FORWARD-LOOKING STATEMENTS

 

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

 

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

 

 

Item 1.

Financial Statements

 

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

(In thousands, except par value) 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

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

(In thousands, except per share data)

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

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

(In thousands)

 

 

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

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

SPARTAN MOTORS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (Unaudited)

(In thousands)

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

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

 

 

 

Item 2.

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

 

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

 

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

 

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

 

Recent Developments

 

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

 

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

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

 

 

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

 

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

 

Executive Overview

 

●

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

●

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

●

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

●

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

●

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

	●	Income from continuing operations of $11.7 million in the first quarter of 2020, compared to $4.8 million in the first quarter of 2019.
	●	Earnings per share from continuing operations of $0.33 in the first quarter of 2020, compared to $0.04 in the first quarter of 2019.

●

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

 

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

 

●

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

 

●

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

 

●

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

 

●

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

 

 

●

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

 

●

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

 

●

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

 

●

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

 

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

 

 

RESULTS OF OPERATIONS

 

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

 

		Three Months Ended March 31,
		2020				2019
Sales			100.0				100.0
Cost of products sold			79.5				88.0
Gross profit		20.5					12.0
Operating expenses:
Research and development			0.9				0.7
Selling, general and administrative			12.1				7.9
Operating income			7.6				3.5
Other income (expense), net			(0.7	)			(0.1	)
Income from continuing operations before income taxes			6.8				3.4
Income tax expense			0.2				0.6
Income from continuing operations			6.6				2.8
Loss from discontinued operations, net of income taxes			(2.2	)			(1.9	)
Non-controlling interest			0.0				0.1
Net income attributable to Spartan Motors, Inc.			4.4				0.8

 

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

 

Sales

 

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

 

Cost of Products Sold

 

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

 

Gross Profit

 

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

 

Operating Expenses

 

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

 

Other Income/(Expense)

 

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

 

Income Tax Expense

 

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

 

Income from Continuing Operations

 

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

 

Loss from Discontinued Operations

 

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

 

Adjusted EBITDA

 

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

 

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

 

Adjusted EBITDA three months ended March 31, 2019		$	8.4
Sales volume			6.5
Sales pricing/mix			8.3
Supplier and other cost decreases			1.0
General and administrative costs and other			(5.8	)
Adjusted EBITDA three months ended March 31, 2020		$	18.4

 

Order Backlog

 

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

 

		March 31, 2020				March 31, 2019
Fleet Vehicles and Services		$	302,236			$	188,528
Specialty Chassis and Vehicles			42,419				29,137
Total consolidated		$	344,655			$	217,665

 

 

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

 

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

 

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

 

Reconciliation of Non-GAAP Financial Measures

 

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

 

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

 

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

 

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

 

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

 

		Three Months Ended
		March 31,
		2020				2019
Income from continuing operations		$	11,742			$	4,835
Net (income) loss attributable to non-controlling interest			(67	)			(140	)
Add (subtract):
Interest expense			731				374
Depreciation and amortization expense			2,517				1,312
Income tax expense			377				1,076
Restructuring and other related charges			992				27
Acquisition related expenses and adjustments			93				45
Non-cash stock based compensation expense			1,991				847
Adjusted EBITDA		$	18,376			$	8,376

 .

 

Our Segments

 

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

 

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

 

Fleet Vehicles and Services

 

		Financial Data
		(Dollars in Thousands)
		Three Months Ended March 31,
		2020								2019
		Amount				Percentage				Amount				Percentage
Sales		$	135,688				100.0	%		$	122,649				100.0	%
Adjusted EBITDA			21,736				16.0	%			6,975				5.7	%

 

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

 

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

 

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

 

Specialty Chassis and Vehicles

 

		Financial Data
		(Dollars in Thousands)
		Three Months Ended March 31,
		2020								2019
		Amount				Percentage				Amount				Percentage
Sales		$	41,260				100.0	%		$	51,685				100.0	%
Adjusted EBITDA			3,721				9.0	%			4,948				9.6	%

 

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

 

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

 

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

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash Flows

 

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

 

Cash Flow from Operating Activities

 

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

 

See the Financial Condition section contained in Item 2 of this Form 10-Q for further information regarding balance sheet line items that drove cash flows for the three-month period ended March 31, 2020.  Also see the Condensed Consolidated Statements of Cash Flows contained in Item 1 of this Form 10-Q for the other various factors that represented the remaining fluctuation of cash from operations between the periods.

 

Cash Flow from Investing Activities

 

We generated $52.6 million of cash from investing activities during the three months ended March 31, 2020, primarily attributable to the sale of the ERV business. This is a $54.5 million increase compared to the $1.9 million used during the three months ended March 31, 2019.

 

Cash Flow from Financing Activities

 

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

 

Contingent Obligations

 

Spartan-Gimaex joint venture

 

In February 2015, the Company and Gimaex Holding, Inc. mutually agreed to begin discussions regarding the dissolution of the Spartan-Gimaex joint venture. In June 2015, the Company and Gimaex Holding, Inc. entered into court proceedings to determine the terms of the dissolution. In February 2017, by agreement of the parties, the court proceeding was dismissed with prejudice and the judge entered an order to this effect as the parties agreed to seek a dissolution plan on their own. In late 2019, the Company initiated additional court proceedings to dissolve and liquidate the joint venture. In April of 2020, as a result of a default judgment, the Company was appointed as liquidating trustee of the Gimaex joint venture, but no dissolution terms have been determined as of the date of this Form 10-Q. Costs associated with the wind-down will be impacted by the final dissolution terms. In accordance with accounting guidance, the costs we have accrued so far represent the low end of the range of the estimated total charges that we believe we may incur related to the wind-down. While we are unable to determine the final cost of the wind-down with certainty at this time, we may incur additional charges, depending on the final terms of the dissolution. Such charges are not expected to be material to our future operating results.

 

Debt

 

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

 

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

 

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

 

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

 

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

 

Equity Securities

 

On April 28, 2016, our Board of Directors authorized the repurchase of up to 1.0 million shares of our common stock in open market transactions. At March 31, 2020 there were 0.8 million shares remaining under this repurchase authorization. If we were to repurchase the remaining 0.8 million shares of stock under the repurchase program, it would cost us approximately $11.4 million based on the closing price of our stock on April 30, 2020. We believe that we have sufficient resources to fund any potential stock buyback in which we may engage.

 

Dividends

 

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

 

Date dividend declared		Record date		Payment date		Dividend per share ($)
Nov. 4, 2019		Nov. 14, 2019		Dec. 16, 2019		$	0.05
May 6, 2019		May 17, 2019		June 17, 2019		$	0.05

 

 

EFFECT OF INFLATION

 

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

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

 

Interest Rate Risk

 

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

 

Commodities Risk

 

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

 

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

 

 

Item 4.

Controls and Procedures.

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of March 31, 2020. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer, concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective due to a material weakness in our internal control over financial reporting that was disclosed in the Annual Report on Form 10-K for the year ended December 31, 2019.

 

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

 

Remediation

 

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

 

Changes in Internal Control over Financial Reporting

 

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

 

 

PART II.  OTHER INFORMATION

 

Item 1A.

Risk Factors

 

We have included in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019, a description of certain risks and uncertainties that could affect our business, future performance or financial condition (the “Risk Factors”). There have been no material changes from the disclosure provided in the Form 10-K for the year ended December 31, 2019 with respect to the Risk Factors except as set forth below. Investors should consider the Risk Factors prior to making an investment decision with respect to our stock.

 

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

 

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

 

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

 

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

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

Issuer Purchases of Equity Securities

 

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

 

Period		Total Number of Shares Purchased				Average Price Paid per Share				Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs				Number of Shares that May Yet Be Purchased Under the Plans or Programs(1)
January 1 to January 31			-			$	-				-				808,994
February 1 to February 29			-				-				-				808,994
March 1 to March 31			-				-				-				808,994
Total			-			$	-				-				808,994

 

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

 

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

 

 

Item 6.

Exhibits.

 

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

 

Exhibit No.		Document
10.1		Employment Offer Letter dated January 21, 2020 from Spartan Motors, Inc. to Jonathan C. Douyard (incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K filed March 16, 2020).*
10.2		Fourth Amendment to Credit Agreement, dated January 31, 2020, by and among the Company and its affiliates, Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K filed March 16, 2020).
10.3		Asset Purchase Agreement dated January 31, 2020, by and among Spartan Motors, Inc., Spartan Motors USA, Inc., Spartan Fire, LLC and REV Group, Inc. (incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K filed March 16, 2020).
31.1		Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. § 1350.
101.INS		XBRL Instance Document
101.SCH		XBRL Schema Document
101.CAL		XBRL Calculation Linkbase Document
101.DEF		XBRL Definition Linkbase Document
101.LAB		XBRL Label Linkbase Document
101.PRE		XBRL Presentation Linkbase Document

 

*Management contract or compensatory plan or arrangement.

 

SIGNATURES

 

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

 

Date:  May 7, 2020	SPARTAN MOTORS, INC.
	By	/s/ Jonathan C. Douyard
		Jonathan C. Douyard Chief Financial Officer

 

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 7, 2020	/s/ Daryl M. Adams
	Daryl M. Adams President and Chief Executive Officer Spartan Motors, Inc.

 

 

EXHIBIT 31.2

 

CERTIFICATION

 

I, Jonathan C. Douyard, 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 7, 2020	/s/ Jonathan C. Douyard
	Jonathan C. Douyard Chief Financial Officer 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, 2020 (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 7, 2020	/s/ Daryl M. Adams
	Daryl M. Adams President and Chief Executive Officer
Dated:  May 7, 2020	/s/ Jonathan C. Douyard
	Jonathan C. Douyard Chief Financial Officer