Company Overview

Established in 1974 as a truck body manufacturer, Supreme Industries, Inc., through its wholly-owned subsidiary, Supreme Indiana Operations, Inc., is one of the nation's leading manufacturers of specialized vehicles. The Company engages principally in the production and sale of customized truck bodies, buses, and other specialty vehicles. Building on its expertise in providing both cargo and passenger transportation solutions, the Company's specialty vehicle offerings include products such as customized armored vehicles and homeland response vehicles.

The Company utilizes a nationwide direct sales and distribution network consisting of approximately 40 bus distributors, a limited number of truck equipment distributors, and approximately 1,000 commercial truck dealers. The Company's manufacturing and service facilities are located in seven states across the continental United States allowing us to meet the needs of customers across all of North America. Additionally, the Company's favorable customer relations, strong brand-name recognition, extensive product offerings, bailment chassis arrangements, and product innovation competitively positions Supreme with a strategic footprint in the markets it serves.

The Company and its product offerings are affected by various factors which include, but are not limited to, economic conditions, interest rate fluctuations, volatility in the supply chain of vehicle chassis, and the availability of credit and financing to the Company, our vendors, dealers, or end users. The Company's business is also affected by the availability and costs of certain raw materials that serve as significant components of its product offerings. The Company's risk factors are disclosed in Item 1A "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.

Management Changes

On March 30, 2012, Kim Korth resigned as a director and the President and Chief Executive Officer of the Company to return to the vehicle and transportation consulting firm, IRN, Inc., which she owns and is the president. On May 3, 2012, the Company and its wholly-owned subsidiary Supreme Indiana Operations, Inc., and Ms. Korth entered into a Separation Agreement and Release (the "Separation Agreement") in connection with Ms. Korth's resignation. Pursuant to the Separation Agreement, assuming Ms. Korth complies with the terms of the Separation Agreement and the portions of her employment agreement dated September 23, 2011 that will remain in effect as set forth in the Separation Agreement, she will be paid (i) nine months' salary ($285,000) over a nine-month period and (ii) an annual bonus for 2011 of $75,000. These amounts have been accrued for and are included in other accrued liabilities in the accompanying balance sheet as of March 31, 2012. In addition, she remains eligible for (i) a pro rata portion of her annual bonus for 2012 based on the annual bonus terms set forth in her employment agreement dated September 23, 2011 and (ii) the benefits upon a "change in control" pursuant to the Company's ownership transaction incentive plan until March 30, 2013, and the Company will reimburse her legal expenses up to $23,000. Ms. Korth and the Company have provided mutual releases to each other and Ms. Korth has agreed to certain confidentiality obligations.

On March 30, 2012, Matthew W. Long, the Company's Chief Financial Officer, Treasurer and Assistant Secretary, assumed the position of interim Chief Executive Officer. The Company is conducting a formal search for a permanent Chief Executive Officer.

Results of Operations

The following discussion should be read in conjunction with the consolidated financial statements and related notes thereto elsewhere in this document and pertains to continuing operations unless otherwise noted.

Overview

Supreme experienced losses for each of the three years ending in December of 2010 and the first two quarters of 2011. That is why it is significant that the first quarter of 2012 represented our third consecutive profitable quarter following these earlier loss periods which occured during the dramatic downturn in the truck body industry. Net income from continuing operations was $2.6 million, or $0.17 per diluted share, compared with a loss from continuing operations of $1.0 million, or ($0.07) per share, in the prior-year first quarter. Higher truck and bus division sales in the first quarter of 2012 resulted from an improved retail truck market and better bus product mix versus the comparable quarter a year ago. The elevated sales coupled with continued operational improvements in the first quarter of 2012 resulted in a quarterly gross margin of 15%, our highest since 2002. We experienced higher levels of general and administrative expenses due to unusual expenses and we expect these costs to decrease during the second half of 2012.

During the fourth quarter of 2011, we began a major renovation project at our main truck production facility in Goshen, Indiana. The project includes establishing a state-of-the-art production facility which will be used as the model for renovating each of our manufacturing facilities across the country. During the first quarter of 2012, we invested $1.8 million of an anticipated investment of approximately $7.2 million over the next three years and we received $1.5 million of conditional tax credits, as well as property tax abatements, from state and local authorities in support of these investments. These renovation projects are intended to substantially increase our efficiencies, improve the employee work experience, and reduce operating costs.

Our sales backlog remained solid at the end of the first quarter of 2012 and totaled $107 million at quarter end compared with $133 million a year ago. While comparatively lower than the prior-year period, we believe our improved pricing discipline has resulted in a more profitable backlog.

As we move throughout 2012, and continue to position the Company for profitable growth, our key areas of focus include:

† Elevating the buying experience for our customers by listening to their needs and exceeding their expectations throughout the buying cycle;

†          Improvement of materials sourcing nationwide;



†          Making strategic investments to ensure that our employees view the
Company as a great place to work and are proud to be members of the Supreme
team;

† Ongoing product development initiatives, particularly in our armored division;

† Continued refinement and monitoring of recently implemented pricing disciplines;

† Further product line rationalization efforts to improve our gross margins and remain focused on our core truck, bus, and armored products; and

† Investment in and implementation of perpetual inventory systems and processes at all locations.

We continue to aggressively review all aspects of our business to identify additional profit improvement opportunities.

Net Sales

Net sales for the three months ended March 31, 2012 increased $4.1 million, or 6.0%, to $72.5 million as compared with $68.4 million for the three months ended April 2, 2011. The following table presents the components of net sales and the changes from period to period:

                                   Three Months Ended
                         March 31,    April 2,
($000's omitted)           2012         2011          Change
Specialized vehicles:
Trucks                  $    49,180   $  45,961   $ 3,219     7.0 %
Buses                        18,092      16,093     1,999    12.4
Armored vehicles              4,402       5,763    (1,361 ) (23.6 )
                             71,674      67,817     3,857     5.7
Fiberglass products             846         583       263    45.2
                        $    72,520   $  68,400   $ 4,120     6.0 %

Truck division sales increased by $3.2 million, or 7.0%, for the three months ended March 31, 2012, primarily due to an improved retail market and the initial shipments of large national fleet orders. Although market demand remains below 2007 (pre-recession) levels, we expect retail truck market conditions to demonstrate continued improvement in the near-term.

Bus division sales increased by $2.0 million, or 12.4%, for the three months ended March 31, 2012, primarily due to increased unit shipments and higher average selling prices due to a favorable product mix. The bus market remains very price competitive, due to a highly-competitive state and municipal government contract bid process.

Armored division sales decreased by $1.4 million, or 23.6%, for the three months ended March 31, 2012, primarily due to a reduction in orders from key customers and a slowdown of orders received from our contract with the U.S. Department of State to produce armored SUVs for embassies abroad. In an attempt to diversify our customer base, we have developed additional niche applications for existing products and expect to benefit from these efforts as we progress through 2012.

Cost of sales and gross profit

Gross profit increased by $4.4 million, or 67.0%, to $10.9 million for the three months ended March 31, 2012, as compared with $6.5 million for the three months ended April 2, 2011. The following table presents the components of cost of sales as a percentage of net sales and the changes from period to period:

Three Months Ended

                March 31,   April 2,   Percent
                  2012        2011     Change
Material             56.4 %     60.2 %    (3.8 )%
Direct Labor         12.3       13.9      (1.6 )
Overhead             14.0       14.3      (0.3 )
Delivery              2.3        2.1       0.2
Cost of sales        85.0       90.5      (5.5 )
Gross profit         15.0 %      9.5 %     5.5 %

Material - Material cost as a percentage of net sales decreased by 3.8% for the three months ended March 31, 2012, as compared with the corresponding period in 2011. The decrease in the material percentage was due in part to favorable product mix and improved pricing disciplines. The potential for future raw material cost increases remains a concern for certain commodities (including but not limited to aluminum, steel, and wood). The Company closely monitors major commodities to identify raw material cost escalations and attempts to remain material-neutral by increasing the price of its products as markets will allow and having material adjustment clauses in most key customer contracts.

Direct Labor - Direct labor as a percentage of net sales decreased by 1.6% for the three months ended March 31, 2012, as compared with the corresponding period in 2011. The decrease in the direct labor percentage was due in part to efficiencies gained by producing increased quantities of similar fleet units. Fleet units typically are less customized than special-purpose retail trucks and require fewer direct labor hours to produce. Additionally, efficiencies were achieved at certain locations resulting from the use of real time metrics on labor utilization and product redesign initiatives for more efficient production.

Overhead - Manufacturing overhead as a percentage of net sales decreased by 0.3% for the three months ended March 31, 2012, as compared with the corresponding period in 2011. The overall overhead percentage declined primarily due to the fixed nature of certain overhead expenses that do not fluctuate with sales volume changes.

Delivery - Delivery as a percentage of net sales increased by 0.2% for the three months ended March 31, 2012, as compared with the corresponding period in 2011. The Company continues to identify and utilize more cost-effective delivery methods to counteract the adverse impact of high fuel costs.

Selling, general and administrative expenses

Selling, general and administrative ("G&A") expenses increased by $1.5 million, or 22.2%, to $8.5 million for the three months ended March 31, 2012, as compared with $7.0 million for the three months ended April 2, 2011. The following table presents selling and G&A expenses as a percentage of net sales and the changes from period to period:

                                  Three Months Ended
                     March 31,         April 2,
($000's omitted)        2012             2011            Change
Selling expenses   $ 2,565    3.5 % $ 2,438    3.6 % $   127   (0.1 )%
G&A expenses         5,983    8.3     4,560    6.6     1,423    1.7
Total              $ 8,548   11.8 % $ 6,998   10.2 % $ 1,550    1.6 %

Selling expenses - Selling expenses increased $0.1 million for the first quarter of 2012 compared to the first quarter of 2011. As a percentage of net sales, selling expenses remained relatively flat.

G&A expenses - G&A expenses increased $1.4 million for the first quarter of 2012 compared to the first quarter of 2011. As a percentage of net sales G&A expenses increased 1.7% for the quarter ended March 31, 2012, as compared with the corresponding period in 2011. The increase was the result of several factors including severance costs and payroll-related costs associated with our improved profitability. Additionally, as a result of changes in senior management, payroll and related benefits increased in the 2012 period compared to the 2011 period.

Other income

Other income was $0.5 million for the three months ended March 31, 2012, compared with $0.1 million for the three months ended April 2, 2011. Other income consisted of rental income, gain on the sale of assets, and other miscellaneous income received by the Company. During the first quarter of 2012, the Company realized a gain of approximately $0.3 million on the sale of real estate.

Legal settlement and related costs

The Company settled a lawsuit during the second quarter of 2011. The legal settlement and related costs were $0.3 million for the three months ended April 2, 2011. No additional legal costs related to this lawsuit were incurred after settlement.

Interest expense

Interest expense was $0.3 million for the three months ended March 31, 2012, and April 2, 2011. The effective interest rate on bank borrowings was 3.2% at quarter end, and we were in compliance with all provisions of our Credit Agreement.

Income taxes

The Company did not record income tax expense for the quarter ended March 31, 2012, due to net operating loss carryforwards totaling $6.5 million for federal tax purposes and approximately $22 million for state tax purposes. Additionally, the Company had research and experiment credits totaling $0.3 million for federal tax purposes and $0.5 million for state tax purposes. Given the accumulated net operating tax losses, it is currently more likely than not that these deferred tax assets will not be realized. Accordingly, after consideration of all positive and negative factors the Company provided a valuation allowance for the deferred tax assets net of the deferred tax liabilities expected. The valuation allowance does not impact the Company's ability to utilize its net operating loss carryforwards to offset taxable earnings in the future.

Net income (loss) from continuing operations

Net income from continuing operations increased by $3.6 million to $2.6 million (3.5% of net sales) for the three months ended March 31, 2012, from a net loss of $1.0 million (1.5% of net sales) for the three months ended April 2, 2011.

Discontinued operations

Discontinued operations include the operating results as well as impairment charges for related buildings and equipment. The Company decided to discontinue its Oregon operations in December of 2010. Accordingly, the Company has classified the prior period results for Oregon as discontinued operations. The operations were ceased in the first quarter of 2011 due to the Company's decision to exit this unprofitable geographic region. The after-tax loss from the discontinued operations was $0.4 million for the three months ended April 2, 2011.

Basic and diluted income (loss) per share

The following table presents basic and diluted income (loss) per share and the changes from period to period:

                                                         Three Months Ended
                                                  March 31,     April 2,
                                                    2012          2011      Change
Basic and diluted net income (loss) per share:
Income (loss) from continuing operations         $      0.17   $    (0.07 ) $  0.24
Loss from discontinued operations                          -        (0.03 )    0.03
Net income (loss)                                $      0.17   $    (0.10 ) $  0.27

Liquidity and Capital Resources

Cash Flows

The Company's primary sources of liquidity have been cash flows from operating activities and borrowings under a credit facility entered into by the Company.
Principal uses of cash have been to support working capital needs, meet debt service requirements, and fund capital expenditure needs.

Operating activities

Cash flows from operations represent the net income earned, or net loss sustained, in the reported periods adjusted for non-cash charges coupled with changes in operating assets and liabilities. Cash used in operating activities totaled $2.6 million for the three months ended March 31, 2012, as compared with $4.3 million for the three months ended April 2, 2011. Cash from operating activities was unfavorably impacted during the first quarter of 2012 by a $7.7 million increase in inventories and a $2.1 million increase in trade accounts receivable. This was partially offset by a $3.0 million increase in trade accounts payable. The increases in working capital components reflect elevated levels of business activity resulting from the large fleet orders generally shipped during the first and second quarters.

Investing activities

Cash used in investing activities was $1.8 million for the three months ended March 31, 2012 as compared with minimal cash used in investing activities for the three months ended April 2, 2011. During the first three months of 2012, the Company's capital expenditures totaled $2.6 million consisting primarily of the previously mentioned capital investments in our Indiana facilities. Additionally, we received $0.7 million from the sale of property, plant, and equipment, including $0.5 million from the sale of our Florida sales/service facility.

Financing activities

Financing activities provided $4.4 million of cash for the three months ended March 31, 2012 as compared with cash provided of $3.4 million for the three months ended April 2, 2011. The Company borrowed against its revolving line of credit in the amount of $4.4 million during the three months ended March 31, 2012. The additional borrowings were used to fund the elevated working capital needs typical for the first half of our year to support seasonal fleet orders.

Capital Resources

Revolving Line of Credit

On September 14, 2011, the Company entered into a Credit Agreement (the "Credit Agreement") with Wells Fargo Capital Finance, LLC (the "Lender"). As of March 31, 2012, the outstanding balance under the Credit Agreement was approximately $16.0 million, and the Company had unused credit capacity of approximately $18.5 million. Interest on outstanding borrowings under the Credit Agreement was based on the Lender's prime rate or LIBOR depending on the pricing option selected and the Company's leverage ratio, as defined in the Credit Agreement, resulting in an effective rate of 3.23% at March 31, 2012.

Other Long Term Debt

During 2011, the Company entered into a capital lease under a sale/leaseback transaction involving its California facility. The outstanding principal amount of the obligation as of March 31, 2012, was $3.5 million with an interest rate of 5.5%. Of this amount $0.1 million and $3.4 million were included in current maturities of long term debt and long term debt, respectively, in the accompanying balance sheet at March 31, 2012.

Summary of Liquidity and Capital Resources

The Company's primary capital needs are for working capital demands, to meet its debt service obligations, and to finance capital expenditure requirements. The Company has a substantial asset collateral base and a strong equity position which management believes adequately supports the outstanding revolving line of credit. Additionally, the Company is completing plans to sell certain idled assets which, if completed, will provide additional liquidity to reduce borrowings under the Company's revolving line of credit.

The Company's cash management system and revolving line of credit are designed to maintain zero cash balances and, accordingly, checks outstanding in excess of bank balances are classified as additional borrowings under the revolving line of credit.

Critical Accounting Policies and Estimates

Management's discussion and analysis of its financial position and results of operations are based upon the Company's consolidated condensed financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company's significant accounting policies are discussed in Note 1 of the Notes to Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2011. In management's opinion, the Company's critical accounting policies include revenue recognition, allowance for doubtful accounts, excess and obsolete inventories, inventory relief, fair value of assets held for sale, accrued insurance, and accrued warranty.

Revenue Recognition - The Company generally recognizes revenue when products are shipped to the customer. Revenue on certain customer requested bill and hold transactions is recognized after the customer is notified that the products have been completed according to customer specifications, have passed all of the Company's quality control inspections, and are ready for delivery based on established delivery terms.

Allowance for Doubtful Accounts - The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial conditions of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required which would adversely affect our future operating results.

Excess and Obsolete Inventories - The Company must make estimates regarding the future use of raw materials, chassis, and finished products, and provide for obsolete or slow-moving inventories. If actual product life cycles, product demand, and/or market conditions are less favorable than those projected by management, additional inventory write-downs may be required which would adversely affect future operating results.

Inventory Relief - For monthly and quarterly financial reporting, cost of sales is recorded and inventories are relieved by the use of standard bills of material adjusted for scrap and other estimated factors affecting inventory relief. Because of our large and diverse product line and the customized nature of each order, it is difficult to place full reliance on the bills of material for accurate relief of inventories. Although the Company continues to refine the process of creating accurate bills of materials, manual adjustments (which are based on estimates) are necessary to assure correct relief of inventories for products sold. The calculations to estimate costs not captured in the bill of materials take into account the customized nature of products, historical inventory relief percentages, scrap variances, and other factors which could impact inventory relief.

The accuracy of the inventory relief is not fully known until physical inventories are conducted at each of the Company's locations. We conduct semi-annual physical inventories at a majority of our locations and schedule them in a manner that provides coverage in each of our calendar quarters. We have invested significant resources in our continuing effort to improve the physical inventory process and accuracy of our inventory accounting system.

Fair Value of Assets Held for Sale - Assets held for sale are carried at fair value less costs to dispose. The Company evaluates the carrying value of property held for sale whenever events or changes in circumstances indicate that a property's carrying amount may not be recoverable. Such circumstances could include, but are not limited to: (1) a significant decrease in the market value of an asset, or (2) a significant adverse change in the extent or manner in which an asset is used. The Company measures the carrying amount of the asset against the estimated undiscounted future cash flows associated with it. Should the sum of the expected future net cash flows be less than the carrying value of the asset being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying value of the asset exceeds its fair value. The Company estimates the fair value of its properties held for sale based on appraisals and other current market data.

Accrued Insurance - The Company has a self-insured retention against product liability claims with insurance coverage over and above the retention. The Company is also self-insured for a portion of its employee medical benefits and workers' compensation. Product liability claims are routinely reviewed by the Company's insurance carrier, and management routinely reviews other self-insurance risks for purposes of establishing ultimate loss estimates. In addition, management must determine estimated liability for claims incurred but not reported. Such estimates, and any subsequent changes in estimates, may result in adjustments to our operating results in the future.

Accrued Warranty - The Company provides limited warranties for periods of up to five years from the date of retail sale. Estimated warranty costs are accrued at the time of sale and are based upon historical experience.

Forward-Looking Statements

. . .