REV Group(REVG) - 2020 Q2 - Quarterly Report

Cautionary Statement About Forward-Looking Statements This report contains forward-looking statements that are subject to inherent uncertainties and various risk factors - The report contains forward-looking statements, identifiable by words like 'anticipate,' 'believe,' 'expect,' etc; investors are cautioned that these statements are inherently uncertain and actual results could differ materially due to various factors, including interest rates, credit availability, consumer confidence, labor availability, material costs, supply chain issues, global tensions, and the impact of the COVID-19 pandemic[9] Website and Social Media Disclosure The company utilizes its website and social media for official information disclosure under SEC Regulation FD - The Company uses its website (www.revgroup.com) and corporate Twitter account (@revgroupinc) as routine channels for distributing company information, including news releases, analyst presentations, and supplemental financial information, to comply with SEC Regulation FD; investors are advised to monitor these channels in addition to traditional SEC filings[11] - Information provided on the website, press releases, public conference calls, or social media channels is not incorporated into, or deemed part of, this Form 10-Q or any other SEC filing[12] PART I. FINANCIAL INFORMATION This part presents the company's unaudited financial statements and management's analysis of performance Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements and accompanying notes Condensed Unaudited Consolidated Balance Sheets The balance sheet shows an increase in total assets and liabilities, with a decrease in shareholders' equity Balance Sheet Summary | Metric | April 30, 2020 (Millions) | October 31, 2019 (Millions) | Change (YoY) | Change (%) | | :-------------------------------- | :-------------------------- | :-------------------------- | :------------- | :--------- | | Total Current Assets | $923.8 | $809.1 | +$114.7 | +14.18% | | Total Assets | $1,462.9 | $1,347.1 | +$115.8 | +8.59% | | Total Current Liabilities | $475.2 | $436.0 | +$39.2 | +9.00% | | Total Liabilities | $978.0 | $841.9 | +$136.1 | +16.17% | | Total Shareholders' Equity | $484.9 | $505.2 | -$20.3 | -4.02% | - Cash and cash equivalents significantly increased from $3.3 million at October 31, 2019, to $21.5 million at April 30, 2020[16] - Inventories, net, increased from $513.4 million to $594.0 million, reflecting a substantial increase in inventory levels[16] Condensed Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss) The company experienced a significant net loss compared to net income in the prior year due to lower sales Three-Month Operational Performance | Metric (Millions) | Three Months Ended April 30, 2020 | Three Months Ended April 30, 2019 | Change (YoY) | Change (%) | | :---------------------------------- | :-------------------------------- | :-------------------------------- | :------------- | :--------- | | Net sales | $547.0 | $615.0 | -$68.0 | -11.06% | | Gross profit | $52.4 | $72.4 | -$20.0 | -27.62% | | Operating (loss) income | $(13.5) | $16.1 | -$29.6 | -183.85% | | Net (loss) income | $(7.6) | $5.6 | -$13.2 | -235.71% | | Basic (loss) income per common share | $(0.12) | $0.09 | -$0.21 | -233.33% | | Diluted (loss) income per common share | $(0.12) | $0.09 | -$0.21 | -233.33% | | Dividends declared per common share | $0.05 | $0.05 | $0.00 | 0.00% | Six-Month Operational Performance | Metric (Millions) | Six Months Ended April 30, 2020 | Six Months Ended April 30, 2019 | Change (YoY) | Change (%) | | :---------------------------------- | :-------------------------------- | :-------------------------------- | :------------- | :--------- | | Net sales | $1,079.1 | $1,133.7 | -$54.6 | -4.81% | | Gross profit | $99.8 | $118.7 | -$18.9 | -15.92% | | Operating (loss) income | $(17.9) | $4.9 | -$22.8 | -465.31% | | Net (loss) income | $(16.7) | $(9.0) | -$7.7 | +85.56% | | Basic (loss) income per common share | $(0.27) | $(0.14) | -$0.13 | +92.86% | | Diluted (loss) income per common share | $(0.27) | $(0.14) | -$0.13 | +92.86% | - The company recorded a significant gain on acquisition of business of $11.9 million for both the three and six months ended April 30, 2020, which positively impacted pre-tax income[17] - A loss on sale of business of $8.8 million was recognized for both the three and six months ended April 30, 2020[17] Condensed Unaudited Consolidated Statements of Cash Flows Cash flow from operations improved significantly, while investing activities used cash for an acquisition Cash Flow Summary | Metric (Millions) | Six Months Ended April 30, 2020 | Six Months Ended April 30, 2019 | Change (YoY) | Change (%) | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | :------------- | :--------- | | Net cash provided by (used in) operating activities | $22.0 | $(39.2) | +$61.2 | +156.12% | | Net cash (used in) provided by investing activities | $(58.5) | $4.7 | -$63.2 | -1344.68% | | Net cash provided by financing activities | $54.7 | $29.1 | +$25.6 | +87.97% | | Net increase (decrease) in cash and cash equivalents | $18.2 | $(5.4) | +$23.6 | +437.04% | | Cash and cash equivalents, end of period | $21.5 | $6.5 | +$15.0 | +230.77% | - Operating activities generated $22.0 million in cash for the six months ended April 30, 2020, a significant improvement from a $39.2 million cash outflow in the prior year, primarily due to improved working capital efficiency and cash preservation measures[19][150] - Investing activities used $58.5 million, mainly due to the acquisition of Spartan ER, contrasting with a $4.7 million cash inflow in the prior year[19][151] - Financing activities provided $54.7 million, primarily from net borrowings to fund the Spartan ER acquisition and pay dividends[19][152] Condensed Unaudited Consolidated Statements of Shareholders' Equity Shareholders' equity declined due to net losses and dividends, resulting in a retained deficit Shareholders' Equity Summary | Metric (Millions) | April 30, 2020 | October 31, 2019 | Change (YoY) | Change (%) | | :------------------------ | :------------- | :--------------- | :----------- | :--------- | | Total Shareholders' Equity | $484.9 | $505.2 | -$20.3 | -4.02% | | Retained (deficit) earnings | $(7.6) | $15.8 | -$23.4 | -148.10% | - Shareholders' equity decreased by $20.3 million from October 31, 2019, to April 30, 2020, primarily due to net losses and dividends declared, partially offset by stock-based compensation[20] - The company moved from retained earnings of $15.8 million at October 31, 2019, to a retained deficit of $7.6 million at April 30, 2020[20] Notes to Condensed Unaudited Consolidated Financial Statements These notes provide detailed explanations of accounting policies and specific financial activities Note 1. Basis of Presentation The financial statements are prepared under U.S. GAAP, with AIP as the primary equity holder - The unaudited Condensed Consolidated Financial Statements include REV Group, Inc and all its subsidiaries, prepared in accordance with U.S. GAAP, with certain information condensed or omitted per SEC rules[22] - American Industrial Partners (AIP) indirectly owns approximately 53.3% of REV Group's voting equity as of April 30, 2020, making them the primary equity holder[23] - The Company adopted ASU 2016-02, 'Leases' (ASC 842), on November 1, 2019, recognizing ROU assets and lease liabilities for operating leases, which did not materially impact results of operations or cash flows[26] Note 2. Revenue Recognition Revenue is primarily recognized at a point-in-time from specialty vehicle sales in the U.S. and Canada - Substantially all revenue is recognized from contracts with customers in the United States and Canada, primarily from the manufacture and sale of specialty vehicles, aftermarket parts, and services[30][31] - Revenue is typically recognized at a point-in-time when control is transferred, usually upon product shipment or customer pick-up from manufacturing facilities[31] Revenue from Customer Advances | Period | Revenue from Customer Advances (Millions) | | :-------------------------------- | :-------------------------------------- | | Three months ended April 30, 2020 | $26.2 | | Three months ended April 30, 2019 | $30.4 | | Six months ended April 30, 2020 | $80.6 | | Six months ended April 30, 2019 | $74.0 | Note 3. Leases The company recognizes Right-of-Use assets and liabilities for its long-term operating leases - The Company leases administrative and production facilities and equipment under long-term operating lease agreements, recognizing Right-of-Use (ROU) assets and lease liabilities based on the present value of lease payments[33] Lease Cost Summary | Lease Costs (Millions) | Three Months Ended April 30, 2020 | Six Months Ended April 30, 2020 | | :--------------------- | :-------------------------------- | :------------------------------ | | Total operating lease costs | $2.5 | $4.8 | | Cash paid for lease liabilities | $2.3 | N/A | - As of April 30, 2020, the weighted average remaining lease term for operating leases was 4.8 years, with a weighted average discount rate of 5.0%[35] Note 4. Acquisition The acquisition of Spartan ER for $54.8 million resulted in a preliminary gain of $11.9 million - On February 1, 2020, REV Group acquired Spartan Emergency Response (Spartan ER) for $54.8 million, increasing market share in emergency response vehicles and providing access to new markets[37] - The preliminary purchase price allocation resulted in a gain on acquisition of $11.9 million, included in the consolidated statements of operations, due to negotiating a purchase price lower than the fair market value of acquired net assets[37] Spartan ER Financial Contribution | Spartan ER Financials (Millions) | Three Months Ended April 30, 2020 | Six Months Ended April 30, 2020 | | :------------------------------- | :-------------------------------- | :------------------------------ | | Net sales | $62.6 | $62.6 | | Operating income | $1.0 | $1.0 | Note 5. Inventories Total inventories increased, driven primarily by a significant rise in work in process inventory Inventory Breakdown | Inventory Category (Millions) | April 30, 2020 | October 31, 2019 | Change (YoY) | Change (%) | | :---------------------------- | :------------- | :--------------- | :----------- | :--------- | | Chassis | $45.3 | $44.9 | +$0.4 | +0.89% | | Raw materials | $207.5 | $198.1 | +$9.4 | +4.74% | | Work in process | $263.0 | $200.8 | +$62.2 | +30.98% | | Finished products | $89.9 | $79.6 | +$10.3 | +12.94% | | Total inventories, net | $594.0 | $513.4 | +$80.6 | +15.70% | - Work in process inventory saw the largest increase, rising by $62.2 million or 30.98% from October 31, 2019, to April 30, 2020[41] Note 6. Property, Plant and Equipment Net property, plant, and equipment decreased slightly, with depreciation expense remaining stable Net Property, Plant and Equipment | Category (Millions) | April 30, 2020 | October 31, 2019 | Change (YoY) | Change (%) | | :------------------ | :------------- | :--------------- | :----------- | :--------- | | Total property, plant and equipment, net | $192.7 | $201.7 | -$9.0 | -4.46% | Depreciation Expense | Depreciation Expense (Millions) | Three Months Ended April 30, 2020 | Three Months Ended April 30, 2019 | Six Months Ended April 30, 2020 | Six Months Ended April 30, 2019 | | :------------------------------ | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Depreciation expense | $7.5 | $7.0 | $14.3 | $14.5 | Note 7. Goodwill and Intangible Assets Goodwill and intangible assets decreased due to divestitures and amortization Goodwill by Segment | Segment (Millions) | April 30, 2020 | October 31, 2019 | Change (YoY) | Change (%) | | :----------------- | :------------- | :--------------- | :----------- | :--------- | | Fire & Emergency | $88.6 | $88.6 | $0.0 | 0.00% | | Commercial | $26.2 | $28.7 | -$2.5 | -8.71% | | Recreation | $42.5 | $42.5 | $0.0 | 0.00% | | Total goodwill | $157.3 | $159.8 | -$2.5 | -1.56% | - Goodwill decreased by $2.5 million for the six months ended April 30, 2020, primarily due to divestitures[43] Net Intangible Assets | Intangible Assets (Millions) | April 30, 2020 (Net) | October 31, 2019 (Net) | Change (YoY) | Change (%) | | :--------------------------- | :------------------- | :--------------------- | :----------- | :--------- | | Finite-lived intangible assets | $35.1 | $44.0 | -$8.9 | -20.23% | | Indefinite-lived trade names | $110.1 | $115.9 | -$5.8 | -5.00% | | Total intangible assets, net | $145.2 | $159.9 | -$14.7 | -9.19% | Note 8. Divestiture Activities The company completed the sale of its shuttle bus businesses, resulting in an $8.8 million loss - In the first quarter of fiscal year 2020, the Company completed the sale of REV Coach, receiving $1.1 million in cash in Q1 and the remaining $0.9 million in Q2[46] - Effective May 8, 2020, the Company completed the sale of its shuttle bus businesses for approximately $49.0 million in cash, with an additional $5.0 million expected from retained accounts and parts inventory[47] - A loss on sale of $8.8 million was recorded for the shuttle bus businesses, including $2.5 million related to goodwill and $1.8 million in costs to sell[48] Note 9. Long-Term Debt Total debt increased to fund an acquisition, and debt covenants were amended Debt Summary | Debt Instrument (Millions) | April 30, 2020 | October 31, 2019 | Change (YoY) | Change (%) | | :------------------------- | :------------- | :--------------- | :----------- | :--------- | | April 2017 ABL facility | $275.0 | $210.0 | +$65.0 | +30.95% | | Term Loan, net | $167.5 | $170.2 | -$2.7 | -1.59% | | Total debt | $442.5 | $380.2 | +$62.3 | +16.39% | | Long-term debt, less current maturities | $440.8 | $376.6 | +$64.2 | +17.05% | - The April 2017 ABL Facility's borrowing capacity was increased from $450.0 million to $500.0 million on January 31, 2020, to fund the Spartan ER acquisition[59] - On April 29, 2020, the Term Loan agreement was amended to replace the maximum leverage ratio covenant with a fixed charge coverage ratio test (minimum 1.25 to 1.00) through Q4 fiscal year 2020, and interest rate margins increased by 75 basis points[64] - The Company was in compliance with all financial covenants under both the April 2017 ABL Facility and Term Loan as of April 30, 2020[57][62] Note 10. Warranties Warranty liability increased significantly, primarily due to the Spartan ER acquisition - The Company's products carry explicit warranties, with selected components covered by OEM warranties passed to the customer[65] Warranty Liability Roll-Forward | Warranty Liability (Millions) | Six Months Ended April 30, 2020 | Six Months Ended April 30, 2019 | Change (YoY) | Change (%) | | :---------------------------- | :-------------------------------- | :-------------------------------- | :------------- | :--------- | | Balance at beginning of period | $22.6 | $30.8 | -$8.2 | -26.62% | | Warranty provisions | $14.8 | $9.2 | +$5.6 | +60.87% | | Settlements made | $(14.0) | $(14.9) | +$0.9 | -6.04% | | Warranties for current year acquisition | $10.2 | $0.0 | +$10.2 | N/A | | Balance at end of period | $32.4 | $24.5 | +$7.9 | +32.24% | - Total warranty liability increased to $32.4 million at April 30, 2020, from $22.6 million at October 31, 2019, largely due to warranties from the Spartan ER acquisition[66][67] Note 11. Stock Repurchase Program No stock was repurchased, and the program is suspended under amended Term Loan provisions - The Board of Directors authorized $100.0 million for common stock repurchases, with $38.3 million remaining as of April 30, 2020[68] - No repurchases were made during the three and six months ended April 30, 2020[68] - The Company is no longer permitted to repurchase stock under the provisions of its Term Loan, as amended on April 29, 2020, through the maturity of the agreement[68] Note 12. Earnings Per Share Basic and diluted EPS were identical due to the anti-dilutive effect of stock equivalents in a net loss period Weighted-Average Shares Outstanding | Metric | Three Months Ended April 30, 2020 | Three Months Ended April 30, 2019 | Six Months Ended April 30, 2020 | Six Months Ended April 30, 2019 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Basic weighted-average common shares outstanding | 63,108,468 | 62,957,854 | 62,941,904 | 62,994,738 | | Diluted weighted-average common shares outstanding | 63,108,468 | 63,347,614 | 62,941,904 | 62,994,738 | - For the three and six months ended April 30, 2020, basic and diluted EPS were the same due to the anti-dilutive effect of common stock equivalents, given the net loss[69][70] Anti-dilutive Securities | Anti-dilutive Common Stock Equivalents | Three Months Ended April 30, 2020 | Three Months Ended April 30, 2019 | Six Months Ended April 30, 2020 | Six Months Ended April 30, 2019 | | :------------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Anti-dilutive stock options | 651,600 | 172,951 | 779,600 | 988,551 | | Anti-dilutive restricted stock units | 2,724,840 | 497,925 | 2,905,823 | 1,750,723 | | Total Anti-dilutive common stock equivalents | 3,376,440 | 689,284 | 3,685,423 | 2,757,682 | Note 13. Income Taxes The company recorded a significant income tax benefit due to the CARES Act and a nontaxable acquisition gain Income Tax Summary | Income Tax (Millions) | Three Months Ended April 30, 2020 | Three Months Ended April 30, 2019 | Six Months Ended April 30, 2020 | Six Months Ended April 30, 2019 | | :-------------------- | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Income tax benefit (expense) | $10.1 | $(2.5) | $12.7 | $(1.9) | | Effective tax rate | 56.1% | 30.8% | 42.5% | 17.8% | - Income tax benefit for the three and six months ended April 30, 2020, was favorably impacted by $5.7 million and $5.4 million, respectively, in net discrete tax benefits, primarily from net operating loss carrybacks under the CARES Act and the nontaxable gain on the Spartan ER acquisition[72][73] - The CARES Act allowed for a $3.5 million tax benefit from carrying back the fiscal year 2018 federal net operating loss, leveraging the rate differential between the previous 35% and current 21% federal tax rates[74] Note 14. Commitments and Contingencies Contingent liabilities increased significantly due to performance bonds for municipal and acquired contracts Contingent Liabilities Summary | Contingent Liabilities (Millions) | April 30, 2020 | October 31, 2019 | Change (YoY) | Change (%) | | :-------------------------------- | :------------- | :--------------- | :----------- | :--------- | | Performance, bid and specialty bonds | $340.0 | $229.9 | +$110.1 | +47.89% | | Open standby letters of credit | $10.4 | $14.3 | -$3.9 | -27.27% | | Total | $350.4 | $244.2 | +$106.2 | +43.49% | - The increase in performance, bid, and specialty bonds is attributed to municipal contracts within the Commercial segment and customer contracts related to Spartan ER[81] - The Company's contingent liability under chassis converter pool agreements decreased from $48.6 million to $36.0 million[82] - Outstanding obligations under repurchase agreements with lending institutions decreased from $212.5 million to $199.6 million[83] - The Company is involved in consolidated federal and state putative securities class actions and derivative actions, which it intends to defend vigorously, with uncertain outcomes and potential material effects[88][89] Note 15. Business Segment Information The company operates through three segments: Fire & Emergency, Commercial, and Recreation - REV Group operates through three reportable segments: Fire & Emergency, Commercial, and Recreation, based on management's decision-making process, capital allocation, and performance measurement[90] Three-Month Segment Performance | Segment (Millions) | Net Sales (3M Apr 2020) | Net Sales (3M Apr 2019) | Adj. EBITDA (3M Apr 2020) | Adj. EBITDA (3M Apr 2019) | | :----------------- | :---------------------- | :---------------------- | :------------------------ | :------------------------ | | Fire & Emergency | $289.3 | $247.1 | $10.2 | $15.1 | | Commercial | $143.2 | $170.0 | $8.0 | $14.7 | | Recreation | $114.0 | $199.7 | $(1.1) | $17.3 | Six-Month Segment Performance | Segment (Millions) | Net Sales (6M Apr 2020) | Net Sales (6M Apr 2019) | Adj. EBITDA (6M Apr 2020) | Adj. EBITDA (6M Apr 2019) | | :----------------- | :---------------------- | :---------------------- | :------------------------ | :------------------------ | | Fire & Emergency | $495.8 | $451.2 | $12.1 | $23.4 | | Commercial | $301.3 | $310.6 | $17.9 | $19.7 | | Recreation | $280.9 | $375.9 | $5.9 | $26.5 | - Adjusted EBITDA is a key financial performance measure used by management and the Board of Directors for profitability assessment and incentive compensation, excluding items not indicative of core operating performance[97][98] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial results, segment performance, liquidity, and the impact of COVID-19 Overview The company is a leading manufacturer of specialty vehicles across three primary market segments - REV Group is a leading designer, manufacturer, and distributor of specialty vehicles and related aftermarket parts and services, serving diversified customers primarily in the U.S. through three segments: Fire & Emergency, Commercial, and Recreation[101] - The Company provides customized vehicle solutions for essential public services (ambulances, fire apparatus, school/transit buses), commercial infrastructure (terminal trucks, industrial sweepers), and consumer leisure (RVs)[101] - Approximately 69% of net sales during Q2 fiscal year 2020 came from products where REV Group holds a first or second market share position[101] Segments The company's three segments serve the fire, ambulance, bus, terminal truck, and RV markets - The Fire & Emergency segment includes brands like KME, E-One, Ferrara, Spartan, and Horton, manufacturing fire apparatus and ambulances, and is considered the largest manufacturer by unit volume in the U.S[102] - The Commercial segment serves the bus market (Collins Bus, Champion Bus, ENC, ElDorado National) and the terminal truck/sweeper market (Capacity, Lay-Mor), being a leading producer of small- to medium-sized buses, Type A school buses, transit buses, terminal trucks, and street sweepers[103] - The Recreation segment includes brands like American Coach, Fleetwood RV, Monaco Coach, and Lance, offering Class A, C, and B motorized RVs, towable travel trailers, and truck campers[104] Factors Affecting Our Performance Performance is influenced by economic conditions, seasonality, acquisitions, and the COVID-19 pandemic General Economic Conditions Business performance is tied to economic health, consumer confidence, and municipal spending - Business performance is influenced by U.S. economic conditions, employment levels, consumer confidence, municipal spending, interest rates, and global market instability[105] - RV purchases are discretionary and highly sensitive to financing availability, consumer confidence, unemployment, and disposable income[106] - Fire & Emergency and Commercial segments, while less economically sensitive than Recreation, are impacted by local tax revenues and the deferrable nature of large municipal purchases[107] Seasonality Operating results are typically slower in the first half of the fiscal year and stronger in the second half - Operating results are typically seasonal, with the first and second fiscal quarters being the slowest due to colder weather and timing of purchasing seasons for school buses, RVs, and sweepers[109] - Sales are generally higher in the third and fourth fiscal quarters, driven by better weather, vacation season, RV dealer/end-user buying habits, and government/municipal fiscal year timing[109] Impact of Acquisitions The company actively uses acquisitions and divestitures to shape its strategic business portfolio - The Company actively pursues targeted acquisitions for growth and may dispose of businesses that no longer align with its strategy[110] - Upfront costs are incurred during the integration of acquired businesses, with benefits potentially impacting financial results in subsequent periods[110] - The acquisition of Spartan ER on February 1, 2020, and the sale of shuttle bus businesses on May 8, 2020, are recent examples of such activities[112] Impact of COVID-19 The COVID-19 pandemic has caused significant disruptions to supply chains, demand, and operations - The COVID-19 pandemic has caused disruptions and delays in the supply chain, customer demand, and logistics, including customers' ability to inspect and take delivery of vehicles[113] - Many of the Company's vehicles (fire trucks, ambulances, buses, terminal trucks) are designated as essential by CISA, representing roughly 70% of production[114] - Precautionary steps taken include temporary closures of Recreation and shuttle bus manufacturing locations, limiting personnel, travel restrictions, furloughs, deferred capital investments, suspension of future quarterly dividends, and temporary salary reductions for leadership[115] Results of Operations The company's operational results show decreased sales and profits, largely due to COVID-19 impacts Net Sales Consolidated net sales decreased, with organic sales declining significantly due to COVID-19 Three-Month Net Sales | Metric (Millions) | Three Months Ended April 30, 2020 | Three Months Ended April 30, 2019 | Change (YoY) | Change (%) | | :---------------- | :-------------------------------- | :-------------------------------- | :------------- | :--------- | | Consolidated Net Sales | $547.0 | $615.0 | -$68.0 | -11.1% | Six-Month Net Sales | Metric (Millions) | Six Months Ended April 30, 2020 | Six Months Ended April 30, 2019 | Change (YoY) | Change (%) | | :---------------- | :------------------------------ | :------------------------------ | :------------- | :--------- | | Consolidated Net Sales | $1,079.1 | $1,133.7 | -$54.6 | -4.8% | - Excluding the $62.6 million revenue from Spartan ER, organic net sales decreased by $130.6 million (21.2%) for the three months and $117.2 million (10.3%) for the six months, primarily due to COVID-19 related shutdowns and travel restrictions impacting the Recreation and Commercial segments[117][119] Gross Profit Gross profit and margin declined due to lower sales volumes and under-absorbed manufacturing costs Three-Month Gross Profit | Metric (Millions) | Three Months Ended April 30, 2020 | Three Months Ended April 30, 2019 | Change (YoY) | Change (%) | | :---------------- | :-------------------------------- | :-------------------------------- | :------------- | :--------- | | Gross Profit | $52.4 | $72.4 | -$20.0 | -27.6% | | Gross Profit % of Net Sales | 9.6% | 11.8% | -2.2 pp | -18.6% | Six-Month Gross Profit | Metric (Millions) | Six Months Ended April 30, 2020 | Six Months Ended April 30, 2019 | Change (YoY) | Change (%) | | :---------------- | :------------------------------ | :------------------------------ | :------------- | :--------- | | Gross Profit | $99.8 | $118.7 | -$18.9 | -15.9% | | Gross Profit % of Net Sales | 9.3% | 10.5% | -1.2 pp | -11.4% | - The decrease in gross profit and margin was primarily due to lower sales volumes from COVID-19 impacts and related under-absorbed manufacturing facility costs, particularly in the Recreation segment, partially offset by Spartan ER's contribution[120][121] Selling, General and Administrative SG&A costs increased, driven by the Spartan ER acquisition and higher transaction costs Three-Month SG&A | Metric (Millions) | Three Months Ended April 30, 2020 | Three Months Ended April 30, 2019 | Change (YoY) | Change (%) | | :---------------- | :-------------------------------- | :-------------------------------- | :------------- | :--------- | | SG&A Costs | $54.9 | $48.6 | +$6.3 | +13.0% | Six-Month SG&A | Metric (Millions) | Six Months Ended April 30, 2020 | Six Months Ended April 30, 2019 | Change (YoY) | Change (%) | | :---------------- | :------------------------------ | :------------------------------ | :------------- | :--------- | | SG&A Costs | $100.9 | $96.3 | +$4.6 | +4.8% | - The increase in SG&A costs was primarily driven by the acquisition of Spartan ER and higher transaction costs[122] Restructuring Restructuring costs rose significantly due to leadership changes and headcount reductions Three-Month Restructuring Costs | Metric (Millions) | Three Months Ended April 30, 2020 | Three Months Ended April 30, 2019 | Change (YoY) | Change (%) | | :---------------- | :-------------------------------- | :-------------------------------- | :------------- | :--------- | | Restructuring Costs | $6.1 | $1.8 | +$4.3 | +238.9% | Six-Month Restructuring Costs | Metric (Millions) | Six Months Ended April 30, 2020 | Six Months Ended April 30, 2019 | Change (YoY) | Change (%) | | :---------------- | :------------------------------ | :------------------------------ | :------------- | :--------- | | Restructuring Costs | $6.7 | $2.9 | +$3.8 | +131.0% | - The increase in restructuring costs was primarily due to leadership changes (e.g., CEO change), headcount reductions in Corporate and the Fire division, and lease termination costs from a Spartan ER facility closure[123] Loss on Sale of Business An $8.8 million loss was recorded from the sale of the shuttle bus businesses - A loss of $8.8 million was recorded for the three and six months ended April 30, 2020, due to the sale of the shuttle bus businesses, completed on May 8, 2020[124] Gain on Acquisition of Business An $11.9 million gain was recorded from the preliminary purchase accounting for Spartan ER - A gain of $11.9 million was recorded during the second quarter of fiscal year 2020 from the preliminary purchase accounting for the acquisition of Spartan ER[125] (Benefit) Provision for Income Taxes The company recorded a significant tax benefit due to the CARES Act and a nontaxable acquisition gain Income Tax Benefit (Expense) | Metric (Millions) | Three Months Ended April 30, 2020 | Three Months Ended April 30, 2019 | Six Months Ended April 30, 2020 | Six Months Ended April 30, 2019 | | :---------------- | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Income Tax Benefit (Expense) | $10.1 | $(2.5) | $12.7 | $(1.9) | - The income tax benefit for both periods in 2020 was favorably impacted by net discrete tax benefits, primarily related to net operating loss carrybacks under the CARES Act and the nontaxable gain on the Spartan ER acquisition[126][127] Net (Loss) Income The company's net loss increased due to lower operating income and a loss on business sale Three-Month Net (Loss) Income | Metric (Millions) | Three Months Ended April 30, 2020 | Three Months Ended April 30, 2019 | Change (YoY) | Change (%) | | :---------------- | :-------------------------------- | :-------------------------------- | :------------- | :--------- | | Net (Loss) Income | $(7.6) | $5.6 | -$13.2 | -235.7% | Six-Month Net (Loss) Income | Metric (Millions) | Six Months Ended April 30, 2020 | Six Months Ended April 30, 2019 | Change (YoY) | Change (%) | | :---------------- | :------------------------------ | :------------------------------ | :------------- | :--------- | | Net (Loss) Income | $(16.7) | $(9.0) | -$7.7 | +85.6% | - The increase in net loss for both periods was primarily due to decreased operating income and the loss on the sale of shuttle bus businesses, partially offset by the gain on the Spartan ER acquisition, lower interest expense, and lower income tax expense[128][129] Fire & Emergency Segment Net sales increased due to the Spartan ER acquisition, but Adjusted EBITDA declined significantly Three-Month Segment Performance | Metric (Millions) | Three Months Ended April 30, 2020 | Three Months Ended April 30, 2019 | Change (YoY) | Change (%) | | :---------------- | :-------------------------------- | :-------------------------------- | :------------- | :--------- | | Net sales | $289.3 | $247.1 | +$42.2 | +17.1% | | Adjusted EBITDA | $10.2 | $15.1 | -$4.9 | -32.5% | | Adjusted EBITDA % of net sales | 3.5% | 6.1% | -2.6 pp | -42.6% | Six-Month Segment Performance | Metric (Millions) | Six Months Ended April 30, 2020 | Six Months Ended April 30, 2019 | Change (YoY) | Change (%) | | :---------------- | :------------------------------ | :------------------------------ | :------------- | :--------- | | Net sales | $495.8 | $451.2 | +$44.6 | +9.9% | | Adjusted EBITDA | $12.1 | $23.4 | -$11.3 | -48.3% | | Adjusted EBITDA % of net sales | 2.4% | 5.2% | -2.8 pp | -53.8% | - Net sales increased primarily due to the Spartan ER acquisition ($62.6 million contribution); excluding Spartan ER, net sales decreased by 8.3% (3M) and 4.0% (6M) due to COVID-19 impacts, higher absentee rates, and travel restrictions[131][132] - Adjusted EBITDA decreased significantly, with Spartan ER contributing $3.4 million; excluding Spartan ER, Adjusted EBITDA decreased by 55.0% (3M) and 62.8% (6M), negatively impacted by lower fire truck shipment volumes and under-absorption of plant costs[133][134] Commercial Segment Both net sales and Adjusted EBITDA decreased due to plant closures and reduced demand from COVID-19 Three-Month Segment Performance | Metric (Millions) | Three Months Ended April 30, 2020 | Three Months Ended April 30, 2019 | Change (YoY) | Change (%) | | :---------------- | :-------------------------------- | :-------------------------------- | :------------- | :--------- | | Net sales | $143.2 | $170.0 | -$26.8 | -15.8% | | Adjusted EBITDA | $8.0 | $14.7 | -$6.7 | -45.6% | | Adjusted EBITDA % of net sales | 5.6% | 8.6% | -3.0 pp | -34.9% | Six-Month Segment Performance | Metric (Millions) | Six Months Ended April 30, 2020 | Six Months Ended April 30, 2019 | Change (YoY) | Change (%) | | :---------------- | :------------------------------ | :------------------------------ | :------------- | :--------- | | Net sales | $301.3 | $310.6 | -$9.3 | -3.0% | | Adjusted EBITDA | $17.9 | $19.7 | -$1.8 | -9.1% | | Adjusted EBITDA % of net sales | 5.9% | 6.3% | -0.4 pp | -6.3% | - Net sales decreased due to temporary plant closures impacting shuttle bus businesses and reduced school bus demand from COVID-19, partially offset by increased transit bus shipments and improved pricing[135][137] - Adjusted EBITDA decreased due to reduced volumes, under-absorption at manufacturing plants, and the sale of shuttle bus businesses (whose results were excluded from segment EBITDA for the period), partially offset by higher margin transit bus sales[138][139] Recreation Segment This segment saw a sharp decline in sales and an Adjusted EBITDA loss due to pandemic-related shutdowns Three-Month Segment Performance | Metric (Millions) | Three Months Ended April 30, 2020 | Three Months Ended April 30, 2019 | Change (YoY) | Change (%) | | :---------------- | :-------------------------------- | :-------------------------------- | :------------- | :--------- | | Net sales | $114.0 | $199.7 | -$85.7 | -42.9% | | Adjusted EBITDA | $(1.1) | $17.3 | -$18.4 | -106.4% | | Adjusted EBITDA % of net sales | -1.0% | 8.7% | -9.7 pp | -111.5% | Six-Month Segment Performance | Metric (Millions) | Six Months Ended April 30, 2020 | Six Months Ended April 30, 2019 | Change (YoY) | Change (%) | | :---------------- | :------------------------------ | :------------------------------ | :------------- | :--------- | | Net sales | $280.9 | $375.9 | -$95.0 | -25.3% | | Adjusted EBITDA | $5.9 | $26.5 | -$20.6 | -77.7% | | Adjusted EBITDA % of net sales | 2.1% | 7.0% | -4.9 pp | -70.0% | - Net sales decreased significantly due to the temporary shutdown of all Recreation businesses during COVID-19 Stay-At-Home orders, partially offset by an increase in Class B RV shipments[140][141] - The segment reported an Adjusted EBITDA loss for the three months ended April 30, 2020, primarily due to lower shipments, under-absorption at manufacturing facilities, and medical insurance costs for laid-off/furloughed employees[142][143] Backlog Total backlog increased year-over-year, driven by the Fire & Emergency segment's Spartan ER acquisition Backlog by Segment | Segment (Millions) | April 30, 2020 | January 31, 2020 | April 30, 2019 | Change (YoY) | Change (QoQ) | | :----------------- | :------------- | :--------------- | :------------- | :----------- | :----------- | | Fire & Emergency | $1,111.7 | $807.3 | $786.5 | +$325.2 | +$304.4 | | Commercial | $413.2 | $455.6 | $435.9 | -$22.7 | -$42.4 | | Recreation | $122.9 | $158.3 | $169.0 | -$46.1 | -$35.4 | | Total Backlog | $1,647.8 | $1,421.2 | $1,391.4 | +$256.4 | +$226.6 | - Total backlog increased to $1,647.8 million as of April 30, 2020, from $1,391.4 million a year prior, primarily driven by the Fire & Emergency segment due to the Spartan ER acquisition and strong Ambulance order intake[146] - Commercial backlog decreased due to lower terminal truck and shuttle bus orders, while Recreation backlog declined due to lower demand for non-motorized units and impacts from COVID-19 related dealer closures[146] Liquidity and Capital Resources The company's liquidity is managed through operating cash flow and credit facilities, with recent amendments to debt covenants General Liquidity needs are met by operating cash flow and borrowings under existing credit facilities - Primary liquidity and capital requirements include working capital, facility improvements, debt service, and general corporate needs, historically met by operating activities, cash, and borrowings under term loan and ABL credit facility[147] - The Company believes current liquidity sources are sufficient but cannot assure future sufficiency, potentially requiring additional financing which could dilute existing stockholders or impose restrictive covenants[148] Cash Flow Operating cash flow improved significantly, while investing cash flow was used for an acquisition Cash Flow Summary | Cash Flow Category (Millions) | Six Months Ended April 30, 2020 | Six Months Ended April 30, 2019 | Change (YoY) | Change (%) | | :---------------------------- | :-------------------------------- | :-------------------------------- | :------------- | :--------- | | Net cash provided by (used in) operating activities | $22.0 | $(39.2) | +$61.2 | +156.1% | | Net cash (used in) provided by investing activities | $(58.5) | $4.7 | -$63.2 | -1344.7% | | Net cash provided by financing activities | $54.7 | $29.1 | +$25.6 | +88.0% | | Net increase (decrease) in cash and cash equivalents | $18.2 | $(5.4) | +$23.6 | +437.0% | Net Cash Provided by (Used in) Operating Activities Operating cash flow turned positive due to improved working capital and cash preservation measures - Net cash provided by operating activities was $22.0 million for the six months ended April 30, 2020, a significant improvement from a $39.2 million use of cash in the prior year, driven by improved net working capital efficiency and cash preservation measures due to COVID-19[150] Net Cash (Used in) Provided by Investing Activities Investing activities used cash primarily for the acquisition of Spartan ER - Net cash used in investing activities increased to $58.5 million for the six months ended April 30, 2020, from a $4.7 million inflow in the prior year, primarily due to the acquisition of Spartan ER[151] Net Cash Provided by Financing Activities Financing activities provided cash from net borrowings to fund the Spartan ER acquisition - Net cash provided by financing activities was $54.7 million for the six months ended April 30, 2020, mainly from net borrowings to fund the Spartan ER acquisition and pay quarterly dividends[152] Dividends The quarterly dividend was suspended due to limitations under the amended Term Loan agreement - The Company paid $6.3 million in cash dividends during the six months ended April 30, 2020[153] - Due to limitations under the amended Term Loan agreement (requiring a leverage ratio not exceeding 3.5 to 1.0 for dividend payments), the Company suspended its quarterly dividend starting Q2 fiscal year 2020[153] Stock Repurchase Program The stock repurchase program is prohibited under the amended Term Loan agreement - The Company had $38.3 million remaining authorization under its $100.0 million stock repurchase program as of April 30, 2020[154] - No shares were repurchased during the three and six months ended April 30, 2020[154] - The Term Loan amendment on April 29, 2020, prohibits further stock repurchases until the agreement's maturity[154] Term Loan The Term Loan agreement was amended to replace the leverage covenant with a fixed charge coverage ratio - The Term Loan agreement, initially $75.0 million, was increased to $175.0 million through incremental commitment options by March 29, 2019[155][156][157] - Amendments in October 2019 and January 2020 raised the maximum net leverage ratio to 4.00:1.00 and then to 5.00:1.00, respectively, in anticipation of the Spartan ER acquisition[158][160] - On April 29, 2020, the maximum leverage ratio covenant was replaced with a fixed charge coverage ratio test (minimum 1.25:1.00) through Q4 fiscal year 2020, with interest rate margins increasing by 75 basis points[161] April 2017 ABL Facility The ABL facility was increased to $500.0 million, with $214.6 million available as of April 30, 2020 - The April 2017 ABL Facility, initially $350.0 million, was increased to $450.0 million in December 2017 and further to $500.0 million on January 31, 2020, to fund the Lance Camper and Spartan ER acquisitions[164][165][166] - As of April 30, 2020, the Company had $214.6 million availability under the ABL Facility and was in compliance with all financial covenants[167] Adjusted EBITDA and Adjusted Net Income These non-GAAP measures are used by management to assess core operating performance - Adjusted EBITDA and Adjusted Net Income are non-GAAP financial measures used by management and the Board of Directors to assess financial performance and for incentive compensation, as they exclude items not indicative of core operating performance[169][170] Non-GAAP Reconciliation Summary | Metric (Millions) | Three Months Ended April 30, 2020 | Three Months Ended April 30, 2019 | Six Months Ended April 30, 2020 | Six Months Ended April 30, 2019 | | :---------------- | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Net (loss) income | $(7.6) | $5.6 | $(16.7) | $(9.0) | | Adjusted EBITDA | $7.6 | $36.1 | $18.4 | $48.4 | | Adjusted Net Loss (Income) | $(5.8) | $15.2 | $(8.8) | $12.3 | - Adjustments to Net Income for these non-GAAP measures include depreciation and amortization, interest expense, income taxes, transaction expenses, restructuring costs, stock-based compensation, legal matters, gains/losses on business sales/acquisitions, impairment charges, and the impact of the CARES Act[172][176][182] Off-Balance Sheet Arrangements The company has no material off-balance sheet arrangements or relationships with unconsolidated entities - The Company has not created or entered into any special-purpose or off-balance sheet entities for capital raising, debt incurrence, or business operations[178] - There are no off-balance sheet arrangements or relationships with unconsolidated entities that are reasonably likely to have a material current or future effect on the Company's financial condition, revenues, expenses, results of operations, liquidity, capital expenditures, and capital resources[178] Critical Accounting Policies and Estimates The preparation of financial statements requires management to make critical estimates and judgments - The preparation of consolidated financial statements requires estimates, assumptions, and judgments affecting reported amounts[179] - The Company adopted ASU 2016-02 relating to leases in the first quarter of fiscal year 2020, as discussed in Note 1 and Note 3 of the financial statements[179] Recent Accounting Pronouncements Details on the impact of new accounting standards are provided in Note 1 of the financial statements - Details on the impact of new accounting standards on the financial statements are provided in Note 1 of the Notes to Condensed Unaudited Consolidated Financial Statements[180] Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in the company's exposure to market risks since the last annual report - There have been no material changes in the Company's exposure to interest rate risk, foreign exchange risk, and commodity price risk since the Annual Report on Form 10-K filed on December 18, 2019[181] Item 4. Controls and Procedures The company's disclosure controls and procedures were deemed effective as of the end of the quarter - The Company's disclosure controls and procedures were evaluated and concluded to be effective as of April 30, 2020, ensuring timely and accurate reporting of information required in Exchange Act reports[183] - No changes in internal control over financial reporting materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting during the quarter ended April 30, 2020[184] PART II. OTHER INFORMATION This part includes information on legal proceedings, risk factors, and other corporate matters Item 1. Legal Proceedings This section refers to Note 14 for a detailed description of the company's legal proceedings - For a description of legal proceedings, refer to Note 14, Commitments and Contingencies, in the Notes to Condensed Unaudited Consolidated Financial Statements[185] Item 1A. Risk Factors The company faces significant risks from the COVID-19 pandemic, supply chain disruptions, and government spending changes - The COVID-19 pandemic has impacted and could continue to materially and adversely affect the Company's operations, supply chain, customer demand, and financial condition, with uncertainties regarding its duration and severity[187][188][192] - Disruptions in the supply of vehicle chassis and other critical components from third-party OEMs, due to production delays, quality changes, recalls, or supplier financial viability, could materially affect sales and manufacturing processes[195][196][197] - Changes in federal and local government spending and priorities, influenced by budgetary constraints or shifts in funding, could adversely affect future sales and growth prospects for Commercial and Fire & Emergency products[200][201] - Cancellations, reductions, or delays in customer orders, customer breaches of purchase agreements, or reductions in expected backlog can negatively impact results of operations, especially given the reliance on customer creditworthiness and repurchase agreements[202][204] Item 5. Other Information This section details recent compensation committee approvals for the COO and CHRO - The Compensation Committee approved an increase in COO Ian Walsh's incentive target to 100% of his base salary ($550,000), a $200,000 cash retention grant, and a grant of 80,000 performance stock units (PSUs)[208] - Mr. Walsh's PSUs are eligible to vest based on Spartan Synergies achievement (20,000 PSUs by June 30, 2021) and Fire Business trailing 4-quarter EBITDA margin achievement (up to 60,000 PSUs by December 31, 2021)[209] - For CHRO Christopher Daniels, the Compensation Committee approved an increase in his incentive target to 70% of his base salary ($400,000) and a minimum payout of $250,000 under the Management Incentive Plan for fiscal year 2020[210] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including bylaws, debt agreements, and certifications - Exhibits include the Second Amended and Restated Bylaws, Fifth Amendment to Term Loan and Guaranty Agreement, Change in Control Severance Agreement for Rodney Rushing, Form of Performance Stock Unit Award Agreement, and certifications by the CEO and CFO (Sarbanes-Oxley Act Sections 302 and 906)[211] Signatures The report was duly signed by the Chief Executive Officer and Chief Financial Officer - The report was duly signed on June 8, 2020, by Rod Rushing, Chief Executive Officer, and Dean J. Nolden, Chief Financial Officer, pursuant to the requirements of the Securities Exchange Act of 1934[214][216]