UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended July 31, 2018

OR

Commission File Number: 001-37999

 

REV Group, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

Registrant’s telephone number, including area code: (414) 290-0190

 

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  ☒    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  ☒    No  ☐

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐

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

As of September 4, 2018, the registrant had 63,194,645 shares of common stock, $0.001 par value per share, outstanding.

 

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Table of Contents

 

 

 

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Cautionary Statement About Forward-Looking Statements

This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue,” “contemplate,” “aim” and other similar expressions, and include our segment net sales and other expectations described under “Overview” below, although not all forward-looking statements contain these identifying words. Investors are cautioned that forward-looking statements are inherently uncertain. A number of factors could cause actual results to differ materially from these statements, including, but not limited to increases in interest rates, availability of credit, low consumer confidence, availability of labor, significant increases in repurchase obligations, inadequate liquidity or capital resources, availability and price of fuel, a slowdown in the economy, increased material and component costs, availability of chassis and other key component parts, sales order cancellations, slower than anticipated sales of new or existing products, new product introductions by competitors, the effect of global tensions and integration of operations relating to mergers and acquisitions activities. Additional information concerning certain risks and uncertainties that could cause actual results to differ materially from that projected or suggested is contained in the “Risk Factors” section in our filings with the U.S. Securities and Exchange Commission (“SEC”). We disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained in this Form 10-Q or to reflect any changes in expectations after the date of this release or any change in events, conditions or circumstances on which any statement is based, except as required by law.

Website and Social Media Disclosure

We use our website (www.revgroup.com) and corporate Twitter account (@revgroupinc) as routine channels of distribution of company information, including news releases, analyst presentations, and supplemental financial information, as a means of disclosing material non-public information and for complying with our disclosure obligations under SEC Regulation FD. Accordingly, investors should monitor our website and our corporate Twitter account in addition to following press releases, SEC filings and public conference calls and webcasts. Additionally, we provide notifications of news or announcements as part of our investor relations website. Investors and others can receive notifications of new information posted on our investor relations website in real time by signing up for email alerts.

 

None of the information provided on our website, in our press releases, public conference calls and webcasts, or through social media channels is incorporated into, or deemed to be a part of, this Quarterly Report on Form 10-Q or in any other report or document we file with the SEC, and any references to our website or our social media channels are intended to be inactive textual references only.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

REV Group, Inc. and Subsidiaries

Condensed Unaudited Consolidated Balance Sheets

(Dollars in millions, except share and per share amounts)

 

See Notes to Condensed Unaudited Consolidated Financial Statements.

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REV Group, Inc. and Subsidiaries

Condensed Unaudited Consolidated Statements of Income

(Dollars in millions, except per share amounts)

 

 

See Notes to Condensed Unaudited Consolidated Financial Statements.

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REV Group, Inc. and Subsidiaries

Condensed Unaudited Consolidated Statements of Cash Flows

(Dollars in millions)

 

See Notes to Condensed Unaudited Consolidated Financial Statements.

 

 

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REV Group, Inc. and Subsidiaries

Condensed Unaudited Consolidated Statement of Shareholders’ Equity

(Dollars in millions)

 

See Notes to Condensed Unaudited Consolidated Financial Statements.

 

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REV Group, Inc. and Subsidiaries

Notes to the Condensed Unaudited Consolidated Financial Statements

(All dollar amounts presented in millions except share and per share amounts)

 

Note 1. Basis of Presentation

The condensed unaudited consolidated financial statements include the accounts of REV Group, Inc. (“REV” or “the Company”) and all its subsidiaries and are prepared in conformity within generally accepted accounting principles in the United States of America (“U.S. GAAP”). All significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying condensed unaudited consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly REV’s consolidated financial position as of July 31, 2018, and October 31, 2017, and the consolidated results of income and comprehensive income for the three and nine months ended July 31, 2018 and July 29, 2017 and the consolidated cash flows for the nine months then ended. The condensed unaudited consolidated statements of income and comprehensive income for the three and nine months ended July 31, 2018, and July 29, 2017 are not necessarily indicative of the results to be expected for the full year. The condensed unaudited consolidated balance sheet data as of October 31, 2017, was derived from audited financial statements, but does not include all of information and footnotes required by U.S. GAAP for complete financial statements. These interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

In the second quarter of fiscal year 2018, the Company made its initial investment in its China joint venture, Anhui Chery REV Specialty Vehicle Technology Co., Ltd (“China JV”). The initial investment of $0.9 million is included in other long-term assets in the Company’s consolidated balance sheet as of July 31, 2018. REV has 10% equity interest in the China JV. During the third quarter of fiscal year 2018, the Company extended a loan to China JV in the amount of $6.7 million at the rate of 5% per annum. The principal and interest of the loan may be converted at the Company’s sole option into an additional 40% equity interest in the China JV. The Company recorded its investment in the China JV under the equity method of accounting.

Initial Public Offering: On January 26, 2017, the Company announced the pricing of an initial public offering (“IPO”) of shares of its common stock, which began trading on the New York Stock Exchange on January 27, 2017. On February 1, 2017, the Company completed the IPO of 12,500,000 shares of common stock at a price of $22.00 per share. The Company received $275.0 million in gross proceeds from the IPO, or $253.6 million in net proceeds after deducting the underwriting discount and expenses related to the IPO. The net proceeds of the IPO were used to pay down the Company’s existing debt. Immediately prior to closing of the IPO, the Company completed an 80-for-one stock split of its Class A common stock and Class B common stock and reclassified the Class A common stock and Class B common stock into a single class of common stock, which was the same class as the shares sold in the IPO.

Recent Accounting Pronouncements

Accounting Pronouncements Recently Adopted

The Company adopted Accounting Standard Update (“ASU”) 2015-11, “Simplifying the Measurement of Inventory” (“ASU 2015-11”) effective fiscal year 2018 and such adoption did not have a material effect on the Company’s consolidated financial statements.

The Company adopted ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting (Topic 718)” (“ASU 2016-09”) effective fiscal year 2018 and such adoption did not have a material effect on the Company’s consolidated financial statements. ASU 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for the related income taxes, forfeitures, statutory tax withholding requirements and classification in the statement of cash flows.

Accounting Pronouncements – To be adopted

In May 2014, the FASB issued their final standard on revenue from contracts with customers. The standard, issued as ASU 2014-09 "Revenue From Contracts with Customers (Topic 606)" by the FASB, outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The ASU is effective beginning November 1, 2018 (the beginning of the Company’s fiscal year 2019). Based on the Company’s assessment completed to date and historical terms of its most significant revenue contracts with customers,

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the Company does not expect a material difference in the timing and amount of revenues recognized today and those upon the adoption of ASU 2014-09, and expects to adopt the standard on a modified retrospective basis. The Company continues to assess the impact of adopting this standard as revenue contracts for fiscal year 2019 are executed. The Company’s preliminary conclusion may differ from that reached on the adoption date, based on actual terms of our revenue contracts with customers, industry clarifications and additional guidance from the FASB and the Securities and Exchange Commission, in effect as of the adoption date.

In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). The amendments in ASU 2017-04 simplify the subsequent measurement of goodwill, by removing the second step of the goodwill impairment test. This ASU is effective for annual reporting periods, and interim reporting beginning after December 15, 2019 (the beginning of the Company’s fiscal year 2021). Early adoption is permitted for testing dates after January 1, 2017. The Company is currently evaluating the impact of ASU 2017-04 on our consolidated financial statements.

Note 2. Acquisitions

The Company has completed numerous acquisitions over the past several years as a component of its growth strategy. The Company has acquired industry leading brands and technologies to position itself as a leader in the industries served.

The Company has accounted for all business combinations using the acquisition method of accounting to record a new cost basis for the assets acquired and liabilities assumed. The difference between the purchase price and the fair value of the assets acquired and liabilities assumed has been recorded as goodwill in the financial statements. The results of operations are reflected in the consolidated financial statements of the Company from the dates of acquisition.

Lance Camper Manufacturing Acquisition

On January 12, 2018, the Company acquired 100% of the common shares of Lance Camper Mfg. Corp. and its sister company Avery Transport, Inc. (collectively, “Lance” and the “Lance Acquisition”). Lance designs, engineers and manufactures truck campers, towable campers and toy haulers. This acquisition gives the Company a meaningful entrance into the high volume and rapidly growing towables segment of the recreational vehicle market. The purchase price paid for Lance was $67.9 million ($61.9 million net of $6.0 million cash acquired), which included an adjustment based on the level of net working capital at closing, as defined in the purchase agreement and was funded through the Company’s revolving credit facility. Lance is reported as part of the Recreation segment.

The Company will also pay up to an additional $10.0 million to the selling shareholders subsequent to the acquisition date in the form of deferred purchase price payable of $5.0 million on each of the 12- and 24-month anniversary dates of the acquisition date as per the agreement terms. This deferred payment will be recognized as an expense in the Company’s consolidated statement of operations over the period of the agreement.

As of July 31, 2018, the Company had not completed its assessment of the fair value of all acquired assets and liabilities assumed, or of the determination of the final purchase price calculation, as defined in the purchase agreement. The preliminary purchase price allocation resulted in goodwill of $27.0 million, which is deductible for income tax purposes.

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The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed for Lance:

Intangible assets acquired as a result of the Lance Acquisition are as follows:

Net sales and operating income attributable to Lance were $34.6 million and $3.8 million for the three months ended July 31, 2018, respectively, and $74.1 million and $8.6 million for the nine months ended July 31, 2018, respectively. The Company has not included pro forma financial information in this report as if the acquisition had occurred on November 1, 2016, since the operating results from Lance were not considered material to the Company’s operating results as a whole.

Van-Mor Enterprises Inc. Acquisition

On May 15, 2017, the Company acquired certain real estate assets and operating assets and liabilities of Van-Mor Enterprises, Inc. (“Van-Mor” and the “Van-Mor Acquisition”). Van-Mor is a supplier of certain materials and components for the Company’s fire apparatus divisions. The final purchase price for Van-Mor was $1.6 million. The net cash consideration paid at closing was funded through the Company’s cash from operations. Van-Mor is reported as part of the Fire & Emergency segment.

Ferrara Fire Apparatus Acquisition

On April 25, 2017, the Company acquired 100% of the common shares of Ferrara Fire Apparatus, Inc. (“Ferrara” and the “Ferrara Acquisition”). Ferrara is a leading custom fire apparatus and rescue vehicle manufacturer that engineers and manufactures vehicles for municipal and industrial customers. This acquisition enhances the Company’s emergency vehicle product offering, particularly with custom fire apparatus including pumpers, aerials, and industrial vehicles. The final purchase price for Ferrara was $97.8 million ($94.8 million net of $3.0 million cash acquired) which includes a subsequent adjustment of $2.3 million received from the seller based on the level of net working capital on the acquisition date. The net cash consideration paid at closing was funded through the Company’s revolving credit facility and Term Loan. Ferrara is reported as part of the Fire & Emergency segment. The final purchase price allocation resulted in goodwill of $31.7 million, which is not deductible for income tax purposes.

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The following table summarizes the fair values of the assets acquired and liabilities assumed for Ferrara:

 

Intangible assets acquired as a result of the Ferrara Acquisition are as follows:

 

Net sales and operating income attributable to Ferrara were $30.8 million and $2.8 million for the three months ended July 31, 2018, respectively, and $91.0 million and $4.1 million for the nine months ended July 31, 2018, respectively. The Company has not included pro forma financial information in this report as if the acquisition had occurred on November 1, 2016, since the Ferrara Acquisition did not meet the materiality requirement for such disclosure.

Midwest Automotive Designs Acquisition

On April 13, 2017, the Company acquired certain assets and liabilities of Midwest Automotive Designs (“Midwest” and the “Midwest Acquisition”). Midwest manufactures Class B recreational vehicles (“RVs”) and luxury vans. This acquisition enhances the Company’s product offerings in both its Recreation and Commercial segments, by adding a selection of Class B recreational vehicles and multiple products for the luxury limousine, charter and tour bus markets. The final purchase price for Midwest was $34.9 million (net of cash acquired), which included a subsequent adjustment of $0.5 million received from the seller based on the level of net working capital on the acquisition date. The net cash consideration paid at closing was funded through the Company’s revolving credit facility. Midwest is reported as part of the Recreation segment. The final purchase price allocation resulted in goodwill of $12.9 million, which is deductible for income tax purposes.

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The following table summarizes the fair values of the assets acquired and liabilities assumed for Midwest:

 

 

Intangible assets acquired as a result of the Midwest Acquisition are as follows:

 

Net sales and operating income attributable to Midwest were $16.5 million and $1.2 million for the three months ended July 31, 2018, respectively, and $48.3 million and $3.5 million for the nine months ended July 31, 2018, respectively. The Company has not included pro forma financial information in this report as if the acquisition had occurred on November 1, 2016, since the Midwest Acquisition did not meet the materiality requirement for such disclosure.

Renegade RV Acquisition

On December 30, 2016, the Company acquired 100% of the common shares of Kibbi, LLC, which operated as Renegade RV (“Renegade” and the “Renegade Acquisition”). Renegade is a leading manufacturer of Class C and “Super C” RVs and heavy-duty special application trailers. The final purchase price for Renegade was $22.5 million ($20.9 million net of $1.6 million cash acquired), which included a $0.3 million payment to Renegade’s sellers based on the level of net working capital on the acquisition date. The net cash consideration paid at closing was funded through the Company’s revolving credit facility. Renegade is reported as part of the Recreation segment. The final purchase price allocation resulted in goodwill of $4.2 million, which is not deductible for income tax purposes.

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The following table summarizes the fair values of the assets acquired and liabilities assumed for Renegade:

 

Intangible assets acquired as a result of the Renegade Acquisition are as follows:

 

 

Net sales and operating income attributable to Renegade were $34.7 million and $5.7 million for the three months ended July 31, 2018, respectively, and $94.9 million and $13.7 million for the nine months ended July 31, 2018, respectively. The Company has not included pro forma financial information in this report as if the acquisition had occurred on November 1, 2016, since the Renegade Acquisition did not meet the materiality requirement for such disclosure.

Note 3. Inventories

Inventories, net of reserves, consisted of the following:

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Note 4. Property, Plant and Equipment

Property, plant and equipment consisted of the following:

 

 

Depreciation expense was $7.1 million and $6.4 million for the three months ended July 31, 2018, and July 29, 2017, respectively, and $20.2 million and $16.4 million for the nine months ended July 31, 2018, and July 29, 2017, respectively.

Note 5. Goodwill and Intangible Assets

The table below represents goodwill by segment:

 

 

The change in the net carrying value amount of goodwill consisted of the following:

 

 

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Intangible assets (excluding goodwill) consisted of the following:

 

 

 

Amortization expense was $4.6 million and $5.1 million for the three months ended July 31, 2018, and July 29, 2017, respectively, and $13.7 million and $10.4 million for the nine months ended July 31, 2018, and July 29, 2017, respectively.

Note 6. Other Current Liabilities

Other current liabilities consisted of the following:

 

Note 7. Long-Term Debt

The Company was obligated under the following debt instruments:

 

April 2017 ABL Facility

Effective April 25, 2017, the Company entered into a $350.0 million revolving credit and guaranty agreement (the “April 2017 ABL Facility” or “ABL Agreement”) with a syndicate of lenders. The April 2017 ABL Facility consists of: (i) Revolving Loans, (ii) Swing Line Loans, and (iii) Letters of Credit, aggregating up to a combined maximum of $350.0 million. The total amount borrowed under the April 2017 ABL Facility is subject to a $30.0 million sublimit for Swing Line loans and a $35.0 million sublimit for Letters of Credit, along with certain borrowing base and other customary restrictions as defined in the ABL Agreement. The Company incurred

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$4.9 million of debt issuance costs related to the April 2017 ABL Facility. The amount of debt issuance costs is included in other long-term assets in the Company’s consolidated balance sheet as of July 31, 2018.

The April 2017 ABL Facility allows for incremental borrowing capacity in an aggregate amount of up to $100.0 million, plus the excess, if any, of the borrowing base then in effect over total commitments then in effect. Any such incremental borrowing capacity is subject to receiving additional commitments from lenders and certain other customary conditions. The April 2017 ABL Facility matures on April 25, 2022.

On December 22, 2017 the Company exercised its $100.0 million incremental commitment option under the April 2017 ABL Facility, which increased total borrowing capacity under the facility from $350.0 million to $450.0 million. The Company incurred an additional $0.4 million of debt issuance costs related to the incremental commitment option under the April 2017 ABL Facility.

Revolving Loans under the April 2017 ABL Facility bear interest at rates equal to, at the Company’s option, either a base rate plus an applicable margin, or a Eurodollar rate plus an applicable margin. Applicable interest rate margins are initially 0.75% for all base rate loans and 1.75% for all Eurodollar rate loans (with the Eurodollar rate having a floor of 0%), subject to adjustment based on utilization in accordance with the ABL Agreement. Interest is payable quarterly for all base rate loans, and is payable monthly or quarterly for all Eurodollar rate loans.

The lenders under the April 2017 ABL Facility have a first priority security interest in substantially all accounts receivable and inventory of the Company, and a second priority security interest in substantially all other assets of the Company.

The Company may prepay principal, in whole or in part, at any time without penalty.

The April 2017 ABL Facility contains customary representations and warranties, affirmative and negative covenants, subject in certain cases to customary limitations, exceptions and exclusions. The April 2017 ABL Facility also contains certain customary events of default, which should such events occur, could result in the termination of the commitments under the April 2017 ABL Facility and the acceleration of all outstanding borrowings under it. The April 2017 ABL Facility contains a financial covenant restricting the Company from allowing its fixed charge coverage ratio to drop below 1.00 to 1.00 during a compliance period, which is triggered when the availability under the April 2017 ABL Facility falls below a threshold set forth in the credit agreement.

The Company was in compliance with all financial covenants under the April 2017 ABL Facility as of July 31, 2018.

October 2013 ABL Facility

On April 25, 2017, the Company repaid all outstanding loans and obligations under its $150.0 million senior secured revolving credit and guaranty agreement (the “ABL Facility”) in full, and that ABL Facility was terminated and resulted in a $0.7 million loss on early extinguishment of debt, which consisted entirely of the write-off of unamortized debt issuance costs.

Term Loan

Effective April 25, 2017, the Company entered into a $75.0 million term loan agreement (“Term Loan” and “Term Loan Agreement”), as Borrower with certain subsidiaries of the Company, as Guarantor Subsidiaries. Principal may be prepaid at any time during the term of the Term Loan without penalty. The Company incurred $2.0 million of debt issuance costs related to the Term Loan.

The Term Loan Agreement allows for incremental facilities in an aggregate amount of up to $125.0 million. Any such incremental facilities are subject to receiving additional commitments from lenders and certain other customary conditions. The Term Loan agreement requires annual payments of $0.8 million per year, with remaining principal payable at maturity, which is April 25, 2022.

On July 18, 2018, the Company exercised its $50.0 million incremental commitment option under the Term Loan Agreement, which increased total borrowing under the facility from $75.0 million to $125.0 million. The Company incurred an additional $0.5 million of debt issuance costs related to the incremental commitment option under the Term Loan. Proceeds from the incremental commitment were used to repay a portion of the outstanding borrowings under the April 2017 ABL Facility.

Applicable interest rate margins for the Term Loan are initially 2.50% for base rate loans and 3.50% for Eurodollar rate loans (with the Eurodollar rate having a floor of 1.00%). Interest is payable quarterly for all base rate loans, and is payable monthly or quarterly for all Eurodollar rate loans.

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The Term Loan Agreement contains customary representations and warranties, affirmative and negative covenants, in each case, subject to customary limitations, exceptions and exclusions. The Term Loan Agreement also contains certain customary events of default. The Term Loan Agreement requires the Company to maintain a specified secured leverage ratio as follows:

 

The Company was in compliance with all financial covenants under the Term Loan as of July 31, 2018.

Senior Secured Notes

On January 17, 2017, the Company issued a Notice of Conditional Redemption for its 8.5% Senior Secured Notes (the “Notes”), subject to the completion of the Company’s IPO, to redeem all the outstanding Notes at a redemption price of 104.250% plus accrued and unpaid interest. On February 16, 2017, the Company redeemed all Notes, which were outstanding as of that date, and retired the debt. As a result of this redemption, the Company recorded a $11.2 million loss associated with the early extinguishment of the debt, which consisted of a prepayment premium of $7.7 million, $3.1 million of unamortized debt issuance costs and $0.4 million of original issue discount. 

Note 8. Warranties

The Company’s products generally carry explicit warranties that extend from several months to several years, based on terms that are generally accepted in the marketplace. Selected components (such as engines, transmissions, tires, etc.) included in the Company’s end products may include warranties from original equipment manufacturers (“OEM”). These OEM warranties are passed on to the end customer of the Company’s products, and the customer deals directly with the applicable OEM for any issues encountered on those components.

Changes in the Company’s warranty liability consisted of the following:

 

 

Accrued warranty is classified in the Company’s consolidated balance sheets as follows:

 

 

Provisions for estimated warranty and other related costs are recorded at the time of sale and are periodically adjusted to reflect actual experience. Certain warranty and other related claims involve matters of dispute that ultimately are resolved by negotiation, arbitration or litigation. At times, warranty issues arise that are beyond the scope of the Company’s historical experience. The potential liability for these issues is evaluated on a case by case basis.

Note 9. Stock Repurchase Program

On March 20, 2018 the Company’s Board of Directors authorized up to $50.0 million of repurchases of the Company’s issued and outstanding common stock with an expiration date of March 19, 2020. The Company’s share repurchase program is executed from

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time to time through open market or through private transactions. Shares purchased under the share repurchase program are retired and returned to authorized and unissued status. During the three months ended July 31, 2018, the Company repurchased 2,475,967 shares under this repurchase program at a total cost of $40.7 million at an average price per share of $16.42. During the nine months ended July 31, 2018, the Company repurchased 2,714,514 shares under this repurchase program at a total cost of $45.5 million at an average price per share of $16.76. As of July 31, 2018, the Company had $4.5 million of authorization remaining under this program.

On September 5, 2018 the Company’s Board of Directors authorized an additional $50.0 million of repurchases of the Company’s issued and outstanding common stock with an expiration date of September 4, 2020.

Note 10. Earnings Per Share

Basic earnings per common share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding including shares of contingently redeemable common stock. Diluted EPS is computed by dividing net income by the weighted-average number of common shares outstanding assuming dilution. The difference between basic EPS and diluted EPS is the result of the dilutive effect of outstanding stock options and restricted stock units. The table below reconciles basic weighted-average common shares outstanding to diluted weighted-average shares outstanding for the three and nine months ended July 31, 2018 and July 29, 2017:

 

 

The table below represents exclusions from the calculation of weighted-average shares outstanding assuming dilution due to the anti-dilutive effect of the common stock equivalents for the three and nine months ended July 31, 2018 and July 29, 2017: 

 

 

Note 11. Stock Compensation

During the three and nine months ended July 31, 2018, the Company recorded stock-based compensation expense of $1.4 million and $5.1 million, respectively, compared to $0.3 million and $26.1 million for the three and nine months ended July 29, 2017, respectively, as selling, general and administrative expenses in the Company’s consolidated statements of income.

Stock Option Awards: During the three and nine months ended July 31, 2018, the Company recorded stock compensation expense of zero and $1.9 million, respectively, to redeem performance based stock options. During the three and nine months ended July 29, 2017, the Company recorded stock compensation expense of zero and $3.3 million, respectively, to redeem performance based stock options. The amount paid per share to redeem these stock options was equal to the fair value of the Company’s common stock on the date of redemption less the stock option exercise price.

The change in the number of stock options outstanding consisted of the following:

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Restricted Stock Units Awards: The Company has granted restricted stock units to certain employees and non-employee directors.

The change in the number of unvested restricted stock units outstanding consisted of the following:

Performance Stock Units Awards: The change in the number of unvested performance stock units outstanding consisted of the following:

 

Note 12. Restructuring Charges

In the third quarter of fiscal year 2017, the Company restructured certain management positions in its Commercial segment and in its Corporate office, and incurred personnel costs, including severance and other employee benefit payments of $1.5 million.

In the first and second quarters of fiscal year 2018, the Company undertook cost reduction initiatives related to its Fire & Emergency, Commercial and Recreation segments, as well as its corporate office. Costs incurred in the first quarter of fiscal year 2018 consisted of $3.5 million of personnel costs, including severance, and other employee benefit payments, as well as facility closure expenses of $0.6 million in the Recreation segment. Costs incurred in the second and third quarters of fiscal year 2018 relating to these initiatives consisted of $2.2 million of personnel costs, including severance and other employee benefit payments, and $0.6 million for facility lease termination expenses in the Recreation segment and its former Miami corporate office location.

A summary of the changes in the Company’s restructuring liability is as follows:

 

 

Note 13. Income Taxes

For interim financial reporting, the Company estimates its annual effective tax rate based on the projected income for its entire fiscal year and records a provision (benefit) for income taxes on a quarterly basis based on the estimated annual effective income tax rate, adjusted for any discrete tax items.

The Company recorded income tax benefit of $7.2 million for the nine months ended July 31, 2018, or (25.8)% of pre-tax income, compared to $5.4 million expense, or 38.1% of pre-tax income, for the nine months ended July 29, 2017. Results for the nine months ended July 31, 2018 were favorably impacted by $14.7 million of net discrete tax benefits, including a $12.5 million benefit related to the remeasurement of net deferred tax liabilities as a result of tax legislation in the United States and a $1.1 million benefit related to a federal provision-to-return adjustment. Results for the nine months ended July 29, 2017 were favorably impacted by income tax incentives for U.S. manufacturing and research and negatively impacted by nondeductible business acquisition costs.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Reform Act”) was signed and enacted into law. The Tax Reform Act significantly revised the U.S. corporate income tax regime by, among other things, lowering the corporate tax rate from 35% to 21%

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effective January 1, 2018, while also repealing the deduction for domestic production activities and implementing a territorial tax system. As a fiscal year taxpayer, the Company’s federal statutory tax rate reduction is effective January 1, 2018; therefore, the Company’s fiscal year 2018 estimated annual effective tax rate reflects the benefit from the reduced U.S. federal rate of 23.3%. A number of other provisions will not impact the Company until fiscal year 2019, such as elimination of the domestic manufacturing deduction and U.S. taxation of foreign earnings.

U.S. GAAP requires the impact of tax legislation be recognized in the period in which the law was enacted. In accordance with SEC Staff Accounting Bulletin No. 118, the Company recorded the estimated income tax impact of the Tax Reform Act during the first quarter of fiscal year 2018. During the third quarter of fiscal year 2018, the Company updated the provisional amounts previously recorded based on its completed fiscal year 2017 federal income tax return. This resulted in additional tax benefit of $2.1 million related to the remeasurement of net deferred tax liabilities. For the nine months ended July 31, 2018, the Company recorded cumulative tax benefit of $12.5 million due to remeasurement of net deferred tax liabilities. Although the $12.5 million tax benefit represents what the Company believes is a reasonable estimate of the income tax effects of the Tax Reform Act on its consolidated financial statements as of July 31, 2018, it is a provisional amount and will be impacted by the Company’s ongoing analysis of the legislation and full fiscal year 2018 financial results. Any adjustments to these provisional amounts will be reported as a component of income tax expense (benefit) in the reporting period in which any such adjustments are determined, which will be no later than the first quarter of fiscal year 2019.

Because of the complexity of the new Global Intangible Low-Taxed Income (GILTI) tax rules, the Company continues to evaluate this provision of the Tax Reform Act and the application of ASC740, Income Taxes. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred (the “period cost method”) or (2) factoring such amounts into the Company’s measurement of its deferred taxes (the “deferred method”). The Company's selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing its global income to determine whether it expects to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Whether the Company expects to have future U.S. inclusions in taxable income related to GILTI depends on not only the Company's current structure and estimated future results of global operations but also its intent and ability to modify its structure. The Company is currently in the process of analyzing its structure and, as a result, is not yet able to reasonably estimate the effect of this provision of the Tax Reform Act. Therefore, the Company has not made any adjustments related to potential GILTI tax in its financial statements and has not made a policy decision regarding whether to use the period cost method or the deferred method.

The Company periodically evaluates its valuation allowance requirements in light of changing facts and circumstances, and may adjust its deferred tax asset valuation allowances accordingly. It is reasonably possible that the Company will either add to, or reverse a portion of its existing deferred tax asset valuation allowances in the future. Such changes in the deferred tax asset valuation allowances will be reflected in the current operations through the Company’s effective income tax rate. During the three or nine months ended July 31, 2018, there were no changes to the Company’s valuation allowances.

The Company’s liability for unrecognized tax benefits, including interest and penalties, was $2.3 million as of July 31, 2018 and $2.9 million as of October 31, 2017. The unrecognized tax benefits are presented in other long-term liabilities in the Company’s consolidated balance sheets for the period ended July 31, 2018. During the next twelve months, it is reasonably possible that $0.2 million of the unrecognized tax benefits, if recognized, would affect the annual effective income tax rate. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes in its consolidated statement of operations.

The Company regularly assesses the likelihood of an adverse outcome resulting from examinations to determine the adequacy of its tax reserves. As of July 31, 2018, the Company believes that it is more likely than not that the tax positions it has taken will be sustained upon the resolution of its audits resulting in no material impact on its consolidated financial position and the results of operations and cash flows. However, the final determination with respect to any tax audits, and any related litigation, could be materially different from the Company’s estimates and from its historical income tax provisions and income tax liabilities and could have a material effect on operating results and cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, and interest assessments related to income tax examinations.

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Note 14. Commitments and Contingencies

Market Risks: The Company is contingently liable under bid, performance and specialty bonds and has open standby letters of credit issued by the Company’s banks in favor of third parties as follows:

 

 

 

Chassis Contingent Liabilities: The Company obtains certain vehicle chassis from automobile manufacturers under converter pool agreements. These agreements generally provide that the manufacturer will supply chassis at the Company’s various production facilities under the terms and conditions set forth in the agreement. The manufacturer does not transfer the certificate of origin to the Company and, accordingly, the chassis are treated as consigned inventory of the automobile manufacturer. Upon being put into production, the Company becomes obligated to pay the manufacturer for the chassis. Chassis are typically converted and delivered to customers within 90 to 120 days of receipt. If the chassis are not converted within this timeframe of delivery, the Company generally purchases the chassis and records the inventory or the Company is obligated to begin paying an interest charge on this inventory until purchased. The Company’s contingent liability under such agreements for future chassis inventory purchases was $42.0 million and $85.9 million at July 31, 2018 and October 31, 2017, respectively.

Repurchase Commitments: The Company has entered into repurchase agreements with certain lending institutions. The repurchase commitments are on an individual unit basis with a term from the date it is financed by the lending institution through payment date by the dealer or other customer, generally not exceeding two years. The Company’s outstanding obligations under such agreements were $288.5 million as of July 31, 2018 and October 31, 2017. This value represents the gross value of all vehicles under repurchase agreements and does not take into consideration proceeds that would be received upon resale of repossessed vehicles, which would be used to reduce the Company’s ultimate net liability. Such agreements are customary in the industries in which the Company operates and the Company’s exposure to loss under such agreements is limited by the potential loss on the resale value of the inventory which is required to be repurchased. Losses incurred under such arrangements have not been significant and the Company expects this pattern to continue into the future. The reserve for losses included in other liabilities on contracts outstanding at July 31, 2018 and October 31, 2017 is immaterial.

Guarantee Arrangements: The Company is party to multiple agreements whereby it guarantees indebtedness of others, including losses under loss pool agreements. The Company estimated that its maximum loss exposure under these contracts was $21.4 million at July 31, 2018 and $0.6 million at October 31, 2017. Under the terms of these and various related agreements and upon the occurrence of certain events, the Company generally has the ability to, among other things, take possession of the underlying collateral. If the financial condition of the customers and dealers were to deteriorate and result in their inability to make payments, then additional accruals may be required. While the Company does not expect to experience losses under these agreements that are materially in excess of the amounts reserved, it cannot provide any assurance that the financial condition of the third parties will not deteriorate resulting in the third party’s inability to meet their obligations.

In the event that third parties are unable to meet obligations under these agreements, the Company cannot guarantee that the collateral underlying the agreements will be available or sufficient to avoid losses materially in excess of the amounts reserved. Any losses under these guarantees would generally be mitigated by the value of any underlying collateral, including financed equipment, and are generally subject to the finance company’s ability to provide the Company clear title to foreclosed equipment and other conditions. During periods of economic weakness, collateral values generally decline and can contribute to higher exposure to losses.

Other Matters: There are three federal and one state putative securities class actions presently pending against the Company and certain of its officers and directors, each on behalf of a putative class of purchasers of the Company’s stock in or traceable to the Company’s January 2017 IPO, as well as, for two of the actions, from January 27, 2017 through June 7, 2018. Two of the complaints also name certain of the underwriters for the Company’s IPO as defendants. The complaints allege certain violations of the Securities Act of 1933 and, for two of the actions, the Securities Exchange Act of 1934. The federal court in the Central District of California has ordered each of the federal complaints to be transferred to the U.S. District Court for the Eastern District of Wisconsin.

The Company also received a complaint on August 23, 2018 against the Company and certain of its officers and directors, on behalf of a putative class of purchasers of the Company’s stock in its secondary offering of common stock in October 2017. This complaint also named certain of the underwriters for the offering, and alleges certain violations of the Securities Act of 1933 made in connection with the October 2017 offering. 

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Collectively, the actions seek certification of the putative classes asserted and compensatory damages and attorneys’ fees and costs. The underwriter defendants have notified the Company of their intent to seek indemnification from the Company pursuant to the IPO underwriting agreement in regard to the claims asserted in the actions with respect to the IPO, and the Company expects them to do the same in regard to the claims asserted in the action with respect to the October 2017 offering. The Company and the other defendants intend to defend these lawsuits vigorously. Additional lawsuits may be filed and, at this time, the Company is unable to predict the outcome of the lawsuits, the possible loss or range of loss, if any, associated with the resolution of the lawsuits, or any potential effect that it may have on the Company or its operations.

The Company is subject to certain other legal proceedings that arise in the ordinary course of business. Although the final results of all such matters and claims cannot be predicted with certainty, management believes that the ultimate resolution of all such other matters and claims will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows. Actual results could vary, among other things, due to the uncertainties involved in litigation.

Note 15. Related Party Transactions

During the three months ended July 31, 2018 and July 29, 2017, the Company reimbursed expenses of its primary equity holder in the amount of $0.2 million and $0.1 million, respectively. During the nine months ended July 31, 2018, and July 29, 2017, the Company reimbursed expenses in the amount of $0.5 million and $0.4 million, respectively. These expenses are included in selling, general and administrative expenses in the Company’s consolidated statements of operations.

Certain production facilities and offices for two of the Company’s subsidiaries are leased from related parties owned by certain members of management. Rent expense under these arrangements totaled $0.4 million and $0.1 million for the three months ended July 31, 2018, and July 29, 2017, respectively. Rent expense under these arrangements totaled $1.0 million and $0.5 million for the nine months ended July 31, 2018 and July 29, 2017, respectively.

The Company engaged with an information technology, software and consulting company (the “IT Consulting Company”) in which the Company’s CEO had a material equity interest. The IT Consulting Company provided software development and installation to the Company. The Company made payments of $1.3 million and $2.7 million during the three and nine months ended July 29, 2017, respectively, to the IT Consulting Company. The amounts paid to the IT Consulting Company included payments which are made to another unrelated consulting company. Excluding the payments to this unrelated consulting company, the payments made to the IT Consulting Company were $0.5 million and $1.1 million during the three and nine months ended July 29, 2017, respectively. On October 27, 2017 the IT Consulting Company was sold to an unrelated third party and therefore any future consulting business that the Company has undertaken or will undertake with the IT Consulting Company after such date will not be considered a related party transaction.

Note 16. Business Segment Information

The Company is organized into three reportable segments based on management’s process for making operating decisions, allocating capital and measuring performance, and based on the similarity of products, customers served, common use of facilities, and economic characteristics. The Company’s segments are as follows:

Fire & Emergency: This segment includes KME, E-One, Inc., Ferrara, American Emergency Vehicles, Inc., Leader Emergency Vehicles, Inc., Horton Enterprises, Inc., REV Ambulance Orlando and REV Brazil. These business units manufacture and market commercial and custom fire and emergency vehicles primarily for fire departments, airports, other governmental units, contractors, hospitals and other care providers in the United States and other countries.

Commercial: This segment includes Collins Bus, Champion Bus, Inc., ENC, ElDorado National (Kansas), Inc., Revability, Capacity and Lay-Mor. Collins Bus manufactures, markets and distributes school buses, normally referred to as Type A school buses, as well as shuttle buses used for churches, transit authorities, hotels and resorts, retirement centers and other similar uses. Champion Bus, Inc., ENC, ElDorado National (Kansas), Inc. and Revability manufacture, market and distribute shuttle buses and mobility vans for transit, airport car rental and hotel/motel shuttles, tour and charter operations and other uses under several well-established brand names. Capacity manufactures, markets and distributes trucks used in terminal type operations, i.e., rail yards, warehouses, rail terminals and shipping terminals/ports. Lay-Mor manufactures, markets and distributes industrial sweepers for both the commercial and rental markets.

Recreation: This segment includes REV Recreation Group, Inc. (“RRG”), Goldshield Fiberglass, Inc. (“Goldshield”), Renegade, Midwest and Lance, and their respective manufacturing facilities, service and parts divisions. RRG primarily manufactures, markets and distributes Class A and Class C mobile RVs in both gas and diesel models. Renegade primarily manufacturers Class C and “Super C” RVs and heavy-duty special application trailers. Goldshield manufactures, markets and distributes fiberglass reinforced molded

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parts to a diverse cross section of original equipment manufacturers and other commercial and industrial customers, including various components for RRG, which is one of Goldshield’s primary customers. Midwest manufactures Class B RVs and luxury vans. Lance designs, engineers and manufactures truck campers, towable campers and toy haulers.

For purposes of measuring financial performance of its business segments, the Company does not allocate to individual business segments costs or items that are of a corporate nature. The caption “Corporate and Other” includes corporate office expenses, results of insignificant operations, intersegment eliminations and income and expense not allocated to reportable segments.

Total assets of the business segments exclude general corporate assets, which principally consist of cash and cash equivalents, certain property, plant and equipment and certain other assets pertaining to corporate and other centralized activities.

Intersegment sales generally include amounts invoiced by a segment for work performed for another segment. Amounts are based on actual work performed and agreed-upon pricing which is intended to be reflective of the contribution made by the supplying business segment. All intersegment transactions have been eliminated in consolidation.

Selected financial information of the Company’s segments is as follows:

 

 

 

 

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In considering the financial performance of the business, the chief operating decision maker analyzes the primary financial performance measure of Adjusted EBITDA. Adjusted EBITDA is defined as net income for the relevant period before depreciation and amortization, interest expense and provision for income taxes, as adjusted for transaction expenses, sponsor expenses, restructuring costs, loss on early extinguishment of debt, certain legal matters, non-cash purchase accounting expenses, stock based compensation expense, initial public company costs and deferred purchase price payment which the Company believes are not indicative of the Company’s ongoing operating performance. Adjusted EBITDA is not a measure defined by U.S. GAAP, but is computed using amounts that are determined in accordance with U.S. GAAP. A reconciliation of this performance measure to income before provision for income taxes is included below.

The Company believes that Adjusted EBITDA is useful to investors and used by management for measuring profitability because the measure excludes the impact of certain items which management believes has less bearing on the Company’s core operating performance. The Company believes that utilizing Adjusted EBITDA allows for a more meaningful comparison of operating fundamentals between companies within its industries by eliminating the impact of capital structure and taxation differences between the companies.

The Company also adjusts for exceptional items which are determined to be those that in management’s judgment need to be disclosed by virtue of their size, nature or incidence, which include non-cash items and items settled in cash. In determining whether an event or transaction is exceptional, management considers quantitative as well as qualitative factors such as the frequency or predictability of occurrence. This is consistent with the way that financial performance is measured by management and reported to the Company’s Board of Directors, assists in providing a meaningful analysis of the Company’s operating performance and used as a measurement in incentive compensation for management.

Provided below is a reconciliation of segment Adjusted EBITDA to net income:

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Note 17. Comprehensive Income (Loss)

Comprehensive income (loss) includes all changes in equity during a period except those that resulted from investments by or distributions to the Company’s shareholders. Other comprehensive income or loss refers to revenues, expenses, gains and losses that are included in comprehensive income, but excluded from net income as these amounts are recorded directly as an adjustment to shareholders’ equity.

The components of accumulated other comprehensive income (loss) are as follows:

 

 

 

 

 

 

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

This management’s discussion and analysis should be read in conjunction with the Unaudited Consolidated Financial Statements contained in this Form 10-Q as well as the Management’s Discussion and Analysis and Risk Factors and audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K filed on December 21, 2017 and in Part II, Item 1A of this Quarterly Report on Form 10-Q.

Overview

REV is a leading designer, manufacturer and distributor of specialty vehicles and related aftermarket parts and services. We provide customized vehicle solutions for applications including: essential needs (ambulances, fire apparatus, school buses, mobility vans and municipal transit buses), industrial and commercial (terminal trucks, cut-away buses and street sweepers) and consumer leisure (recreational vehicles “RVs” and luxury buses). Our brand portfolio consists of 30 well-established principal vehicle brands including many of the most recognizable names within our served markets. Several of our brands pioneered their specialty vehicle product categories and date back more than 50 years. We believe that in most of our markets, we hold the first or second market share position and approximately 61% of our net sales during the third quarter of fiscal year 2018 came from products where we believe we hold such share positions.

Segments

We serve a diversified customer base primarily in the United States through the following segments:

Fire & Emergency – The Fire & Emergency segment sells fire apparatus equipment under the Emergency One, Kovatch Mobile Equipment and Ferrara brands and ambulances under the American Emergency Vehicles, Horton Emergency Vehicles, Leader Emergency Vehicles, Marque, McCoy Miller, Road Rescue, Wheeled Coach and Frontline brands. We believe we are the largest manufacturer by unit volume of fire and emergency vehicles in the United States and have one of the industry’s broadest portfolios of products including Type I ambulances (aluminum body mounted on a heavy truck-style chassis), Type II ambulances (van conversion ambulance typically favored for non-emergency patient transportation), Type III ambulances (aluminum body mounted on a van-style chassis), pumpers (fire apparatus on a custom or commercial chassis with a water pump and small tank to extinguish fires), ladder trucks (fire apparatus with stainless steel or aluminum ladders), tanker trucks and rescue and other vehicles. Each of our individual brands is distinctly positioned and targets certain price and feature points in the market such that dealers often carry and customers often buy more than one REV Fire & Emergency product line.

Commercial – Our Commercial segment serves the bus market through the following principal brands: Collins Bus, Goshen Coach, ENC, ElDorado National, Krystal Coach, Federal Coach, Champion and World Trans. We serve the terminal truck market through the Capacity brand, the sweeper market through the Lay-Mor brand and the mobility van market through our Revability brand. We are a leading producer of small- and medium-sized buses, Type A school buses, transit buses, terminal trucks and street sweepers in the United States. Our products in the Commercial segment include cut-away buses (customized body built on various types and sizes of commercial chassis), transit buses (large municipal buses where we build our own chassis and body), luxury buses (bus-style limo or high-end luxury conversions), street sweepers (three- and four-wheel versions used in road construction activities), terminal trucks (specialized vehicle which moves freight in warehouses or intermodal yards and ports), Type A school buses (small school bus built on commercial chassis), and mobility vans (mini-van converted to be utilized by wheelchair passengers). Within each market segment, we produce a large number of customized configurations to address the diverse needs of our customers.

Recreation – Our Recreation segment serves the RV market through seven principal brands: American Coach, Fleetwood RV, Monaco Coach, Holiday Rambler, Renegade, Midwest and Lance. We believe our brand portfolio contains some of the longest standing, most recognized brands in the RV industry. Under these seven brands, REV provides a variety of highly recognized models such as: American Eagle, Signature, Marquis, Bounder, Pace Arrow, Verona and Daycruiser, among others. Our products in the Recreation segment include Class A motorized RVs (motorhomes built on a heavy duty chassis with either diesel or gas engine configurations), Class C and “Super C” motorized RVs (motorhomes built on a commercial truck or van chassis), a line of heavy-duty special application trailers, and, as a result of the acquisition of Midwest, Class B RVs (motorhomes built out on a van chassis). The Recreation segment also includes Goldshield Fiberglass, which produces a wide range of custom molded fiberglass products for the RV and broader industrial markets. In January 2018, we acquired Lance, a producer of truck campers, towable campers and toy haulers.

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Factors Affecting Our Performance

The primary factors affecting our results of operations include:

General Economic Conditions

Our business is impacted by the U.S. economic environment, employment levels, consumer confidence, municipal spending, changes in interest rates and instability in securities markets around the world, among other factors. In particular, changes in the U.S. economic climate can impact demand in key end markets.

RV purchases are discretionary in nature and therefore sensitive to the availability of financing, consumer confidence, unemployment levels, levels of disposable income and changing levels of consumer home equity, among other factors. The 2008 recession caused consumers to reduce their discretionary spending, which negatively affected sales volumes for RVs. Terminal truck sales volumes are also impacted by economic conditions and industrial output, as these factors impact our end-market customers for these products, which include shipping ports, trucking/distribution hubs and rail terminal operators. Although RV and terminal truck sales have increased in recent years, these markets are affected by general U.S. and global economic conditions, which create risks that future economic downturns will further reduce consumer demand and negatively impact our sales.

While less economically sensitive than the Recreation segment, our Fire & Emergency and Commercial segments are also impacted by the overall economic environment. Local tax revenues are an important source of funding for fire and emergency response departments. As fire and emergency products and school buses are typically a larger cost item for municipalities and their service life is relatively long, their purchase is more deferrable, which can result in reduced demand for our products.

A decrease in employment levels, consumer confidence or the availability of financing, or other adverse economic events, or the failure of actual demand for our products to meet our estimates, could negatively affect the sales of our products. Any decline in overall customer demand in markets in which we operate could have a material adverse effect on our operating performance.

Impact of Acquisitions

For the past several years, a significant component of our growth has been the addition of businesses or business units through acquisitions. We typically incur upfront costs as we integrate acquired businesses and implement our operating philosophy at newly acquired companies, including consolidation of supplies and materials, changes to production processes at acquired facilities to implement manufacturing improvements and other restructuring initiatives. The benefits of these integration efforts may not positively impact our financial results until subsequent periods. Operational and financial integration of our recently acquired businesses could be ongoing.

In accordance with GAAP, we recognize acquired assets and liabilities at fair value. This includes the recognition of identified intangible assets and goodwill which, in the case of definite-life intangible assets, are then amortized over their expected useful lives, which typically results in an increase in amortization expense. In addition, assets acquired and liabilities assumed generally include tangible assets, as well as contingent assets and liabilities.

Cost Management Initiatives

Purchased materials, including chassis, represent our largest component of costs of sales. We operate a centralized strategic procurement organization dedicated to reducing our overall level of materials spend across our three segments, while simplifying and standardizing suppliers and parts. Our operating performance is therefore significantly impacted by the results of our initiatives to lower material cost and standardize our products.

Similar to many industrial companies, we are working through some challenges as a result of the strong economy in the United States. Labor markets are tight, commodity and logistics costs have risen rapidly and higher production levels are causing a strain on the Company's supply chain. We are working to mitigate each of these challenges to minimize the negative impact on our results.

The Company has implemented price increases and steel and aluminum surcharges to address the dramatic increase in the cost of materials over the last six months. The Company started to experience the impact of the higher raw material costs in the second quarter of fiscal year 2018. As orders in backlog at the time these pricing actions were implemented were not impacted, the Company expects that it will only partially offset the impact of the higher input costs in fiscal year 2018 and has factored this into its updated outlook.

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Results of Operations

Three Months Ended July 31, 2018 Compared with Three Months Ended July 29, 2017

 

 

Net Sales. Net sales were $597.7 million for the three months ended July 31, 2018, an increase of $2.1 million, or 0.4%, from $595.6 million for the three months ended July 29, 2017. The increase in net sales was primarily due to an increase in net sales of $20.3 million and $3.6 million in the Recreation and Commercial segments, respectively, offset by a decrease in net sales of $23.2 million in the Fire & Emergency segment. The increase in Recreation segment net sales was primarily due to net sales from Lance, which was acquired in January 2018, partially offset by a decrease in net sales of Class A motorhomes resulting from our decision to rationalize and upgrade our product lineup as well as timing of our new model year introductions in the current year. The decrease in Fire & Emergency segment net sales was primarily due to chassis supply disruptions which resulted in lower unit shipments for ambulances and the timing of firetruck shipments compared to the prior year period. Excluding the impact of the Lance Acquisition, consolidated net sales decreased $32.6 million or 5.5% compared to the prior year period primarily due to the decline in Fire & Emergency segment net sales.

Gross Profit. Gross profit was $79.5 million for the three months ended July 31, 2018, compared to $78.0 million for the three months ended July 29, 2017. Gross profit, as a percentage of net sales, was 13.3% for the three months ended July 31, 2018, a slight increase compared to 13.1% for the three months ended July 29, 2017. This increase is primarily due to higher gross margins in the Recreation segment and pricing actions, net of material cost increases.

Selling, General and Administrative. Selling, general and administrative (“SG&A”) expenses were $43.5 million for the three months ended July 31, 2018, an increase of $2.9 million, or 7.1%, from $40.6 million for the three months ended July 29, 2017. SG&A expenses as a percentage of net sales, were 7.3% and 6.8% for the three months ended July 31, 2018 and July 29, 2017, respectively. The increase in SG&A expenses was due primarily to additional acquired company expenses, increased stock compensation expense and higher legal expenses.

Restructuring. Restructuring costs were $0.9 million for the three months ended July 31, 2018, compared to $2.3 million for the three months ended July 29, 2017. Restructuring expenses in the current year quarter represented additional severance costs for certain employees associated with closing of the Miami corporate office.

Interest Expense, Net. Interest expense, net of interest income was $6.8 million for the three months ended July 31, 2018, an increase of $2.3 million, or 51.1% from $4.5 million for the three months ended July 29, 2017. Interest expense increased compared to prior year primarily due to the increase in borrowings to fund the acquisition of Lance and share repurchases along with higher interest rates.

Income Taxes. Income tax expense was $3.8 million for the three months ended July 31, 2018, or 17.2% of pre-tax income, compared to $9.1 million, or 37.4% of pre-tax income, for the three months ended July 29, 2017. The decrease in the Company’s effective income tax rate for the three months ended July 31, 2018 relative to the prior year relates primarily to new tax legislation in the United States which lowered the U.S. corporate tax rate from 35% to 21% effective January 1, 2018. As a result of U.S. tax

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legislation, the Company also recorded a tax benefit of $2.1 million for the three months ended July 31, 2018 related to the remeasurement of net deferred tax liabilities.

Net Income. Net income was $18.3 million for the three months ended July 31, 2018, an increase of $3.1 million, or 20.4% from a net income of $15.2 million for the three months ended July 29, 2017.

Adjusted Net Income. Adjusted Net Income was $24.7 million for the three months ended July 31, 2018, an increase of $2.8 million, or 12.8% from $21.9 million for the three months ended July 29, 2017.

Adjusted EBITDA. Adjusted EBITDA was $47.6 million for the three months ended July 31, 2018, an increase of $2.1 million, or 4.6% from $45.5 million for the three months ended July 29, 2017. Excluding the impact of the acquisition of Lance, Adjusted EBITDA decreased 7.0% compared to the prior year period.

Fire & Emergency Segment

 

 

Fire & Emergency (“F&E”) segment net sales were $238.9 million for the three months ended July 31, 2018, a decrease of $23.2 million, or 8.9%, from $262.1 million for the three months ended July 29, 2017. The decrease in net sales was primarily due to chassis supply disruptions which resulted in lower unit shipments for ambulances and timing of firetruck shipments compared to the prior year period.

F&E segment Adjusted EBITDA was $25.3 million for the three months ended July 31, 2018, a decrease of $3.7 million, or 12.8%, from $29.0 million for the three months ended July 29, 2017. The decrease in Adjusted EBITDA was due to decreased gross profit driven by a decrease in unit shipments for ambulances and firetrucks and continued higher material costs, partially offset by improved profitability at acquired firetruck businesses, lower SG&A expenses and impact of pricing actions for ambulances.

Commercial Segment

 

 

Commercial segment net sales were $157.6 million for the three months ended July 31, 2018, an increase of $3.2 million, or 2.1%, from $154.4 million for the three months ended July 29, 2017. The increase in net sales was due primarily to an increase in shuttle bus, school bus, motorcoach, mobility van and terminal truck units sold compared to the prior year period, partially offset by lower transit bus sales.

Commercial segment Adjusted EBITDA was $11.8 million for the three months ended July 31, 2018, a decrease of $1.1 million, or 8.5%, from $12.9 million for the three months ended July 29, 2017. This decrease was primarily due to reduced volumes of transit bus units sold compared to the prior year and higher material and freight costs, partially offset by impact of pricing actions in certain product categories.

Recreation Segment

 

 

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Recreation segment net sales were $197.3 million for the three months ended July 31, 2018, an increase of $19.4 million, or 10.9%, from $177.9 million for the three months ended July 29, 2017. The increase in net sales was due to net sales attributable to our recent Lance Acquisition and increases in net sales across our entire RV brand line-up except Class A motorhomes. Class A RV volume declined compared to the prior year period due to a reduction in the number of different models produced and the timing of new model year introductions as well as slower end market growth. Excluding the impact of net sales from Lance, Recreation segment net sales decreased by $15.2 million compared to the prior year period.

Recreation segment Adjusted EBITDA was $17.9 million for the three months ended July 31, 2018, an increase of $6.2 million, or 53.0%, from $11.7 million for the three months ended July 29, 2017. The increase in Adjusted EBITDA was primarily due to the impact of the acquisition of Lance and higher volumes in the more profitable Class B, Super C and towable product categories, partially offset by lower Class A RV volumes. Excluding the impact of the acquisition of Lance, Recreation segment Adjusted EBITDA increased by $0.9 million, or 7.3% compared to the prior year period.

Nine months ended July 31, 2018 compared with the nine months ended July 29, 2017

 

 

Net Sales. Net sales were $1,721.4 million for the nine months ended July 31, 2018, an increase of $137.5 million, or 8.7%, from $1,583.9 million for the nine months ended July 29, 2017. The increase in consolidated net sales was primarily due to an increase in net sales of $39.6 million, $92.5 million and $3.7 million in the Fire & Emergency, Recreation and Commercial segments, respectively. The increase in net sales in the Recreation segment was due to net sales from the acquisition of Lance as well as higher unit sales volumes in certain RV product categories. The increase in Fire & Emergency segment net sales was due to the impact of net sales from Ferrara acquired in April 2017 partially offset by decreases in sales of certain fire apparatus and ambulance units caused by chassis supply constraints and timing of unit shipments. The increase in Commercial segment net sales was primarily due to increases in sales of shuttle bus units, parts sales partially offset by lower school and transit bus unit volume compared to the prior year period. Excluding net sales from acquired companies, net sales for the nine months ended July 31, 2018 decreased by $27.0 million or 1.7% compared to the same period in the prior year.

Gross Profit. Gross profit was $204.8 million for the nine months ended July 31, 2018, an increase of $6.4 million, or 3.2% from $198.4 million for the nine months ended July 29, 2017. Gross profit, as a percentage of net sales, was 11.9% and 12.5% for the nine months ended July 31, 2018 and July 29, 2017, respectively. The decrease in gross profit, as a percentage of net sales, was due to the mix of units sold and higher material costs, partially offset by pricing actions.

Selling, General and Administrative. Selling, general and administrative (“SG&A”) expenses were $133.2 million for the nine months ended July 31, 2018, a decrease of $6.5 million, or 4.7%, from $139.7 million for the nine months ended July 29, 2017. SG&A expenses, as a percentage of net sales, were 7.7% and 8.8% for the nine months ended July 31, 2018 and July 29, 2017, respectively. The decrease in SG&A expenses was due primarily to decreased stock-based compensation expense as a result of our IPO in the prior year period. The decline in stock-based compensation was partially offset by expenses from acquired companies, higher public company related costs and higher legal expenses compared to the prior year. SG&A expenses for the nine months ended

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July 29, 2017 included $26.1 million of stock-based compensation expense compared to $5.1 million for the nine months ended July 31, 2018.

Research and Development. Research and development costs were $4.9 million for the nine months ended July 31, 2018, an increase of $1.5 million, or 44.1% from $3.4 million for the nine months ended July 29, 2017. This increase was primarily due to greater activity for research and development in the Fire & Emergency and Commercial segments.

Restructuring. Restructuring costs were $6.9 million for the nine months ended July 31, 2018, compared to $3.5 million for the nine months ended July 29, 2017. In the first half of fiscal year 2017, the Company implemented a plan to relocate production of Goshen Coach buses from its Elkhart, Indiana facility to its facilities in Salina, Kansas and Imlay City, Michigan and the relocation of our Eldorado mobility van production facility from Salina, Kansas to Longview, Texas. Restructuring expenses in the current year represent costs incurred to close the Miami corporate office, costs to exit a Class B RV production facility and reduce certain management positions in the Fire & Emergency, Commercial and Recreation segments. Costs incurred in the current year consisted of personnel costs, including severance, vacation and other employee benefit payments as well as costs associated with lease terminations.

Amortization of Intangible Assets. Amortization of intangible assets was $13.6 million for the nine months ended July 31, 2018, compared to $10.4 million for the nine months ended July 29, 2017. The increase in amortization expense was due to the amortization of the intangible assets recorded as part of the acquisitions of Renegade in December 2016, Midwest and Ferrara in April 2017, and Lance in January 2018.

Interest Expense, Net. Interest expense, net of interest income was $18.3 million for the nine months ended July 31, 2018, an increase of $2.9 million, or 18.8% from $15.4 million for the nine months ended July 29, 2017, respectively. Interest expense increased compared to prior year primarily due to the increase in debt resulting from the Lance Acquisition in January 2018, share repurchases and higher interest rates.

Loss on Early Extinguishment of Debt. Loss on early extinguishment of debt was $11.9 million for the nine months ended July 29, 2017, which includes losses recognized upon the redemption of our Notes in February 2017 and our April 2017 re-financing. The Company paid a prepayment premium of $7.7 million and wrote off $3.1 million of unamortized debt issuance costs and $0.4 million of original issue discount resulting from the redemption of our Notes. Loss on early extinguishment of debt also included a write-off of $0.7 million of unamortized debt issuance costs as a result of our debt re-financing in April 2017.

Income Taxes. Consolidated income tax benefit was $7.2 million for the nine months ended July 31, 2018, or (25.8)% of pre-tax income, compared to $5.4 million expense, or 38.1% of pre-tax income, for the nine months ended July 29, 2017. Results for the nine months ended July 31, 2018 were favorably impacted by $14.7 million of net discrete tax benefits, including a $12.5 million benefit related to the remeasurement of net deferred tax liabilities as a result of tax legislation in the United States and a $1.1 million benefit related to a federal provision-to-return adjustment. The effective tax rate for the nine months ended July 31, 2018 before discrete items of 26.8% decreased relative to the prior year primarily due to U.S. tax legislation.

On December 22, 2017, the Tax Reform Act was signed and enacted into law and is effective for tax years beginning on or after January 1, 2018, with the exception of certain provisions. The Tax Reform Act reduces the U.S. corporate rate from 35% to 21%. A number of other provisions will not impact the Company until fiscal year 2019, such as elimination of the domestic manufacturing deduction and U.S. taxation of foreign earnings. As a result of the Tax Reform Act, the Company recognized a non-cash estimated tax benefit of $10.4 million in the first quarter of fiscal year 2018 related to the remeasurement of the Company’s net deferred tax liabilities. During the third quarter of fiscal year 2018, the Company updated the provisional amounts previously recorded as a result of the Tax Reform Act based on its completed fiscal year 2017 federal income tax return. This resulted in additional tax benefit of $2.1 million related to the remeasurement of net deferred tax liabilities. For the nine months ended July 31, 2018, the Company recorded cumulative tax benefit of $12.5 million due to remeasurement of net deferred tax liabilities. Although the $12.5 million tax benefit represents what the Company believes is a reasonable estimate of the income tax effects of the Tax Reform Act on its consolidated financial statements as of July 31, 2018, it is a provisional amount and will be impacted by the Company’s ongoing analysis of the legislation and full fiscal year 2018 financial results. Any adjustments to these provisional amounts will be reported as a component of income tax expense (benefit) in the reporting period in which any such adjustments are determined, which will be no later than the first quarter of fiscal year 2019.

Net Income. Net income was $35.1 million for the nine months ended July 31, 2018, an increase of $26.4 million, from net income of $8.7 million for the nine months ended July 29, 2017. This increase in net income was due to the prior year impact of various one-time items relating to our IPO and debt re-financings and the income tax benefit in the current year.

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Adjusted Net Income. Adjusted Net Income was $51.0 million for the nine months ended July 31, 2018, an increase of $4.3 million, or 9.2% from $46.7 million for the nine months ended July 29, 2017.

Adjusted EBITDA. Adjusted EBITDA was $104.3 million for the nine months ended July 31, 2018, an increase of $0.2 million, or 0.2%, from $104.1 million for the nine months ended July 29, 2017. The increase was due to higher Adjusted EBITDA in the Recreation segment, offset by lower Adjusted EBITDA in the Fire & Emergency and Commercial segments and higher corporate expenses. Excluding acquisitions, Adjusted EBITDA decreased 17.9% for the first nine months of fiscal year 2018 compared to the first nine months of fiscal year 2017.

Fire & Emergency Segment

 

 

F&E segment net sales were $706.1 million for the nine months ended July 31, 2018, an increase of $39.6 million, or 5.9%, from $666.5 million for the nine months ended July 29, 2017. Net sales increased primarily due to sales from Ferrara, which was acquired in April 2017 partially offset by decreases in sales of certain ambulance units caused by chassis supply constraints and the timing of firetruck shipments. Excluding the impact of net sales from acquired companies, Fire & Emergency segment net sales decreased by $7.3 million, or 1.1% compared to the prior year period.

F&E segment Adjusted EBITDA was $65.5 million for the nine months ended July 31, 2018, a decrease of $4.7 million, or 6.7%, from $70.2 million for the nine months ended July 29, 2017. The decrease in Adjusted EBITDA was primarily due to a decrease in the sales of higher content fire apparatus, a decrease in ambulance unit sales, higher product costs caused by chassis supply constraints and other higher material costs partially offset by the impact of the Ferrara acquisition and pricing actions. Excluding the impact of the Ferrara acquisition, Fire & Emergency segment Adjusted EBITDA decreased by $7.9 million, or 11.2% compared to the prior year period.

Commercial Segment

 

 

Commercial segment net sales were $447.9 million for the nine months ended July 31, 2018, an increase of $3.7 million, or 0.8%, from $444.2 million for the nine months ended July 29, 2017. The increase in net sales was due to increases in sales of shuttle buses, mobility vans and parts sales partially offset by a decrease in school and transit bus unit sales compared to the prior year period. 

Commercial segment Adjusted EBITDA was $25.7 million for the nine months ended July 31, 2018, a decrease of $9.9 million, or 27.8%, from $35.6 million for the nine months ended July 29, 2017. The decrease in Adjusted EBITDA was primarily due to reduced volume in our higher margin school and transit bus businesses compared to the prior year and higher material costs, partially offset by pricing actions in certain product categories.

Recreation Segment

 

Recreation segment net sales were $563.4 million for the nine months ended July 31, 2018, an increase of $92.5 million, or 19.6%, from $470.9 million for the nine months ended July 29, 2017. The increase in net sales for the first nine months of fiscal year

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2018 compared to the prior year period was due to the Lance acquisition, and higher volumes in all classes of RVs except Class A. Excluding the impact of net sales from acquired companies, Recreation segment net sales decreased $25.1 million, compared to the prior year period.

Recreation segment Adjusted EBITDA was $38.7 million for the nine months ended July 31, 2018, an increase of $16.9 million, or 77.5%, from $21.8 million for the nine months ended July 29, 2017. The increase in Adjusted EBITDA was primarily due to impact of the acquired companies and higher profitability in all classes of RVs except Class A. This increase was partially offset by higher purchased material costs and lower Class A sales volumes. Excluding the impact of net sales from acquired companies, Recreation segment Adjusted EBITDA increased $1.2 million, or 5.5% compared to the prior year period.

Backlog

Backlog represents firm orders received from dealers or directly from end customers. Backlog does not include purchase options or verbal orders. The following table presents a summary of our backlog by segment:

 

 

Each of our three segments has a backlog of new vehicle orders that generally extends out from two to twelve months in duration. We expect that $75.1 million of our current backlog will not be produced and sold within the next twelve months following July 31, 2018.

Our businesses take orders from our dealers and end customers that are evidenced by a contract, firm purchase order or reserved production slot for delivery of one or many vehicles with a given specification over a period of time. These orders are placed in our backlog and reported at the aggregate selling prices, net of discounts or allowances, at the time the order is received.

As of July 31, 2018, our backlog was $1,276.0 million compared to $951.5 million as of July 29, 2017. The increase in Commercial backlog was due to a large transit bus order that is expected to begin delivering in early fiscal year 2019. The increase in Recreation backlog was partially due to the current year acquisition of Lance.

Liquidity and Capital Resources

General

Our primary requirements for liquidity and capital are working capital, acquiring machinery and equipment, acquiring and building manufacturing facilities, the improvement and expansion of existing manufacturing facilities, debt service payments, regular quarterly dividend payments, general corporate needs, and common stock repurchases under the Company’s recently authorized stock buyback program. Historically, these cash requirements have been met through cash provided by operating activities, cash and cash equivalents and borrowings under our revolving credit facility. During the third quarter of fiscal year 2018, we increased the size of our Term Loan by $50.0 million to support the execution of our stock repurchase program.

We believe that our sources of liquidity and capital will be sufficient to finance our continued operations, growth strategy, cash dividends and additional expenses we expect to incur as a public company. However, we cannot assure you that our cash provided by operating activities and borrowings under our current revolving credit facility will be sufficient to meet our future needs. If we are unable to generate sufficient cash flows from operations in the future, and if availability under our current revolving credit facility is not sufficient due to the size of our borrowing base or other external factors, we may have to obtain additional financing. If we obtain additional capital by issuing equity, the interests of our existing stockholders will be diluted. If we incur additional indebtedness, that indebtedness may contain financial and other covenants that may significantly restrict our operations. We cannot assure you that we will be able to obtain refinancing or additional financing on favorable terms or at all.

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Cash Flow

The following table shows summary cash flows for the nine months ended July 31, 2018 and July 29, 2017:

 

 

Net Cash Used in Operating Activities

Net cash used in operating activities for the nine months ended July 31, 2018 was $56.8 million, compared to $60.0 million for the nine months ended July 29, 2017. The reduction in cash used in operating activities for the nine months ended July 31, 2018, compared to the prior year was due to continued improvement in inventory management and receivable collection efforts. These benefits were partially offset by timing of vendor payments.

Excluding stock-based compensation expense and restructuring costs, operating income decreased by $12.8 million in the nine months ended July 31, 2018 compared to the prior year period.

Net Cash Used in Investing Activities

Net cash used in investing activities for the nine months ended July 31, 2018 was $109.1 million, compared to $211.1 million for the nine months ended July 29, 2017. The decrease in net cash used in investing activities for the nine months ended July 31, 2018, compared to the prior year period, was primarily due to a decrease in business acquisition activity and lower capital expenditures. The Company completed the acquisition of Lance in the current year period, compared to the acquisitions of Renegade, Ferrara and Midwest in the prior year period.

Net Cash Provided by Financing Activities

Net cash provided by financing activities for the nine months ended July 31, 2018 was $162.8 million, which primarily consisted of net borrowings to fund the acquisition of Lance, capital expenditures, to repurchase the Company’s common stock and to pay regular quarterly dividends. Net cash provided by financing activities for the nine months ended July 29, 2017 was $274.4 million, which primarily consisted of net proceeds from our IPO offset by the use of those proceeds to redeem our Notes, and further net borrowings from our ABL Facility and Term Loan to support acquisitions, operating activities and capital expenditures.

In the nine months ended July 31, 2018, the Company paid cash dividends of $9.7 million.

Offering of Common Stock

On January 26, 2017, the Company announced an initial public offering (“IPO”) of our common stock which began trading on the New York Stock Exchange under the ticker symbol “REVG”. On February 1, 2017, the Company completed the offering of 12,500,000 shares of common stock at a price of $22.00 per share and the Company received $275.0 million in gross proceeds from the IPO, or $253.6 million in net proceeds after deducting the underwriting discount and expenses related to the offering. The net proceeds of the IPO were used to partially pay down the Company’s existing debt. The Company redeemed the entire outstanding balance of its Notes, including a prepayment premium and accrued interest, plus it partially paid down the then outstanding balance of its revolving credit facility.

Dividends

Subject to legally available funds and the discretion of our board of directors, we expect to pay a quarterly cash dividend at the rate of $0.05 per share on our common stock. We expect to pay this quarterly dividend on or about the last day of the first month following each fiscal quarter to shareholders of record on the last day of such fiscal quarter. Our dividend policy has certain risks and limitations, particularly with respect to liquidity, and we may not pay dividends according to our policy, or at all. We cannot assure you that we will declare dividends or have sufficient funds to pay dividends on our common stock in the future.

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On September 5, 2018, our board of directors declared a cash dividend of $0.05 per share on our common stock, payable in respect of the third quarter of fiscal year 2018. The dividend is payable on November 30, 2018 to holders of record as of October 31, 2018.

Stock Repurchase Program

On March 20, 2018 the Company’s Board of Directors authorized up to $50.0 million of repurchases of the Company’s issued and outstanding common stock with an expiration date of March 19, 2020. The Company’s share repurchase program is executed from time to time through open market or through private transactions. Shares purchased under the share repurchase program are retired and returned to authorized and unissued status. As of July 31, 2018, the Company had $4.5 million of authorization remaining under this program. During the three months ended July 31, 2018, the Company repurchased 2,475,967 shares under this repurchase program at a total cost of $40.7 million at an average price per share of $16.42. During the nine months ended July 31, 2018, the Company repurchased 2,714,514 shares under this repurchase program at a total cost of $45.5 million at an average price per share of $16.76.

On September 5, 2018 the Company’s Board of Directors authorized an additional $50.0 million of repurchases of the Company’s issued and outstanding common stock with an expiration date of September 4, 2020.

Term Loan

On April 25, 2017, we entered into a $75.0 million term loan (“Term Loan” or “Term Loan Agreement”), as Borrower, certain subsidiaries of the Company, as Guarantor Subsidiaries. Principal may be prepaid at any time during the term of the Term Loan without penalty. The Company incurred $2.0 million in debt issuance costs related to the Term Loan. The Term Loan Agreement expires on April 25, 2022.

On July 18, 2018 the Company exercised its $50.0 million incremental commitment option under the Term Loan Agreement, which increased total borrowing under the facility from $75.0 million to $125.0 million. The Company incurred an additional $0.5 million of debt issuance costs related to the incremental commitment option under the Term Loan. Proceeds from the increase in the Term Loan were used to repay a portion of the borrowings under the April 2017 ABL Facility.

The Company may voluntarily prepay principal, in whole or in part, at any time, without penalty. Commencing with fiscal year 2018 and payable in fiscal year 2019, the Company is obligated to prepay certain minimum amounts based on the Company’s excess cash flow, as defined in the Term Loan Agreement. We are not expecting to make significant excess cash flow payments in fiscal year 2019. The Term Loan is also subject to mandatory prepayment if the Company or any of its restricted subsidiaries receives proceeds from certain events, including certain asset sales and casualty events, and the issuance of certain debt and equity interests.

April 2017 ABL Facility

On April 25, 2017, we entered into a new $350.0 million ABL revolving credit agreement with a syndicate of lenders (the “April 2017 ABL Facility” or “ABL Agreement”). The April 2017 ABL Facility provides for revolving loans and letters of credit in an aggregate amount of up to $350.0 million. The total April 2017 ABL Facility is subject to a $30.0 million sublimit for swing line loans and a $35.0 million sublimit for letters of credit, along with certain borrowing base and other customary restrictions as defined in the ABL Agreement. The April 2017 ABL Facility expires on April 25, 2022.

On December 22, 2017 the Company exercised its $100.0 million incremental commitment option under the April 2017 ABL Facility, which increased the facility to $450.0 million.

Funds from the April 2017 ABL Facility were used to repay borrowings on the previous ABL Facility and to fund the Ferrara acquisition.

Principal may be repaid at any time during the term of the ABL Facility without penalty.

The April 2017 ABL Facility contains certain financial covenants. We were in compliance with all financial covenants under the ABL Facility as of July 31, 2018. As of July 31, 2018, our availability under the April 2017 ABL Facility was $119.4 million.

Adjusted EBITDA and Adjusted Net Income

In considering the financial performance of the business, management analyzes the primary financial performance measures of Adjusted EBITDA and Adjusted Net Income. Adjusted EBITDA is defined as net income for the relevant period before depreciation and amortization, interest expense and provision for income taxes, as adjusted for certain items described below that we believe are not indicative of our ongoing operating performance. Adjusted Net Income is defined as net income, as adjusted for certain items

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described below that we believe are not indicative of our ongoing operating performance. Neither Adjusted EBITDA nor Adjusted Net Income is a measure defined by GAAP. The most directly comparable GAAP measure to EBITDA, Adjusted EBITDA and Adjusted Net Income is net income for the relevant period.

We believe Adjusted EBITDA and Adjusted Net Income are useful to investors and are used by our management for measuring profitability because these measures exclude the impact of certain items which we believe have less bearing on our core operating performance because they are items that are not needed or available to the Company’s managers in the daily activities of their businesses. We believe that the core operations of our business are those which can be affected by our management in a particular period through their resource allocation decisions that affect the underlying performance of our specialty vehicle operations conducted during that period. We also believe that decisions utilizing Adjusted EBITDA and Adjusted Net Income allow for a more meaningful comparison of operating fundamentals between companies within our markets by eliminating the impact of capital structure and taxation differences between the companies. To determine Adjusted EBITDA, we further adjust net income for the following items: non-cash depreciation and amortization, interest expense and benefit for income taxes. Stock-based compensation expense is excluded from both Adjusted Net Income and Adjusted EBITDA because it is an expense that is measured based upon external inputs such as our current share price and the movement of share price of peer companies, which cannot be impacted by our business managers. Stock-based compensation expense also reflects a cost which may obscure trends in our underlying vehicle businesses for a given period, due to the timing and nature of the equity awards.

We also adjust for exceptional items which are determined to be those that in management’s judgment need to be disclosed by virtue of their size, nature or incidence, which include non-cash items and items settled in cash. In determining whether an event or transaction is exceptional, management considers quantitative as well as qualitative factors such as the frequency or predictability of occurrence. This is consistent with the way that financial performance is measured by management and reported to our Board of Directors, assists in providing a meaningful analysis of our operating performance and used as a measurement in incentive compensation for management. Based on the foregoing factors, management considers the adjustment for non-cash purchase accounting, certain legal matters, initial public company costs, transaction expenses, restructuring costs, sponsor expenses and deferred purchase price payment to be exceptional items.

Adjusted EBITDA and Adjusted Net Income have limitations as analytical tools. These are not presentations made in accordance with GAAP, nor are they measures of financial condition and they should not be considered as an alternative to net income or net loss for the period determined in accordance with GAAP. Adjusted EBITDA and Adjusted Net Income are not necessarily comparable to similarly titled measures used by other companies. As a result, you should not consider this performance measure in isolation from, or as a substitute analysis for, our results of operations as determined in accordance with GAAP. Moreover, such measures do not reflect:

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The following table reconciles net income to Adjusted EBITDA for the periods presented:

 

 

During the first two quarters of fiscal year 2018, transaction expenses consisted primarily of costs related to the inception of our China Joint venture and expenses related to the Lance Acquisition.

Transaction expenses in the prior year consisted primarily of costs related to various business acquisitions.

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The following table reconciles net income to Adjusted Net Income for the periods presented:

 

During the first two quarters of fiscal year 2018, transaction expenses consisted primarily of costs related to the inception of our China Joint venture and expenses related to the Lance Acquisition.

Transaction expenses in the prior year consisted primarily of costs related to various business acquisitions.

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Off-Balance Sheet Arrangements

We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating our business. With the exception of operating lease obligations, we do not have any off-balance sheet arrangements or relationships with entities that are not consolidated into or disclosed in our consolidated financial statements that have, or are reasonably likely to have, a material current or future effect on our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures and capital resources. In addition, we do not engage in trading activities involving non-exchange traded contracts.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates, assumptions and judgments that affect amounts reported in the consolidated financial statements and accompanying notes. The Company's disclosures of critical accounting policies in its 2017 Annual Report on Form 10-K for the fiscal year ended October 31, 2017 have not materially changed since that report was filed.

Recent Accounting Pronouncements

See Note 1 of the Notes to Condensed Unaudited Consolidated Financial Statements for a discussion of the impact on our financial statements of new accounting standards.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There have been no material changes in our exposure to interest rate risk, foreign exchange risk and commodity price risk from the information provided in the Company’s Annual Report on Form 10-K filed on December 21, 2017.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

In accordance with Rule 13a-15(b) of the Exchange Act, the Company’s management evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the quarter ended July 31, 2018. Based upon their evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the quarter ended July 31, 2018 to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the Securities and Exchange Commission rules and forms, and to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

There are three federal and one state putative securities class actions presently pending against the Company and certain of its officers and directors, each on behalf of a putative class of purchasers of the Company’s stock in or traceable to the Company’s January 2017 IPO, as well as, for two of the actions, from January 27, 2017 through June 7, 2018. Two of the complaints also name certain of the underwriters for the Company’s IPO as defendants. The complaints allege certain violations of the Securities Act of 1933 and, for two of the actions, the Securities Exchange Act of 1934. The federal court in the Central District of California has ordered each of the federal complaints to be transferred to the U.S. District Court for the Eastern District of Wisconsin.

The Company has also received a complaint against the Company and certain of its officers and directors, on behalf of a putative class of purchasers of the Company’s stock in its secondary offering of common stock in October 2017. This complaint also named certain of the underwriters for the offering, and alleges certain violations of the Securities Act of 1933 made in connection with the October 2017 offering.

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Collectively, the actions seek certification of the putative classes asserted and compensatory damages and attorneys’ fees and costs. The underwriter defendants have notified the Company of their intent to seek indemnification from the Company pursuant to the IPO underwriting agreement in regard to the claims asserted in the actions with respect to the IPO, and the Company expects them to do the same in regard to the claims asserted in the action with respect to the October 2017 offering. The Company and the other defendants intend to defend these lawsuits vigorously. Additional lawsuits may be filed and, at this time, the Company is unable to predict the outcome of the lawsuits, the possible loss or range of loss, if any, associated with the resolution of the lawsuits, or any potential effect that it may have on the Company or its operations.

The Company is subject to certain other legal proceedings that arise in the ordinary course of business. Although the final results of all such other matters and claims cannot be predicted with certainty, management believes that the ultimate resolution of all such matters and claims will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows. Actual results could vary, among other things, due to the uncertainties involved in litigation.

Item 1A. Risk Factors.

There have been no material changes to the risk factors associated with our business previously disclosed in “Item 1A. Risk Factors,” in 2017 Annual Report on Form 10-K for the fiscal year ended October 31, 2017, as supplemented by our Quarterly Report on Form 10-Q for the quarterly period ended January 31, 2018, other than as follows:

We are party to four putative securities class actions, as well as other litigation in the ordinary course of business, and uninsured judgments or a rise in insurance premiums may adversely impact our results of operations.

There are three federal and one state putative securities class actions presently pending against us and certain of our officers and directors, each on behalf of a putative class of purchasers of our common stock in or traceable to the Company’s January 2017 IPO, as well as, for two of the actions, from January 27, 2017 through June 7, 2018. We have also received a complaint against us and certain of our officers and directors, on behalf of a putative class of purchasers of our stock in our secondary offering of common stock in October 2017. These complaints allege certain violations of the Securities Act of 1933 and, for two of the actions, the Securities Exchange Act of 1934. See “Item 1. Legal Proceedings.” We are also subject to various claims and litigation in the ordinary course of business. Any such claims, whether with or without merit, could be time consuming and expensive to defend and could divert management’s attention and resources. Some of our businesses have in the past and may in the future face claims and litigation regarding accidents involving their products, including accidents involving passenger injuries and deaths, and the increasing amount of our vehicles on the road may increase our exposure to such matters. In accordance with customary practice, we maintain insurance against some, but not all, of these potential claims. We may elect not to obtain insurance if we believe that the cost of available insurance is excessive relative to the risks presented. The levels of insurance we maintain may not be adequate to fully cover any and all losses or liabilities. Further, we may not be able to maintain insurance at commercially acceptable premium levels or at all.

For product liability claims, we have a self-insured retention (“SIR”) for product liability matters of $1.0 million. Amounts above the SIR, up to a certain dollar amount, are covered by our excess insurance policy. Currently, we maintain excess liability insurance aggregating $100.0 million with outside insurance carriers to minimize our risks related to catastrophic claims in excess of our self-insured positions for product liability and personal injury matters. Any material change in the aforementioned factors could have an adverse impact on our operating results. Any increase in the frequency and size of these claims, as compared to our experience in prior years, may cause the premium that we are required to pay for insurance to increase significantly and may negatively impact future SIR levels. It may also increase the amounts we pay in punitive damages, not all of which are covered by our self-insurance.

If there is an unfavorable outcome from the securities class actions described above, or if any significant accident, judgment, claim or other event is not fully insured or indemnified against, then in either case that could have a material adverse impact on our business, financial condition and results of operations. We cannot assure that the outcome of all current or future litigation will not have a material adverse impact on our business and results of operations.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Common Stock Repurchases

The following table sets forth information with respect to purchases of common stock made by the Company during the third quarter of fiscal year 2018 (in millions, except share and per share amounts):

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Item 6. Exhibits.

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

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