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

Show all filings for SUPREME INDUSTRIES INC

Form 10-Q for SUPREME INDUSTRIES INC


8-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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 25 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.


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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.

Results of Operations

The following discussion should be read in conjunction with the consolidated financial statements and related notes (See Note 1 "Basis of Presentation and Opinion of Management") thereto elsewhere in this document and pertains to continuing operations unless otherwise noted.

Overview

Net income from continuing operations for the third quarter of 2012 was $3.6 million, or $0.23 per diluted share, compared with $1.5 million, or $0.10 per diluted share, in the third quarter of 2011. Net income from continuing operations for the nine months ended September 29, 2012 was $11.4 million, or $0.74 per diluted share, compared with a loss from continuing operations of $0.4 million, or ($0.02) per diluted share, for the nine months ended October 1, 2011. These improved results reflect the focus of our strategy to enhance efficiencies, as well as our ability to implement sustainable improvements in all of our core processes.

Our sales backlog at the end of the third quarter of 2012 totaled $63 million compared with $90 million a year ago. While 30% lower than the prior-year period, we believe our improved pricing discipline has created profitable backlog. Additionally, the prior year backlog included initial orders for the 2012 fleet season. As of the end of the third quarter of 2012, the 2013 fleet orders had not yet been awarded.

As we continue through 2012 and into 2013, and manage the Company for profitable growth, our key areas of focus include:

Improving the buying experience for our customers by incorporating their product improvement ideas and exceeding their expectations throughout the order fulfillment cycle;

Improving our materials procurement sourcing nationwide;

Making capital investments to upgrade facilities and equipment;

Implementing employee-focused initiatives to ensure that our employees view the Company as a great place to work and are proud to be members of the Supreme team;

Continuing our product development initiatives related to both new and existing products; and

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

We continue to aggressively review all aspects of our business by establishing a continuous improvement culture to ensure the ongoing growth and strength of the Company.


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Net Sales

Net sales for the three months ended September 29, 2012 decreased $1.1 million, or 1.6%, to $71.7 million as compared with $72.8 million for the three months ended October 1, 2011. Net sales for the nine months ended September 29, 2012 decreased $6.5 million, or 2.8%, to $228.4 million as compared with $234.9 million for the nine months ended October 1, 2011. The following table presents the components of net sales and the changes from period to period:

                                  Three Months Ended                           Nine Months Ended
                        Sep 29,     Oct 1,                          Sep 29,     Oct 1,
($000's omitted)          2012       2011          Change            2012        2011           Change
Specialized vehicles:
Trucks                  $ 54,216   $ 53,544   $    672      1.3 %  $ 170,984   $ 174,385   $ (3,401 )   (2.0 )%
Buses                     12,705     14,455     (1,750 )  (12.1 )     44,474      44,665       (191 )   (0.4 )
Armored vehicles           4,050      4,272       (222 )   (5.2 )     10,740      14,123     (3,383 )  (24.0 )
                          70,971     72,271     (1,300 )   (1.8 )    226,198     233,173     (6,975 )   (3.0 )
Fiberglass products          700        529        171     32.2        2,214       1,730        484     28.0
                        $ 71,671   $ 72,800   $ (1,129 )   (1.6 )% $ 228,412   $ 234,903   $ (6,491 )   (2.8 )%

Truck division sales increased by $0.7 million, or 1.3%, for the three months ended September 29, 2012 due largely to increased orders from one of our National customers. Truck sales decreased by $3.4 million, or 2.0%, for the nine months ended September 29, 2012, primarily due to fewer orders from certain large National fleet customers and our continued policy to avoid business that does not meet our target margins. Although market demand remains below 2007 (pre-recession) levels, we expect retail truck market conditions to show improvement in the near-term.

Bus division sales decreased by $1.8 million, or 12.1%, for the three months ended September 29, 2012, and $0.2 million, or 0.4%, for the nine months ended September 29, 2012. The decrease is primarily due to product mix and highly-competitive state and municipal government contracts. The bus market has been adversely affected by tightened state and municipal budgets, and we are not inclined to bid on business at weak profit margins.

Armored division sales decreased by $0.2 million, or 5.2%, for the three months ended September 29, 2012, and decreased by $3.4 million, or 24.0%, for the nine months ended September 29, 2012, primarily due to lower government procurements, which directly affect our business with the U.S. Department of State to produce armored SUVs for embassies abroad. Partially offsetting the slowness in government orders are increased sales to armored cash-in-transit customers.

Cost of sales and gross profit

Gross profit increased by $2.3 million, or 25%, to $11.6 million for the three months ended September 29, 2012, as compared with $9.3 million for the three months ended October 1, 2011. Gross profit increased by $12.1 million, or 51%, to $35.9 million for the nine months ended September 29, 2012, as compared with $23.8 million for the nine months ended October 1, 2011. The following presents the components of cost of sales as a percentage of net sales and the changes from period to period:


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Material - Material cost as a percentage of net sales decreased by 2.9% and 4.7% for the three and nine months ended September 29, 2012, as compared with the corresponding periods in 2011. The decrease in the material percentage was due in part to favorable product mix and our focus on increasing gross margins. Although commodity raw material prices seem to have stabilized, the potential for future raw material cost increases remains an ongoing concern for certain commodities including but not limited to aluminum, steel, and wood products. The Company closely monitors major commodities to identify raw material cost escalations and attempts to pass-through cost increases as markets will allow by having material adjustment clauses in most key customer contracts.

Direct Labor - Direct labor as a percentage of net sales decreased by 0.3% and 0.9% for the three and nine months ended September 29, 2012, as compared with the corresponding periods in 2011. The decrease in the direct labor percentage was due to efficiencies achieved at certain locations resulting from recent plant redesign and product flow changes.

Overhead - Manufacturing overhead as a percentage of net sales increased by 0.5% and 0.1% for the three and nine months ended September 29, 2012, as compared with the corresponding periods in 2011. These slight increases were primarily due to the fixed nature of certain overhead expenses that do not fluctuate with sales volume changes.

Delivery - Delivery costs as a percentage of net sales decreased by 0.7% and 0.1% for the three and nine months ended September 29, 2012, as compared with the corresponding periods in 2011. The Company continuously seeks more cost-effective delivery methods to counteract the ongoing impact of high fuel costs.

Selling, general and administrative expenses

Selling, general and administrative ("G&A") expenses increased by $1.2 million, or 17.5%, to $7.9 million for the three months ended September 29, 2012, as compared with $6.7 million for the three months ended October 1, 2011. Selling and G&A expenses increased by $4.1 million, or 19.7%, to $24.7 million for the nine months ended September 29, 2012, as compared with $20.6 million for the nine months ended October 1, 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                                Nine Months Ended
                      Sep 29,          Oct 1,                           Sep 29,           Oct 1,
($000's omitted)        2012            2011           Change            2012              2011           Change
Selling expenses   $ 2,493    3.5 % $ 2,444   3.4 % $    49   0.1 % $  7,690    3.4 % $  7,046   3.0 % $   644   0.4 %
G&A expenses         5,406    7.5     4,277   5.9     1,129   1.6     16,997    7.4     13,582   5.8     3,415   1.6
Total              $ 7,899   11.0 % $ 6,721   9.2 % $ 1,178   1.8 % $ 24,687   10.8 % $ 20,628   8.8 % $ 4,059   2.0 %

Selling expenses - Selling expenses remained relatively unchanged for the three months ended September 29, 2012, and increased $0.6 million for the nine months ended September 29, 2012, as compared to the corresponding periods in 2011. As a percentage of net sales, selling expenses increased 0.1% and 0.4% for the three and nine months ended September 29, 2012, as compared with the corresponding periods in 2011. The increase as a percentage of net sales resulted from a change in the sales commission structure which better correlates to the profitable sales levels.


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G&A expenses - G&A expenses increased $1.1 million and $3.4 million for the three and nine months ended September 29, 2012, as compared to the corresponding periods in 2011. As a percentage of net sales, G&A expenses increased 1.6% for both the three and nine months ended September 29, 2012, as compared with the corresponding periods in 2011. The increase was the result of several factors including additions in senior management, incentive compensation plans, and severance costs related to senior management changes made in early 2012, as well as costs associated with the implementation of a new inventory management system.

Other income

Other income was $0.2 million and $0.8 million for the three and nine months ended September 29, 2012, compared with $0.2 million and $0.6 million for the three and nine months ended October 1, 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 $2.2 million for the nine months ended October 1, 2011. No additional legal costs related to this lawsuit were incurred after settlement.

Interest expense

Interest expense was $0.1 million and $0.7 million for the three and nine months ended September 29, 2012, compared with $1.2 million and $1.9 million for the three and nine months ended October 1, 2011. The decline in interest expense resulted from a combination of lower average bank borrowings and lower (performance-based) borrowing rates during the periods. Additionally, interest expense in 2011 included approximately $0.8 million of charges resulting from the write off of capitalized bank fees related to the Company's previous bank credit agreement. The effective interest rate on bank borrowings was 3.3% at quarter end, and the Company was in compliance with all provisions of its Credit Agreement.

Income taxes

At December 31, 2011, the Company maintained a valuation allowance against its net deferred tax assets of $4.6 million due to uncertainty of the utilization of such assets. In the second quarter of 2012 the Company determined it was more likely than not that a portion of the net deferred tax assets would be realized based upon sustained profitability coupled with positive forecasted future operating results. As a result, the Company reversed $0.4 million of the valuation allowance, recorded as a non-cash income tax benefit for the three and six months ended June 30, 2012. The Company had retained a $0.4 million valuation allowance against certain state net operating loss carryforwards as of June 30, 2012. In the third quarter of 2012, the Company determined it was more likely than not that these state net operating loss carryforwards will be realized due to anticipated positive operating results and a detailed analysis of future expected taxable income by state. The Company is estimating an effective tax rate for the year ending December 29, 2012 which will be substantially lower than statutory rates due to the reversal of these deferred tax asset reserves. Beginning with the first quarter of 2013, the Company expects to recognize income taxes at normalized rates. The 2011 results did not include any provision for or benefit from income taxes due to the establishment of a full deferred tax valuation allowance.


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Net income (loss) from continuing operations

Net income from continuing operations increased by $2.1 million to $3.6 million (5.0% of net sales) for the three months ended September 29, 2012, from net income of $1.5 million (2.1% of net sales) for the three months ended October 1, 2011. Net income from continuing operations increased by $11.8 million to $11.4 million (5.0% of net sales) for the nine months ended September 29, 2012, from a net loss of $0.4 million (0.1% of net sales) for the nine months ended October 1, 2011. Net income improved significantly, despite lower sales, due to a margin-focused sales strategy, favorable product mix and efficiencies gains at our manufacturing plants.

Discontinued operations

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 $0.7 million for the nine months ended October 1, 2011. The Oregon facility and equipment were sold during the quarter ended September 29, 2012. The sale resulted in a $0.1 million loss and is included in other income in the consolidated statements of operations.

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            Nine Months Ended
                                          Sep 29,        Oct 1,        Sep 29,          Oct 1,
                                           2012           2011           2012            2011
Basic income (loss) per share:
Income (loss) from continuing
operations                              $      0.23    $      0.10   $       0.75    $      (0.02 )
Loss from discontinued operations                 -              -              -           (0.05 )
Net income (loss) per basic share       $      0.23    $      0.10   $       0.75    $      (0.07 )

Diluted income (loss) per share:
Income (loss) from continuing
operations                              $      0.23    $      0.10   $       0.74    $      (0.02 )
Loss from discontinued operations                 -              -              -           (0.05 )
Net income (loss) per diluted share     $      0.23    $      0.10   $       0.74    $      (0.07 )

Shares used in the computation of
income (loss) per share:
Basic                                    15,206,196     15,155,528     15,186,505      14,693,856
Diluted                                  15,470,335     15,345,234     15,437,246      14,693,856


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Liquidity and Capital Resources

Cash Flows

The Company's primary sources of liquidity have been cash flows from operating activities and borrowings under its credit facility. 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 provided by operating activities totaled $7.9 million for the nine months ended September 29, 2012, as compared with $10.0 million for the nine months ended October 1, 2011. Cash from operating activities was unfavorably impacted during the first nine months of 2012 by a $5.9 million decrease in trade accounts payable. The decrease in accounts payable resulted from payments to vendors due to the Company's improved overall liquidity and borrowing capacity.

Investing activities

Cash used in investing activities was $1.0 million for the nine months ended September 29, 2012 as compared with $0.7 for the nine months ended October 1, 2011. During the first nine months of 2012, the Company's capital expenditures totaled $5.4 million consisting primarily of the capital investments in our Indiana manufacturing facilities. Additionally, we received $4.2 million from the sale of idle property, plant, and equipment, including $4.0 million from the sale of assets previously classified as held for sale.

Financing activities

Financing activities used $3.6 million of cash for the nine months ended September 29, 2012 as compared with cash used of $10.2 million for the nine months ended October 1, 2011. The Company paid down its revolving bank line of credit and other long-term debt in the amount of $3.7 million during the nine months ended September 29, 2012. The repayments resulted from improved profitability and lower working capital needs during the second half of the year versus the first half of the year when higher working capital was necessary 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 September 29, 2012, the outstanding balance under the Credit Agreement was approximately $8.8 million, and the Company had unused credit capacity of approximately $15.9 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 3.3% at September 29, 2012, and the Company was in compliance with all provisions of its Credit Agreement.


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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 September 29, 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 consolidated balance sheets at September 29, 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 attempt to sell certain idle 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. However, as of September 29, 2012, the Company had approximately $3.5 million of cash primarily resulting from proceeds received from the sale of a facility which was classified as held for sale. The proceeds from this sale will be used as part of a like-kind exchange transaction.

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.


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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.

Beginning in the second quarter of 2012, the Company began the process of implementing a perpetual inventory system. As a result of the ongoing implementation, the Company self-identified errors related to revenue recognition during certain past reporting periods (See Note 1). Although the errors were limited to one location and deemed immaterial, the Company believes that these findings underscore the importance of implementing a perpetual inventory system. The Company is in the process of implementing the perpetual inventory system by division with an anticipated completion in the fourth quarter of 2012.

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 . . .

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