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,
8
t
he Company does not expect a material differenc
e 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 contrac
ts 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 t
he 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.
9
The following table
summarizes the preliminary fair values of the assets acquired and liabilities assumed for Lance:
Assets:
|
|
|
|
|
Cash
|
|
$
|
6.0
|
|
Accounts receivable, net
|
|
|
4.4
|
|
Inventories, net
|
|
|
10.3
|
|
Other current assets
|
|
|
0.3
|
|
Property, plant and equipment
|
|
|
4.6
|
|
Intangible assets, net
|
|
|
24.5
|
|
Other long-term assets
|
|
|
0.1
|
|
Total assets acquired
|
|
|
50.2
|
|
Liabilities:
|
|
|
|
|
Accounts payable
|
|
|
2.4
|
|
Accrued warranty
|
|
|
1.4
|
|
Other current liabilities
|
|
|
5.5
|
|
Other long-term liabilities
|
|
|
—
|
|
Total liabilities assumed
|
|
|
9.3
|
|
Net Assets Acquired
|
|
|
40.9
|
|
Consideration Paid
|
|
|
67.9
|
|
Goodwill
|
|
$
|
27.0
|
|
Intangible assets acquired as a result of the Lance Acquisition are as follows:
Customer relationships (6 year life)
|
|
$
|
12.4
|
|
Order backlog (1 year life)
|
|
|
1.7
|
|
Non-compete agreements (4 year life)
|
|
|
0.6
|
|
Trademarks (indefinite life)
|
|
|
9.8
|
|
Total intangible assets, net
|
|
$
|
24.5
|
|
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.
10
The following table summarizes the fair values
of the assets acquired and liabilities assumed for Ferrara:
Assets:
|
|
|
|
|
Cash
|
|
$
|
3.0
|
|
Accounts receivable, net
|
|
|
15.8
|
|
Inventories, net
|
|
|
40.1
|
|
Other current assets
|
|
|
0.4
|
|
Property, plant and equipment
|
|
|
12.5
|
|
Other long-term assets
|
|
|
0.1
|
|
Intangible assets, net
|
|
|
32.7
|
|
Total assets acquired
|
|
|
104.6
|
|
Liabilities:
|
|
|
|
|
Accounts payable
|
|
|
17.1
|
|
Accrued warranty
|
|
|
3.4
|
|
Customer advances
|
|
|
7.7
|
|
Deferred income taxes
|
|
|
3.6
|
|
Other current liabilities
|
|
|
2.8
|
|
Other long-term liabilities
|
|
|
3.9
|
|
Total liabilities assumed
|
|
|
38.5
|
|
Net Assets Acquired
|
|
|
66.1
|
|
Consideration Paid
|
|
|
97.8
|
|
Goodwill
|
|
$
|
31.7
|
|
Intangible assets acquired as a result of the Ferrara Acquisition are as follows:
Customer relationships (12 year life)
|
|
$
|
14.4
|
|
Order backlog (1 year life)
|
|
|
3.2
|
|
Non-compete agreements (4 year life)
|
|
|
1.5
|
|
Trade names (indefinite life)
|
|
|
13.6
|
|
Total intangible assets, net
|
|
$
|
32.7
|
|
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.
11
The following table summarizes the fair values of the assets acquired and liabilities assumed for Midwest:
Assets:
|
|
|
|
|
Cash
|
|
$
|
—
|
|
Accounts receivable, net
|
|
|
4.3
|
|
Inventories, net
|
|
|
9.0
|
|
Other current assets
|
|
|
0.1
|
|
Property, plant and equipment
|
|
|
0.2
|
|
Intangible assets, net
|
|
|
16.5
|
|
Total assets acquired
|
|
|
30.1
|
|
Liabilities:
|
|
|
|
|
Accounts payable
|
|
|
6.7
|
|
Accrued warranty
|
|
|
0.3
|
|
Customer advances
|
|
|
0.9
|
|
Other current liabilities
|
|
|
0.2
|
|
Total liabilities assumed
|
|
|
8.1
|
|
Net Assets Acquired
|
|
|
22.0
|
|
Consideration Paid
|
|
|
34.9
|
|
Goodwill
|
|
$
|
12.9
|
|
Intangible assets acquired as a result of the Midwest Acquisition are as follows:
Customer relationships (6 year life)
|
|
$
|
12.9
|
|
Order backlog (1 year life)
|
|
|
0.5
|
|
Trade names (indefinite life)
|
|
|
3.1
|
|
Total intangible assets, net
|
|
$
|
16.5
|
|
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.
12
The following table summarizes the
fair values of the assets acquired and liabilities assumed for Renegade:
Assets:
|
|
|
|
|
Cash
|
|
$
|
1.6
|
|
Accounts receivable, net
|
|
|
2.3
|
|
Inventories, net
|
|
|
14.3
|
|
Other current assets
|
|
|
0.1
|
|
Property, plant and equipment
|
|
|
0.9
|
|
Intangible assets, net
|
|
|
7.7
|
|
Total assets acquired
|
|
|
26.9
|
|
Liabilities:
|
|
|
|
|
Accounts payable
|
|
|
4.1
|
|
Accrued warranty
|
|
|
0.4
|
|
Customer advances
|
|
|
0.3
|
|
Other current liabilities
|
|
|
1.0
|
|
Deferred income taxes
|
|
|
2.7
|
|
Other long-term liabilities
|
|
|
0.1
|
|
Total liabilities assumed
|
|
|
8.6
|
|
Net Assets Acquired
|
|
|
18.3
|
|
Consideration Paid
|
|
|
22.5
|
|
Goodwill
|
|
$
|
4.2
|
|
Intangible assets acquired as a result of the Renegade Acquisition are as follows:
Customer relationships (6 year life)
|
|
$
|
5.2
|
|
Order backlog (1 year life)
|
|
|
0.9
|
|
Trade names (indefinite life)
|
|
|
1.6
|
|
Total intangible assets, net
|
|
$
|
7.7
|
|
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:
|
|
July 31,
2018
|
|
|
October 31,
2017
|
|
Chassis
|
|
$
|
53.1
|
|
|
$
|
54.7
|
|
Raw materials
|
|
|
192.6
|
|
|
|
162.5
|
|
Work in process
|
|
|
191.8
|
|
|
|
180.1
|
|
Finished products
|
|
|
108.7
|
|
|
|
68.4
|
|
|
|
|
546.2
|
|
|
|
465.7
|
|
Less: reserves
|
|
|
(14.7
|
)
|
|
|
(13.3
|
)
|
Total inventories, net
|
|
$
|
531.5
|
|
|
$
|
452.4
|
|
13
Note 4. Property, Plant and Equipment
Property, plant and equipment consisted of the following:
|
|
July 31,
2018
|
|
|
October 31,
2017
|
|
Land & land improvements
|
|
$
|
25.3
|
|
|
$
|
25.5
|
|
Buildings & improvements
|
|
|
112.1
|
|
|
|
104.2
|
|
Machinery & equipment
|
|
|
76.9
|
|
|
|
70.3
|
|
Rental fleet
|
|
|
33.6
|
|
|
|
17.7
|
|
Computer hardware & software
|
|
|
53.3
|
|
|
|
39.7
|
|
Office furniture & fixtures
|
|
|
5.3
|
|
|
|
5.0
|
|
Construction in process
|
|
|
32.5
|
|
|
|
34.8
|
|
|
|
|
339.0
|
|
|
|
297.2
|
|
Less: accumulated depreciation
|
|
|
(97.9
|
)
|
|
|
(80.1
|
)
|
Total property, plant and equipment, net
|
|
$
|
241.1
|
|
|
$
|
217.1
|
|
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:
|
|
July 31,
2018
|
|
|
October 31,
2017
|
|
Fire & Emergency
|
|
$
|
88.6
|
|
|
$
|
88.3
|
|
Commercial
|
|
|
29.9
|
|
|
|
28.7
|
|
Recreation
|
|
|
44.1
|
|
|
|
16.2
|
|
Total goodwill
|
|
$
|
162.6
|
|
|
$
|
133.2
|
|
The change in the net carrying value amount of goodwill consisted of the following:
|
|
Nine Months Ended
|
|
|
|
July 31,
2018
|
|
|
July 29,
2017
|
|
Balance at beginning of period
|
|
$
|
133.2
|
|
|
$
|
84.5
|
|
Activity during the quarter:
|
|
|
|
|
|
|
|
|
Activity from prior year acquisitions
|
|
|
2.4
|
|
|
|
1.1
|
|
Activity from current year acquisitions
|
|
|
27.0
|
|
|
|
44.2
|
|
Balance at end of period
|
|
$
|
162.6
|
|
|
$
|
129.8
|
|
14
Intangible assets (excluding goodwill) consisted of the following:
|
|
Weighted-
Average Life
|
|
|
July 31,
2018
|
|
|
October 31,
2017
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology-related
|
|
|
7.0
|
|
|
$
|
1.7
|
|
|
$
|
1.7
|
|
Customer relationships
|
|
|
8.0
|
|
|
|
124.4
|
|
|
|
112.0
|
|
Order backlog
|
|
|
1.0
|
|
|
|
6.5
|
|
|
|
4.7
|
|
Non-compete agreements
|
|
|
5.0
|
|
|
|
2.7
|
|
|
|
2.0
|
|
Trade names
|
|
|
7.0
|
|
|
|
3.5
|
|
|
|
3.5
|
|
|
|
|
|
|
|
|
138.8
|
|
|
|
123.9
|
|
Less: accumulated amortization
|
|
|
|
|
|
|
(74.8
|
)
|
|
|
(62.1
|
)
|
|
|
|
|
|
|
|
64.0
|
|
|
|
61.8
|
|
Indefinite-lived trade names
|
|
|
|
|
|
|
115.9
|
|
|
|
106.1
|
|
Total intangible assets, net
|
|
|
|
|
|
$
|
179.9
|
|
|
$
|
167.9
|
|
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:
|
|
July 31,
2018
|
|
|
October 31,
2017
|
|
Payroll and related benefits and taxes
|
|
$
|
27.9
|
|
|
$
|
21.6
|
|
Incentive compensation
|
|
|
0.2
|
|
|
|
11.7
|
|
Customer sales programs
|
|
|
4.5
|
|
|
|
6.1
|
|
Restructuring costs
|
|
|
1.8
|
|
|
|
0.6
|
|
Interest payable
|
|
|
1.7
|
|
|
|
1.5
|
|
Income taxes payable
|
|
|
—
|
|
|
|
11.2
|
|
Dividends payable
|
|
|
3.2
|
|
|
|
3.2
|
|
Deferred purchase price payment
|
|
|
2.8
|
|
|
|
—
|
|
Other
|
|
|
14.0
|
|
|
|
14.3
|
|
Total other current liabilities
|
|
$
|
56.1
|
|
|
$
|
70.2
|
|
Note 7. Long-Term Debt
The Company was obligated under the following debt instruments:
|
|
July 31,
2018
|
|
|
October 31,
2017
|
|
Senior secured facility:
|
|
|
|
|
|
|
|
|
Revolving credit ABL facility
|
|
$
|
319.5
|
|
|
$
|
157.0
|
|
Term Loan, net of debt issuance costs ($1.9 and $1.8)
|
|
|
122.2
|
|
|
|
72.9
|
|
|
|
|
441.7
|
|
|
|
229.9
|
|
Less: current maturities
|
|
|
(1.3
|
)
|
|
|
(0.8
|
)
|
Long-term debt, less current maturities
|
|
$
|
440.4
|
|
|
$
|
229.1
|
|
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
15
$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.
16
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 defa
ult. The Term Loan Agreement requires the Company to maintain a specified secured leverage ratio as follows:
Through July 31, 2018
|
|
4.00 to 1.00
|
Through July 31, 2019
|
|
3.75 to 1.00
|
Through July 31, 2020
|
|
3.50 to 1.00
|
Through July 31, 2021
|
|
3.25 to 1.00
|
Through April 25, 2022
|
|
3.00 to 1.00
|
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:
|
|
Nine Months Ended
|
|
|
|
July 31,
2018
|
|
|
July 29,
2017
|
|
Balance at beginning of period
|
|
$
|
40.2
|
|
|
$
|
38.8
|
|
Warranty provisions
|
|
|
13.2
|
|
|
|
21.5
|
|
Settlements made
|
|
|
(19.7
|
)
|
|
|
(25.9
|
)
|
Warranties for current year acquisitions
|
|
|
1.4
|
|
|
|
3.3
|
|
Changes in liability of pre-existing warranties
|
|
|
(1.7
|
)
|
|
|
(2.7
|
)
|
Balance at end of period
|
|
$
|
33.4
|
|
|
$
|
35.0
|
|
Accrued warranty is classified in the Company’s consolidated balance sheets as follows:
|
|
July 31,
2018
|
|
|
October 31,
2017
|
|
Current liabilities
|
|
$
|
19.6
|
|
|
$
|
26.0
|
|
Other long-term liabilities
|
|
|
13.8
|
|
|
|
14.2
|
|
Total warranty liability
|
|
$
|
33.4
|
|
|
$
|
40.2
|
|
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
17
time to time through open market or through private transactions. Shares purchas
ed 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 ave
rage 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 ha
d $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:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
July 31, 2018
|
|
|
July 29, 2017
|
|
|
July 31, 2018
|
|
|
July 29, 2017
|
|
Basic weighted-average common shares outstanding
|
|
|
63,993,398
|
|
|
|
63,769,388
|
|
|
|
64,258,655
|
|
|
|
59,617,447
|
|
Dilutive stock options
|
|
|
854,163
|
|
|
|
1,751,220
|
|
|
|
1,571,864
|
|
|
|
1,670,652
|
|
Dilutive restricted stock units
|
|
|
—
|
|
|
|
8,083
|
|
|
|
2,163
|
|
|
|
13,137
|
|
Dilutive performance stock units
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Diluted weighted-average common shares outstanding
|
|
|
64,847,561
|
|
|
|
65,528,691
|
|
|
|
65,832,682
|
|
|
|
61,301,236
|
|
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:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
July 31, 2018
|
|
|
July 29, 2017
|
|
|
July 31, 2018
|
|
|
July 29, 2017
|
|
Anti-Dilutive Stock Options
|
|
|
40,951
|
|
|
|
—
|
|
|
|
97,085
|
|
|
|
—
|
|
Anti-Dilutive Restricted Stock Units
|
|
|
528,515
|
|
|
|
—
|
|
|
|
541,584
|
|
|
|
—
|
|
Anti-Dilutive Performance Stock Units
|
|
|
91,509
|
|
|
|
—
|
|
|
|
91,509
|
|
|
|
—
|
|
Anti-Dilutive Common Stock Equivalents
|
|
|
660,975
|
|
|
|
—
|
|
|
|
730,178
|
|
|
|
—
|
|
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:
|
|
Number of
Shares
|
|
|
Weighted-Average Exercise
Price Per Share
|
|
Outstanding, October 31, 2017
|
|
|
3,063,668
|
|
|
$
|
5.80
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
(1,746,783
|
)
|
|
$
|
5.52
|
|
Cancelled
|
|
|
(499,934
|
)
|
|
$
|
4.61
|
|
Outstanding, July 31, 2018
|
|
|
816,951
|
|
|
$
|
7.12
|
|
18
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:
|
|
Restricted Stock Units Outstanding
|
|
|
Weighted-Average Grant Date Fair Value Per Unit
|
|
Outstanding, October 31, 2017
|
|
|
59,192
|
|
|
$
|
25.44
|
|
Granted
|
|
|
417,197
|
|
|
$
|
26.18
|
|
Exercised
|
|
|
(17,637
|
)
|
|
$
|
25.37
|
|
Cancelled
|
|
|
(44,719
|
)
|
|
$
|
28.78
|
|
Outstanding, July 31, 2018
|
|
|
414,033
|
|
|
$
|
25.83
|
|
Performance Stock Units Awards
: The change in the number of unvested performance stock units outstanding consisted of the following:
|
|
Performance Stock Units Outstanding
|
|
|
Weighted-Average Grant Date Fair Value Per Unit
|
|
Outstanding, October 31, 2017
|
|
|
73,101
|
|
|
$
|
27.36
|
|
Granted
|
|
|
121,167
|
|
|
$
|
22.70
|
|
Vested
|
|
|
—
|
|
|
|
—
|
|
Cancelled
|
|
|
—
|
|
|
|
—
|
|
Outstanding, July 31, 2018
|
|
|
194,268
|
|
|
$
|
24.45
|
|
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:
|
|
2018
Restructuring
|
|
|
2017
Restructuring
|
|
|
Total
|
|
Balance at October 31, 2017
|
|
$
|
—
|
|
|
$
|
0.6
|
|
|
$
|
0.6
|
|
Expenses Incurred
|
|
|
6.9
|
|
|
|
—
|
|
|
|
6.9
|
|
Amounts Paid
|
|
|
(5.3
|
)
|
|
|
(0.4
|
)
|
|
|
(5.7
|
)
|
Balance at July 31, 2018
|
|
$
|
1.6
|
|
|
$
|
0.2
|
|
|
$
|
1.8
|
|
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%
19
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.
20
Note 1
4
. 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:
|
|
July 31,
2018
|
|
|
October 31,
2017
|
|
Performance, bid and specialty bonds
|
|
$
|
215.4
|
|
|
$
|
272.2
|
|
Open standby letters of credit
|
|
|
11.1
|
|
|
|
7.2
|
|
Total
|
|
$
|
226.5
|
|
|
$
|
279.4
|
|
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.
21
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 201
7 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, assoc
iated 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
22
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:
|
|
Three Months Ended July 31, 2018
|
|
|
|
Fire &
Emergency
|
|
|
Commercial
|
|
|
Recreation
|
|
|
Corporate and
Other
|
|
|
Consolidated
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales—External Customers
|
|
$
|
238.9
|
|
|
$
|
157.6
|
|
|
$
|
197.3
|
|
|
$
|
3.9
|
|
|
$
|
597.7
|
|
Net Sales—Intersegment
|
|
$
|
—
|
|
|
$
|
0.7
|
|
|
$
|
5.7
|
|
|
$
|
(6.4
|
)
|
|
$
|
—
|
|
Depreciation and amortization
|
|
$
|
3.3
|
|
|
$
|
1.9
|
|
|
$
|
3.6
|
|
|
$
|
2.9
|
|
|
$
|
11.7
|
|
Capital expenditures
|
|
$
|
2.1
|
|
|
$
|
1.1
|
|
|
$
|
2.1
|
|
|
$
|
2.9
|
|
|
$
|
8.2
|
|
Total assets
|
|
$
|
607.4
|
|
|
$
|
299.2
|
|
|
$
|
359.9
|
|
|
$
|
136.6
|
|
|
$
|
1,403.1
|
|
Adjusted EBITDA
|
|
$
|
25.3
|
|
|
$
|
11.8
|
|
|
$
|
17.9
|
|
|
$
|
(7.4
|
)
|
|
|
|
|
|
|
Three Months Ended July 29, 2017
|
|
|
|
Fire &
Emergency
|
|
|
Commercial
|
|
|
Recreation
|
|
|
Corporate and
Other
|
|
|
Consolidated
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales—External Customers
|
|
$
|
262.1
|
|
|
$
|
154.4
|
|
|
$
|
177.9
|
|
|
$
|
1.2
|
|
|
$
|
595.6
|
|
Net Sales—Intersegment
|
|
$
|
—
|
|
|
$
|
0.2
|
|
|
$
|
3.2
|
|
|
$
|
(3.4
|
)
|
|
$
|
—
|
|
Depreciation and amortization
|
|
$
|
4.5
|
|
|
$
|
2.4
|
|
|
$
|
3.5
|
|
|
$
|
1.2
|
|
|
$
|
11.6
|
|
Capital expenditures
|
|
$
|
1.5
|
|
|
$
|
6.5
|
|
|
$
|
1.7
|
|
|
$
|
2.1
|
|
|
$
|
11.8
|
|
Total assets
|
|
$
|
625.7
|
|
|
$
|
272.6
|
|
|
$
|
253.2
|
|
|
$
|
94.6
|
|
|
$
|
1,246.1
|
|
Adjusted EBITDA
|
|
$
|
29.0
|
|
|
$
|
12.9
|
|
|
$
|
11.7
|
|
|
$
|
(8.1
|
)
|
|
|
|
|
|
|
Nine Months Ended July 31, 2018
|
|
|
|
Fire &
Emergency
|
|
|
Commercial
|
|
|
Recreation
|
|
|
Corporate and
Other
|
|
|
Consolidated
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales—External Customers
|
|
$
|
706.1
|
|
|
$
|
447.9
|
|
|
$
|
563.4
|
|
|
$
|
4.0
|
|
|
$
|
1,721.4
|
|
Net Sales—Intersegment
|
|
$
|
—
|
|
|
$
|
8.8
|
|
|
$
|
16.6
|
|
|
$
|
(25.4
|
)
|
|
$
|
—
|
|
Depreciation and amortization
|
|
$
|
11.8
|
|
|
$
|
7.5
|
|
|
$
|
9.5
|
|
|
$
|
5.1
|
|
|
$
|
33.9
|
|
Capital expenditures
|
|
$
|
4.8
|
|
|
$
|
3.4
|
|
|
$
|
6.3
|
|
|
$
|
17.4
|
|
|
$
|
31.9
|
|
Total assets
|
|
$
|
607.4
|
|
|
$
|
299.2
|
|
|
$
|
359.9
|
|
|
$
|
136.6
|
|
|
$
|
1,403.1
|
|
Adjusted EBITDA
|
|
$
|
65.5
|
|
|
$
|
25.7
|
|
|
$
|
38.7
|
|
|
$
|
(25.6
|
)
|
|
|
|
|
23
|
|
Nine Months Ended July 29, 2017
|
|
|
|
Fire &
Emergency
|
|
|
Commercial
|
|
|
Recreation
|
|
|
Corporate and
Other
|
|
|
Consolidated
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales—External Customers
|
|
$
|
666.5
|
|
|
$
|
444.2
|
|
|
$
|
470.9
|
|
|
$
|
2.3
|
|
|
$
|
1,583.9
|
|
Net Sales—Intersegment
|
|
$
|
—
|
|
|
$
|
3.2
|
|
|
$
|
9.7
|
|
|
$
|
(12.9
|
)
|
|
$
|
—
|
|
Depreciation and amortization
|
|
$
|
10.2
|
|
|
$
|
6.0
|
|
|
$
|
8.2
|
|
|
$
|
2.4
|
|
|
$
|
26.8
|
|
Capital expenditures
|
|
$
|
9.0
|
|
|
$
|
8.6
|
|
|
$
|
3.9
|
|
|
$
|
28.4
|
|
|
$
|
49.9
|
|
Total assets
|
|
$
|
625.7
|
|
|
$
|
272.6
|
|
|
$
|
253.2
|
|
|
$
|
94.6
|
|
|
$
|
1,246.1
|
|
Adjusted EBITDA
|
|
$
|
70.2
|
|
|
$
|
35.6
|
|
|
$
|
21.8
|
|
|
$
|
(23.5
|
)
|
|
|
|
|
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:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
July 31, 2018
|
|
|
July 29, 2017
|
|
|
July 31, 2018
|
|
|
July 29, 2017
|
|
Fire & Emergency Adjusted EBITDA
|
|
$
|
25.3
|
|
|
$
|
29.0
|
|
|
$
|
65.5
|
|
|
$
|
70.2
|
|
Commercial Adjusted EBITDA
|
|
|
11.8
|
|
|
|
12.9
|
|
|
|
25.7
|
|
|
|
35.6
|
|
Recreation Adjusted EBITDA
|
|
|
17.9
|
|
|
|
11.7
|
|
|
|
38.7
|
|
|
|
21.8
|
|
Corporate and Other Adjusted EBITDA
|
|
|
(7.4
|
)
|
|
|
(8.1
|
)
|
|
|
(25.6
|
)
|
|
|
(23.5
|
)
|
(Provision) benefit for income taxes
|
|
|
(3.8
|
)
|
|
|
(9.1
|
)
|
|
|
7.2
|
|
|
|
(5.4
|
)
|
Depreciation and amortization
|
|
|
(11.7
|
)
|
|
|
(11.6
|
)
|
|
|
(33.9
|
)
|
|
|
(26.8
|
)
|
Interest expense, net
|
|
|
(6.8
|
)
|
|
|
(4.5
|
)
|
|
|
(18.3
|
)
|
|
|
(15.4
|
)
|
Restructuring costs
|
|
|
(0.9
|
)
|
|
|
(2.3
|
)
|
|
|
(6.9
|
)
|
|
|
(3.5
|
)
|
Transaction expenses
|
|
|
—
|
|
|
|
(0.5
|
)
|
|
|
(2.1
|
)
|
|
|
(2.7
|
)
|
Stock-based compensation expense
|
|
|
(1.4
|
)
|
|
|
(0.3
|
)
|
|
|
(5.1
|
)
|
|
|
(26.1
|
)
|
Non-cash purchase accounting expense
|
|
|
(0.5
|
)
|
|
|
(1.9
|
)
|
|
|
(1.2
|
)
|
|
|
(3.2
|
)
|
Sponsor expenses
|
|
|
(0.2
|
)
|
|
|
(0.1
|
)
|
|
|
(0.5
|
)
|
|
|
(0.4
|
)
|
Loss on early extinguishment of debt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(11.9
|
)
|
Legal matters
|
|
|
(1.1
|
)
|
|
|
—
|
|
|
|
(2.8
|
)
|
|
|
—
|
|
Initial public company costs
|
|
|
(1.0
|
)
|
|
|
—
|
|
|
|
(1.5
|
)
|
|
|
—
|
|
Deferred purchase price payment
|
|
|
(1.9
|
)
|
|
|
—
|
|
|
|
(4.1
|
)
|
|
|
—
|
|
Net Income
|
|
$
|
18.3
|
|
|
$
|
15.2
|
|
|
$
|
35.1
|
|
|
$
|
8.7
|
|
24
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:
|
|
Nine Months Ended July 31, 2018
|
|
|
|
Increase (Decrease)
in Fair Value of
Derivatives
|
|
|
Translation
Adjustment
|
|
|
Other
|
|
|
Accumulated Other
Comprehensive
Income (loss)
|
|
Balance at October 31, 2017
|
|
$
|
0.1
|
|
|
$
|
(0.1
|
)
|
|
$
|
0.0
|
|
|
$
|
—
|
|
Changes, net of tax
|
|
|
—
|
|
|
|
(1.3
|
)
|
|
|
0.1
|
|
|
|
(1.2
|
)
|
Balance at July 31, 2018
|
|
$
|
0.1
|
|
|
$
|
(1.4
|
)
|
|
$
|
0.1
|
|
|
$
|
(1.2
|
)
|
|
|
Nine Months Ended July 29, 2017
|
|
|
|
Increase (Decrease)
in Fair Value of
Derivatives
|
|
|
Translation
Adjustment
|
|
|
Other
|
|
|
Accumulated Other
Comprehensive
Income (Loss)
|
|
Balance at October 29, 2016
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
Changes, net of tax
|
|
|
(0.4
|
)
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
(0.1
|
)
|
Balance at July 29, 2017
|
|
$
|
(0.4
|
)
|
|
$
|
0.1
|
|
|
$
|
0.3
|
|
|
$
|
—
|
|
25