NOTES TO CONSOLIDATED FINANCIAL STATEMENT
S
(Dollar amounts in thousands, except per share data
)
NOTE 1 - GENERAL AND SUMMARY OF ACCOUNTING POLICIES
Nature of Operations
. Spartan Motors, Inc. (the “Company”, “we”, or “us”) is a custom engineer and manufacturer of specialized motor vehicle chassis and bodies. Our principal chassis markets are emergency response vehicles, motor homes and other specialty vehicles. We also have various subsidiaries that are manufacturers of bodies for various markets including emergency response vehicles and fleet vehicles.
Our operating activities are conducted through our wholly-owned operating subsidiary, Spartan Motors USA, Inc. (“Spartan USA”), with locations in Charlotte, Michigan; Brandon, South Dakota; Ephrata, Pennsylvania; and Bristol, Indiana
, along with contract manufacturing in Kansas City, Missouri and Saltillo, Mexico. Spartan USA was formerly known as Crimson Fire, Inc.
We recently completed a corporate reorganization. On July 1, 2015, our former Spartan Motors Chassis, Inc. subsidiary (which operated our Charlotte, Michigan location) and our former Crimson Fire Aerials, Inc. subsidiary (which operated our Ephrata, Pennsylvania location) were merged into Spartan USA. On January 1, 2016, our former Utilimaster Corporation subsidiary (which operated our Bristol, Indiana location) was also merged into Spartan USA. These transactions were completed to consolidate our U.S. operations into a single subsidiary and to simplify our corporate structure.
Our
Charlotte, Michigan location manufactures heavy duty chassis and vehicles and supplies aftermarket parts and accessories under the Spartan Chassis and Spartan ERV brand names. Our Brandon, South Dakota and Ephrata, Pennsylvania locations manufacture emergency response vehicles under the Spartan ERV brand name, while our Bristol, Indiana location manufactures vehicles used in the parcel delivery, mobile retail and trades and construction industries, and supplies related aftermarket parts and services under the Utilimaster brand name. Our Kansas City, Missouri and Saltillo, Mexico locations sell and install equipment used in fleet vehicles. Spartan USA is also a participant in Spartan-Gimaex Innovations, LLC (“Spartan-Gimaex”), a 50/50 joint venture with Gimaex Holding, Inc. that was formed to provide emergency response vehicles for the domestic and international markets. Spartan-Gimaex is reported as a consolidated subsidiary of Spartan Motors, Inc. In February 2015, Spartan USA and Gimaex Holding, Inc. mutually agreed to begin discussions regarding the dissolution of the joint venture. In June 2015, Spartan USA and Gimaex Holding, Inc. entered into court proceedings to determine the terms of the dissolution. In February 2017, by agreement of the parties, the court proceeding was dismissed with prejudice and the judge entered an order to this effect as the parties agreed to seek a dissolution plan on their own. No dissolution terms have been determined as of the date of this Form 10-K.
Principles of Consolidation
. The consolidated financial statements include our accounts and the accounts of our wholly owned subsidiary, Spartan USA. All intercompany transactions have been eliminated.
Non-Controlling Interest
At December 31, 201
6, Spartan USA held a 50% share in Spartan-Gimaex, however, due to the management and operational structure of the joint venture, Spartan USA was considered to have had the ability to control the operations of Spartan-Gimaex. Accordingly, Spartan-Gimaex is reported as a consolidated subsidiary of Spartan Motors, Inc., within the Emergency Response Vehicles segment.
Use of Estimates
. In the preparation of our financial statements in accordance with U.S. generally accepted accounting
Principles (“GAAP”), management uses estimates and makes judgments and assumptions that affect asset and liability values and the amounts reported as income and expense during the periods presented. Certain of these estimates, judgments and assumptions, such as the allowance for credit losses, warranty expenses,
impairment assessments of tangible and intangible assets, and the provision for income taxes, are particularly sensitive. If actual results are different from estimates used by management, they may have a material impact on the financial statements.
Revenue Recognition
. We recognize revenue in accordance with Accounting Standards Codification Topic (“ASC”) 605. Accordingly, revenue is recognized when title to the product and risk of ownership passes to the buyer. In certain instances, risk of ownership and title passes when the product has been completed in accordance with purchase order specifications and has been tendered for delivery to the customer. On certain customer requested bill and hold transactions, revenue recognition occurs prior to the products being delivered to the buyer. We enter into such transactions when there is a valid business reason and the buyer has committed to the purchase. At the time revenue is recognized, the customer has been notified that the products have been completed according to their specifications, the products have passed all of our quality control inspections and are ready for delivery and the customer has accepted all of the risks of ownership. All sales are shown net of returns, discounts and sales incentive programs, which historically have not been significant. Rebates for certain product sales, which are known and accrued at time of sale, are reflected as a reduction of revenue. Service revenue is immaterial at less than one percent of total sales. The collectability of any related receivable is reasonably assured before revenue is recognized.
Business Combinations
. When acquiring other businesses we recognize identifiable assets acquired and liabilities assumed at their acquisition date fair values, and separately from any goodwill that may be required to be recognized. Goodwill, when recognizable, is measured as the excess amount of any consideration transferred, which is measured at fair value, over the acquisition date fair values of the identifiable assets acquired and liabilities assumed. Acquisition gain, when recognizable, is measured as the excess of the acquisition date fair values of the identifiable assets acquired and liabilities assumed over the acquisition date fair value of any consideration transferred.
SPARTAN MOTORS, INC. AND SUBSIDIARIE
S
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
S
(Dollar amounts in thousands, except per share data
)
Accounting for such acquisitions requires us to make significant assumptions and estimates and, although we believe any estimates and assumptions we make are reasonable and appropriate at the time they are made, unanticipated events and circumstances may arise that affect their accuracy, which may cause actual results to differ from those estimated by us. When necessary, we will adjust the values of the assets acquired and liabilities assumed against the goodwill or acquisition gain, as initially recorded, for a period of up to one year after the acquisition date.
Costs incurred to effect an acquisition, such as legal, accounting, valuation or other third party costs, as well as internal general and administrative costs incurred are charged to expense in the periods incurred.
Shipping and Handling of Products
. Costs incurred related to the shipment and handling of products are classified in cost of products sold. Amounts billed to customers for shipping and handling of products are included in sales.
Cash and Cash Equivalents
include cash on hand, cash on deposit, treasuries and money market funds. We consider all investments purchased with an original maturity of three months or less to be cash equivalents.
Accounts Receivable
. Our receivables are subject to credit risk, and we do not typically require collateral on our accounts receivable. We perform periodic credit evaluations of our customers’ financial condition and generally require a security interest in the products sold. Receivables generally are due within 30 to 60 days. We maintain an allowance for customer accounts that reduces receivables to amounts that are expected to be collected. In estimating the allowance for doubtful accounts, management makes certain assumptions regarding the risk of uncollectable open receivable accounts. This risk factor is applied to the balance on accounts that are aged over 90 days: generally this reserve has an estimated range from 10-25%. The risk percentage applied to the aged accounts may change based on conditions such as: general economic conditions, industry-specific economic conditions, historical and anticipated customer performance, historical experience with write-offs and the level of past-due amounts from year to year. However, generally our assumptions are consistent year-over-year and there has been little adjustment made to the percentages used. In addition, in the event there are certain known risk factors with an open account, we may increase the allowance to include estimated losses on such “specific” account balances. The “specific” reserves are identified by a periodic review of the aged accounts receivable. If there is an account in question, credit checks are made and there is communication with the customer, along with other means to try to assess if a specific reserve is required. The inclusion of the “specific” reserve has caused the greatest fluctuation in the allowance for doubtful accounts balance historically. Past due accounts are written off when collectability is determined to be no longer assured.
Inventories
are stated at the lower of first-in, first-out cost or market. Estimated inventory allowances for slow-moving inventory are based upon current assessments about future demands, market conditions and related management initiatives. If market conditions are less favorable than those projected by management, additional inventory allowances may be required.
Property, Plant and Equipment
is stated at cost and the related assets are depreciated over their estimated useful lives on a straight line basis for financial statement purposes and an accelerated method for income tax purposes. Cost includes an amount of interest associated with significant capital projects. Estimated useful lives range from 20 to 31.5 years for buildings and improvements, 3 to 15 years for plant machinery and equipment, 3 to 7 years for furniture and fixtures and 3 to 5 years for vehicles. Leasehold improvements are depreciated over the shorter of the lease term or the estimated useful life of the asset. Maintenance and repair costs are charged to earnings, while expenditures that increase asset lives are capitalized. We review our property, plant and equipment, along with all other long-lived assets that have finite lives, including finite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Assets held-for-sale are recorded at the lower of historical depreciated cost or the estimated fair value less costs to sell. See Note 6,
Property
,
Plant and Equipment
for further information on our property and equipment.
Related Party Transactions
.
We purchase certain components used in the manufacture of our products from parties that could be considered related to us because one or more of our executive officers or board members is also an executive officer or board member of the related party. See Note 17,
Related Party Transactions
, for more information regarding our transactions with related parties.
SPARTAN MOTORS, INC. AND SUBSIDIARIE
S
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
S
(Dollar amounts in thousands, except per share data
)
Goodwill and Other Intangible Assets
. Goodwill represents the excess of the cost of a business combination over the fair value of the net assets acquired. Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to impairment tests on an annual basis, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Goodwill is allocated to the reporting unit from which it was created. A reporting unit is an operating segment or sub-segment to which goodwill is assigned when initially recorded. We review indefinite lived intangible assets annually for impairment by comparing the carrying value of those assets to their fair value.
Other intangible assets with finite lives are amortized over their estimated useful lives and are tested for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.
We
perform our annual goodwill and indefinite lived intangible assets impairment test as of October 1 and monitor for interim triggering events on an ongoing basis. For goodwill we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Under authoritative guidance, we are not required to calculate the fair value of a reporting unit unless we determine that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. We have the option to bypass the qualitative assessment and proceed to the first step of the two-step impairment test.
I
f we elect to bypass the qualitative assessment for a reporting unit, or if after completing the assessment we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we perform a two-step impairment test, whereby the first step is comparing the fair value of a reporting unit with its carrying amount, including goodwill. The fair value of the reporting unit is determined by estimating the future cash flows of the reporting unit to which the goodwill relates, and then discounting the future cash flows at a market-participant-derived weighted-average cost of capital (“WACC”). In determining the estimated future cash flows, we consider current and projected future levels of income based on our plans for that business; business trends, prospects and market and economic conditions; and market-participant considerations. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered to not be impaired and the second step of the test is not performed. The second step of the impairment test is performed if the carrying amount of the reporting unit exceeds the fair value, in which case the implied fair value of the reporting unit goodwill is compared with the carrying amount of that goodwill based on a hypothetical allocation of the reporting unit’s fair value to all of its underlying assets and liabilities. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess.
We
evaluate the recoverability of our indefinite lived intangible asset, which consists of our Utilimaster trade name, based on estimates of future royalty payments that are avoided through our ownership of the trade name, discounted to their present value. In determining the estimated fair value of the trade name, we consider current and projected future levels of revenue based on our plans for Utilimaster, business trends, prospects and market and economic conditions.
Significant judgments inherent in these assessments and analyses include assumptions about macroeconomic and industry conditions, appropriate sales growth rates, WACC and the amount of expected future net cash flows. The judgments and assumptions used in the estimate of fair value are generally consistent with the projections and assumptions that are used in current operating plans. Such assumptions are subject to change as a result of changing economic and competitive conditions. The determination of fair value is highly sensitive to differences between estimated and actual cash flows and changes in the related discount rate used to evaluate the fair value of the reporting units and trade name
s.
See Note 5
,
Goodwill
and Intangible Assets,
for further details on our goodwill and other intangible assets.
Warranties
. Our policy is to record a provision for the estimated cost of warranty-related claims at the time of the sale, and periodically adjust the warranty liability to reflect actual experience. The amount of warranty liability accrued reflects management’s best estimate of the expected future cost of honoring our obligations under the warranty agreements. Expense related to warranty liabilities accrued for product sales, as well as adjustments to pre-existing warranty liabilities, are reflected within Cost of products sold on our Consolidated Statements of Operations. Our estimates are based on historical experience, the number of units involved and the extent of features and components included in product models. See Note 10,
Commitments
and Contingent Liabilities
, for further information regarding warranties.
Deposits from Customers
. We sometimes receive advance payments from customers for product orders and record these amounts as liabilities. We accept such deposits when presented by customers seeking improved pricing in connection with orders that are placed for products to be manufactured and sold at a future date. Revenue associated with these deposits is deferred and recognized upon shipment of the related product to the customer.
SPARTAN MOTORS, INC. AND SUBSIDIARIE
S
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
S
(Dollar amounts in thousands, except per share data
)
Research and Development
. Our research and development costs, which consist of compensation costs, travel and entertainment, administrative expenses and new product development among other items, are expensed as incurred.
Taxes on Income
. We recognize deferred income tax assets and liabilities using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. Deferred tax liabilities generally represent tax expense recognized for which payment has been deferred, or expenses which have been deducted in our tax returns but which have not yet been recognized as an expense in our financial statements.
We establish valuation allowances for deferred income tax assets in accordance with GAAP, which provides that such valuation allowances shall be established unless realization of the income tax benefits is more likely than not.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. At each reporting period, we consider the scheduled reversal of deferred tax liabilities, available taxes in carryback periods, tax planning strategies and projected future taxable income in making this assessment.
We
recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The determination is based on the technical merits of the position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. Although we believe the estimates are reasonable, no assurance can be given that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals.
Interest and penalties attributable to income taxes are recorded as a component of
income taxes.
See Note
8,
Taxes on Income
, for further details on our income taxes.
Earnings
(Loss)
Per Share
. Basic earnings per share is based on the weighted average number of common shares, share equivalents of stock appreciation rights (“SAR”s) and participating securities outstanding during the period. Diluted earnings per share also include the dilutive effect of additional potential common shares issuable from stock options and are determined using the treasury stock method. Basic earnings per share represents net earnings divided by basic weighted average number of common shares outstanding during the period, including the average dilutive effect of our SARs outstanding during the period determined using the treasury stock method. Diluted earnings per share represents net earnings divided by diluted weighted average number of common shares outstanding, which includes the average dilutive effect of our stock options outstanding during the period. Our unvested stock awards are included in the number of shares outstanding for both basic and diluted earnings per share calculations, unless a net loss is reported, in which situation unvested stock awards are excluded from the number of shares outstanding for both basic and diluted earnings per share calculations. See Note 15,
Earnings Per Share,
for further details.
Stock Incentive Plans
. Share based payment compensation costs for equity-based awards is measured on the grant date based on the fair value of the award at that date, and is recognized over the requisite service period, net of estimated forfeitures. Fair value of stock option and stock appreciation rights awards are estimated using a closed option valuation (Black-Scholes) model. Fair value of restricted stock awards is based upon the quoted market price of the common stock on the date of grant. Our
incentive stock plans are described in more detail in Note 13,
Stock Based Compensation
.
Fair Value
. We are required to disclose the estimated fair value of our financial instruments. The carrying value at December 31, 2016 and 2015 of cash and cash equivalents, accounts receivable and accounts payable approximate their fair value due to their short term nature. The carrying value of variable rate debt instruments approximate their fair value based on their relative terms and market rates.
Reclassifications
. Certain engineering costs related to routine product changes, that, prior to 2015, were classified within Research and development expense, have been classified within Cost of products sold on the Condensed Consolidated Statements of Operations in order to more consistently align the results of our individual business units. Expenses of $7,825 for 2014 have been reclassified accordingly. See our discussion on Accounting Standards Update 2015-17 below for information on reclassifications related to our adoption of this standard in 2016. Certain other immaterial amounts in the prior periods’ financial statements have been reclassified to conform to the current period’s presentation. These reclassifications had no impact on previously reported Net earnings (loss), Total assets, Total shareholders’ equity or cash flows.
SPARTAN MOTORS, INC. AND SUBSIDIARIE
S
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
S
(Dollar amounts in thousands, except per share data
)
Segment Reporting
.
We identify our reportable segments based on our management structure and the financial data utilized by the chief operating decision makers to assess segment performance and allocate resources among our operating units. We have three reportable segments: Emergency Response Vehicles, Fleet Vehicles and Services, and Specialty Chassis and Vehicles. More detailed information about our reportable segments can be found in Note 16,
Business
Segments
.
Supplemental Disclosures of Cash Flow Information.
Cash paid for interest was $309, $374 and $327 for 2016, 2015 and 2014. Cash paid (received) for income taxes, net of refunds, was $2,232, $(18) and $1,168 for 2016, 2015 and 2014.
New Accounting Standard
s
In January 2017, the
Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2017-4,
Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
(“ASU 2017-4”). ASU 2017-4 eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. Under the amendments in the new ASU, goodwill impairment testing will be performed by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The new standard is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. Early adoption is permitted for annual or interim goodwill impairment testing performed after January 1, 2017.
We believe that
that the adoption of the provisions of ASU 2017-04 will not have a material impact on our consolidated financial position, results of operations or cash flows.
In January 2017, the FASB issued Accounting Standards Update 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
(“ASU 2017-01”), which provides guidance to entities to assist with evaluating when a set of transferred assets and activities (collectively, the "set") is a business and provides a screen to determine when a set is not a business. Under the new guidance, when substantially all of the fair value of gross assets acquired (or disposed of) is concentrated in a single identifiable asset, or group of similar assets, the assets acquired would not represent a business. Also, to be considered a business, an acquisition would have to include an input and a substantive process that together significantly contribute to the ability to produce outputs. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and should be applied on a prospective basis to any transactions occurring within the period of adoption. Early adoption is permitted for interim or annual periods in which the financial statements have not been issued.
We believe that the adoption of the provisions of ASU 2017-01 will not have a material impact on our consolidated financial position, results of operations or cash flows.
In August 2016, the FASB issued Accounting Standards Update No. 2016-15,
Statement of Cash Flows (Topic 230)
(“ASU 2016-15”). ASU 2016-15 is intended to reduce diversity in current practice regarding the manner in which certain cash receipts and cash payments are presented and classified in the cash flow statement. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We believe that
that the adoption of the provisions of ASU 2016-15 will not have a material impact on our consolidated financial position, results of operations or cash flows.
In June 2016, the FASB issued Accounting Standards Update 2016-13,
Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments
("ASU 2016-13"). ASU 2016-13 is intended to introduce a revised approach to the recognition and measurement of credit losses, emphasizing an updated model based on expected losses rather than incurred losses. The provisions of this standard are effective for reporting periods beginning after December 15, 2019 and early adoption is permitted. We believe that that the adoption of the provisions of ASU 2016-13 will not have a material impact on our consolidated financial position, results of operations or cash flows.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09,
Compensation – Stock Compensation
(“ASU 2016-09”). ASU 2016-09 simplifies the accounting for a stock payment’s tax consequences by requiring the recognition of the income tax effects of awards in the income statement when the awards vest or are settled. It also allows a company to elect to account for forfeitures as they occur rather than on an estimated basis and revises the classification of certain tax payments related to stock compensation on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The impact of our adoption of ASU 2016-09 for the year ending December 31, 2017 will depend on market factors and the timing and intrinsic value of future stock based compensation award vesting.
SPARTAN MOTORS, INC. AND SUBSIDIARIE
S
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
S
(Dollar amounts in thousands, except per share data
)
In February 2016, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update No. 2016-02,
Leases
(“ASU 2016-02”). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently evaluating the impact of our pending adoption of ASU 2016-02 on our consolidated financial position, results of operations or cash flows.
In November 2015, the FASB issued Accounting Standards Update 2015-17,
Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes
(“ASU 2015-17”). ASU 2015-17 requires net deferred tax assets and liabilities to be classified as non-current on the Consolidated Balance Sheets. Prior to adoption of the new standard, net deferred tax assets and liabilities were presented separately as current and non-current on the Consolidated Balance Sheets. ASU 2015-17 is effective for financial statements issued for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted. We retrospectively adopted ASU 2015-17 as of the second quarter of 2016. As a result, we reclassified $3,164 of Deferred income tax assets (current) to Deferred income taxes, net (non-current) and $2,520 from Deferred income tax liabilities to Deferred income taxes, net. The December 31, 2015 balances in Total current assets decreased by $3,164, Other assets increased by $644 and Total assets and Total liabilities both decreased by $2,520.
In July 2015, the FASB issued Accounting Standards Update 2015-11,
Inventory (Topic 330) – Simplifying the Measurement of Inventory
(“ASU 2015-11”). ASU 2015-11 requires entities that measure inventory using the FIFO or average cost methods to measure inventory at the lower of cost or net realizable value to more closely align the measurement of inventory in GAAP with International Financial Reporting Standards. Net realizable value is defined as estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal. ASU 2015-11 is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016. We do not believe the adoption of ASU 2015-11 will have a material impact on our consolidated financial position, results of operations or cash flows.
In February 2015, the FASB issued Accounting Standards Update 2015-02
Consolidation (Topic 810), Amendments to the Consolidation Analysis
(“ASU 2015-02”). ASU 2015-02 modifies the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The amendments under the new guidance modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities, eliminate the presumption that a general partner should consolidate a limited partnership and affect the consolidation analysis of reporting entities that are involved with VIEs. ASU 2015-02 is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. T
he adoption of the provisions of ASU 2015-02 had no impact on our consolidated financial position, results of operations or cash flows.
In May 2014, the FASB issued Accounting Standards Update 2014-09,
Revenue from Contracts with Customers (Topic 606)
(“ASU 2014-09”). ASU 2014-09 is based on the principle that revenue should be recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. Early adoption for annual reporting periods beginning after December 15, 2016 is permitted. On August 12, 2015, FASB delayed the effective date to give companies an extra year to implement the standard. The standard will be effective in 2018, but companies will have the option of adopting it as of the original 2017 effective date. We have begun the process of analyzing the impact of ASU 2014-09 and the related ASU’s across all revenue streams to evaluate the impact of the new standard on revenue contracts. Based on the analysis completed to date, we expect the impact on our accounting for revenue to remain substantially unchanged. We currently expect to adopt the new standard using the modified retrospective approach, under which the cumulative effect of the initial application of the new guidance will be recognized as an adjustment to the opening balance of retained earnings, in the first quarter of 2018.
SPARTAN MOTORS, INC. AND SUBSIDIARIE
S
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
S
(Dollar amounts in thousands, except per share data
)
In March 2016, the FASB issued Accounting Standards Update No. 2016-08,
Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
(“ASU 2016-08”). ASU 2016-08 clarifies the implementation guidance for principal-versus-agent considerations in the revenue recognition standard. A principal-versus-agent consideration applies to sales that involve two or more suppliers to a customer. Each participant in the sale must determine whether they control the good or service and are entitled to the gross amount of the transaction or are acting as an agent and should collect only a fee or commission for arranging the sale. ASU 2016-08 will go into effect when the revenue standard issued in ASU 2014-09 becomes effective.
In April 2016, the FASB issued Accounting Standards Update No. 2016-10,
Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing
(“ASU 2016-10”). ASU 2016-10 clarifies the implementation guidance in Topic 606 for identifying performance obligations and determining when to recognize revenue on licensing agreements for intellectual property. ASU 2016-10 removes the requirement to assess whether promised goods or services are performance obligations if they are immaterial to the contract with the customer and allows an entity to elect to account for shipping and handling activities that occur after the customer has obtained control of a good as an activity to fulfill the promise to transfer the good rather than as an additional promised service. ASU 2016-10 also includes implementation guidance on determining whether a license granted by an entity provides a customer with a right to use the intellectual property, which is satisfied at a point in time, or a right to access the intellectual property, which is satisfied over time. ASU 2016-10 will go into effect when the revenue standard issued in ASU 2014-09 becomes effective.
In May 2016, the FASB issued Accounting Standards Update No. 2016-12,
Revenue from Contracts with Customers (Topic 606), Narrow-Scope Improvements and Practical Expedients
(“ASU 2016-12”). ASU 2016-12 clarifies the implementation guidance on assessing collectability, presentation of sales taxes, non-cash consideration and completed contracts and contract modifications at transition. ASU 2016-12 will go into effect when the revenue standard issued in ASU 2014-09 becomes effective.
NOTE 2
– ACQUISITION ACTIVITIES (Subsequent Event)
On January 1, 2017, we completed the acquisition of substantially all of the assets and certain liabilities of Smeal Fire Apparatus Co., Smeal Properties, Inc., Ladder Tower Co., and U.S. Tanker Co. pursuant to a Purchase Agreement dated December 12, 2016.
When used in these Notes, “ Smeal” refers to the assets, liabilities and operations acquired from these entities. Smeal will be included within our Emergency Response Vehicles segment.
This acquisition will bring significant scale to our Emergency Response Vehicles segment, expand the geographic reach of our dealer network and add complementary products to our existing emergency response product portfolio
.
SPARTAN MOTORS, INC. AND SUBSIDIARIE
S
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
S
(Dollar amounts in thousands, except per share data
)
Purchase Price
The estimated total purchase price paid for our acquisition of Smeal was $42,550.
The consideration paid consisted of $28,958 in cash, net of cash acquired of $3,825, and the forgiveness of certain liabilities owed by the former owners of Smeal to the Company in the amount of $7,397. Pursuant to the purchase agreement, the sellers may receive additional consideration in the form of a tax gross-up payment, which is payable no later than April 1, 2018, and is not expected to exceed $2,400. The consideration paid is subject to certain post-closing adjustments, including a net working capital adjustment that we expect to finalize in the second quarter of 2017.
This acquisition will be accounted for using the purchase method of accounting with the purchase price allocated to the assets purchased and liabilities assumed based upon their estimated fair values at the date of acquisition.
We are unable to present the supplemental pro forma revenue and earnings of the Spartan and Smeal combined entity as of January 1, 2016 because the full year 2016 financial statements for Smeal Fire Apparatus Co. and subsidiaries are not yet available. We are unable to present the amounts of the assets acquired and liabilities assumed recognized at the acquisition date as the purchase accounting and valuation are in a preliminary stage and have not been audited.
SPARTAN MOTORS, INC. AND SUBSIDIARIE
S
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
S
(Dollar amounts in thousands, except per share data
)
Financing for the Acquisition
Our acquisition of
Smeal was financed using $32,800 borrowed from our existing $100 million line of credit, as set forth in the Second Amended and Restated Credit Agreement, dated as of October 31, 2016, by and among us and our affiliates, as borrowers; certain lenders; Wells Fargo Bank, National Association, as Administrative Agent; and Wells Fargo Securities, LLC, as Sole Lead Arranger and Sole Bookrunner.
Acquisition Related Expenses
During 20
16, we recorded pretax charges totaling $882 for legal expenses and other transaction costs related to the acquisition. These charges, which were expensed in accordance with the accounting guidance for business combinations, were recorded in “Selling, general and administrative” and reflected within the “Other” column in the 2016 business segment table in Note 16,
Business Segments
. We expect to incur expenses totaling approximately $600 during 2017 for additional transaction and integration costs related to the acquisition.
NOTE
3
– INVENTORIES
Inventories are summarized as follows:
|
|
December
31,
|
|
|
|
201
6
|
|
|
201
5
|
|
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
12,743
|
|
|
$
|
16,812
|
|
Work in process
|
|
|
14,063
|
|
|
|
11,691
|
|
Raw materials and purchased components
|
|
|
35,458
|
|
|
|
35,285
|
|
Reserve for slow-moving inventory
|
|
|
(3,368
|
)
|
|
|
(3,230
|
)
|
|
|
|
|
|
|
|
|
|
Total Inventory
|
|
$
|
58,896
|
|
|
$
|
60,558
|
|
We
also have a number of demonstration units as part of our sales and training program. These demonstration units are included in the “Finished goods” line item above, and amounted to $3,558 and $2,857 at December 31, 2016 and 2015. When the demonstration units are sold, the cost related to the demonstration unit is included in Cost of products sold on our Consolidated Statements of Operations.
SPARTAN MOTORS, INC. AND SUBSIDIARIE
S
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
S
(Dollar amounts in thousands, except per share data
)
NOTE
4
– RESTRUCTURING CHARGES
During
each of 2016, 2015 and 2014, we incurred restructuring charges related to the relocation of our Ocala, Florida manufacturing operations to our Charlotte, Michigan and Brandon, South Dakota facilities, along with efforts undertaken to upgrade production processes at our Brandon, South Dakota and Ephrata, Pennsylvania locations.
Restructuring charges included in our Consolidated Statements of Operations for the years ended December 31,
2016, 2015 and 2014, which were all related to our Emergency Response Vehicles segment, are as follows:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
Cost of products sold
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory impairment
|
|
$
|
-
|
|
|
$
|
345
|
|
|
$
|
584
|
|
Relocation/retention costs
|
|
|
-
|
|
|
|
-
|
|
|
|
93
|
|
Production relocation
/equipment impairment
|
|
|
136
|
|
|
|
174
|
|
|
|
-
|
|
Accrual for severance
|
|
|
-
|
|
|
|
-
|
|
|
|
131
|
|
Total cost of products sold
|
|
|
136
|
|
|
|
519
|
|
|
|
808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing process reengineering
|
|
|
959
|
|
|
|
2,336
|
|
|
|
1,017
|
|
Relocation/retention costs
|
|
|
-
|
|
|
|
-
|
|
|
|
298
|
|
Accrual for severance
|
|
|
-
|
|
|
|
-
|
|
|
|
34
|
|
Total general and administrative
|
|
|
959
|
|
|
|
2,336
|
|
|
|
1,349
|
|
Total restructuring
|
|
$
|
1,095
|
|
|
$
|
2,855
|
|
|
$
|
2,157
|
|
NOTE
5
– GOODWILL AND INTANGIBLE ASSETS
Goodwill
We
test goodwill for impairment at the reporting unit level on an annual basis as of October 1, or whenever an event or change in circumstances occurs that would more likely than not reduce the fair value of a reporting unit below its carrying amount. See “Goodwill and Other Intangible Assets” within Note 1,
General and Summary of Accounting Policies
for a description of our accounting policies regarding goodwill and other intangible assets.
At December 31, 201
6 and 2015, we had recorded goodwill at our Fleet Vehicles and Services reportable segment, which was also determined to be a reporting unit for goodwill impairment testing. The goodwill recorded in the Fleet Vehicles & Services reporting unit was evaluated for impairment as of October 1, 2016 using a discounted cash flow valuation.
The estimated fair value of
our Fleet Vehicles and Services reporting unit exceeded its carrying value by approximately 115% in 2016, indicating that the goodwill was not impaired. Based on the discounted cash flow valuation at October 1, 2016, an increase in the weighted average cost of capital (“WACC”) used for the Fleet Vehicles and Services reporting unit of 500 basis points would not result in impairment. As discussed in Note 1,
General and Summary of Accounting Policies
, there are significant judgments inherent in our impairment assessments and discounted cash flow analyses. These discounted cash flow analyses are most sensitive to the WACC assumption.
SPARTAN MOTORS, INC. AND SUBSIDIARIE
S
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
S
(Dollar amounts in thousands, except per share data
)
Our
goodwill by reportable segment is as follows:
|
|
Emergency Response
Vehicles
|
|
|
Fleet
Vehicles &
Services
|
|
|
Total
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
201
6
|
|
|
20
15
|
|
|
201
6
|
|
|
201
5
|
|
|
201
6
|
|
|
201
5
|
|
Goodwill, beginning of
year
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
15,961
|
|
|
$
|
15,961
|
|
|
$
|
15,961
|
|
|
$
|
15,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment losses during the
year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Goodwill, end of
year
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
15,961
|
|
|
$
|
15,961
|
|
|
$
|
15,961
|
|
|
$
|
15,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired goodwill
|
|
$
|
4,854
|
|
|
$
|
4,854
|
|
|
$
|
15,961
|
|
|
$
|
15,961
|
|
|
$
|
20,815
|
|
|
$
|
20,815
|
|
Accumulated impairment
|
|
|
(4,854
|
)
|
|
|
(4,854
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,854
|
)
|
|
|
(4,854
|
)
|
Goodwill, net
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
15,961
|
|
|
$
|
15,961
|
|
|
$
|
15,961
|
|
|
$
|
15,961
|
|
Fleet
Vehicles
and
Services
segment
intangible assets
At December 31, 201
6, we had other intangible assets associated with our Fleet Vehicles and Services segment, including customer and dealer relationships, non-compete agreements, an acquired product development project and a trade name. The non-compete agreement, acquired product development project and certain other intangible assets are being amortized over their expected remaining useful lives based on the pattern of estimated after-tax operating income generated, or on a straight-line basis. Our Utilimaster trade name has an indefinite life, and is not amortized. We test our trade name for impairment at least annually, and test other intangible assets for impairment if impairment indicators are present.
We
tested our Utilimaster trade name for impairment, as of October 1, 2016 and 2015, by estimating the fair value of the trade name based on estimates of future royalty payments that are avoided through our ownership of the trade name, discounted to their present value. The estimated fair value of our Utilimaster trade name at October 1, 2016 exceeded its carrying cost by 505%. Accordingly, there was no impairment recorded on this trade name. Based on the discounted cash flow valuation at October 1, 2016, an increase in the WACC used for this impairment analysis of 500 basis points would not result in impairment of the trade name.
Emergency Response Vehicles
segment
intangible assets
During the three months ended September 30, 2015, we determined that, based on updated sales forecasts for our Classic line of emergency response vehicles, it is more likely than not that our Classic Fire trade name intangible asset was impaired. Accordingly, we conducted an impairment test by comparing the discounted future cash flows expected to result from our ownership of the trade name with its carrying cost at September 30, 2015. The result of this analysis showed that the carrying cost of the Classic Fire trade name exceeded its fair value
and the balance was entirely written off.
During the three months ended September 30, 2015, we determined that an asset group related to certain locations of our Emergency Response Vehicles segment may be impaired due to operating losses recorded in recent years, along with uncertainty regarding future financial performance at these locations. Accordingly, we conducted an impairment test on this asset group as of September 30, 2015 by comparing the non-discounted cash flows expected to result from the use and eventual disposition of the asset group with its carrying value, which resulted in a determination that the asset group was impaired.
SPARTAN MOTORS, INC. AND SUBSIDIARIE
S
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
S
(Dollar amounts in thousands, except per share data
)
We estimated the fair value of the intangible assets of this asset group by determining the discounted cash flows associated with benefits that we will receive or expenses we will avoid as a result of our ownership of these intangible assets. Impairment charges recorded within General and administrative in the Condensed Consolidated Statement of Operations to adjust the carrying cost of these long-lived intangible assets to their estimated fair value at September 30, 2015 are as follows:
Asset Description
|
|
Impairment Charge
|
|
Customer relationships
|
|
$
|
224
|
|
Non-patented technology
|
|
|
209
|
|
Classic Fire trade name
|
|
|
560
|
|
Total General and administrative
|
|
$
|
993
|
|
The following table provides information regarding
our other intangible assets:
|
|
As of December 31, 201
6
|
|
|
As of December 31, 201
5
|
|
|
|
Gross
carrying
amount
|
|
|
Accumulated amortization
|
|
|
Net
|
|
|
Gross
carrying
amount
|
|
|
Accumulated amortization
|
|
|
Net
|
|
Customer and dealer relationships
|
|
$
|
6,170
|
|
|
$
|
3,348
|
|
|
$
|
2,822
|
|
|
$
|
6,170
|
|
|
$
|
2,986
|
|
|
$
|
3,184
|
|
Acquired product development project
|
|
|
1,860
|
|
|
|
1,167
|
|
|
|
693
|
|
|
|
1,860
|
|
|
|
821
|
|
|
|
1,039
|
|
Non-compete agreements
|
|
|
400
|
|
|
|
400
|
|
|
|
-
|
|
|
|
400
|
|
|
|
400
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Backlog
|
|
|
320
|
|
|
|
320
|
|
|
|
-
|
|
|
|
320
|
|
|
|
320
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade Names
|
|
|
2,870
|
|
|
|
-
|
|
|
|
2,870
|
|
|
|
2,870
|
|
|
|
-
|
|
|
|
2,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,620
|
|
|
$
|
5,235
|
|
|
$
|
6,385
|
|
|
$
|
11,620
|
|
|
$
|
4,527
|
|
|
$
|
7,093
|
|
We recorded $
708, $872 and $1,136 of intangible asset amortization expense during 2016, 2015 and 2014.
The estimated remaining amortization associated with finite-lived intangible assets is expected to be expensed as follows:
|
|
Amount
|
|
|
|
|
|
|
201
7
|
|
$
|
683
|
|
201
8
|
|
|
666
|
|
201
9
|
|
|
299
|
|
20
20
|
|
|
273
|
|
2021
|
|
|
249
|
|
Thereafter
|
|
|
1,345
|
|
Total
|
|
$
|
3,515
|
|
SPARTAN MOTORS, INC. AND SUBSIDIARIE
S
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
S
(Dollar amounts in thousands, except per share data
)
NOTE
6
- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized by major classifications as follows:
|
|
December
31,
|
|
|
|
201
6
|
|
|
201
5
|
|
Land and improvements
|
|
$
|
8,049
|
|
|
$
|
5,538
|
|
Buildings and improvements
|
|
|
63,418
|
|
|
|
59,371
|
|
Plant machinery and equipment
|
|
|
34,879
|
|
|
|
35,395
|
|
Furniture and fixtures
|
|
|
12,954
|
|
|
|
15,897
|
|
Vehicles
|
|
|
2,912
|
|
|
|
2,949
|
|
Construction in process
|
|
|
7,876
|
|
|
|
5,566
|
|
Subtotal
|
|
|
130,088
|
|
|
|
124,716
|
|
Less accumulated depreciation
|
|
|
(76,972
|
)
|
|
|
(77,396
|
)
|
Total property, plant and equipment, net
|
|
$
|
53,116
|
|
|
$
|
47,320
|
|
We recorded depreciation expense of $
7,195, $6,565 and $7,242 during 2016, 2015 and 2014. There were no capitalized interest costs in 2016 or 2015.
Construction in progress includes $
6,624 and $4,604 at December 31, 2016 and 2015 for the implementation of our ERP system, which has been delayed from its original targeted go-live dates of 2013 through 2015. Work continues on the system, which is now expected to go live in phases in 2017 and 2018.
We review our long-lived assets that have finite lives for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.
When reviewing long-lived assets for impairment, we group our long-lived assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. During the three months ended
September 30, 2016 and 2015, we determined that an asset group related to certain locations of our Emergency Response Vehicles segment may be impaired due to operating losses recorded in recent years, along with uncertainty regarding future financial performance at these locations. Accordingly, we conducted an impairment test on this asset group as of September 30, 2016 and 2015 by comparing the non-discounted cash flows expected to result from the use and eventual disposition of the asset group with its carrying value, resulting in a determination that the asset group was impaired.
We estimated the fair value of our tangible long-lived assets of this asset group based on assessments or recent sale prices of similar assets. Impairment charges recorded within Cost of goods sold and General and administrative in the Condensed Consolidated Statement of Operations to adjust the carrying cost of these long-lived tangible assets to their estimated fair value at September
30 are as follows:
|
|
2016
|
|
|
2015
|
|
Cost of goods sold
|
|
|
|
|
|
|
|
|
Machinery & equipment
|
|
$
|
406
|
|
|
$
|
1,013
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
|
|
|
|
|
|
Office & computer equipment
|
|
|
-
|
|
|
|
228
|
|
Total asset impairment
|
|
$
|
406
|
|
|
$
|
1,241
|
|
SPARTAN MOTORS, INC. AND SUBSIDIARIE
S
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
S
(Dollar amounts in thousands, except per share data
)
NOTE
7
- LEASES
We
lease certain office equipment, computer hardware, manufacturing equipment and manufacturing and warehouse space under operating lease agreements. Building leases generally provide that we pay the cost of utilities, insurance, taxes and maintenance. Rent expense for the years ended December 31, 2016, 2015 and 2014 was $3,086, $2,876 and $2,286.
Future minimum operating lease commitments under non-cancelable leases are as follows:
Year
|
|
Future Minimum
Operating Lease
Payments
|
|
201
7
|
|
$
|
2,247
|
|
201
8
|
|
|
1,843
|
|
201
9
|
|
|
1,541
|
|
20
20
|
|
|
1,455
|
|
202
1
|
|
|
1,130
|
|
Thereafter
|
|
|
73
|
|
|
|
|
|
|
Total
|
|
$
|
8,289
|
|
We lease
certain office equipment, computer hardware and material handling equipment under capital lease agreements. Cost and accumulated depreciation of capitalized leased assets included in machinery and equipment are $609 and $483, respectively, at December 31, 2016. Future minimum capital lease commitments under non-cancelable leases are as follows:
Year
|
|
Future Minimum
Capital Lease
Payments
|
|
201
7
|
|
$
|
71
|
|
201
8
|
|
|
45
|
|
201
9
|
|
|
33
|
|
20
20
|
|
|
-
|
|
20
21
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
|
|
|
|
|
Total lease obligations, including imputed interest
|
|
|
149
|
|
|
|
|
|
|
Less imputed interest charges
|
|
|
(10
|
)
|
|
|
|
|
|
Total outstanding capital lease obligations
|
|
$
|
139
|
|
SPARTAN MOTORS, INC. AND SUBSIDIARIE
S
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
S
(Dollar amounts in thousands, except per share data
)
NOTE
8
- TAXES ON INCOME
Income taxes consist of the following:
|
|
Year Ended December
31,
|
|
|
|
201
6
|
|
|
201
5
|
|
|
201
4
|
|
Current
(credit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
2,203
|
|
|
$
|
(520
|
)
|
|
$
|
269
|
|
State
|
|
|
563
|
|
|
|
253
|
|
|
|
(107
|
)
|
Total current
|
|
|
2,766
|
|
|
|
(267
|
)
|
|
|
162
|
|
Deferred (credit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(2,666
|
)
|
|
|
3,994
|
|
|
|
(1,426
|
)
|
State
|
|
|
-
|
|
|
|
1,153
|
|
|
|
(839
|
)
|
Total deferred
|
|
|
(2,666
|
)
|
|
|
5,147
|
|
|
|
(2,265
|
)
|
TOTAL TAXES ON INCOME
|
|
$
|
100
|
|
|
$
|
4,880
|
|
|
$
|
(2,103
|
)
|
The current tax expense amounts differ from the actual amounts payable to the taxing authorities due to the tax impact associated with stock incentive plan transactions under the plans described in Note 1
3,
Stock Based Compensation
. These adjustments were an addition of $123, $44 and $100 in 2016, 2015 and 2014. The adjustments to current taxes on income were recognized as adjustments of additional paid-in capital.
The deferred income tax credit at December 31, 2016 represents a net increase of our deferred tax assets to their realizable value.
Differences between the expected income tax expense derived from applying the federal statutory income tax rate to earnings from continuing operations before taxes on income and the actual tax expense are as follows:
|
|
Year Ended December
31,
|
|
|
|
201
6
|
|
|
201
5
|
|
|
201
4
|
|
|
|
Amount
|
|
|
Percentage
|
|
|
Amount
|
|
|
Percentage
|
|
|
Amount
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income taxes at the
statutory rate
|
|
$
|
2,959
|
|
|
|
34.00
|
%
|
|
$
|
(4,284
|
)
|
|
|
34.00
|
%
|
|
$
|
(365
|
)
|
|
|
34.00
|
%
|
Increase (decrease)
in income taxes
resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax adjustment
|
|
|
(51
|
)
|
|
|
(0.59
|
)
|
|
|
(156
|
)
|
|
|
1.24
|
|
|
|
(275
|
)
|
|
|
25.61
|
|
Non-deductible
compensation
|
|
|
459
|
|
|
|
5.27
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Non-deductible NHTSA penalty
|
|
|
-
|
|
|
|
-
|
|
|
|
340
|
|
|
|
(2.70
|
)
|
|
|
-
|
|
|
|
-
|
|
Other nondeductible expenses
|
|
|
226
|
|
|
|
2.60
|
|
|
|
176
|
|
|
|
(1.39
|
)
|
|
|
449
|
|
|
|
(41.80
|
)
|
State tax expense, net of federal income tax benefit
|
|
|
68
|
|
|
|
0.78
|
|
|
|
(79
|
)
|
|
|
0.63
|
|
|
|
(201
|
)
|
|
|
18.72
|
|
Valuation allowance adjustment
|
|
|
(2,932
|
)
|
|
|
(33.69
|
)
|
|
|
9,472
|
|
|
|
(75.17
|
)
|
|
|
(505
|
)
|
|
|
47.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefit adjustment, settlement and expiration of statute
|
|
|
-
|
|
|
|
-
|
|
|
|
(172
|
)
|
|
|
1.36
|
|
|
|
(765
|
)
|
|
|
71.23
|
|
Federal research and development
tax credit
|
|
|
(801
|
)
|
|
|
(9.20
|
)
|
|
|
(364
|
)
|
|
|
2.89
|
|
|
|
(296
|
)
|
|
|
27.56
|
|
Other
|
|
|
172
|
|
|
|
1.98
|
|
|
|
(53
|
)
|
|
|
0.41
|
|
|
|
(145
|
)
|
|
|
13.47
|
|
TOTAL
|
|
$
|
100
|
|
|
|
1.15
|
%
|
|
$
|
4,880
|
|
|
|
(38.73
|
)
%
|
|
$
|
(2,103
|
)
|
|
|
195.81
|
%
|
SPARTAN MOTORS, INC. AND SUBSIDIARIE
S
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
S
(Dollar amounts in thousands, except per share data
)
Temporary differences which give rise to deferred income tax assets (liabilities)
are as follows:
|
|
December 31,
|
|
|
|
2016
|
|
|
201
5
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Warranty reserve
|
|
$
|
7,246
|
|
|
$
|
6,286
|
|
C
redit carry-forwards, net of federal income tax benefit
|
|
|
3,199
|
|
|
|
3,170
|
|
Inventory costs and reserves
|
|
|
2,194
|
|
|
|
2,163
|
|
Compensation related accruals
|
|
|
1,512
|
|
|
|
1,030
|
|
Net operating loss carry-forwards, net of federal income tax benefit
|
|
|
1,029
|
|
|
|
1,108
|
|
Stock based compensation
|
|
|
615
|
|
|
|
626
|
|
Other intangible assets
|
|
|
232
|
|
|
|
(209
|
)
|
Other
|
|
|
773
|
|
|
|
921
|
|
Total deferred tax assets
|
|
$
|
16,800
|
|
|
$
|
15,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
$
|
(2,294
|
)
|
|
$
|
(551
|
)
|
Trade name
|
|
|
(1,072
|
)
|
|
|
(999
|
)
|
Prepaid insurance
|
|
|
(522
|
)
|
|
|
(367
|
)
|
Total deferred income tax liabilities
|
|
$
|
(3,888
|
)
|
|
$
|
(1,917
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets
|
|
$
|
12,912
|
|
|
$
|
13,178
|
|
Valuation allowance
|
|
|
(9,602
|
)
|
|
|
(12,534
|
)
|
Net
deferred tax asset
|
|
$
|
3,310
|
|
|
$
|
644
|
|
We assessed the available positive and negative evidence to determine whether sufficient future taxable income will be generated to realize the benefit of the deferred tax assets as of December 31, 2016 and 2015, and recorded a valuation allowance of $9,602 and $12,534
against a portion of the deferred tax assets. A significant portion of negative evidence considered was the cumulative loss incurred over the three-year periods ending December 31, 2016 and 2015. The remaining residual value of $3,310 represents that portion of our deferred income tax assets that could generate future tax losses and be successfully carried back and offset against current year taxable income to recover taxes paid.
The determination of this valuation allowance took into account our deferred tax liability for a trade name assigned an indefinite life for book purposes in the amount of $1,072 and $999 at December 31, 2016 and 2015. This deferred tax liability was excluded from sources of future taxable income as the timing of its reversal cannot be predicted due to the indefinite life of the trade name, and thus cannot be used to offset the valuation allowance. However, we have also considered prudent and feasible tax planning strategies on certain appreciated property that may be entered into in the future.
At December
31, 2016 and 2015, we had state deferred income tax assets related to state tax net operating loss carry-forwards, of $1,560 and $1,678, which begin expiring in 2018. Also, as of December 31, 2016 and 2015, we had deferred income tax assets related to federal and state tax credit carry-forwards of $4,846 and $4,824, which begin expiring in 2019. Due to accumulated losses in several state jurisdictions, we had recorded valuation allowances against certain deferred income tax assets aggregating $4,228 and $4,278 at December 31, 2016 and 2015.
SPARTAN MOTORS, INC. AND SUBSIDIARIE
S
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
S
(Dollar amounts in thousands, except per share data
)
A reconciliation of the change in the unrecognized tax benefits (“UTB”) for the three years ended December 31, 2016, 2015 and 2014 is as follows:
|
|
201
6
|
|
|
201
5
|
|
|
201
4
|
|
Balance at January
1,
|
|
$
|
349
|
|
|
$
|
481
|
|
|
$
|
833
|
|
Increase (decrease) related to prior year tax positions
|
|
|
(24
|
)
|
|
|
(73
|
)
|
|
|
73
|
|
Increase
related to current year tax positions
|
|
|
20
|
|
|
|
91
|
|
|
|
99
|
|
Settlement
|
|
|
-
|
|
|
|
(110
|
)
|
|
|
-
|
|
Expiration of statute
|
|
|
-
|
|
|
|
(40
|
)
|
|
|
(524
|
)
|
Balance at December
31,
|
|
$
|
345
|
|
|
$
|
349
|
|
|
$
|
481
|
|
As of December
31, 2016, we had an ending UTB balance of $345 along with $188 of interest and penalties, for a total liability of $533, with $82 recorded as a current liability and $451 recorded as a non-current liability based on the applicable statutes of limitations. The change in interest and penalties amounted to an increase of $133 in 2016, a decrease of $30 in 2015, and a decrease of $198 in 2014, which were reflected in Income tax expense (benefit) within our Consolidated Statements of Operations.
As of December 31, 2016, we are no longer subject to examination by federal taxing authorities for 2012 and earlier years.
We also file tax returns in a number of states and those jurisdictions remain subject to audit in accordance with relevant state statutes. These audits can involve complex issues that may require an extended period of time to resolve and may cover multiple years. To the extent we prevail in matters for which reserves have been established, or are required to pay amounts in excess of our reserves, our effective income tax rate in a given fiscal period could be impacted. However, we do not expect such impacts to be material to our financial statements. An unfavorable tax settlement would require use of our cash and could result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement could result in a reduction in our effective income tax rate in the period of resolution. We do not expect the total amount of unrecognized tax benefits to significantly increase or decrease over the next twelve months.
NOTE
9
- TRANSACTIONS WITH MAJOR CUSTOMERS
Major customers are defined as those with sales greater than 10 percent of consolidated sales in a given year.
We
had one customer classified as a major customer in 2016, 2015 and 2014 (Customer A), which was a customer of the Specialty Chassis and Vehicles segment. Information about our major customer is as follows:
|
|
201
6
|
|
|
201
5
|
|
|
201
4
|
|
Customer
|
|
Sales
|
|
|
Accounts
Receivable
(at year end)
|
|
|
Sales
|
|
|
Accounts
Receivable
(at year end)
|
|
|
Sales
|
|
|
Accounts
Receivable
(at year end)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
$
|
70,954
|
|
|
$
|
7,169
|
|
|
$
|
78,759
|
|
|
$
|
8,512
|
|
|
$
|
57,093
|
|
|
$
|
7,541
|
|
NOTE
10
- COMMITMENTS AND CONTINGENT LIABILITIES
Under the terms of
our credit agreement with our banks, we have the ability to issue letters of credit totaling $20,000. At December 31, 2016 and 2015, we had outstanding letters of credit totaling $1,599 and $1,337 related to certain emergency response vehicle contracts and our workers compensation insurance.
At December
31, 2016, we and our subsidiaries were parties, both as plaintiff and defendant, to a number of lawsuits and claims arising out of the normal course of our business. In the opinion of management, our financial position, future operating results or cash flows will not be materially affected by the final outcome of these legal proceedings.
SPARTAN MOTORS, INC. AND SUBSIDIARIE
S
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
S
(Dollar amounts in thousands, except per share data
)
Spartan-Gimaex joint venture
In February 2015, Spartan USA and Gimaex Holding, Inc. mutually agreed to begin discussions regarding the dissolution of the Spartan-Gimaex joint venture. In June 2015, Spartan USA and Gimaex Holding, Inc. entered into court proceedings to determine the t
erms of the dissolution. In February 2017, by agreement of the parties, the court proceeding was dismissed with prejudice and the judge entered an order to this effect as the parties agreed to seek a dissolution plan on their own. No dissolution terms have been determined as of the date of this Form 10-K. In the fourth quarters of 2015 and 2014, we accrued charges totaling $982 and $235 to write down certain inventory items associated with this joint venture to their estimated fair values. Costs associated with the wind-down will be impacted by the final dissolution agreement. 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, and such charges could be material to our results.
National Highway Traffic Safety Administration (“NHTSA”) penalty
In July 2015, we entered into a settlement agreement with the NHTSA pertaining to our early warning and defect reporting. Under the terms of the agreement we will pay a fine of $1,000 in equal installments over three years, and will complete performance obligations including compliance and regulatory practice improvements, industry outreach, and recalls to remedy safety defects in certain of our chassis. The following table presents the charges recorded in the Condensed Consolidated Statement of Operations during the
year ended December 31, 2015 as a result of this agreement:
Cost of products sold
|
|
$
|
1,269
|
|
Selling, general and administrative
|
|
|
1,000
|
|
|
|
$
|
2,269
|
|
Chassis Agreements
Our
Fleet Vehicles and Services segment assembles van and truck bodies onto original equipment manufacturer (“OEM”) chassis. The majority of such OEM chassis are purchased directly by our customers from the OEM and drop-shipped to our facilities. We are a bailee of most other chassis under converter pool agreements with the OEMs, as described below. Chassis possessed under converter pool agreements are invoiced to the customer by the OEM or its affiliated financial institution based upon the terms of the converter pool agreements. On an annual basis, we purchase and take title to an immaterial number of chassis that ultimately are recorded as sales and cost of sales.
Converter pool chassis obtained from the OEMs are based upon estimated future requirements and, to a lesser extent, confirmed orders from customers. Although each manufacturer’s agreement has different terms and conditions, the agreements generally provide that the manufacturer will provide a supply of chassis to be maintained at our production facility under the conditions that we will store such chassis, will not make any additions or modifications to such chassis and will not move, sell or otherwise dispose of such chassis, except under the terms of the agreement. The manufacturer does not transfer the certificate of origin to us and, accordingly, we account for the chassis in our possession as bailed inventory belonging to the manufacturer.
We are
party to chassis bailment inventory agreements with General Motors Company (“GM”) and Chrysler Group, LLC (“Chrysler”) which allow GM and Chrysler to draw up to $10,000 against our revolving credit line for chassis placed at our facilities. As a result of these agreements, there was $784 and $3,795 outstanding on our revolving credit line at December 31, 2016 and 2015. Under the terms of the bailment inventory agreements, these chassis never become our property, and the amount drawn against the credit line will be repaid by a GM or Chrysler dealer at the time an order is placed for one of our bodies, utilizing a GM or Chrysler chassis. As such, the chassis, and the related draw on the line of credit, are not reflected in the accompanying Consolidated Balance Sheets. See Note 12
Debt
, for further information on our revolving line of credit.
Warranty Related
We
provide limited warranties against assembly/construction defects for periods generally ranging from two years to the life of the product. These warranties generally provide for the replacement or repair of defective parts or workmanship for a specified period following the date of sale. The end users also may receive limited warranties from suppliers of components that are incorporated into our chassis and vehicles.
Our
policy is to record a provision for the estimated cost of warranty-related claims at the time of the sale and periodically adjust the provision and liability to reflect actual experience. The amount of warranty liability accrued reflects our best estimate of the expected future cost of honoring our obligations under the warranty agreements. Historically, the cost of fulfilling our warranty obligations has principally involved replacement parts and labor for field retrofit campaigns. Our estimates are based on historical experience, the number of units involved and the extent of features and components included in product models.
Certain warranty and other related claims involve matters of dispute that ultimately are resolved by negotiation, arbitration or litigation.
Material warranty issues can arise which are beyond the scope of our historical experience. We provide for any such warranty issues as they become known and are estimable. It is reasonably possible that additional warranty and other related claims could arise from disputes or other matters beyond the scope of our historical experience.
Changes in
our warranty liability during the years ended December 31, 2016 and 2015 were as follows:
|
|
2016
|
|
|
201
5
|
|
Balance of accrued warranty at January
1
|
|
$
|
16,610
|
|
|
$
|
9,237
|
|
Warranties issued during the period
|
|
|
5,705
|
|
|
|
5,027
|
|
Cash settlements made during the period
|
|
|
(10,265
|
)
|
|
|
(8,015
|
)
|
Changes in liability for pre-existing warranties during
the period, including expirations
|
|
|
7,284
|
|
|
|
10,361
|
|
Balance of accrued warranty at December
31
|
|
$
|
19,334
|
|
|
$
|
16,610
|
|
Changes in liability for pre-existing warranties during the
years ended December 31, 2016 and 2015 includes $3,968 and $7,100 for campaigns and recalls outside of our normal warranty programs.