REV Group(REVG) - 2020 Q4 - Annual Report

Part I Business REV Group designs, manufactures, and distributes specialty vehicles, holding top market shares and driving growth via acquisitions - REV Group is a leading designer, manufacturer, and distributor of specialty vehicles and related parts, operating in three segments: Fire & Emergency, Commercial, and Recreation[17] - The company believes it holds the 1 or 2 market share position for products representing approximately 62% of its fiscal year 2020 net sales[17] - The company's top 10 customers represented about 21% of net sales in fiscal year 2020, with no single customer exceeding 5%[19] - REV Group operates 22 manufacturing facilities, 9 Regional Technical Centers (RTCs), and 4 aftermarket parts warehouses, leveraging its scale for competitive advantage[20] Products and Markets The company's product portfolio is diversified across its three main segments, primarily serving the U.S. market - The Fire & Emergency segment manufactures fire apparatus (E-ONE, KME, Ferrara, Spartan ER) and ambulances (AEV, Horton, Wheeled Coach) The company acquired Spartan ER in Q2 2020 and is sunsetting the Marque, McCoy Miller, and Frontline ambulance brands[25] - The Commercial segment produces small Type A school buses (Collins Bus), transit buses (ENC), terminal trucks (Capacity), and sweepers (Lay-Mor) The company sold its shuttle bus businesses in Q3 2020[27] - The Recreation segment serves the RV market with brands like American Coach, Fleetwood RV, and Lance, offering Class A, B, and C motorized RVs and towable trailers[30] - The U.S. market is the primary focus, representing approximately 94% of overall net sales for fiscal year 2020 International sales, including Canada, were $132 million[35] Strengths and Strategies REV Group's competitive strengths include market leadership, a large installed base, and scale, with growth strategies focused on margin expansion, innovation, and acquisitions - Key strengths include market leadership, a large installed base of ~227,000 vehicles with an estimated replacement value of $36 billion, a broad portfolio of recognized brands, centralized sourcing, and a unique scale and business model[49][50][51] - Growth strategies include driving margin expansion via operational initiatives, developing innovative products, enhancing the sales/distribution model, accelerating aftermarket growth, and pursuing synergistic acquisitions[57][58][62] Operations The company distributes products through dealers and direct sales, manufactures across 22 facilities, and relies on OEM chassis for a significant portion of material purchases - Distribution is handled through a direct sales force and a network of approximately 500 dealers[64] R&D Expenses (Fiscal Years 2018-2020) | Fiscal Year | R&D Expense (in millions) | | :--- | :--- | | 2020 | $5.8 | | 2019 | $4.8 | | 2018 | $6.5 | - In fiscal 2020, the company purchased $1.45 billion in materials, with vehicle chassis from major OEMs accounting for 30% of this total[80] - As of October 31, 2020, the company had approximately 7,060 employees, with none currently represented by a labor union[91] Risk Factors The company faces risks from COVID-19, supply chain, competition, debt, legal issues, and majority shareholder influence Business and Operational Risks Operational risks are significant, including COVID-19 impacts, supply chain dependencies, intense competition, and reliance on dealer performance - The COVID-19 pandemic has disrupted operations, supply chains, and customer demand, and its full impact remains uncertain The company suspended production at its RV facilities in March 2020, which restarted in May 2020[97][99] - The business is highly dependent on the supply of vehicle chassis from major OEMs Disruptions, delays, or quality issues from these suppliers could materially harm sales and manufacturing processes[108][109] - The company faces intense competition from both large, well-resourced companies and smaller, more flexible regional players, which could lead to price pressure or loss of customers[112] - The business relies on a network of independent dealers Disruption to this network, dealer consolidation, or lack of available financing for dealers could negatively affect sales[123][125] Financial and Strategic Risks Financial and strategic risks include acquisition integration challenges, significant working capital needs, restrictive debt covenants, and potential goodwill impairment - Acquisitions are a key growth strategy but involve risks such as difficult integration, assumption of unanticipated liabilities, and potential failure to achieve expected financial benefits[157] - The company has significant working capital requirements and outstanding debt The ABL Facility and Term Loan Agreement mature on April 25, 2022, and contain restrictive covenants that could impair operational flexibility[161][162][165] - Contingent obligations, including repurchase agreements with lending institutions, expose the company to potential financial losses if it must repurchase vehicles[164] - A substantial amount of goodwill and other intangible assets on the balance sheet is subject to impairment risk, which could lead to significant write-downs and negatively affect operating results[168] Legal, Regulatory, and Governance Risks The company is exposed to legal and regulatory risks, including vehicle safety standards, product liability, environmental liabilities, and securities class actions, with its majority shareholder influencing governance - The company is subject to numerous regulations, including NTMVSA safety standards, and faces risks of costly vehicle recalls and product liability claims[172][173] - The company may face significant costs related to environmental laws, including a potential liability from an EPA information request regarding the San Fernando Valley Area 2 Superfund Site[175][176] - The company is a defendant in consolidated putative securities class actions and a related derivative action, which could result in significant legal costs and potential damages[191] - AIP owns 53.3% of the company's common stock, giving it significant influence This qualifies the company as a "controlled company" under NYSE rules, exempting it from certain corporate governance requirements like having a majority-independent board[196][200] Properties The company operates a corporate office and 22 manufacturing facilities, 9 RTCs, and 4 aftermarket parts warehouses Company Facilities Overview | Facility Type | Count | Total Square Feet (Approx.) | | :--- | :--- | :--- | | Manufacturing Facilities | 22 | 5,266,000 | | RTCs & Aftermarket Parts Warehouses | 13 | 546,500 | Legal Proceedings REV Group is involved in legal proceedings, defending against consolidated securities class actions related to its 2017 IPO - The company is defending against consolidated federal and state putative securities class actions related to its January 2017 IPO and October 2017 secondary offering[207] - The lawsuits allege violations of the Securities Act of 1933 and the Securities Exchange Act of 1934 A related derivative action is also pending[207][208] - The company is unable to predict the outcome or potential loss from these lawsuits but intends to defend them vigorously[208] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities REV Group's common stock trades on NYSE; its stock repurchase program expired, and quarterly dividends were suspended - The company's stock repurchase program expired on September 4, 2020 No repurchases were made in fiscal year 2020 In fiscal year 2019, 717,597 shares were repurchased for $8.3 million[215] - The company paid cash dividends of $9.5 million ($0.10 per share) in fiscal year 2020 However, it suspended its quarterly dividend beginning in the second quarter of fiscal year 2020[216] Selected Financial Data This section summarizes five years of historical financial data, including fiscal 2020 net sales and net loss figures Selected Financial Data (in millions, except per share data) | Fiscal Year Ended Oct 31 | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net sales | $2,277.6 | $2,403.7 | $2,381.3 | | Gross profit | $228.1 | $251.8 | $278.0 | | Net (loss) income | $(30.5) | $(12.3) | $13.0 | | Diluted EPS | $(0.48) | $(0.20) | $0.20 | | Total assets (at year-end) | $1,312.3 | $1,347.1 | $1,408.1 | | Long-term debt (at year-end) | $340.5 | $376.6 | $420.6 | Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 2020 net sales decreased 5.2%, leading to a wider net loss and lower Adjusted EBITDA, offset by a 35% total backlog increase Results of Operations For fiscal year 2020, consolidated net sales decreased 5.2% to $2.28 billion, gross profit fell 9.4%, and the company reported a net loss of $30.5 million, while total backlog increased 35.0% Consolidated Results of Operations (FY2020 vs. FY2019) | Metric (in millions) | FY 2020 | FY 2019 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $2,277.6 | $2,403.7 | $(126.1) | -5.2% | | Gross Profit | $228.1 | $251.8 | $(23.7) | -9.4% | | Net (Loss) Income | $(30.5) | $(12.3) | $(18.2) | 148.0% | | Adjusted EBITDA | $67.5 | $102.1 | $(34.6) | -33.9% | - The decrease in FY2020 net sales was primarily due to the divestiture of two shuttle bus businesses and organic sales declines in all segments, partially offset by the acquisition of Spartan ER[246] Backlog by Segment (as of Oct 31, 2020 vs. Oct 31, 2019) | Segment (in millions) | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Fire & Emergency | $965.8 | $832.7 | 16.0% | | Commercial | $273.8 | $317.3 | (13.7)% | | Recreation | $538.9 | $167.0 | 222.7% | | Total Backlog | $1,778.5 | $1,317.0 | 35.0% | Segment Performance In fiscal 2020, Fire & Emergency net sales grew 17.0% due to acquisition, while Commercial and Recreation segments experienced net sales and Adjusted EBITDA declines Fire & Emergency Segment Performance (FY2020) | Metric | Amount (in millions) | % Change YoY | | :--- | :--- | :--- | | Net Sales | $1,132.0 | 17.0% | | Adjusted EBITDA | $39.9 | -7.6% | Commercial Segment Performance (FY2020) | Metric | Amount (in millions) | % Change YoY | | :--- | :--- | :--- | | Net Sales | $484.8 | -32.7% | | Adjusted EBITDA | $34.5 | -38.4% | Recreation Segment Performance (FY2020) | Metric | Amount (in millions) | % Change YoY | | :--- | :--- | :--- | | Net Sales | $657.8 | -8.2% | | Adjusted EBITDA | $38.4 | -17.9% | Liquidity and Capital Resources The company's liquidity is supported by cash from operations and credit facilities, with debt covenants amended for flexibility, and significant contractual obligations maturing in 2022 Cash Flow Summary (in millions) | Fiscal Year Ended Oct 31 | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $55.7 | $52.5 | | Net cash provided by investing activities | $1.7 | $0.2 | | Net cash used in financing activities | $(49.3) | $(61.3) | - The company amended its Term Loan agreement on April 29, 2020, to eliminate the maximum leverage ratio covenant and replace it with a fixed charge coverage ratio test through Q4 2020, enhancing financial flexibility[306] - As of October 31, 2020, availability under the April 2017 ABL Facility was $283.4 million[312] Contractual Obligations as of Oct 31, 2020 (in millions) | Obligation | Total | Due in 2021 | Due in 2022 | | :--- | :--- | :--- | :--- | | Debt | $343.9 | $1.7 | $342.2 | | Interest | $18.0 | $12.0 | $6.0 | | Operating leases | $28.0 | $9.4 | $7.6 | | Purchasing obligations | $53.5 | $20.0 | $9.5 | | Total | $443.4 | $43.1 | $365.3 | Critical Accounting Policies and Estimates Critical accounting policies involve significant estimates for inventory valuation, goodwill and intangible asset impairment, and warranty reserves - Inventory is valued at the lower of cost (FIFO) or net realizable value, with reserves recorded based on forecasts, market conditions, and potential obsolescence[329] - Goodwill and indefinite-lived intangible assets are tested for impairment annually (or more frequently if needed) using qualitative assessments and quantitative valuation models (income and market approaches), which involve significant management assumptions[332][333] - Warranty provisions are recorded based on management's best estimate of future costs, considering historical experience, number of units, and cost per claim[335] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rate and commodity price fluctuations, mitigated by fixed-price vendor contracts - The company is exposed to interest rate risk from its floating-rate debt A 100-basis point increase in floating rates would increase annualized interest expense by an estimated $2.1 million[339] - The company faces commodity price risk as a purchaser of aluminum, steel, and other materials It mitigates this risk by fixing prices through vendor contracts for up to 24 months, but rarely uses financial hedging instruments[340] Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements and the independent auditor's unqualified report Financial Statements The consolidated financial statements present the company's financial position and performance, including total assets of $1.31 billion and a net loss of $30.5 million in fiscal 2020 Consolidated Balance Sheet Data (as of Oct 31, 2020) | Account (in millions) | Amount | | :--- | :--- | | Total Current Assets | $812.0 | | Total Assets | $1,312.3 | | Total Current Liabilities | $447.3 | | Total Liabilities | $840.0 | | Total Shareholders' Equity | $472.3 | Consolidated Statement of Operations Data (FY 2020) | Account (in millions) | Amount | | :--- | :--- | | Net Sales | $2,277.6 | | Gross Profit | $228.1 | | Operating Loss | $(17.9) | | Net Loss | $(30.5) | Notes to Financial Statements The notes provide detailed disclosures on accounting policies, acquisitions, divestitures, debt, and contingent liabilities, including the Spartan ER acquisition and shuttle bus divestiture - On February 1, 2020, the company acquired Spartan ER for net consideration of $47.3 million, resulting in a preliminary gain on acquisition of $8.6 million[415][416] - In Q3 2020, the company sold its shuttle bus businesses, recognizing a loss of $11.1 million on the transaction[424] - In fiscal 2020, the company recorded $9.9 million in restructuring charges and $12.1 million in impairment charges, related to exiting its rental program, sunsetting certain brands, and other cost-reduction efforts[426] - As of October 31, 2020, the company had outstanding obligations of $191.5 million under vehicle repurchase agreements with lending institutions[479] Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective, with an unqualified auditor's opinion - Management concluded that the company's disclosure controls and procedures were effective as of October 31, 2020[499] - Management's assessment of internal control over financial reporting concluded that controls were effective as of October 31, 2020 This assessment excluded the newly acquired Spartan Emergency Response (Spartan ER) business[498][502] - The independent registered public accounting firm issued an unqualified attestation report on the company's internal control over financial reporting[503] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's definitive proxy statement - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's upcoming Proxy Statement[506] Executive Compensation Information regarding executive and director compensation is incorporated by reference from the company's definitive proxy statement - Information regarding executive compensation is incorporated by reference from the company's upcoming Proxy Statement[507] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management is incorporated by reference from the company's definitive proxy statement - Information regarding security ownership of certain beneficial owners and management is incorporated by reference from the company's upcoming Proxy Statement[509] Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the company's definitive proxy statement - Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's upcoming Proxy Statement[511] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the company's definitive proxy statement - Information regarding principal accounting fees and services is incorporated by reference from the company's upcoming Proxy Statement[511] Part IV Exhibits, Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Form 10-K report, with all financial statement schedules omitted - This section lists all financial statements and exhibits filed with the Form 10-K All financial statement schedules have been omitted[514]