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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011.
 
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to _____________________

Commission File Number 000-13611

SPARTAN MOTORS, INC.
(Exact Name of Registrant as Specified in Its Charter)

Michigan
(State or Other Jurisdiction of
Incorporation or Organization)
 
38-2078923
(I.R.S. Employer Identification No.)
     
1541 Reynolds Road
Charlotte, Michigan
(Address of Principal Executive Offices)
 
 
48813
(Zip Code)

Registrant’s Telephone Number, Including Area Code:  (517) 543-6400

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 
Yes
X
 
No
   

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 
Yes
X
 
No
 
 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
  o  
Accelerated filer
  x
Non-accelerated filer
  o  
Smaller Reporting Company
  o

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).
 
Yes
   
No
X
 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 
Class
Outstanding at
October 31, 2011
Common stock, $.01 par value
33,579,902 shares
 
 
 

 



SPARTAN MOTORS, INC.

INDEX
____________________________________

 
Page
     
FORWARD-LOOKING STATEMENTS
3
 
     
PART I.  FINANCIAL INFORMATION
   
         
 
Item 1.
Financial Statements:
   
   
Condensed Consolidated Balance Sheets – September 30, 2011 (unaudited)
     and December 31, 2010
 
4
 
         
   
Condensed Consolidated Statements of Operations -
     Three Months Ended September 30, 2011 and 2010 (Unaudited)
 
5
 
         
   
Condensed Consolidated Statements of Operations –
      Nine Months Ended September 30, 2011 and 2010 (Unaudited)
6
 
         
   
Condensed Consolidated Statements of Cash Flows -
     Nine Months Ended September 30, 2011 and 2010 (Unaudited)
 
7
 
         
   
Condensed Consolidated Statement of Shareholders’
     Equity - Nine Months Ended September 30, 2011 (Unaudited)
 
8
 
         
   
Notes to Condensed Consolidated Financial Statements
9
 
         
 
Item 2.
Management’s Discussion and Analysis of Financial
   Condition and Results of Operations
 
22
 
         
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
39
 
         
 
Item 4.
Controls and Procedures
40
 
         
PART II.  OTHER INFORMATION
   
         
 
Item 1A.
Risk Factors
41
 
         
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
41
 
         
 
Item 6.
Exhibits
42
 
         
SIGNATURES
43
 
         
EXHIBIT INDEX
   


 
2

 
 
FORWARD-LOOKING STATEMENTS

There are certain statements within this Report that are not historical facts.  These statements are called “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements involve important known and unknown risks, uncertainties and other factors and can be identified by phrases using “estimate,” “anticipate,” “believe,” “project,” “expect,” “intend,” “predict,” “potential,” “future,” “may,” “should” and similar expressions or words. Our future results, performance or achievements may differ materially from the results, performance or achievements discussed in the forward-looking statements. There are numerous factors that could cause actual results to differ materially from the results discussed in forward-looking statements, including, among others:

Constrained government budgets may have a negative effect on the Company’s business and its operations.
   
The integration of businesses or assets we have acquired or may acquire in the future involves challenges that could disrupt our business and harm our financial condition.
   
When we introduce new products, we may incur expenses that we did not anticipate, such as recall expenses, resulting in reduced earnings.
   
Changes in economic conditions, including changes in interest rates, credit availability, financial market performance and the Company’s industries can have adverse affects on its earnings and financial condition, as well as its customers, dealers and suppliers.  In particular, the Company could be adversely affected by the economic impact to its supply base, including those members of the supply base that support the automobile industry.
   
Changes in relationships with major customers and suppliers could significantly affect the Company’s revenues and profits.
   
Amendments of the laws and regulations governing our businesses, or the promulgation of new laws and  regulations, could have a material impact on the Company’s operations.
   
We source components from a variety of domestic and global suppliers who may be subject to disruptions from natural or man made causes.  Disruptions in our supply of components could have a material and adverse impact on our results of operations or financial position.
   
Changes in the markets we serve may, from time to time, require us to re-configure our production lines or re-locate production of products between buildings or locations in order to maximize the efficient utilization of our production capacity.  Costs incurred to effect these re-configurations may exceed our estimates and efficiencies gained may be less than anticipated.

This list provides examples of factors that could affect the results described by forward-looking statements contained in this Report.  However, this list is not intended to be all inclusive.  The risk factors disclosed in Item 1A “Risk Factors” of Part II of this Quarterly Report on Form 10-Q and in Part I – Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010, include all known risks our management believes could materially affect the results described by forward-looking statements contained in this Report.  However, those risks may not be the only risks we face.  Our business, operations, and financial performance could also be affected by additional factors that are not presently known to us or that we currently consider to be immaterial to our operations.  In addition, new risks may emerge from time to time that may cause actual results to differ materially from those contained in any forward-looking statements.  We believe that the forward-looking statements contained in this Report are reasonable.  However, given these risks and uncertainties, we cannot provide you with any guarantee that the anticipated results will be achieved. All forward-looking statements in this Report are expressly qualified in their entirety by the cautionary statements contained in this Section and you are cautioned not to place undue reliance on the forward-looking statements contained in this Report as a prediction of actual results. We disclaim any obligation to update or revise information contained in any forward-looking statement to reflect developments or information obtained after the date this Report is filed with the Securities and Exchange Commission.

 
 
3

 
 
Item 1.
Financial Statements

SPARTAN MOTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
 
 
   
September 30,
       
   
2011
   
December 31,
 
   
(Unaudited)
   
2010
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 30,505     $ 14,507  
Accounts receivable, less allowance of $733 and $996
    44,225       52,542  
Inventories
    64,877       60,161  
Deferred income tax assets
    6,218       6,218  
Income taxes receivable
    2,821       2,890  
Other current assets
    1,660       3,636  
Total current assets
    150,306       139,954  
                 
Property, plant and equipment, net
    66,820       71,268  
Goodwill
    20,815       18,418  
Intangible assets, net
    12,118       10,946  
Other assets
    1,313       1,163  
TOTAL ASSETS
  $ 251,372     $ 241,749  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
                 
Current liabilities:
               
Accounts payable
  $ 27,897     $ 17,970  
Accrued warranty
    6,054       5,702  
Accrued customer rebates
    1,131       1,205  
Accrued compensation and related taxes
    4,055       3,680  
Accrued vacation
    1,600       1,635  
Deposits from customers
    2,252       3,902  
Other current liabilities and accrued expenses
    8,862       7,528  
Current portion of long-term debt
    64       102  
Total current liabilities
    51,915       41,724  
                 
Other non-current liabilities
    3,426       4,284  
Long-term debt, less current portion
    5,098       5,122  
Deferred income tax liabilities
    7,640       7,640  
                 
Shareholders' equity:
               
Preferred stock, no par value: 2,000 shares authorized (none issued)
    -       -  
Common stock, $0.01 par value; 40,000 shares authorized; 33,579 and 33,215 outstanding
    336       332  
Additional paid in capital
    70,616       68,715  
Retained earnings
    112,341       113,932  
Total shareholders' equity
    183,293       182,979  
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
  $ 251,372     $ 241,749  
 
 
See Accompanying Notes to Condensed Consolidated Financial Statements.
   
 
 
4

 
 
SPARTAN MOTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

 
   
Three Months Ended September 30,
 
   
2011
   
2010
 
             
Sales
  $ 120,303     $ 120,572  
Cost of products sold
    99,857       100,802  
Gross profit
    20,446       19,770  
                 
Operating expenses:
               
Research and development
    3,274       4,001  
Selling, general and administrative
    11,896       10,400  
Total operating expenses
    15,170       14,401  
                 
Operating income
    5,276       5,369  
                 
Other income (expense):
               
Interest expense
    (88 )     (238 )
Interest and other income (expense)
    (72 )     305  
Total other income (expense)
    (160 )     67  
                 
Earnings before taxes
    5,116       5,436  
                 
Taxes
    1,918       1,952  
                 
Net earnings from continuing operations
    3,198       3,484  
                 
Net loss from discontinued operations
    -       (167 )
                 
Net earnings
  $ 3,198     $ 3,317  
                 
Basic net earnings (loss) per share
               
Earnings from continuing operations
  $ 0.10     $ 0.11  
Loss from discontinued operations
    -       (0.01 )
    $ 0.10     $ 0.10  
                 
Diluted net earnings (loss) per share
               
Earnings from continuing operations
  $ 0.10     $ 0.11  
Loss from discontinued operations
    -       (0.01 )
    $ 0.10     $ 0.10  
                 
Basic weighted average common shares outstanding
    33,506       33,056  
                 
Diluted weighted average common shares outstanding
    33,525       33,079  
 
 
See Accompanying Notes to Condensed Consolidated Financial Statements.
 
 
5

 
 
SPARTAN MOTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

 
   
Nine Months Ended September 30,
 
   
2011
   
2010
 
             
Sales
  $ 314,800     $ 353,861  
Cost of products sold
    266,933       299,767  
Restructuring charges
    1,731       990  
Gross profit
    46,136       53,104  
                 
Operating expenses:
               
Research and development
    10,472       12,943  
Selling, general and administrative
    34,309       32,990  
Restructuring charges
    1,050       1,006  
Total operating expenses
    45,831       46,939  
                 
Operating income
    305       6,165  
                 
Other income (expense):
               
Interest expense
    (260 )     (812 )
Interest and other income
    83       238  
Total other income (expense)
    (177 )     (574 )
                 
Earnings before taxes
    128       5,591  
                 
Taxes
    48       2,009  
                 
Net earnings from continuing operations
    80       3,582  
                 
Net loss from discontinued operations
    -       (2,872 )
                 
Net earnings
  $ 80     $ 710  
                 
Basic net earnings (loss) per share
               
Income from continuing operations
  $ 0.00     $ 0.11  
Loss from discontinued operations
    -       (0.09 )
    $ 0.00     $ 0.02  
                 
Diluted net earnings (loss) per share
               
Income from continuing operations
  $ 0.00     $ 0.11  
Loss from discontinued operations
    -       (0.09 )
    $ 0.00     $ 0.02  
                 
Basic weighted average common shares outstanding
    33,391       32,961  
                 
Diluted weighted average common shares outstanding
    33,459       33,043  
 
 
See Accompanying Notes to Condensed Consolidated Financial Statements
 
 
6

 
 
SPARTAN MOTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
   
Nine Months Ended September 30,
 
   
2011
   
2010
 
Cash flows from operating activites:
           
Net earnings
  $ 80     $ 710  
Adjust for loss from discontinued operations
    -       2,872  
Earnings from continuing operations
    80       3,582  
Adjustments to reconcile net earnings from coninuing operations to net cash provided by operating activities:
               
Depreciation and amortization
    7,510       8,127  
(Gain)/loss on disposal and impairment of assets
    1,122       (10 )
Expense from changes in fair value of contingent consideration
    1,001       170  
Tax expense related to stock incentive plan transactions
    232       575  
Stock based compensation related to stock awards
    1,305       1,983  
Decrease (increase) in operating assets, net of acquired business:
         
Accounts receivable
    8,952       (5,002 )
Inventories
    (3,365 )     17,879  
Income taxes receivable
    69       1,246  
Other current assets
    1,985       (344 )
Increase (decrease) in operating liabilities, net of acquired business:
       
Accounts payable
    9,741       9,695  
Accrued warranty
    212       (558 )
Accrued customer rebates
    (74 )     218  
Accrued compensation and related taxes
    366       (1,537 )
Accrued vacation
    (52 )     (33 )
Deposits from customers
    (1,650 )     (6,508 )
Other current liabilites and accrued expenses
    (1,079 )     328  
Taxes on income
    85       (868 )
Total adjustments
    26,360       25,361  
Net cash provided by operating activities
    26,440       28,943  
                 
Cash flows from investing activities:
               
Proceeds from sale of discontinued operations
    -       7,428  
Purchases of property, plant and equipment
    (3,631 )     (3,017 )
Proceeds from sale of property, plant and equipment
    96       18  
Acquisition of business, net of cash acquired
    (4,746 )     (13 )
Net cash (used in) provided by investing activities
    (8,281 )     4,416  
                 
Cash flows from financing activities:
               
Proceeds from long-term debt
    17       29,024  
Payments on long-term debt
    (78 )     (60,122 )
Net use of cash from the exercise, vesting or cancellation of stock incentive awards
    (197 )     (270 )
Cash paid related to tax impact of stock incentive plan transactions
    (232 )     (575 )
Payment of dividends
    (1,671 )     (1,642 )
Net cash used in financing activities
    (2,161 )     (33,585 )
                 
Cash flows from discontinued operations:
               
Operating activities
    -       (4,358 )
Investing activities
    -       2,851  
Net cash used in discontinued operations
    -       (1,507 )
                 
Net increase (decrease) in cash and cash equivalents
    15,998       (1,733 )
Cash and cash equivalents at beginning of period
    14,507       18,475  
Cash and cash equivalents at end of period
  $ 30,505     $ 16,742  
 
Non-cash investing activities for 2011 included the issuance of common stock valued at $1,029 in conjunction with the acquisition of Classic Fire, LLC
 
See Accompanying Notes to Condensed Consolidated Financial Statements
 
 
7

 
 
SPARTAN MOTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(In thousands)
 (Unaudited)
 
 
   
Number of
   
Common
   
Additional
   
Retained
   
Total Shareholders'
 
   
Shares
   
Stock
   
Paid In Capital
   
Earnings
   
Equity
 
Balance at December 31, 2010
    33,215     $ 332     $ 68,715     $ 113,932     $ 182,979  
                                         
Issuance of common stock and the tax impact of stock incentive plan transactions
    (41 )     -       (429 )     -       (429 )
                                         
Issuance of common stock related to investment in subsidiary
    188       2       1,027       -       1,029  
                                         
Issuance of restricted stock, net of cancellation
    217       2       (2 )     -       -  
                                         
Stock based compensation expense related to restricted stock
    -       -       1,305       -       1,305  
                                         
Dividends declared
    -       -       -       (1,671 )     (1,671 )
                                         
Net income
    -       -       -       80       80  
                                         
Balance at September 30, 2011
    33,579     $ 336     $ 70,616     $ 112,341     $ 183,293  
 
 
See Accompanying Notes to Condensed Consolidated Financial Statements.
 
 
8

 
SPARTAN MOTORS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
 
NOTE 1 - GENERAL AND SUMMARY OF ACCOUNTING POLICIES
 
For a description of key accounting policies followed refer to the notes to the Spartan Motors, Inc. (the “Company”) consolidated financial statements for the year ended December 31, 2010, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 15, 2011.  There have been no changes in such accounting policies as of the date of this report.
 
The accompanying unaudited interim condensed consolidated financial statements reflect all normal and recurring adjustments that are necessary for the fair presentation of the Company’s financial position as of September 30, 2011, the results of operations for the three and nine month periods ended September 30, 2011 and the cash flows for the nine month periods ended September 30, 2011 and 2010, and should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
 
In June 2010, the Company’s Board of Directors approved a plan to exit from Road Rescue, Inc. (“Road Rescue”), a wholly-owned subsidiary of the Company.  In September 2010, the Company completed the sale of substantially all of the assets and related liabilities of Road Rescue.  For all periods presented, the operating results related to Road Rescue have been classified as discontinued operations.  Additionally, results of the discontinued operations are excluded from the accompanying notes to the condensed consolidated financial statements for all periods presented, unless noted otherwise. See Note 6 - Discontinued Operations for further detail.

The results of operations for the nine month period ended September 30, 2011 are not necessarily indicative of the results to be expected for the full year.

The Company is required to disclose the fair value of its financial instruments in accordance with Financial Accounting Standards Board (FASB) Codification relating to “Disclosures about Fair Values of Financial Instruments.”  The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and the Company’s fixed and variable rate debt instruments approximate their fair value at September 30, 2011 and December 31, 2010.

Certain immaterial amounts in the prior periods’ financial statements have been reclassified to conform to the current period’s presentation.

Recently issued accounting standard.  In September, 2011 the FASB issued Accounting Standards Update 2011-08 “Intangibles – Goodwill and Other (Topic 350):  Testing Goodwill for Impairment” (“ASU 2011-08”).  ASU 2011-08 permits entities to 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 the amendments in ASU 2011-08, an entity is not required to calculate the fair value of a reporting unit unless it determines that it is more likely than not that the fair value of the reporting unit is less than its carrying amount.  ASU 2011-08 is effective for interim and annual goodwill impairment tests performed for fiscal years beginning on or after December 15, 2011, with early adoption permitted.  The Company does not expect that the adoption of ASU 2011-08 will have a material impact on its consolidated financial statements.
 
 
9

 
 
SPARTAN MOTORS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
 
NOTE 2 – INVENTORIES

Inventories are summarized as follows:
 
   
September 30,
   
December 31,
 
   
2011
   
2010
 
             
Finished goods
  $ 12,617     $ 16,453  
Work in process
    19,747       9,528  
Raw materials and purchased components
    37,528       37,867  
Reserve for slow-moving inventory
    (5,015 )     (3,687 )
                 
    $ 64,877     $ 60,161  

Included in the “Raw materials and purchased components” line item above are transitional engines purchased in preparation for the 2010 engine emissions regulatory change.  These engines amounted to approximately $1,226 and $5,560 at September 30, 2011 and December 31, 2010, respectively.  As of September 30, 2011, customer deposits related to these engines approximate $394.

The Company also has a number of demonstration units as part of its sales and training program.  These demonstration units are included in the “Finished goods” line item above, and amounted to approximately $11,072 and $11,409 at September 30, 2011 and December 31, 2010, respectively.
 
NOTE 3 - WARRANTIES
 
The Company’s products generally carry limited warranties based on terms that are generally accepted in the marketplace.  Some components included in the Company’s end products (such as engines, transmissions, tires, etc.) may include manufacturers’ warranties.  These manufacturers’ warranties are generally passed onto the end customer of the Company’s products.
 
The Company’s 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 management’s best estimate of the expected future cost of honoring the Company’s obligations under the warranty agreements. Historically, the cost of fulfilling the Company’s warranty obligations has principally involved replacement parts and labor for field retrofit campaigns.  The Company’s 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.  Infrequently, a material warranty issue can arise which is beyond the scope of the Company’s historical experience.  The Company provides 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 the Company’s historical experience.
 
 
10

 
SPARTAN MOTORS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
 
Changes in the Company’s warranty liability were as follows for the nine months ended September 30:

   
2011
   
2010
 
Balance of accrued warranty at January 1
  $ 5,702     $ 6,296  
Warranties issued during the period
    2,179       2,426  
Adjustments (1)
    140       -  
Cash settlements made during the period
    (3,073 )     (4,105 )
Changes in liability for pre-existing warranties during the period, including expirations
    1,106       1,121  
Balance of accrued warranty at September 30
  $ 6,054     $ 5,738  

(1)  Adjustments are assumed warranties outstanding at Classic Fire on April 1, 2011.
 
NOTE 4 – ACQUISITION ACTIVITIES

On April 1, 2011, the Company completed its acquisition of substantially all of the assets and related liabilities of Classic Fire, LLC (“Classic Fire”), a manufacturer of fire trucks and fire apparatus.  The Company expects that its acquisition of Classic Fire will allow it to expand its offerings in the fire truck market into segments and price points that complement its offerings from Spartan Motors Chassis, Inc. and Crimson Fire, Inc., as well as provide strategic sourcing of pump modules and other technology.  Classic Fire is reported as a component of the Company’s Specialty Vehicles segment.  The pro forma effect of the acquisition on the Company’s results of operations is immaterial.

The revenue and earnings of Classic Fire, included in the Company’s results since the April 1, 2011 acquisition, and acquisition related expenses included in the Company’s Condensed Consolidated Statements of Operations are not material.

This acquisition was accounted for using the purchase method of accounting and the purchase price was allocated to the assets purchased and liabilities assumed based upon their estimated fair values at the date of acquisition.  Identifiable intangible assets acquired include a trade name, customer and dealer relationships, unpatented technology and certain non-compete agreements.  The excess purchase price over the net tangible and intangible assets acquired of $2,397 was recorded as goodwill, which is expected to be deductible for tax purposes.  The purchase price consisted of cash consideration of $3,975, net of cash acquired of $25, paid by the Company at closing; a working capital adjustment of $771; Spartan Motors, Inc. common stock valued at $1,029 and a contingency for certain performance-based earn out payments recorded at $180, discounted to April 1, 2011.

 
11

 
SPARTAN MOTORS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
 
The purchase price was allocated to assets acquired and liabilities assumed as follows:

Cash and cash equivalents
  $ 25  
Accounts receivable
    635  
Inventory
    1,352  
Other current assets
    7  
Property, plant and equipment
    451  
Intangible assets
    1,650  
Goodwill
    2,397  
Total assets acquired
    6,517  
         
Accounts payable
    186  
Accrued warranty
    140  
Other current liabilities
    31  
Other non-current liabilities
    180  
Total liabilities assumed
    537  
         
Total purchase price
  $ 5,980  
 
The Company leases the land and building that houses the operations of Classic Fire, from an entity that is controlled by the sellers of Classic Fire, under an operating lease with an initial term of three years.  The lease contains options allowing the Company to renew the lease for an additional three year term, or purchase the property at a fixed price at any time during the initial lease period or the renewal period, if any.  For purchase accounting purposes, the Company recorded an unfavorable lease liability valued at $180 at April 1, 2011.  For the three and nine months ended September 30, 2011 the Company accreted $15 and $30 to earnings as amortization of this liability.
 
NOTE 5 – GOODWILL AND INTANGIBLE ASSETS

As described in Note 4 - Acquisition Activities, the Company acquired substantially all of the assets and related liabilities of Classic Fire on April 1, 2011.  The difference between the consideration paid and the acquisition-date fair value of the identifiable assets acquired and liabilities assumed was recognized as goodwill, as disclosed in the table below. Due to the short period of time that has elapsed since the acquisition of Classic Fire, it is the Company’s assessment that the goodwill at Classic Fire is not impaired.  The goodwill at Classic Fire will be evaluated as part of the next annual assessment which will occur as of October 1, 2011.

 
12

 
SPARTAN MOTORS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
 
Changes in the carrying amount of goodwill, by reportable segment, are as follows:
 
   
Goodwill by segment
 
   
Specialty
Vehicles
   
Delivery and
Service
Vehicles
   
Total
 
Balance as of December 31, 2010
  $ 2,457     $ 15,961     $ 18,418  
                         
Acquisition of Classic Fire
    2,397       -       2,397  
                         
Balance as of September 30, 2011
  $ 4,854     $ 15,961     $ 20,815  
 
There were no accumulated impairment charges recorded against the goodwill in the Company’s Specialty Vehicles or Delivery and Service Vehicles segments as of December 31, 2010.

With the acquisition of Classic Fire, the Company acquired other intangible assets besides goodwill.  The Company recorded $1,650 in intangibles from the acquisition.  The intangibles consist of a trade name, unpatented technology, customer and dealer relationships and non-compete agreements.  The trade name has an indefinite life, and will be tested for impairment annually as of October 1, along with the Company’s other indefinite lived intangible asset.  The remaining intangible assets will all be amortized using the straight-line method over their estimated remaining lives, consistent with the pattern of economic benefits estimated to be received.

The following table provides information regarding the Company’s intangible assets, which include those that were acquired as part of the Classic Fire and Utilimaster Corporation acquisitions:

         
September 30, 2011
   
December 31, 2010
 
   
Weighted average amortization
period (years)
   
Gross
carrying
amount
   
Accumulated amortization
   
Net
   
Gross
carrying
amount
   
Accumulated amortization
   
Net
 
Customer and dealer relationships
    18     $ 6,760     $ 676     $ 6,084     $ 6,170     $ 282     $ 5,888  
Acquired product development project
    20       1,860       -       1,860       1,860       -       1,860  
Unpatented technology
    10       380       19       361       -       -       -  
Non-compete agreements
    6       520       137       383       400       72       328  
Backlog
 
less than 1
      320       320       -       320       320       -  
Trade Names
 
indefinite
      3,430       -       3,430       2,870       -       2,870  
                                                         
            $ 13,270     $ 1,152     $ 12,118     $ 11,620     $ 674     $ 10,946  
 
 
 
13

 
SPARTAN MOTORS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
 
The estimated remaining amortization associated with finite-lived intangible assets is expected to be expensed as follows:

Remaining 2011
  $ 175  
2012
    891  
2013
    958  
2014
    870  
2015
    775  
Thereafter
    5,019  
         
    $ 8,688  
 
NOTE 6 - DISCONTINUED OPERATIONS

In June 2010, the Company’s Board of Directors decided to discontinue the operations of Road Rescue and hold the assets for sale.  The exit of the Road Rescue operations was driven by the realignment of the Company’s cost structure and a focus on areas of the business that generate profitable market share.   Exiting this business has allowed the Company to concentrate its efforts and resources on business opportunities with the best long-term growth potential and focus more on core operations.

On September 20, 2010, the Company completed the sale of substantially all of the assets and related liabilities of its Road Rescue operations to an unrelated party for $8,000, consisting of $7,067 in cash, net of working capital adjustments of $572 and selling costs of $361.  During the fourth quarter of 2010, the working capital adjustment was finalized, resulting in an additional adjustment of $70, paid by the Company to the purchaser.  The acquiring entity is not a related party of the Company.

The following table details the results of discontinued operations for the three and nine months ended September 30, 2010 reported in the Condensed Consolidated Statements of Operations within Net loss from discontinued operations:

   
Three Months
   
Nine Months
 
Sales
  $ 4,377     $ 14,002  
Pre-tax loss from operations
    (346 )     (4,972 )
Pre-tax gain on sale
    545       545  
Net loss
    (167 )     (2,872 )

 
 
14

 
SPARTAN MOTORS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
 
NOTE 7 – EARNINGS PER SHARE

The following table presents a reconciliation of the weighted average shares outstanding used in the Net earnings per share (“EPS”) calculation (in thousands):

   
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Basic weighted average common shares outstanding
    33,506       33,056       33,391       32,961  
Effect of dilutive stock options
    19       23       68       82  
Diluted weighted average common shares outstanding
    33,525       33,079       33,459       33,043  
 
Stock option awards totaling 382 and 625 shares for the three months ended September 30, 2011 and 2010, and 33 and 260 shares for the nine months ended September 30, 2011 and 2010 were not included in the calculation of diluted earnings per common share because the effect would have been anti-dilutive.  Although these stock awards were not included in the Company’s calculation of diluted earnings per share, they may have a dilutive effect on the earnings per share calculation in future periods if the price of the common stock increases.
 
NOTE 8 – DEBT

Long-term debt consists of the following:

   
September 30,
2011
   
December 31,
2010
 
Note payable to Prudential Investment Management, Inc.
           
    Principal due December 1, 2016 with quarterly interest
         only payments of $68 at 5.46%.  Unsecured debt.
  $ 5,000     $ 5,000  
Line of credit revolver with JP Morgan Chase Bank (1)
    --       --  
Capital lease obligations (2)
    162       224  
    Total debt
    5,162       5,224  
    Less current portion of long-term debt
    (64 )     (102 )
    Total long-term debt
  $ 5,098     $ 5,122  

The long-term debt due is as follows: $14 in 2012; $56 in 2013; $28 in 2014; none in 2015 and $5,000 thereafter.

(1)  
The Company’s primary line of credit is a $70,000 unsecured revolving line with JPMorgan Chase Bank and Wells Fargo Bank, expiring on November 30, 2012. Both lending institutions equally share this commitment. This line carries an interest rate equal to the Eurodollar rate plus an applicable margin.
(2)  
The Company leases certain office equipment, computer hardware and material handling equipment classified as capital leases.  Future minimum lease payments required under these leases having initial or remaining non cancelable lease terms in excess of one year amount to:  $26 in 2011, $52 in 2012, $56 in 2013 and $28 in 2014.
 
 
 
15

 
SPARTAN MOTORS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
 
The Company has a private shelf agreement with Prudential Investment Management, Inc.  This agreement allows the Company to borrow up to an additional $45,000 to be issued in $5,000 minimum increments.  The interest rate is determined based on applicable rates at the time of issuance.  The Company had $5,000 of private placement notes outstanding as of September 30, 2011 and December 31, 2010 with Prudential Investment Management, Inc.

Under the terms of the primary line of credit agreement and the private shelf agreement, the Company is required to maintain certain financial ratios and other financial conditions. The agreements also prohibit the Company from incurring additional indebtedness; limit certain acquisitions, investments, advances and loans; and restrict substantial asset sales.  At September 30, 2011 and December 31, 2010, the Company was in compliance with all debt covenants.
 
NOTE 9 – RESTRUCTURING

During the second quarter of 2011, the Company undertook restructuring activities to help align its structure and operating expenses with current and future revenue expectations.  Restructuring charges incurred during the nine months ended September 30, 2011 include $1,186 for the write down of fixed assets for a building that is no longer in use and tooling related to a discontinued product line; $278 for severance costs related to personnel reductions; and $1,317 to write down inventories related to a discontinued product line and de-emphasized markets.  Restructuring charges affecting cost of products sold amounted to $1,731 for the nine months ended September 30, 2011.  Restructuring charges impacting operating expenses for the nine months ended September 30, 2011 amounted to $1,050. There were no material charges or credits related to these restructuring activities incurred after June 30, 2011.


 
16

 
SPARTAN MOTORS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
 
The following table provides a summary of the compensation related charges incurred through the three and nine month period ended September 30, 2011 and the related outstanding balances to be paid out in relation to those expenses:

   
Severance
 
Balance as of Jan 1, 2011
  $ 116  
         
Accrual for severance
    -  
         
Payments made in period
    (58 )
         
Balance March 31, 2011
    58  
         
Accrual for severance
    278  
         
Payments made in period
    (58 )
         
Balance June 30, 2011
    278  
         
Adjustment to severance accrual
    (96 )
         
Payments made in period
    (129 )
         
Balance September 30, 2011
    53  
 
During the second quarter of 2010, the Company undertook restructuring activities, pertaining to continuing operations, to help align expenses with future revenue expectations.  Restructuring charges incurred in the nine months ended September 30, 2010 were $1,996 consisting of compensation related costs of $1,022 and changes in reserves for inventory of $974.  Of the total $1,996 in restructuring charges, $990 and $1,006 affected cost of products sold and operating expenses, respectively.

Restructuring charges, by reportable segment, included in the Consolidated Statements of Operations for the nine months ended September 30, 2011 and 2010 included the following:

   
2011
   
2010
 
   
Specialty
Vehicles
   
Other
   
Total
   
Specialty
Vehicles
   
Delivery
& Service
Vehicles
   
Total
 
                                     
Accrual for severance
  $ 278     $ -     $ 278     $ 380     $ 642     $ 1,022  
                                                 
Inventory impairment
    1,317       -       1,317       974       -       974  
                                                 
Asset impairment
    1,060       126       1,186       -       -       -  
                                                 
Totals
  $ 2,655     $ 126     $ 2,781     $ 1,354     $ 642     $ 1,996  

 
 
17

 
SPARTAN MOTORS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
 
NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES

Under the terms of its credit agreement with its banks, the Company has the ability to issue letters of credit totaling $5,000.  The balance of letters of credit outstanding was $430 and $1,180 at September 30, 2011 and December 31, 2010, respectively.

Utilimaster Corporation (“Utilimaster”), a wholly owned subsidiary of the Company, is party to a chassis bailment inventory agreement with General Motors Company (“GM”) which allows GM to draw up to $5,000 against the Company’s revolving credit line (discussed in Note 8) for chassis placed at Utilimaster.  As a result of this agreement, there was $1,858 and $0 outstanding on the Company’s revolving credit line on September 30, 2011 and December 31, 2010, respectively.  Under the terms of the bailment inventory agreement, these chassis never become the property of Utilimaster, and the amount drawn against the credit line will be repaid by a GM dealer at the time an order is placed for a Utilimaster body, utilizing a GM chassis.  As such, the chassis, and the related draw on the line of credit, are not reflected in the accompanying condensed consolidated financial statements.  As a result of this program, the net available to borrow under the line of credit was $65,000, at September 30, 2011.
 
In connection with the acquisition of Utilimaster in November, 2009, the Company incurred contingent obligations through 2014 in the form of certain performance-based earn-out payments, up to an aggregate maximum amount of $7,000. In accordance with accounting guidance, the Company recorded an estimated fair value of the future consideration to be $2,772 based upon the likelihood of the payments, discounted to September 30, 2011.  The increase in fair value since the acquisition date resulted in charges of $671 and $1,001 for the three and nine months ended September 30, 2011, and $170 for the three and nine months ended September 30, 2010, appearing within Selling, general and administrative on the Condensed Consolidated Statements of Operations. The increase in fair value in 2011 is primarily due to the increase in forecasted revenue for Utilimaster over levels expected at the time of the acquisition.  Management believes that the Company has sufficient liquidity to fund the contingent obligations as they become due.

In connection with the acquisition of Classic Fire in April, 2011, the Company incurred contingent obligations through 2013 in the form of certain performance-based earn-out payments, up to an aggregate maximum amount of $1,000.  In accordance with accounting guidance, the Company recorded an estimated fair value of the future consideration to be $216 based upon the likelihood of the payments, discounted to September 30, 2011.  Management believes that the Company has sufficient liquidity to fund the contingent obligations as they become due.

Spartan Motors Chassis, Inc. (“Spartan Chassis”) is currently in negotiations with a customer regarding certain supply contracts Spartan Chassis has completed but for which the customer is now claiming a post-delivery price adjustment.  Throughout the course of Spartan Chassis's relationship with this customer (dating back to 2006), Spartan Chassis always sold products to the customer on what Spartan Chassis believed to be a “fixed price” basis.  This price was then used in the customer's purchase order and was paid to Spartan Chassis in the ordinary course of business by the customer following delivery of the product by Spartan Chassis.  In the spring of 2009, for the first time, the customer notified Spartan Chassis of the customer's claim that the pricing for certain orders made by the customer, filled by Spartan Chassis, and paid for by the customer, had not been “definitized” and was yet to be agreed upon by the parties.  Spartan Chassis believes the pricing for all of the contested orders was, in fact, agreed-upon by the parties and is vigorously disputing this claim by the customer. Spartan Chassis and the customer are engaged in negotiations in an attempt to resolve the dispute.  To date, no resolution has been reached and the Company's liability, if any, with respect to this matter remains uncertain.

 
18

 
SPARTAN MOTORS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
 
At September 30, 2011, the Company and its subsidiaries were parties, both as plaintiff and defendant, to a number of lawsuits and claims arising out of the normal course of their businesses.  In the opinion of management, the financial position, future operating results or cash flows of the Company will not be materially affected by the final outcome of these legal proceedings.
 
NOTE 11 - BUSINESS SEGMENTS

The Company operates in two reportable segments: Specialty Vehicles, which consists of the Company’s emergency response chassis, motor home chassis, defense vehicles, emergency response bodies and related aftermarket parts and assemblies operations; and Delivery and Service Vehicles, consisting of Utilimaster.

The Specialty Vehicles segment consists of Spartan Chassis, Crimson Fire, Crimson Fire Aerials and Classic Fire.  This segment engineers and manufactures emergency response chassis and motor home chassis, as well as emergency response bodies, defense vehicles and aftermarket parts and assemblies.  The Delivery and Service Vehicles segment focuses on designing and manufacturing walk-in vans for the delivery and service market and the production of commercial truck bodies along with related aftermarket parts and assemblies.  Assets and related depreciation expense, along with interest expense, in the column labeled “Other” pertain to capital assets and debt maintained at the corporate level.  Appropriate expense amounts are allocated to the two reportable segments and are included in their reported earnings or loss from operations.  Segment loss from operations in the “Other” column contains the related eliminations for the allocation, as well as corporate related expenses not allocable to the operating segments.


 
19

 
SPARTAN MOTORS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
 
The accounting policies of the segments are the same as those described, or referred to, in Note 1 - General and Summary of Accounting Policies. Sales and other financial information by business segment are as follows:

Three Months Ended September 30, 2011
                       
   
Business Segments
             
   
Specialty
Vehicles
   
Delivery and
Service
Vehicles
   
Other
   
Consolidated
 
                         
Emergency response chassis sales
  $ 23,589     $ -     $ -     $ 23,589  
Emergency response body sales
    11,749       -       -       11,749  
Motor home chassis sales
    14,156       -       -       14,156  
Utilimaster product sales
    -       42,157       -       42,157  
Other product sales:
                               
   Vehicles
    2,910       -       -       2,910  
   Aftermarket parts and assemblies
    6,688       19,054       -       25,742  
                                 
Sales
  $ 59,092     $ 61,211     $ -     $ 120,303  
                                 
Interest expense
  $ 8     $ 57     $ 23     $ 88  
Depreciation and amortization expense
    1,167       575       570       2,312  
Taxes (credit) on income
    (376 )     2,872       (578 )     1,918  
Net earnings (loss) from continuing operations
    (723 )     4,786       (865 )     3,198  
Segment assets
    98,609       76,030       76,733       251,372  
 
 
Three Months Ended September 30, 2010
                       
   
Business Segments
             
   
Specialty
Vehicles
   
Delivery and
Service
Vehicles
   
Other
   
Consolidated
 
                         
Emergency response chassis sales
  $ 33,437     $ -     $ -     $ 33,437  
Emergency response body sales
    9,546       -       -       9,546  
Motor home chassis sales
    21,526       -       -       21,526  
Utilimaster product sales
    -       22,402       -       22,402  
Other product sales:
                               
   Vehicles
    8,336       -       -       8,336  
   Aftermarket parts and assemblies
    20,111       5,214       -       25,325  
                                 
Sales
  $ 92,956     $ 27,616     $ -     $ 120,572  
                                 
Interest expense
  $ 348     $ 34     $ (144 )   $ 238  
Depreciation and amortization expense
    1,231       788       593       2,612  
Taxes (credit) on income
    2,354       14       (416 )     1,952  
Net earnings (loss) from continuing operations
    4,053       25       (594 )     3,484  
Segment assets
    128,902       73,799       59,394       262,095  
 
 
 
20

 
SPARTAN MOTORS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
 
Nine Months Ended September 30, 2011
                       
   
Business Segments
             
   
Specialty
Vehicles
   
Delivery and
Service
Vehicles
   
Other
   
Consolidated
 
                         
Emergency response chassis sales
  $ 76,424     $ -     $ -     $ 76,424  
Emergency response body sales
    33,603       -       -       33,603  
Motor home chassis sales
    48,560       -       -       48,560  
Utilimaster product sales
    -       84,446       -       84,446  
Other product sales:
                               
   Vehicles
    10,992       -       -       10,992  
   Aftermarket parts and assemblies
    21,580       39,195       -       60,775  
                                 
Sales
  $ 191,159     $ 123,641     $ -     $ 314,800  
                                 
Interest expense
  $ 26     $ 229     $ 5     $ 260  
Depreciation and amortization expense
    3,866       1,699       1,945       7,510  
Taxes (credit) on income
    (1,774 )     3,279       (1,457 )     48  
Net earnings (loss) from continuing operations
    (2,660 )     5,464       (2,724 )     80  
Segment assets
    98,609       76,030       76,733       251,372  

 
Nine Months Ended September 30, 2010
                       
   
Business Segments
             
   
Specialty
Vehicles
   
Delivery and
Service
Vehicles
   
Other
   
Consolidated
 
                         
Emergency response chassis sales
  $ 110,325     $ -     $ -     $ 110,325  
Emergency response body sales
    36,573       -       -       36,573  
Motor home chassis sales
    69,847       -       -       69,847  
Utilimaster product sales
    -       61,266       -       61,266  
Other product sales:
                               
   Vehicles
    18,339       -       -       18,339  
   Aftermarket parts and assemblies
    44,952       12,559       -       57,511  
                                 
Sales
  $ 280,036     $ 73,825     $ -     $ 353,861  
                                 
Interest expense
  $ 1,051     $ 101     $ (340 )   $ 812  
Depreciation and amortization expense
    3,706       2,641       1,780       8,127  
Taxes (credit) on income
    4,771       (1,337 )     (1,425 )     2,009  
Net earnings (loss) from continuing operations
    8,356       (2,378 )     (2,396 )     3,582  
Segment assets
    128,902       73,799       59,394       262,095  

 
 
21

 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Spartan Motors, Inc. was organized as a Michigan corporation on September 18, 1975, and is headquartered in Charlotte, Michigan. We began development of our first product that same year and shipped our first fire truck chassis in October 1975.

We are known as a leading niche-market engineer and manufacturer in the heavy-duty, specialty vehicles marketplace. We have five wholly-owned operating subsidiaries: Spartan Motors Chassis, Inc., located at our corporate headquarters in Charlotte, Michigan (“Spartan Chassis”); Crimson Fire, Inc., located in Brandon, South Dakota (“Crimson”); Crimson Fire Aerials, Inc., located in Ephrata, Pennsylvania (“Crimson Aerials”); Utilimaster Corporation, located in Wakarusa, Indiana (“Utilimaster”); and, as of April 1, 2011, Classic Fire, LLC (“Classic Fire”), located in Ocala, Florida. On September 20, 2010 we completed the sale of substantially all of the assets and related liabilities of our Road Rescue, Inc. subsidiary, located in Marion, South Carolina (“Road Rescue”).  Spartan Chassis, Crimson, Crimson Aerials and Classic Fire make up our Specialty Vehicles segment and Utilimaster comprises our Delivery and Service Vehicles segment. Classic Fire was included in our Specialty Vehicles segment beginning with the second quarter of 2011.  Our brand names, Spartan™, Crimson Fire™, and Utilimaster™ are known for quality, value, service and innovation.

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

Our business strategy is to further diversify product lines and develop innovative design, engineering and manufacturing expertise in order to be the best value producer of specialty vehicle products.  We have an innovative team focused on building lasting relationships with our customers. This is accomplished by striving to deliver premium specialty vehicles, vehicle components, and services that inspire customer loyalty.  Our diversification across several sectors creates numerous opportunities while minimizing overall risk.  Additionally, our business model provides the agility to quickly respond to market needs, take advantage of strategic opportunities when they arise and correctly size operations to ensure stability and growth.

Recent Acquisition

On April 1, 2011, we completed our acquisition of substantially all of the assets of Classic Fire, a manufacturer of fire trucks and fire apparatus, as more fully described in Note 4 - Acquisition Activities, of the Notes to Condensed Consolidated Financial Statements appearing in Item 1 of this Form 10-Q.  We expect that our acquisition of Classic Fire will allow us to expand our offerings in the fire truck market into segments and price points that complement our offerings from Spartan Chassis and Crimson as well as provide strategic sourcing of pump modules and other technology.
 
 
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Discontinued Operations

In June 2010, our Board of Directors approved a plan to exit the operations of Road Rescue to focus on more profitable markets and invest in strategic growth initiatives.  On September 20, 2010, we completed the sale of substantially all of the assets and related liabilities of our Road Rescue operations for a sales price of $8.0 million, consisting of $7.0 million in cash, net of a net working capital adjustment of $0.6 million and selling costs of $0.4 million.

For the three and nine months ended September 30, 2010, the operating results related to Road Rescue have been classified as discontinued operations.  See Note 6 – Discontinued Operations, in the Notes to Condensed Consolidated Financial Statements appearing in Item 1 of this Form 10-Q for further details related to this activity and its impact on the reported period’s results.

Executive Overview

We reported sales of $120.3 million for the third quarter of 2011, which was flat with the previous year’s third quarter and represents an increase of 21.1% from the revenue of $99.4 million that we recorded in the second quarter of 2011.  We reported net income of $3.2 million, or $0.10 per diluted share for the three months ended September 30, 2011, compared to income from continuing operations of $3.5 million, or $0.11 per diluted share, and net income of $3.3 million or $0.10 per diluted share, for the same period in 2010.  Our third quarter net income represents an increase of $5.4 million over the net loss of $2.2 million we reported for the second quarter of 2011.

Our Delivery and Service Vehicles segment continued its strong performance in the third quarter, with an increase in sales of $33.6 million or 121.7% to $61.2 million for the quarter ended September 30, 2011 compared to $27.6 million for the same period in 2010.  These increases were somewhat offset by the continuing softness in our Specialty Vehicle segment, with most of the markets served by that segment showing decreases in revenues in the third quarter of 2011 compared to the same period in 2010.

Our overall backlog decreased by 20.4% to $142.8 million at September 30, 2011 compared to $179.3 million at June 30, 2011.  This decrease was driven by the Delivery and Service Vehicles segment, which experienced decreases in backlog for certain aftermarket parts and assemblies as orders were filled, along with some seasonal decreases in late year orders from our major fleet customers in anticipation of their busy holiday delivery season.

The current quarter’s results reflect the strength of our diversified business lines as well as savings from the restructuring activities undertaken in the second quarter and completed in the third quarter of 2011.  Throughout the year we experienced strong cash flows from operations with the help of tightly managed accounts receivable and inventory balances.   This generation of cash from operations allowed us to complete our purchase of Classic Fire without incurring additional debt.  Our balance sheet remains strong with a healthy cash balance, low debt and an open line of credit.

 
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As a result of our revenue diversification and growth and innovation strategies, we believe we are well positioned to take advantage of long-term opportunities.  Some of our recent innovations and strategic developments include:
 
  The Reach™, a commercial van offering up to 35% better fuel economy, which debuted at the 2011 National Truck Equipment Association’s “The Work Truck Show" in March.  This compelling product establishes a new benchmark for safety, performance and cost-effectiveness and further solidifies Utilimaster’s technical leadership in the delivery and service market.  Initial shipments are expected in the fourth quarter of 2011.
     
  Continued ramp up of production of the N-Series gas cab and chassis assembly, in partnership with Isuzu Commercial Truck of America.  We continue to broaden our reach into new market niches and explore opportunities to leverage our existing assembly capacity and expertise in order to increase volumes and utilize capacity.
     
  The expansion of the Crimson Fire product portfolio with the addition of the Classic Series, as a result of our acquisition of Classic Fire.  Consisting of eight new product offerings, this product line complements the Legend and Star Series.  The Classic Series offers high performance and is already known for durability and unparalleled quality at affordable prices – a critical market position given current economic realities.
     
  The introduction of our newest cab and chassis, the “Spartan Force”, which offers custom features, such as improved performance, spacious cab and lifetime frame warranty, all at an aggressive market-penetrating price.
     
  The award of orders to Spartan Chassis for 23 Metro Star® emergency response chassis for multiple fire departments in China, representing another step forward in our efforts to expand sales globally.
     
  Investments in air bag technology, which will be offered in Spartan chassis beginning in 2012 and will expand our bid opportunities while providing another compelling reason for customers to choose a Spartan product.
     
  Growth opportunities in field service solutions for existing customer fleets that will allow for the improvement in performance, safety and retrofitting with new vocational packages.
 
The following section provides a narrative discussion about our financial condition and results of operations. The comments should be read in conjunction with our Condensed Consolidated Financial Statements and related Notes thereto included in Item 1 of this Form 10-Q and in conjunction with our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 15, 2011.
 
 
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RESULTS OF OPERATIONS
 
The following table sets forth, for the periods indicated, the components of the Company’s Condensed Consolidated Statements of Operations as a percentage of sales:
 
   
Three Months Ended September 30,
 
   
2011
   
2010
 
Sales
    100.0       100.0  
Cost of products sold
    83.0       83.6  
Gross profit
    17.0       16.4  
Operating expenses:
               
Research and development
    2.7       3.3  
Selling, general and administrative
    9.9       8.6  
Operating income (loss)
    4.4       4.5  
Other expense, net
    (0.1 )     0.0  
Earnings before taxes
    4.3       4.5  
Taxes
    1.6       1.6  
Net earnings from continuing operations
    2.7       2.9  
                 
Loss from discontinued operations
    0.0       (0.1 )
                 
Net earnings
    2.7       2.8  
 
 
   
Nine Months Ended September 30,
 
      2011       2010  
Sales
    100.0       100.0  
Cost of products sold
    84.8       84.7  
Restructuring charges
    0.5       0.3  
Gross profit
    14.7       15.0  
Operating expenses:
               
Research and development
    3.3       3.7  
Selling, general and administrative
    11.0       9.3  
Restructuring charges
    0.3       0.3  
Operating income
    0.1       1.7  
Other expense, net
    (0.1 )     (0.1 )
Earnings before taxes
    0.0       1.6  
Taxes
    0.0       0.6  
Net earnings from continuing operations
    0.0       1.0  
                 
Loss from discontinued operations
    0.0       (0.8 )
                 
Net earnings
    0.0       0.2  
 

 
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Quarter Ended September 30, 2011 Compared to the Quarter Ended September 30, 2010

For the three months ended September 30, 2011, consolidated sales of $120.3 million were essentially flat compared to sales for the same period in 2010.  Our Delivery and Service Vehicles segment recorded an increase of $33.6 million or 121.7% from the same quarter in the previous year, which offset a decline in our Specialty Vehicles segment of $33.9 million, or 36.4%, compared with the prior year.  In our Delivery and Service Vehicles segment we expect to see a decrease in sales in the final quarter of 2011 from those experienced in the third quarter due to a decline in field service revenue and the seasonal decrease in our fleet sales due to the busy holiday delivery season in that industry, but we expect the fourth quarter 2011 to be stronger than the same period of 2010.  We expect to see continued softness in our Specialty Vehicles markets for the remainder of 2011.

Cost of products sold decreased by $0.9 million or 0.9%, to $99.9 million in the third quarter of 2011 compared to $100.8 million in the third quarter of 2010.  As a percentage of sales, cost of products sold decreased to 83.0% of sales in the third quarter of 2011, compared to 83.6% of sales in the third quarter of 2010.  This decrease is due to changes in the mix of products sold in the third quarter of 2011 as compared the same period in 2010, along with savings resulting from our restructuring programs implemented in the second quarter of 2011.
 
Gross profit increased $0.6 million, or 3.4%, to $20.4 million for the quarter ended September 30, 2011 from $19.8 million for the same period in 2010.  Consolidated gross margin increased to 17.0% from 16.4% over the same time period.  This increase was the result of the product mix and restructuring savings, as discussed above.  We expect our gross margin levels to decrease in the final quarter of 2011 and the first part of 2012 from the levels we experienced in the third quarter due to decreases in aftermarket parts and assemblies sales in our Delivery and Service Vehicles segment.

Operating expenses increased by $0.8 million or 5.3% to $15.2 million for the quarter ended September 30, 2011, compared to $14.4 million for the same period in 2010.  Research and development expenses decreased by $0.7 million, or 18.2% to $3.3 million for the third quarter of 2011 compared to $4.0 million in the third quarter of 2010.  This decrease is the result of savings due to our restructuring efforts in the second quarter of 2011 along with reduced spending on development of the Reach, as that product moves into production.  Selling, general and administrative expense increased by $1.5 million or 14.4% to $11.9 million for the quarter ended September 30, 2011 compared to $10.4 million in the same period of 2010.  This increase was driven by an increase in commissions, sales related costs and additional provisions for certain earn-out payments associated with the increased revenues at our Utilimaster subsidiary.  Also contributing to the year over year increase were operating expenses from our Classic Fire subsidiary, which were not present in 2010.

Our effective income tax rate was 37.5% in the third quarter of 2011, compared to 35.9% in the third quarter of 2010.  The increase in our effective tax rate is attributable to the impact of certain relatively fixed components of income tax expense and an increase of certain non-deductible expenses over amounts incurred in the previous year.

We recorded net income from continuing operations of $3.2 million, or $0.10 per diluted share, for the three months ended September 30, 2011, which was a decrease of $0.3 million, or 8.2% compared to net income from continuing operations of $3.5 million, or $0.11 per diluted share, for the same period in 2010.  Driving the change in net income for the three months ended September 30, 2011 compared with the prior year were the factors mentioned above.
 
 
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At September 30, 2011, we had $142.8 million in backlog compared to $172.6 million at September 30, 2010, a decrease of $29.8 million or 17.3%, which is attributable to our Specialty Vehicles segment which decreased by $44.7 million or 33.5%.  The decrease in our Specialty Vehicles Segment backlog is attributable to the softness in the emergency vehicle market as a result of tightening government budgets.  We expect this softness in the emergency vehicle market to continue throughout the remainder of 2011.  Also contributing to the decrease in backlog is a reduction in defense related orders for vehicles and aftermarket parts and assemblies.  The above decreases were partially offset by an increase in backlog for our Delivery and Service Vehicles segment, which increased by $14.9 million or 38.2% to $53.9 million at September 30, 2011 from $39.0 million at September 30, 2010.  The increase in our Delivery and Service Vehicles backlog is a reflection of the recovery in this early cycle market.  Although some seasonal drop-off in volumes in our Delivery and Service Vehicles segment is expected, we expect volumes in this segment to remain stronger for the remainder of 2011 than those we experienced in 2010.  Certain items, including certain aftermarket parts and assemblies sales related to our Delivery and Service Vehicles segment and revenues related to assembly contracts undertaken by our Specialty Vehicles segment are not reflected in our current backlog.  The amounts of these items are not currently material to our overall backlog, but we expect these items to increase over time which could cause them to become material in future periods.    Intercompany orders are eliminated from the backlog dollars presented.  We anticipate filling our current backlog orders by May 2012.

While orders in the backlog are subject to modification, cancellation or rescheduling by customers, this has not been a major factor in the past.  Although the backlog of unfilled orders is one of many indicators of market demand, several factors, such as changes in production rates, available capacity, new product introductions and competitive pricing actions, may affect actual sales.  Accordingly, a comparison of backlog from period-to-period is not necessarily indicative of eventual actual shipments.
 
Nine Months Ended September 30, 2011 Compared to the Nine Months Ended September 30, 2010

Consolidated sales decreased $39.1 million, or 11.0% to $314.8 million for the nine months ended September 30, 2011, compared to sales for the same period in 2010 of $353.9 million. The decrease was primarily due to the reduction in our Specialty Vehicle segment where we saw revenues decrease by $88.9 million, or 31.7% from the level of sales in the previous year.  This was partially offset by an increase in our Delivery and Service Vehicles segment which showed an increase of $49.8 million, or 67.5% from the same period in the previous year.  Sales decreased in most of the markets served by our Specialty Vehicles segment with the largest decreases resulting from our emergency response chassis and motor home chassis sales, and sales of defense related parts and assemblies.  We expect these sales trends to continue during the remainder of 2011, with a seasonal decrease in our Delivery and Service Vehicles and somewhat lower revenue from aftermarket parts and assemblies.

Cost of products sold decreased by $32.8 million or 11.0%, to $266.9 million in the nine months ended September 30, 2011 compared to $299.8 million in the nine months ended September 30, 2010.  This decrease was largely the impact of the reduced sales volumes we experienced during the first nine months of 2011 compared with the same period in 2010.  As a percentage of sales, cost of products sold was slightly higher for the nine months ended September 30, 2011, compared to the same period of 2010.
 
 
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Gross profit decreased $7.0 million or 13.1%, to $46.1 million for the nine months ended September 30, 2011 from $53.1 million for the same period in 2010.  Gross margin decreased from 15.0% to 14.7% over the same time period.  This decrease was primarily the result of a product mix shift, along with higher restructuring charges incurred during 2011 compared to those incurred in 2010.

During the nine months ended September 30, 2011 and 2010, we undertook restructuring activities, pertaining to continuing operations, to align our structure and operating expenses with current and expected future revenue levels.  Restructuring charges included within cost of products sold during the nine months ended September 30, 2011 and 2010 were $1.7 million, or 0.5% of sales, and $1.0 million, or 0.3% of sales, respectively.  Excluding all restructuring costs incurred, adjusted gross profit for the nine months ended September 30, 2011 and 2010 was $47.9 million and $54.1 million.

Operating expenses as a percent of sales increased to 14.6% for the nine month period ended September 30, 2011 compared to 13.3% for the same period of 2010.  Operating expense dollars for the nine months ended September 30, 2011, which include restructuring related charges of $1.1 million, showed a decrease of $1.1 million or 2.4% over the same period in 2010, in which restructuring charges of $1.0 million were recorded.  Contributing to the decrease was a reduction in spending on Research and development due to lower spending on the new Reach delivery vehicle as that vehicle nears production and the completion of the 2010 engine emission design work that was included in Research and development for the nine months ended September 30, 2010, that has not been incurred in 2011.  These decreases were partially offset by increased Selling, general and administrative expenses, which were impacted by the addition of Classic Fire in the second quarter of 2011, additional expense for the earn-out contingency related to the Utilimaster acquisition and increased selling expenses at Utilimaster as sales volumes ramped up.  The Research and development and Selling, general and administrative expenses shown for the nine months ended September 30, 2011 reflect adjustments of $0.9 million and $(0.9) million, respectively, made to the expenses disclosed for the second quarter to more accurately depict the Research and development and Selling, general and administrative expenses excluding the restructuring charges incurred during the second quarter.  There was no impact to restructuring charges or total operating expense as a result of these adjustments.
 
Our effective income tax rate was 37.5% for the nine months ended September 30, 2011, compared to 35.9% in the same period of 2010.  The increase in our effective tax rate is attributable to the impact of certain relatively fixed components of income tax expense and an increase in certain non-deductible expenses over the amounts incurred in the prior year.  Due to our reduced pretax income, these items had, and may continue to have, a disproportionate impact on our income tax expense as a percent of pre tax income.

We recorded earnings from continuing operations of $0.1 million for the nine months ended September 30, 2011 compared to earnings from continuing operations of $3.6 million for the same period in 2010, as a result of the factors discussed above.

For the nine months ended September 30, 2010 we recorded a loss from discontinued operations, net of applicable taxes, of $2.9 million, which included impairment charges and exit related costs totaling $2.0 million, net of tax.

Net earnings for the nine months ended September 30, 2011 decreased by $0.6 million to $0.1 million or $0.00 per diluted share in 2011 compared to net earnings of $0.7 million or $0.02 per diluted share in 2010 as a result of the factors discussed above.
 
 
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Restructuring charges incurred during the nine months ended September 30, 2011 and 2010 and included in net earnings from continuing operations were $2.8 million ($1.8 million net of tax) and $2.0 million ($1.2 million net of tax), respectively.  Excluding all restructuring costs incurred, adjusted net earnings from continuing operations was $1.9 million or $0.06 per share for the nine months ended September 30, 2011 and $4.8 million or $0.15 per share for the nine months ended September 30, 2010.

The aforementioned adjusted non-GAAP (Generally Accepted Accounting Principles) measures (adjusted gross profit, adjusted net earnings from continuing operations and adjusted net earnings per share from continuing operations) are not measurements of financial performance under GAAP and should not be considered as an alternative to gross profit, net earnings from continuing operations or net earnings per share from continuing operations under GAAP.  These adjusted measures have limitations as analytical tools, and should not be considered in isolation or as a substitute for analysis of results as reported under GAAP.  In addition, in evaluating adjusted gross profit, adjusted net earnings from continuing operations and adjusted net earnings per share from continuing operations, in the future additional expenses may be incurred similar to the adjustments in this presentation.  This presentation of adjusted measures should not be construed as an inference that future results will be unaffected by unusual or infrequent items.  These limitations are compensated by providing equal prominence of GAAP results and using adjusted measures only as a supplement.
 
The following table reconciles gross profit to adjusted gross profit, net earnings from continuing operations to adjusted net earnings from continuing operations and net earnings per share from continuing operations to adjusted net earnings per share from continuing operations for the periods indicated (dollars in thousands, except per share amounts):
 
   
Nine Months Ended
September 30,
 
   
2011
   
2010
 
Gross profit
  $ 46,136     $ 53,104  
Add back:  restructuring charges
    1,731       990  
Adjusted gross profit
  $ 47,867     $ 54,094  
                 
                 
Net earnings from continuing operations
  $ 80     $ 3,582  
Add back:  restructuring charges, net of tax
    1,796       1,205  
Adjusted net earnings from continuing operations
  $ 1,876     $ 4,787  
                 
                 
Net earnings per share from continuing operations - diluted
  $ 0.00     $ 0.11  
Add back:  restructuring charges, net of tax
    0.06       0.04  
Adjusted net earnings per share from continuing operations - diluted