleet Vehicles and Services and Emergency Response Vehicles reportable segments were determined to be reporting units for goodwill impairment testing, while the reporting unit for the goodwill recorded in the Specialty Chassis and Vehicles segment was determined to be limited to the Reach Manufacturing component of that reportable segment. The goodwill recorded in these reporting units was evaluated for impairment as of October 1, 2017 using a discounted cash flow valuation.

 

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

 

We evaluate the recoverability of our indefinite lived intangible assets, which, as of March 31, 2018, consisted of our Utilimaster and Smeal trade names, by comparing the estimated fair value of the trade names with their carrying values. We estimate the fair value of our trade names based on estimates of future royalty payments that are avoided through our ownership of the trade name, discounted to their present value. In determining the estimated fair value of the trade names, we consider current and projected future levels of revenue based on our plans for Utilimaster and Smeal branded products, business trends, prospects and market and economic conditions.

 

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

 

In 2017, we elected to bypass the qualitative assessment and proceed to the quantitative goodwill impairment assessment for all of our reporting units. The estimated fair values of these reporting units exceeded their carrying values by 232%, 91% and 62%, respectively, as of October 1, 2017, the most recent annual assessment date. Based on the discounted cash flow valuations at October 1, 2017, an increase in the WACC for the reporting units of 500 basis points would not result in impairment.

 

The acquired Utilimaster and Smeal trade names have indefinite lives as it is anticipated that they will contribute to our cash flows indefinitely. The estimated fair values of our Utilimaster and Smeal trade names exceeded their associated carrying values of $2.9 million and $2.4 million, respectively, by 545% and 141%, respectively, as of October 1, 2017. Accordingly, there was no impairment recorded on these trade names. Based on the discounted cash flow valuations at October 1, 2017, an increase in the WACC used for these impairment analyses of 500 basis points would not result in impairment in the trade names.

 

Since October 1, 2017, there have been no events or changes in circumstances that would more likely than not reduce the fair value of our Fleet Vehicles and Services, Emergency Response Vehicles, or Specialty Chassis and Vehicles reporting units or our indefinite-lived intangible assets below their respective carrying costs.

 

 

We cannot predict the occurrence of certain events or changes in circumstances that might adversely affect the carrying value of goodwill and indefinite-lived intangible assets. Such events may include, but are not limited to, the impact of the general economic environment; a material negative change in relationships with significant customers; strategic decisions made in response to economic and competitive conditions; and other risk factors as detailed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017.

 

See Note 1, General and Summary of Accounting Policies and Note 5, Goodwill and Intangible Assets, in the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2017 for further details on our goodwill and indefinite-lived intangible assets.

 

Warranties - Our policy is to record a provision for the estimated cost of warranty-related claims at the time of the sale, and periodically adjust the warranty liability to reflect actual experience. The amount of warranty liability accrued reflects actual historical warranty cost, which is accumulated on specific identifiable units. From that point, there is a projection of the expected future cost of honoring our obligations under the warranty agreements. Historically, the cost of fulfilling our warranty obligations has principally involved replacement parts and labor for field retrofit campaigns and recalls, which increase the reserve. Our estimates are based on historical experience, the number of units involved and the extent of features and components included in product models. See Note 4, Commitments and Contingent Liabilities, in the Notes to Condensed Consolidated Financial Statements contained in Item 1 of this Form 10-Q, for further information regarding warranties.

 

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

 

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

 

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

 

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

 

 

EFFECT OF INFLATION

 

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

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

 

Our primary market risk exposure is a change in interest rates and the effect of such a change on outstanding variable rate short-term and long-term debt. At March 31, 2018, we had $17.8 million in debt outstanding under our variable rate short-term and long-term debt agreements. An increase of 100 basis points in interest rates would result in additional interest expense of $0.2 million on an annualized basis for the floating rate debt that we incurred in January 2017 for the acquisition of Smeal. We believe that we have sufficient financial resources to accommodate this hypothetical increase in interest rates. We do not enter into market-risk-sensitive instruments for trading or other purposes.

 

 

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

 

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

 

 

Item 4.

Controls and Procedures.

 

An evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of March 31, 2018. Based on and as of the time of such evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed by us in the reports that we file or submit is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

No changes in our internal control over financial reporting were identified as having occurred during the quarter ended March 31, 2018 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, 2017, a description of certain risks and uncertainties that could affect our business, future performance or financial condition (the “Risk Factors”). There have been no material changes from the disclosure provided in the Form 10-K for the year ended December 31, 2017 with respect to the Risk Factors. Investors should consider the Risk Factors prior to making an investment decision with respect to our stock.

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

Issuer Purchases of Equity Securities

 

On April 28, 2016, our Board of Directors authorized the repurchase of up to 1.0 million shares of our common stock in open market transactions. During the quarter ended March 31, 2018, no shares were repurchased under this authorization.

 

During the quarter ended March 31, 2018, there were 152,855 shares delivered by associates in satisfaction of tax withholding obligations that occurred upon the vesting of restricted shares. These shares are not repurchased pursuant to the Board of Directors authorization disclosed above.

 

Period		Total Number of Shares Purchased				Average Price Paid per Share				Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs				Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
January 1 to January 31			10,234			$	15.75				-				1,000,000
February 1 to February 28			-				-				-				1,000,000
March 1 to March 31			142,621				17.20				-				1,000,000
Total			152,855			$	17.10				-				1,000,000

 

(1)

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

 

 

Item 6.

Exhibits.

 

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

 

Exhibit Number	Document
10.1	Management severance plan.
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

 

 

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 3, 2018	SPARTAN MOTORS, INC.
	By	/s/ Frederick J. Sohm
		Frederick J. Sohm Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

 

 

EXHIBIT INDEX

 

Exhibit No.	Document
10.1	Management severance plan.
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
32	Certification 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

 

 

EXHIBIT 31.1

 

CERTIFICATION

 

I, Daryl M. Adams, certify that:

 

1.	I have reviewed this quarterly report on Form 10-Q of Spartan Motors, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
	a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
	a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date:  May 3, 2018	/s/ Daryl M. Adams
	Daryl M. Adams President and Chief Executive Officer Spartan Motors, Inc.

 

EXHIBIT 31.2

 

CERTIFICATION

 

I, Frederick J. Sohm, certify that:

 

1.	I have reviewed this quarterly report on Form 10-Q of Spartan Motors, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
	a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
	a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date:  May 3, 2018	/s/ Frederick J. Sohm
	Frederick J. Sohm Chief Financial Officer and Treasurer Spartan Motors, Inc.

 

EXHIBIT 32

 

CERTIFICATION

 

Each of the undersigned hereby certifies in his capacity as an officer of Spartan Motors, Inc. (the “Company”), pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 that:

 

1.	The Quarterly Report on Form 10-Q of the Company for the period ended March 31, 2018 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities and Exchange Act of 1934 (15 U.S.C. 78m); and
2.	The information contained in the Report fairly presents, in all material respects, the financial condition at the end of such period and results of operations of the Company for such period.

 

 

Dated:  May 3, 2018	/s/ Daryl M. Adams
	Daryl M. Adams President and Chief Executive Officer
Dated:  May 3, 2018	/s/ Frederick J. Sohm
	Frederick J. Sohm Chief Financial Officer and Treasurer

 

Exhibit 10.1

 

SPARTAN MOTORS, INC.

MANAGEMENT SEVERANCE PLAN

 

 

 

____________________________________________________________________

 

 

 

 

 

 

TABLE OF CONTENTS

 

Section 1.     Introduction     1

 

1.1.     Purpose.     1

 

1.2.     Effective Date.     1

 

Section 2.     Definitions and Construction     2

 

2.1.     Definitions.     2

 

2.2.     Gender and Number.     3

 

2.3.     Section 409A     3

 

Section 3.     Participation by Eligible Managers     4

 

3.1.     Generally.     4

 

3.2.     Participation Agreement Required.     4

 

Section 4.     Severance Benefits     5

 

4.1.     Basic Severance Benefits.     5

 

4.2.     COBRA Benefits.     6

 

4.3.     Equity Awards     7

 

4.4.     Outplacement Services     8

 

4.5.     Qualifying Termination.     8

 

Section 5.     Covenants     9

 

5.1.     Generally.     9

 

5.2.     Noncompetition.     9

 

5.3.     Interference with Business Relations.     9

 

5.4.     Proprietary and Confidential Information.     10

 

5.5.     Nondisparagement     10

 

5.6.     Cooperation     10

 

5.7.     Claw-back     11

 

Section 6.     Release     12

 

6.1.     Generally.     12

 

6.2.     Time Limit for Providing Release.     12

 

Section 7.     Nature of Participant’s Interest in the Plan     13

 

7.1.     No Right to Assets.     13

 

7.2.     No Right to Transfer Interest.     13

 

7.3.     No Employment Rights.     13

 

7.4.     Withholding and Tax Liabilities.     13

 

Section 8.     Administration, Interpretation, and Modification of Plan     14

 

8.1.     Plan Administrator.     14

 

8.2.     Powers of the Administrator.     14

 

8.3.     Finality of Committee Determinations.     14

 

8.4.     Incapacity.     14

 

8.5.     Amendment, Suspension, and Termination.     14

 

8.6.     Power to Delegate Authority.     15

 

8.7.     Headings.     15

 

8.8.     Severability.     15

 

8.9.     Governing Law.     15

 

8.10.     Complete Statement of Plan.     15

 

Section 9.     Claims and Appeals     16

 

9.1.     Application of Claims and Appeals Procedures.     16

 

9.2.     Initial Claims.     16

 

9.3.     Appeals.     17

 

9.4.     Other Rules and Rights Regarding Claims and Appeals.     18

 

9.5.     Interpretation.     18

 

 

 

 

Section 1.     Introduction

 

1.1.     Purpose.

 

The Plan is an unfunded severance plan maintained primarily for the purpose of providing severance benefits to a select group of key management employees

 

1.2.     Effective Date.

 

The Plan is effective as of July 26, 2017.

 

 

 

Section 2.     Definitions and Construction

 

2.1.     Definitions.

 

When used in capitalized form in the Plan, the following words and phrases have the following meanings, unless the context clearly indicates that a different meaning is intended:

 

(a)

“Across the Board Change” means any change affecting more than fifty percent (50%) of the Company’s employees.

 

(b)

“Administrative Committee” means the Spartan Motors, Inc. Board of Directors Human Resources & Compensation Committee.

 

(c)

“Cause” has the meaning provided in Section 4.5(b).

 

(d)

“CEO” means the Chief Executive Officer of the Company.

 

(e)

“Change in Control” means a Change in Control of the Company as defined in the Spartan Motors, Inc. Leadership Compensation Plan.

 

(f)

“Code” means the Internal Revenue Code of 1986, as amended.

 

(g)

“Company” means Spartan Motors, Inc., and any successor to Spartan Motors, Inc. Employment with the Company includes employment with any corporation, partnership, or other organization that would, if applicable, be aggregated with the Company under sections 414(b) and (c) of the Code.

 

(h)

“Effective Date” means January 1, 2017.

 

(i)

“Eligible Manager” means a common law W-2 employee of the Company who is designated by the Administrative Committee, who is a Section 16 Officer , to be eligible to participate in the Plan.

 

(j)

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

 

(k)

“Participant” means an Eligible Manager who is eligible to participate in the Plan under Section 2. All Participants will be listed on Exhibit B with their respective participation date, as determined by the Board of Directors of the Company, except to the extent that the Board has delegated such authority to the Compensation Committee, the CEO, or another person or committee.

 

(l)

“Participation Agreement” has the meaning provided in Section 3.2.

 

(m)

“Plan” means the Spartan Motors, Inc. Management Severance Plan as set forth in this document.

 

(n)

“Qualifying Termination” has the meaning provided in Section 4.5

 

(o)

“Section” means a section of this Plan and any subsections of that section.

 

(p)

“Section 409A” means section 409A of the Code.

 

(q)

“Severance Benefit” has the meaning provided in Section 4.1.

 

(r)

“Severance Coverage Period” is, with respect to a Participant, the period of severance specified in the Participant’s Participation Agreement. For purposes of this Plan, each Participant will be designated as a Group A or a Group B Participant. Group A Participants are provided with an 18-month Severance Coverage Period, and Group B Participants are provided with a 12-month Severance Coverage Period. Unless designated otherwise in any Participation Agreement, Group A will include the CEO of the Company (if he or she is otherwise designated and meets the participation requirements), and Group B will include all other Participants.

 

2.2.     Gender and Number.

 

Words used in the masculine gender in the Plan are intended to include the feminine and neuter genders, where appropriate. Words used in the singular form in the Plan are intended to include the plural form, where appropriate, and vice versa.

 

2.3.     Section 409A

 

Payments under the Plan are intended to be exempt from, or in compliance with, Section 409A, and the Plan will be interpreted to achieve this result. However, in no event is the Company responsible for any tax or penalty owed by a Participant with respect to the payments under this Plan.

 

Section 3.     Participation by Eligible Managers

 

3.1.     Generally.

 

An employee of the Company becomes eligible to participate in the Plan upon the later of (a) the date on which the Administrative Committee designates the employee as an Eligible Manager and (b) the date on which the Company and the employee execute a Participation Agreement in accordance with Section 3.2.

 

3.2.     Participation Agreement Required.

 

No employee will be eligible to receive a benefit under this Plan unless the employee and the Company execute a Participation Agreement containing such terms as shall be determined by the Administrative Committee. The executed Participation Agreement will constitute an agreement between the Company and the employee that binds both of them to the terms of the Plan, as amended, and will bind their heirs, executors, administrators, successors, and assigns, both present and future.

 

Section 4.     Severance Benefits

 

4.1.     Basic Severance Benefits.

 

A Participant who has a Qualifying Termination is entitled to a Severance Benefit in the amount described in subsection (a), which is paid in the time and form specified in subsection (b), and is conditioned upon the Participant’s timely execution of a release as provided in Section 6.

 

(a)

Amount. The Participant’s Severance Benefit will include the Participant’s base salary and bonus award as follows—

 

(1)

Base Salary. The Participant’s Severance Benefit includes the Participant’s base salary (at the rate in effect immediately prior to the Participant’s Qualifying Termination, or if greater, the rate in effect at any time within 180 days prior to the Participant’s Qualifying Termination) for the Participant’s Severance Coverage Period.

 

(2)

Bonus Award. If the threshold is satisfied for bonus eligibility under the Company’s annual cash incentive plan for the Company’s fiscal year in which the Qualifying Termination occurs, the Participant’s Severance Benefit will include the following bonus award: a pro-rata portion of the target incentive under the Company’s annual cash incentive plan for the measurement period during which the Qualifying Termination occurs, which is equal to the target incentive for the period multiplied by a fraction, the numerator of which is the number of complete calendar months that elapsed from the beginning of the incentive measurement period until the Participant’s Qualifying Termination, and the denominator of which is the total number of complete calendar months in the incentive measurement period.

 

(b)

Time and Form of Payment. If a Participant is entitled to a Severance Benefit, the Severance Benefit will be paid as follows—

 

(1)

In General. Except as otherwise provided in paragraph (2) or (3), below, (A) the base salary portion of a Participant’s Severance Benefit will be paid during the Severance Coverage Period (in equal installments) on every other Friday, except that payments otherwise to be made before the 60th day following the Participant’s Qualifying Termination date will be paid on the second Friday following the 60th day following the Participant’s Qualifying Termination date and continuing on the schedule for the duration of the payments, and (B) the bonus award portion of the Participant’s Severance Benefit will be paid, in a lump sum, after the end of the calendar year in which the Qualifying Termination occurs and on the first April 1 following the end of such calandar year.

 

(2)

Qualifying Termination Related to a Change in Control. If the Participant’s Qualifying Termination occurs in anticipation of, or is related to, a Change in Control (or any corporate transaction of change in the Board of Directors), the terms of this Plan will not be adjusted and any such benefits will be determined as provided in this Plan. The Change of Control provisions applicable to this Plan are as set forth in the Spartan Motors leadership Team Compensation Plan.

 

(3)

Time of Payment under Section 409A. To comply with Section 409A (or to be exempt, as the case may be) —

 

(A)

Any payment under the Plan that is subject to Section 409A and that is contingent on a termination of employment must, for purposes of this Plan, be contingent on a “separation from service” within the meaning of Section 409A.

 

(B)

Notwithstanding anything to the contrary contained herein, if, upon separation from service, the Participant is a “specified employee” within the meaning of Section 409A, any payment under the Plan that is subject to Section 409A and would otherwise be paid within six months after the Participant’s separation from service will instead be paid on the second Friday in the seventh month following the Participant’s separation from service.

 

4.2.     COBRA Benefits.

 

If the Participant has a Qualifying Termination and timely executes a release as provided in Section 6, the Company will provide the Participant with COBRA benefits as follows—

 

(a)

Amount. During the Severance Coverage Period (but not for more than 18 months), if the employee enrolls under COBRA, the Company will pay a portion of the Participant’s premiums for any benefits under COBRA equal to the portion of such benefit premiums (if any) that the Company would have paid with respect to the Participant had the Participant continued employment with the Company in the same position held by the Participant at the time of his or her Qualifying Termination (with the Company’s share and the Participant’s share varying consistently on a pro rata basis with cost sharing adjustments for active employees). Notwithstanding the previous sentence, the Company reserves the right to modify, amend, or terminate, at any time, any Company benefit plan to the extent permitted under the terms of the plan and applicable law.

 

(b)

Time of Payment. The Company’s portion of each month’s premium will be paid on the first day of each month, except that payments may be delayed pending the Participant’s execution of a release in accordance with Section 6. For purposes of Section 409A, payments under this Section will not be made by the Company after 18 months after the separation from service, or if otherwise would be noncompliant with Section 409A.

 

4.3.     Equity Awards

 

If the Participant has a Qualifying Termination and timely executes a release as provided in Section 6, the Participant’s awards, if any, under the Spartan Motors, Inc. 2016 Stock Incentive Plan (the “Stock Incentive Plan”) will be treated as follows, subject to the terms of the Stock Incentive Plan:

 

(a)

Stock Options and Stock Appreciation Rights. Each of the Participant’s stock options and stock appreciation rights that is outstanding on the date of the Participant’s Qualifying Termination shall be vested and, unless otherwise provided in the applicable award agreement, be exercisable until the six month anniversary of the Participant’s Qualifying Termination (but no later than the earlier of the 10th anniversary of the date the award was granted or the expiration date of the award as specified in the award agreement).

 

(b)

Restricted Stock Awards. The restrictions shall lapse, and the award shall be fully vested, with respect to each of the Participant’s Restricted Stock Awards (as defined in the Stock Incentive Plan) that is outstanding on the date of the Participant’s Qualifying Termination.

 

(c)

Non-Performance-Based Restricted Stock Unit Awards. Each of the Participant’s Restricted Stock Unit Awards (as defined in the Stock Incentive Plan) that are not based on performance measures and that are outstanding on the date of the Participant’s Qualifying Termination shall vest on the date of the Participant’s Qualifying Termination.

 

(d)

Performance-Based Restricted Stock Unit Awards. A pro-rated portion of each of the Participant’s Restricted Stock Units that are based on performance measures and that are outstanding on the date of the Participant’s Qualifying Termination shall be paid at the same time the award would have been paid if the Participant had not incurred a Qualifying Termination (subject to any provision of the award agreement that applies on account of a change in control, as determined under such agreement). Such prorated portion shall equal the total amount that would have been paid absent the Participant’s Qualifying Termination (if any) multiplied by a fraction, the numerator of which is the total number of full calendar months during the performance period that ended on or before the Participant’s Qualifying Termination, and the denominator of which is the total number of full calendar months in the performance period.

 

Notwithstanding anything to the contrary contained in this Section 4.3, if the provisions of this Section 4.3 shall cause a violation of Section 409A, including if an accelerated vesting event causes the existence of deferred compensation under Section 409A where such deferral results in noncompliance with Section 409A, then any payout shall be adjusted to comply with Section 409A.

 

4.4.     Outplacement Services

 

If the Participant has a Qualifying Termination and timely executes a release as provided in Section 6, the Company will provide the Participant with reasonable outplacement services during the Severance Coverage Period, but in no event later than the end of the 18th complete calendar month after a Qualifying Termination. All reimbursements will be made in the year in which the expense is incurred and will be subject to a maximum of $10,000.00 per year with no carryovers among years.

 

4.5.     Qualifying Termination.

 

(a)

A Participant has a Qualifying Termination if his or her employment with the Company is terminated—involuntarily by the Company for any reason other than for Cause.

 

(b)

Cause. “Cause” means, as determined by the Administrative Committee in its discretion, fraud, embezzlement, a conviction of a felony, a material violation of the Company’s code of conduct, a willful and continual failure after notice to substantially perform his duties (other than failure resulting from the Participant’s incapacity due to physical or mental illness).

 

Section 5.     Covenants

 

5.1.     Generally.

 

Each Participant will agree to the covenants set forth in Section 5.2 through 5.7 as outlined below. Failure to comply with these covenants shall result in a loss of and recoupment of severance benefits as outlined in section 5.7 below.

 

5.2.     Noncompetition.

 

(a)

Prohibited Conduct. During the period of a Participant’s employment with the Company, and for the Participant’s Severance Coverage Period, the Participant will not, without the prior written consent of the CEO (or the Board or the Compensation Committee if it pertains to the CEO) —

 

(1)     personally engage in Competitive Activities (as defined below); or

 

(2)

work for, own, manage, operate, control, or participate in the ownership, management, operation, or control of, or provide consulting or advisory services to, any individual, partnership, firm, corporation, or institution engaged in Competitive Activities, or any company or person affiliated with such person or entity engaged in Competitive Activities; provided that Participant’s mere purchase or holding, for investment purposes, of securities of a publicly-traded company will not constitute “ownership” or “participation in ownership” for purposes of this paragraph so long as Participant’s equity interest in any such company is less than 5% of its outstanding shares.

 

(b)

Competitive Activities. “Competitive Activities” means business activities, for anywhere in North America, which, in whole or in part, are in competition with the Company and its divisions, subsidiaries, affiliates and joint ventures as of the date that employment with the Company terminates. If the scope of the obligations contained in this Section 5.2 is determined to exceed that which may be enforceable under applicable law, the scope of these obligations will be reformed to provide for enforcement to the maximum extent permitted under applicable law. The Participant will bear the burden of proving the scope of the maximum enforceable obligations under applicable law and that the activities in which he or she has engaged do not exceed such maximum enforceable obligations.

 

5.3.     Interference with Business Relations.

 

During the period of the Participant’s employment with the Company, and for the Participant’s Severance Coverage Period, Participant will not, without the prior written consent of the CEO—

 

(a)

recruit or solicit any employee of the Company for employment or for retention as a consultant or service provider;

 

(b)

hire or participate (with another company or third party) in the process of hiring (other than for the Company) any person who is then an employee of the Company, or provide names or other information about Company employees to any person or business (other than the Company) under circumstances that could lead to the use of that information for purposes of recruiting or hiring;

 

(c)

interfere with the relationship of the Company with any of its employees, agents, or representatives;

 

(d)

solicit or induce, or in any manner attempt to solicit or induce, any client, customer, or prospect of the Company (1) to cease being, or not to become, a customer of the Company or (2) to divert any business of such customer or prospect from the Company; or

 

(e)

otherwise interfere with, disrupt, or attempt to interfere with or disrupt, the relationship, contractual or otherwise, between the Company and any of its customers, clients, prospects, suppliers, consultants, or employees.

 

5.4.     Proprietary and Confidential Information.

 

The Participant will at all times preserve the confidentiality of all proprietary information and trade secrets of the Company, except to the extent that disclosure of such information is legally required. “Proprietary information” means information that has not been disclosed to the public and that is treated as confidential within the business of the Company, such as strategic or tactical business plans; undisclosed financial data; ideas, processes, methods, techniques, systems, patented or copyrighted information, models, devices, programs, computer software, or related information; documents relating to regulatory matters and correspondence with governmental entities; undisclosed information concerning any past, pending, or threatened legal dispute; pricing and cost data; reports and analyses of business prospects; business transactions that are contemplated or planned; research data; personnel information and data; identities of users and purchasers of the Company’s products or services; and other confidential matters pertaining to or known by the Company, including confidential information of a third party that Participant knows or should know the Company is bound to protect.

 

5.5.     Nondisparagement

 

The Participant will at no time make any derogatory, misleading or otherwise negative statement about the actions, performance or behavior of the Company or its officers, directors, employees and agents.

 

5.6.     Cooperation

 

The Participant will cooperate with the Company in order to ensure an orderly transfer of his or her duties and responsibilities. In addition, the Participant will at all times, both before and after termination of employment, (a) provide reasonable cooperation in connection with any action or proceeding (or any appeal from any action or proceeding) that relates to events occurring during the Participant’s employment hereunder, provided that such cooperation does not materially interfere with the Manager’s then current employment, and (b) cooperate with the Company in executing and delivering documents requested by the Company, and taking any other actions, that are necessary or requested by the Company to assist the Company in patenting, copyrighting, or registering any programs, ideas, inventions, discoveries, patented or copyrighted material, or trademarks, and to vest title thereto in the Company.

 

5.7.     Claw-back

 

If the Participant breaches any of the covenants set forth in this Section 5, or if it is finally determined that the Participant was responsible for a material financial misstatement or misrepresentation relative to the Company’s financial statements, reporting, or disclosure obligations, the Company will have no further obligation to pay to the Participant any benefit under the Plan, and the Participant will be obligated to repay to the Company all benefits previously paid to, or on behalf of, the Participant under the Plan. The Participant also agrees that he/she will pay all of the Company’s costs and all attorney fees incurred for having to enforce the provisions of this Section 5.

 

Section 6.     Release

 

6.1.     Generally.

 

A Participant will not be entitled to any benefits under this Plan unless, at the time of the Participant’s Qualifying Termination, he or she executes and does not subsequently revoke a release satisfactory to the Company releasing the Company, its affiliates, subsidiaries, shareholders, directors, officers, employees, representatives, and agents and their successors and assigns from any and all employment-related claims the Participant or his or her successors and beneficiaries might then have against them (excluding any claims the Participant might then have under this Plan or any employee benefit plan sponsored by the Company). The release will be substantially in the form that is attached as Exhibit A to the Plan and have a revocation period of no more than 7 days unless otherwise required by law.

 

6.2.     Time Limit for Providing Release.

 

A Participant will execute and submit the release to the Company within 30 days after the date of the Participant’s Qualifying Termination. However, if the Participant has a Qualifying Termination in connection with an exit incentive or other employment termination program offered to a group or class of employees, the Participant will have 50 days after the Participant terminates employment to execute and submit the release to the Company.

 

Section 7.     Nature of Participant’s Interest in the Plan

 

7.1.     No Right to Assets.

 

Participation in the Plan does not create, in favor of any Participant, any right or lien in or against any asset of the Company. Nothing contained in the Plan, and no action taken under its provisions, will create or be construed to create a trust of any kind, or a fiduciary relationship, between the Company and a Participant or any other person. The Company’s promise to pay benefits under the Plan will at all times remain unfunded as to each Participant, whose rights under the Plan are limited to those of a general and unsecured creditor of the Company.

 

7.2.     No Right to Transfer Interest.

 

Rights to benefits payable under the Plan are generally not subject in any manner to alienation, sale, transfer, assignment, pledge, or encumbrance. However, the Administrative Committee may, in its discretion, recognize the right of an alternate payee named in a domestic relations order to receive all or part of a Participant’s benefits under the Plan, but only if such procedure is compliant with applicable law and does not result in any compliance issue related to this Plan.

 

7.3.     No Employment Rights.

 

No provisions of the Plan and no action taken by the Company or the Administrative Committee will give any person any right to be retained in the employ of the Company, and the Company specifically reserves the right and power to dismiss or discharge any Participant for any reason or no reason and at any time.

 

7.4.     Withholding and Tax Liabilities.

 

The amount of any withholdings required to be made by any government or government agency will be deducted from benefits paid under the Plan to the extent deemed necessary by the Administrative Committee. In addition, the Participant will bear the cost of any taxes not withheld on benefits provided under the Plan, regardless of whether withholding is required.

 

 

 

Section 8.     Administration, Interpretation, and Modification of Plan

 

8.1.     Plan Administrator.

 

The Administrative Committee will administer the Plan.

 

8.2.     Powers of the Administrator.

 

The Administrative Committee powers include, but are not limited to, the power to adopt rules consistent with the Plan; the power to decide all questions relating to the interpretation of the terms and provisions of the Plan; and the power to resolve all other questions arising under the Plan (including, without limitation, the power to remedy possible ambiguities, inconsistencies, or omissions by a general rule or particular decision). The Administrative Committee has full discretionary authority to exercise each of the foregoing powers.

 

8.3.     Finality of Committee Determinations.

 

Determinations by the Administrative Committee and any interpretation, rule, or decision adopted by the Administrative Committee under the Plan or in carrying out or administering the Plan will be final and binding for all purposes and upon all interested persons, their heirs, and their personal representatives, and will be given the most deference permitted by law including case law.

 

8.4.     Incapacity.

 

If the Administrative Committee determines that any Participant entitled to benefits under the Plan is unable to care for his or her affairs because of illness or accident, any payment due (unless a duly qualified guardian or other legal representative has been appointed) may be paid for the benefit of such Participant to his or her spouse, parent, brother, sister, or other party deemed by the Administrative Committee to have incurred expenses for such Participant. If a Participant dies after having a Qualifying Termination, any payment of the Participant's Severance Benefit remaining due to the Participant will be paid to the Participant's estate at the time such payment would otherwise be paid to the Participant but no later than 90 days after the Participant's death.

 

8.5.     Amendment, Suspension, and Termination.

 

The CEO (or such committee or person as the CEO designates) has the right by written resolution to amend, suspend, or terminate the Plan at any time. However, no amendment, suspension, or termination that reduces the benefits to which a Participant is entitled under the Plan will apply to an employee who already is a Participant in the Plan without his or her express written consent if such amendment, suspension, or termination occurs less than one year before, or within the two-year period following, a Change in Control. Notwithstanding the foregoing, the CEO (or such committee or person as the CEO designates) may amend the Plan at any time to comply with Section 409A.

 

8.6.     Power to Delegate Authority.

 

The CEO and the Administrative Committee may, in their sole discretion, delegate to any person or persons all or part of its authority and responsibility under the Plan, including, without limitation, the authority to amend the Plan.

 

8.7.     Headings.

 

The headings used in this document are for convenience of reference only and may not be given any weight in interpreting any provision of the Plan.

 

8.8.     Severability.

 

If an arbitrator or court of competent jurisdiction determines that any term, provision, or portion of this Plan is void, illegal, or unenforceable, the other terms, provisions, and portions of this Plan will remain in full force and effect, and the terms, provisions, and portions that are determined to be void, illegal, or unenforceable will either be limited so that they will remain in effect to the extent permissible by law, or such arbitrator or court will substitute, to the extent enforceable, provisions similar thereto or other provisions, so as to provide to the Company, to the fullest extent permitted by applicable law, the benefits intended by this Plan.

 

8.9.     Governing Law.

 

The Plan will be construed, administered, and regulated in accordance with the laws of Michigan (excluding any conflicts or choice of law rule or principle), except to the extent that those laws are preempted by federal law.

 

8.10.     Complete Statement of Plan.

 

This Plan contains a complete statement of its terms. The Plan may be amended, suspended, or terminated only in writing and then only as provided in Section 8.5 or 8.6. A Participant’s right to any benefit of a type provided under the Plan will be determined solely in accordance with the terms of the Plan. No other evidence, whether written or oral, will be taken into account in interpreting the provisions of the Plan. Notwithstanding the preceding provisions of this Section 8.10, for purposes of determining benefits with respect to a Participant, this Plan will be deemed to include (a) the provisions of any Participation Agreement executed in accordance with Section 3.2, and (b) the provisions of any other written agreement between the Company and the Participant to the extent such other agreement explicitly provides for the incorporation of some or all of its terms into this Plan.

 

Section 9.     Claims and Appeals

 

9.1.     Application of Claims and Appeals Procedures.

 

(a)

The provisions of this Section 9 will apply to any claim for a benefit under the Plan, regardless of the basis asserted for the claim and regardless of when the act or omission upon which the claim is based occurred.

 

(b)

No claim for non-payment or underpayment of benefits allegedly owed under the Plan may be filed in court until the claimant has exhausted the claims review procedures established in accordance with this Section 9.

 

9.2.     Initial Claims.

 

(a)

Any claim for benefits will be in writing (which may be electronic if permitted by the Administrative Committee) and will be delivered to a claims administrator designated in writing by the Administrative Committee

 

(b)

Each claim for benefits will be decided by the claims administrator or the Administrative Committee (as determined by the Administrative Committee) within a reasonable period of time, but not later than 90 days after such claim is received by the claims administrator (without regard to whether the claim submission includes sufficient information to make a determination), unless the claims administrator or the Administrative Committee determines that special circumstances require an extension of time for processing the claim. If the claims administrator or the Administrative Committee determines that an extension of time for processing is required, the claims administrator or the Administrative Committee will notify the claimant in writing before the end of the initial 90-day period of the circumstances requiring an extension of time and the date by which a decision is expected.

 

(c)

If any claim is denied in whole or in part, the claims administrator or the Administrative Committee will provide to the claimant a written decision, issued by the end of the period prescribed by subsection (b), above, that includes the following information:

 

(1)

The specific reason or reasons for denial of the claim;

 

(2)

References to the specific Plan provisions upon which such denial is based;

 

(3)

A description of any additional material or information necessary to perfect the claim, and an explanation of why such material or information is necessary;

 

(4)

An explanation of the appeal procedures Plan’s and the applicable time limits; and

 

(5)

A statement of the claimant’s right to bring a civil action under section 502(a) of ERISA, if his or her claim is denied upon review.

 

9.3.     Appeals.

 

(a)

If a claim for benefits is denied in whole or in part, the claimant may appeal the denial to the Administrative Committee. Such appeal will be in writing (which may be electronic, if permitted by the Administrative Committee), may include any written comments, documents, records, or other information relating to the claim for benefits, and will be delivered to the Administrative Committee within 60 days after the claimant receives written notice that his or her claim has been denied.

 

(b)

The Administrative Committee will decide each appeal within a reasonable period of time, but not later than 60 days after such claim is received by the Administrative Committee, unless the Administrative Committee determines that special circumstances require an extension of time for processing the appeal.

 

(1)

If the Administrative Committee determines that an extension of time for processing is required, the Administrative Committee will notify the claimant in writing before the end of the initial 60-day period of the circumstances requiring an extension of time and the date by which the claims administrator expects to render a decision.

 

(2)

If an extension of time pursuant to paragraph (1), above, is due to a claimant’s failure to submit information necessary to decide the appeal, the period for deciding the appeal will be tolled from the date on which the notification of extension is sent to the claimant until the date on which the claimant responds to the request for additional information.

 

(c)

In connection with any appeal, a claimant will be provided, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to his or her claim for benefits. A document, record, or other information will be considered relevant to a claim for benefits if such document, record, or other information:

 

(1)

Was relied upon in making the benefit determination;

 

(2)

Was submitted, considered, or generated in the course of making the benefit determination, without regard to whether such document, record, or other information was relied upon in making the benefit determination; or

 

(3)

Demonstrates compliance with processes and safeguards designed to ensure and to verify that the benefit determination was made in accordance with the terms of the Plan and that such terms of the Plan have been applied consistently with respect to similarly situated claimants.

 

(d)

The Administrative Committee review on appeal will take into account all comments, documents, records and other information submitted by the claimant, without regard to whether such information was considered in the initial benefit determination.

 

(e)

If any appeal is denied in whole or in part, the Administrative Committee will provide to the claimant a written decision, issued by the end of the period prescribed by subsection (b), above, that includes the following information:

 

(1)

The specific reason or reasons for the decision;

 

(2)

References to the specific Plan provisions upon which the decision is based;

 

(3)

An explanation of the claimant’s right to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to his or her claim for benefits (as determined pursuant to subsection (c), above); and

 

(4)

A statement of the claimant’s right to bring a civil action under section 502(a) of ERISA.

 

9.4.     Other Rules and Rights Regarding Claims and Appeals.

 

(a)

A claimant may authorize a representative to pursue any claim or appeal on his or her behalf. The Administrative Committee may establish reasonable procedures for verifying that any representative has in fact been authorized to act on his or her behalf.

 

(b)

Notwithstanding the deadlines prescribed by this 9.4, the Administrative Committee and any claimant may agree to a longer period for deciding a claim or appeal or for filing an appeal, provided that the Administrative Committee will not extend any deadline for filing an appeal unless imposition of the deadline prescribed by Section 9.3(a) would be unreasonable under the applicable circumstances.

 

9.5.     Interpretation.

 

The provisions of this Section 9 are intended to comply with section 503 of ERISA and will be administered and interpreted in a manner consistent with such intent.

 

 

 

EXHIBIT A

DRAFT RELEASE

 

In consideration of the benefits I am entitled to receive under the Spartan Motors, Inc. Management Severance Plan (the “Plan”), I, [employee name], on behalf of myself, and on behalf of my heirs, successors and assigns, hereby agree to release Spartan Motors Spartan Motors, Inc. (the “Company”), all of its past, present and future subsidiaries, affiliates, directors, officers, employees; and all of its and their respective heirs, successors, and assigns (the “Released Parties”) from any and all claims, demands, actions, and liabilities that I might otherwise have asserted arising out of my employment with the Company, including the termination of that employment.

 

I also promise not to sue the Company or any of the Released Parties based, in whole or in part, on any claims relating to my employment with the Company or the termination of that employment. However, I am not releasing my rights, if any, under the Plan or any qualified employee retirement plan, nor am I releasing any rights or claims that may arise after the date on which I sign this Release. Those rights, and only those rights, survive unaffected by this Release.

 

I understand that as a consequence of my signing this Release I am giving up, with respect to my employment and the termination of that employment, any and all rights I might otherwise have under (1) the Age Discrimination in Employment Act of 1967, as amended; (2) and all other federal, state or municipal laws prohibiting discrimination in employment on the basis of sex, race, national origin, religion, age, handicap or other invidious factor; and (3) any and all theories of contract or tort law, whether based on common law or otherwise.

 

I acknowledge and agree that:

 

1.     .The benefits I am receiving under the Plan constitute consideration over and above any benefits that I might be entitled to receive without executing this Release.

 

2.	.The Company advised me in writing to consult with an attorney prior to executing a copy of the Plan document and the Release.

 

3.	.I was given a period of at least 21 days within which to consider the Plan and the Release.

 

4.	.The Company has advised me of my statutory right to revoke my acceptance of the terms of the Plan and this Release at any time within seven (7) days of my signing of this Release.

 

5.	.I remain subject to and will continue to comply with the restrictive covenants set forth in Section 5 of the Plan.

 

6.	.Should I violate Section 5 or bring suit against the Company for any reason, I agree to tender back the value of the funds and benefits received under this plan. I also agree that I will tender back those funds before I file any lawsuit or claim against the Company.

 

7.

.I warrant and represent that my decision to accept the Plan (including this Release) was (a) entirely voluntary on my part; (b) not made in reliance on any inducement, promise or representation, whether express or implied, other than the inducements, representations and promises expressly set forth in the Plan or in the Release; and (c) did not result from any threats or other coercive activities to induce acceptance of the Plan or Release.

 

In the event I decide to exercise my right to revoke within seven (7) days of my acceptance of this Release, I warrant and represent that I will do the following: (1) notify the Company in writing of my intent to revoke my agreement, and (2) simultaneously return in full the consideration received from the Company under the Plan. I acknowledge that, if I revoke this Release during the revocation period, I will not be entitled to the benefits under the Plan.

 

I further warrant and represent that I fully understand and appreciate the consequence of my signing this Release.

 

IN WITNESS WHEREOF, I hereby acknowledge receipt of consideration and execute the foregoing agreement at ___, this ____ day of ____________, 20__.

 

 

 

_______________________________

[name of employee]

 

 

 

Witnessed by _______________ on this _____ day of ____________, 20_.

 

 

 

_______________________________

WITNESS

 

 

 

 

 

 

 

 

 

EXHIBIT B

 

LIST OF PARTICIPANTS

 

The following Eligible Managers have been name as Participants in this Plan and have executed a Participation Agreement:

 

Name	Participation Date

 

 

 

 

 

EXHIBIT C

 

FORM OF PARTICIPATION AGREEMENT

 

 

The undersigned employee of Spartan Motors, Inc. has been designated as a Participant in the Spartan Motors, Inc. Management Severance Plan (the “Plan”), as a member of Group ___, as of ___________________, 201__. Execution of this Participation Agreement (by the Participant and a representative of the Plan) is necessary to effectuate the Participant’s participation in the Plan, and any conflict between this Participation Agreement and the Plan shall be governed by the Plan. This Participation Agreement shall also serve as the Participant’s summary plan description of the Plan. The Participant may request a copy of the Plan document.

 

The following summarizes the severance benefits, and the conditions under which they will be paid to the Participant:

 

[INSERT A SUMMARY OF THE BENEFITS HERE FOR EACH ONE]

 

In the event that the Participant desires to file a claim for benefits (or appeal such a claim), the claims procedures described on the following page must be followed.

 

 

Acknowledged and Agreed to by:

 

_________________________________               Date: ___________

Print Participant Name:

 

 

On behalf of the Plan:

 

     By: ______________________________               Date: ___________

Print Name: