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SPAR > SEC Filings for SPAR > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for SPARTAN MOTORS INC

Form 10-Q for SPARTAN MOTORS INC


8-Nov-2012

Quarterly Report


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. We began development of our first product that same year and shipped our first fire truck chassis in October 1975.

We are known as a leading niche-market engineer and manufacturer in the heavy-duty, specialty vehicles marketplace. We have five wholly-owned operating subsidiaries: Spartan Motors Chassis, Inc., located at our corporate headquarters in Charlotte, Michigan ("Spartan Chassis"); Crimson Fire, Inc., located in Brandon, South Dakota ("Crimson"); Crimson Fire Aerials, Inc., located in Ephrata, Pennsylvania ("Crimson Aerials"); Utilimaster Corporation, located in Bristol and Wakarusa, Indiana ("Utilimaster"); and, as of April 1, 2011, Classic Fire, LLC ("Classic Fire"), located in Ocala, Florida. Our brand names, Spartan Chassis™, Spartan ERV™, and Utilimaster™ are known for quality, value, service and innovation.

Spartan Chassis is a leader in the designing, engineering and manufacturing of specialty heavy-duty chassis. The chassis consists of a frame assembly, engine, transmission, electrical system, running gear (wheels, tires, axles, suspension and brakes) and, for emergency response chassis and some specialty chassis applications, a cab. Spartan Chassis customers are original equipment manufacturers ("OEMs") who manufacture the body or apparatus of the vehicle which is mounted on our chassis. Crimson specializes in the engineering and manufacturing of emergency response vehicles built on chassis platforms purchased from either Spartan Chassis or outside sources. Crimson Aerials engineers and manufactures aerial ladder components for fire trucks. Classic Fire specializes in manufacturing emergency response vehicles built on chassis from outside sources and provides strategic sourcing of pump modules. Utilimaster is a leading manufacturer of vehicles made to customer specifications in the delivery and service market, including walk-in and hi-cube vans, truck bodies and the new Reach commercial van.

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 specialty vehicle products. We have an innovative team focused on building lasting relationships with our customers. This is accomplished by striving to deliver premium specialty vehicles, vehicle components, and services that inspire customer loyalty. Our diversification across several sectors creates numerous opportunities while minimizing 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.

2011 Acquisition

On April 1, 2011, we completed our acquisition of substantially all of the assets of Classic Fire, as more fully described in Note 3 - Acquisition Activities, of the Notes to Condensed Consolidated Financial Statements appearing in Item 1 of this Form 10-Q. Our acquisition of Classic Fire has allowed us to expand our offerings in the emergency response vehicle market into segments and price points that complement our offerings from Spartan Chassis and Crimson as well as provided strategic sourcing of pump modules and other technology.

Executive Overview

We reported sales of $112.9 million for the third quarter of 2012, a decrease of 6.2% from the $120.3 million in sales we reported in the third quarter of 2011. We reported a net loss of $0.3 million, or $0.01 per share for the three months ended September 30, 2012, compared to net income of $3.2 million, or $0.10 per share for the same period in 2011. Excluding the restructuring charges incurred in the third quarter, we recorded adjusted net income of $0.7 million or $0.02 per share in 2012 compared to net income of $3.2 million or $0.10 per share in 2011.

Our Emergency Response Vehicles and Specialty Vehicles segments posted stronger sales in the third quarter with increases of $4.6 million, or 13.0% and $0.1 million or 0.4%, respectively, compared with the same period in 2011. Third quarter 2012 sales in our Delivery and Service Vehicles segment decreased by $12.2 million or 19.9% compared to the same period in 2011.

During the third quarter of 2012, we incurred restructuring costs of $1.6 million, mainly as a result of a write down of certain buildings at our Wakarusa, Indiana campus that were reclassified as held for sale during the quarter, and expenses related to the planned move of our delivery and service vehicles operation to Bristol, Indiana. When fully implemented, we expect that these restructuring actions will result in future savings of approximately $4 million per year as a result of increased efficiencies in our delivery and service vehicles operations. These cost savings are expected to be realized beginning in mid 2013.


Our overall backlog increased by 18.0% to $168.3 million at September 30, 2012 compared to $142.6 million at September 30, 2011, which reflects strong order intake during the year for our emergency response bodies, motorhome chassis, and delivery and service vehicles.

Our balance sheet remains strong with a healthy cash balance, low debt and an open line of credit.

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:

· The first shipments in the third quarter of 2012 of emergency response chassis equipped with our Spartan Advanced Protection System (APS), a pioneering blend of industry-first airbag and safety belt protections that make occupants safer than ever before. The APS offers eight airbags, including officer and driver knee airbags and a rear side curtain which is larger than any other system on the road, along with a restraint control module deploying advanced motion sensors around the cab perimeter and advanced seat belts with pretensioning and load limiting.

· The re-branding of Crimson Fire, Crimson Fire Aerials and Classic Fire under the Spartan ERVTM brand to focus on one brand and leverage the strength of the Spartan name.

· The introduction of the Spartan Telstar, a 138 foot telescopic and articulated aerial platform, which supplies an "up, over and down" range of motion to navigate over parapets for roof rescues, clear power lines and trees for access and provide for below-grade rescues.

· The introduction of the Spartan Intelligent Pump Solution (IPS). This new pumper system offers upgrades to traditional firefighting equipment, including improved storage, overall pump capabilities and functionality and maneuverability of the fire fighting vehicle.

· The award of orders to Spartan Chassis for Metro Star® emergency response chassis for multiple fire departments in China and Chile, representing another step forward in our efforts to expand sales globally.

· The introduction of the Spartan One-Touch Rapid Compressed Air Foam System (CAFS). Spartan engineering has incorporated smart electronics and developed an exclusive plumbing design to deliver the unique, easy to use, One-Touch Rapid CAFS.

· The shipment of 182 ReachTM commercial vans during the third quarter of 2012, coupled with follow-on orders from two of our largest delivery and service vehicle customers.


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 14, 2012.

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 September 30,               Nine Months Ended September 30,
                                           2012                      2011                 2012                     2011
Sales                                           100.0 %                   100.0 %              100.0 %                  100.0 %
Cost of products sold                            87.1                      83.0                 85.2                     84.8
Restructuring charge                              1.4                         -                  1.7                      0.5
Gross profit                                     11.5                      17.0                 13.1                     14.6

Operating expenses:
Research and development                          2.6                       2.7                  2.9                      3.3
Selling, general and administrative               9.0                       9.9                  9.7                     10.9
Restructuring charge                              0.1                       0.0                  0.6                      0.3
Operating income (loss)                          (0.3 )                     4.4                  0.1                      0.1

Other income (expense), net                       0.1                      (0.2 )                0.1                     (0.1 )
Income (loss) before taxes                       (0.2 )                     4.2                  0.1                      0.0

Taxes                                             0.1                       1.6                  0.1                      0.0

Net earnings (loss)                              (0.3 )%                    2.7 %                0.0 %                    0.0 %

Quarter Ended September 30, 2012 Compared to the Quarter Ended September 30, 2011

For the three months ended September 30, 2012, we reported consolidated sales of $112.9 million, a decrease of $7.4 million or 6.2% compared to $120.3 million reported for the same quarter in 2011. These results reflect a decrease in our delivery and service vehicles revenue, which was partially offset by increases in our emergency response vehicles and specialty vehicles revenue.

Cost of products sold was flat at $99.9 million in the third quarter of 2012 compared to $99.9 million in the third quarter of 2011. As a percentage of sales, cost of products sold increased to 88.5% in the third quarter of 2012, compared to 83.0% in the third quarter of 2011. This increase is mainly due to a change in product mix that included a lower proportion of aftermarket parts and assemblies sales in 2012 in our Delivery and Service Vehicles segment, along with an increase in restructuring charges in the third quarter of 2012, as compared with the prior year. Excluding restructuring charges, our adjusted cost of products sold decreased by $1.4 million or 1.4% to $98.4 million in the third quarter of 2012, compared to $99.8 million in 2011, driven by the decrease in revenue. Our adjusted cost of products sold was 87.1% of sales in the third quarter of 2012, compared to 83.0% in 2011, due to the less favorable product mix in the third quarter of 2012.


Gross profit decreased by $7.5 million, or 36.6%, to $13.0 million for the quarter ended September 30, 2012 from $20.5 million for the same period in 2011. Gross margin decreased to 11.5% from 17.0% over the same time period, impacted by the less favorable product mix that included a lower proportion of aftermarket parts and assemblies and higher restructuring charges as discussed above. Excluding restructuring charges, our adjusted gross profit decreased by $6.0 million, or 29.3% to $14.5 million in the third quarter of 2012 from $20.5 million in the third quarter of 2011, driven by the decrease in revenue and less favorable product mix in 2012. Our adjusted gross margin decreased to 12.9% in the third quarter of 2012 compared to 17.0% for the same period in 2011, mainly due to the less favorable product mix in 2012.

Operating expenses decreased by $2.0 million or 13.2% to $13.2 million for the quarter ended September 30, 2012, compared to $15.2 million for the same period in 2011. Research and development expense decreased by $0.4 million due to reduced spending on defense related products. Selling, general and administrative expense decreased by $1.7 million, reflecting a $0.5 million decrease in provisions for certain earn out payments associated with our 2009 acquisition of Utilimaster, a $0.4 million reduction in sales commissions and $0.8 million in savings attributable to restructuring and cost cutting efforts.

Our effective income tax rate was (83.7)% in the third quarter of 2012, compared to 37.5% in the third quarter of 2011. Our effective tax rate in the third quarter of 2012 was unfavorably impacted by a $0.2 million increase in our reserve for uncertain tax liabilities as a result of a state court ruling that occurred in the third quarter of 2012, in accordance with Accounting Standards Codification Topic 740, "Income Taxes". This adjustment was not normal or recurring in nature, and as such was a discrete event for tax purposes, with the entire impact of the uncertain tax position taken into account in the third quarter of 2012.

We recorded a net loss of $0.3 million, or $0.01 per share, for the three months ended September 30, 2012, compared to net income of $3.2 million, or $0.10 per share for the same period in 2011. Driving the decrease in net earnings for the three months ended September 30, 2012 compared with the prior year were the factors discussed above.

Excluding restructuring charges, adjusted net earnings were $0.7 million or $0.02 per diluted share for the three months ended September 30, 2012, compared to adjusted net income of $3.2 million or $0.10 per share for the three months ended September 30, 2011.

At September 30, 2012, we had $168.3 million in backlog compared to $142.6 million at September 30, 2011, an increase of $25.7 million or 18.0%. This increase is mainly attributable to a $13.3 million increase in our emergency response bodies backlog due to strong order intake from outside North America along with an increase of $11.1 million in our delivery and service vehicles backlog due to a large order received in the third quarter of 2012 from a fleet customer, along with smaller increases in most of our other markets. Intercompany orders are eliminated from the backlog dollars presented. We anticipate filling our current backlog orders by April, 2013.

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.

Nine Months Ended September 30, 2012 Compared to the Nine Months Ended September 30, 2011

For the nine months ended September 30, 2012, we reported consolidated sales of $346.1 million, an increase of $31.3 million or 9.9% compared to the same period in 2011. These results reflect the strength in our Delivery and Service Vehicles segment during the first half of the year.

Cost of products sold increased by $31.9 million or 11.9%, to $300.6 million for the nine months ended September 30, 2012 compared to $268.7 million in 2011. The increase is attributable to the increase in sales along with higher restructuring charges that we experienced in 2012 compared to 2011. As a percentage of sales, cost of products sold increased to 86.9% in 2012, compared to 85.4% in 2011. This increase is mainly due to the higher restructuring costs incurred in the nine months ended September 30, 2012 compared to the same period in 2011. We incurred restructuring charges of $5.8 million within cost of products sold during the nine months ended September 30, 2012 as a result of the planned moves of our Utilimaster operations to Bristol, Indiana and our Reach manufacturing to Charlotte, Michigan, along with restructuring actions undertaken in our specialty vehicles operations, compared to $1.7 million incurred in the nine months ended September 30, 2011 to align our structure and operating expenses with expected revenue levels. Excluding restructuring charges, our adjusted cost of products sold increased by $27.8 million or 10.4% to $294.8 million in the nine months ended September 30, 2012 from $267.0 million in the same period of 2011, driven by the increase in revenue. For more information on our restructuring activities, see Note 5 - Restructuring of the Notes to Condensed Consolidated Financial Statements appearing in Item 1 of this Form 10-Q.


Gross profit decreased by $0.6 million, or 1.3%, to $45.5 million in the nine months ended September 30, 2012 from $46.1 million in the same period in 2011. The decrease was the result of higher restructuring charges, partially offset by higher sales volumes, as discussed above. Consolidated gross margin decreased to 13.1% from 14.6% over the same time period, mainly due to the higher restructuring charges incurred in 2012. Excluding restructuring charges, our adjusted gross profit increased by $3.4 million, or 7.1% to $51.2 million during the nine months ended September 30, 2012 from $47.8 million during the nine months ended September 30, 2011, while our adjusted gross margin decreased to 14.8% for the first nine months of 2012 compared to 15.2% for the same period in 2011.

Operating expenses decreased by $0.5 million or 1.1% to $45.3 million or 13.1% of sales for the nine month period ended September 30, 2012, compared to $45.8 million or 14.5% of sales for the same period in 2011, mainly driven by savings of approximately $0.8 million in selling, general and administrative expense due to restructuring and cost cutting efforts, along with a decrease of approximately $0.6 million in research and development expense driven by a reduction in development costs related to the Reach commercial van. These decreases were partially offset by the $1.0 million increase in restructuring charges recorded in the first nine months of 2012 compared with the same period of 2011. We recorded restructuring charges within operating expense of $2.0 million during the nine months ended September 30, 2012, with approximately $1.2 million related to the planned moves of our Utilimaster operations to Bristol, Indiana, and approximately $0.8 million related to restructuring initiatives undertaken in our Emergency Response Vehicles and Specialty Vehicles segments to align expenses with current and expected future revenue levels. Excluding restructuring charges, our adjusted operating expense decreased by $1.4 million, or 3.1% to $43.3 million or 12.5% of sales during the nine months ended September 30, 2012, from $44.7 million or 14.2% of sales during the same period of 2011 due to the factors discussed above.

Our effective income tax rate was 97.6% for the nine months ended September 30, 2012, compared to 37.5% for the same period in 2011. Our effective tax rate in the third quarter of 2012 was unfavorably impacted by a $0.2 million increase in our reserve for uncertain tax liabilities as a result of a state court ruling that occurred in the third quarter of 2012, in accordance with Accounting Standards Codification Topic 740, "Income Taxes". This adjustment was not normal or recurring in nature, and as such was a discrete event for tax purposes, with the entire impact of the uncertain tax position taken into account in the third quarter of 2012.

We recorded net earnings at break even for the nine months ended September 30, 2012, compared to net income of $0.1 million, or $0.00 per share for the same period in 2011. Driving the decrease in net earnings for the nine months ended September 30, 2012 compared with the prior year were the factors mentioned above.

Excluding restructuring charges of $7.7 million ($4.7 million net of tax) incurred during the nine months ended September 30, 2012 and $2.8 million ($1.8 million net of tax) incurred during the nine months ended September 30, 2011, adjusted net earnings were $4.7 million or $0.14 per diluted share for the nine months ended September 30, 2012, compared to net income of $1.9 million or $0.06 per share for the nine months ended September 30, 2011.

The aforementioned adjusted non-GAAP (Generally Accepted Accounting Principles) measures (adjusted cost of products sold, adjusted gross profit, adjusted operating expense, adjusted net earnings and adjusted net earnings per share) are not measurements of financial performance under GAAP and should not be considered as an alternative to cost of products sold, gross profit, operating expense, net earnings (loss) or net earnings (loss) per share under GAAP. These adjusted measures have limitations as analytical tools, and should not be considered in isolation or as a substitute for analysis of results as reported under GAAP. In addition, in evaluating adjusted cost of products sold, adjusted gross profit, adjusted operating expense, adjusted net earnings and adjusted net earnings per share, in the future additional expenses may be incurred similar to the adjustments in this presentation. This presentation of adjusted measures should not be construed as an inference that future results will be unaffected by unusual or infrequent items. These limitations are compensated by providing equal prominence of GAAP results and using adjusted measures only as a supplement.

The following table reconciles cost of products sold to adjusted cost of products sold, gross profit to adjusted gross profit, operating expense to adjusted operating expense, operating income to adjusted operating income, net earnings (loss) to adjusted net earnings and net earnings (loss) per share to adjusted net earnings per share for the periods indicated (dollars in thousands, except per share amounts) (unaudited):


                          Financial Summary (Non-GAAP)
                     (In thousands, except per share data)
                                  (Unaudited)

                                            Three Months Ended September 30,                             Nine Months Ended September 30,
                                    2012        % of sales        2011       % of sales        2012        % of sales        2011        % of sales
Cost of products sold            $   99,889            88.5     $ 99,857            83.0     $ 300,631            86.9     $ 268,664            85.3
Subtract: restructuring
charges                               1,543             1.4            -               -         5,760             1.7         1,731             0.5
Adjusted cost of products sold   $   98,346            87.1     $ 99,857            83.0     $ 294,871            85.2     $ 266,933            84.8


Gross profit/Gross margin        $   12,968            11.5     $ 20,446            17.0     $  45,456            13.1     $  46,136            14.7
Add back: restructuring
charges                               1,543             1.4            -               -         5,760             1.7         1,731             0.5
Adjusted gross profit/Adjusted
gross margin                     $   14,511            12.9     $ 20,446            17.0     $  51,216            14.8     $  47,867            15.2


Operating expenses               $   13,243            11.7     $ 15,170            12.6     $  45,266            13.1     $  45,831            14.6
Less: restructuring charges             100             0.1            -               -         1,976             0.6         1,050             0.3
Adjusted operating expenses      $   13,143            11.6     $ 15,170            12.6     $  43,290            12.5     $  44,781            14.2


Net earnings (loss)              $     (327 )          (0.3 )   $  3,198             2.7     $       9             0.0     $      80             0.0
Add back: restructuring
charges, net of tax                   1,002             0.9            -               -         4,719             1.4         1,796             0.6
Adjusted net earnings            $      675             0.6     $  3,198             2.7     $   4,728             1.4     $   1,876             0.6


Net earnings per share - basic
and diluted                      $    (0.01 )                   $   0.10                     $       -                     $       -
Add back: restructuring
charges, net of tax                    0.03                            -                          0.14                          0.06
Adjusted net earnings per
share - diluted                  $     0.02                     $   0.10                     $    0.14                     $    0.06

Our Segments

As a result of a realignment of our operations completed during the course of the third quarter of 2012, we realigned our reportable segments into three segments: Emergency Response Vehicles, Delivery and Service Vehicles, and Specialty Vehicles. Our Emergency Response Vehicles segment consists of the emergency response chassis operations of Spartan Chassis and the operations of Crimson, Crimson Aerials and Classic Fire. Our Delivery and Service Vehicles segment is comprised of our Utilimaster operations and Our Specialty Vehicles segment is comprised of the motorhome, aftermarket parts and assemblies, defense and other specialty vehicle operations of Spartan Chassis. The reportable segments have been identified based on the financial data utilized by our chief operating decision makers to assess segment performance and allocate resources among our operating units. Segment results from prior periods are shown reflecting the change. For certain financial information related to each segment, see Note 9 - Business Segments, of the Notes to Condensed Consolidated Financial Statements appearing in Item 1 of this Form 10-Q.


Emergency Response Vehicles

Income Statement Data
(Dollars in thousands)
                         Three Months Ended September 30,                    Nine Months Ended September 30,
                           2012                     2011                     2012                       2011
                    Amount         %         Amount         %         Amount          %          Amount          %

Sales              $ 39,890       100.0 %   $ 35,335       100.0 %   $ 117,389       100.0 %    $ 110,475       100.0 %

Operating Income
(loss)                   89         0.2 %       (548 )     (1.6) %      (3,256 )      (2.8 )%      (1,042 )      (0.9 )%

Segment assets       71,798                   72,954                    71,798                     72,954

Comparison of the Three Month Periods Ended September 30, 2012 and 2011

Sales in our Emergency Response Vehicles segment increased by $4.6 million, or 13.0% to $39.9 million in the third quarter of 2012 compared to $35.3 million for the same period of 2011, driven by stronger sales of emergency response chassis, which, despite the quarter's increases, remain below historical levels due to continuing municipal budget constraints. Partially offsetting these increases was a decrease in sales of emergency response bodies due to production delays caused by later than expected receipt of certain commercial chassis. There were no changes in pricing of products sold by our Emergency Response Vehicles segment that had a significant impact on our financial statements when . . .

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