NOTE 1 - GENERAL AND SUMMARY OF ACCOUNTING POLICIES
Nature of Operations
. Spartan Motors, Inc. (the “Company”, “we”, or “us”) is a niche market leader in specialty vehicle manufacturing and assembly for the commercial vehicle (including last-mile delivery, specialty service and vocation-specific up-fit segments), emergency response and recreational vehicle industries. We have various subsidiaries that are manufacturers of bodies for various markets including fleet vehicles and emergency response vehicles. Our principal chassis markets are emergency response vehicles, motor homes and other specialty vehicles.
Our operating activities are conducted through our wholly-owned operating subsidiary, Spartan Motors USA, Inc. (“Spartan USA”), with locations in Charlotte, Michigan; Brandon, South Dakota; Snyder and Neligh, Nebraska; Ladson, South Carolina; Ephrata, Pennsylvania; Pompano Beach, Florida; Bristol, Indiana; Kansas City, Missouri; and Saltillo, Mexico.
On December 17, 2018, the Company acquired all of the assets and assumed certain liabilities of Strobes-R-Us, Inc. (“SRUS”), a premier provider of up-fit services for government and non-government vehicles. The acquisition will enable the Company to increase its product offerings to both fleet and emergency response customers, while further expanding its manufacturing capabilities into the southeastern U.S. market. As part of this acquisition, Spartan acquired Strobes-R-Us’ state-of-the-art up-fit facility and product showroom in Pompano Beach, Florida. SRUS will be reported as part of the Fleet Vehicles and Services segment.
On January 1, 2017, Spartan USA acquired substantially all of the assets and assumed certain liabilities of Smeal Fire Apparatus Co., Smeal Properties, Inc., Ladder Tower Co., and U.S. Tanker Co. When used in this Annual Report on Form 10-K, “Smeal” refers to the assets, liabilities, and operations acquired from such entities. The assets acquired consist of the assets used by the former owners of Smeal in the operation of its business designing, manufacturing, and distributing emergency response vehicle bodies and aerial devices for the fire service industry. Smeal has operations in Snyder and Neligh, Nebraska; and Ephrata, Pennsylvania and is operated as part of our Emergency Response Vehicles segment.
Our Bristol, Indiana location manufactures vehicles used in the parcel delivery, mobile retail and trades and construction industries, and supplies related aftermarket parts and services under the Utilimaster brand name. Our Kansas City, Missouri, Pompano Beach, Florida and Saltillo, Mexico locations sell and install equipment used in commercial and fleet vehicles. Our Brandon, South Dakota, Snyder and Neligh, Nebraska, and Ephrata, Pennsylvania locations manufacture emergency response vehicles under the Spartan, Smeal, US Tanker and Ladder Tower Company brand names. Our Charlotte, Michigan location manufactures heavy duty chassis and vehicles and supplies aftermarket parts and accessories under the Spartan Chassis and Spartan brand names. Spartan USA was also a participant in Spartan-Gimaex Innovations, LLC (“Spartan-Gimaex”), a 50/50 joint venture with Gimaex Holding, Inc. that was formed to provide emergency response vehicles for the domestic and international markets. Spartan-Gimaex is reported as a consolidated subsidiary of Spartan Motors, Inc. In February 2015, Spartan USA and Gimaex Holding, Inc. mutually agreed to begin discussions regarding the dissolution of the joint venture. In June 2015, Spartan USA and Gimaex Holding, Inc. entered into court proceedings to determine the terms of the dissolution. In February 2017, by agreement of the parties, the court proceeding was dismissed with prejudice and the judge entered an order to this effect as the parties agreed to seek a dissolution plan on their own. The Company is continuing to work on this dissolution plan and no dissolution terms have been determined as of the date of this Form 10-K.
Principles of Consolidation
. The consolidated financial statements include our accounts and the accounts of our wholly owned subsidiary, Spartan USA and its subsidiaries. All inter-company transactions have been eliminated.
Non-Controlling Interest
At December 31, 2018, Spartan USA held a 50% share in Spartan-Gimaex, however, due to the management and operational structure of the joint venture, Spartan USA was considered to have had the ability to control the operations of Spartan-Gimaex. Accordingly, Spartan-Gimaex is reported as a consolidated subsidiary of Spartan Motors, Inc., within the Emergency Response Vehicles segment. The joint venture is not currently active and as noted above the parties are currently seeking a dissolution plan.
Use of Estimates
. In the preparation of our financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”), management uses estimates and makes judgments and assumptions that affect asset and liability values and the amounts reported as income and expense during the periods presented. Certain of these estimates, judgments and assumptions, such as the allowance for credit losses, warranty expenses, impairment assessments of tangible and intangible assets, and the provision for income taxes, are particularly sensitive. If actual results are different from estimates used by management, they may have a material impact on the financial statements.
SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
Revenue Recognition
. Essentially all of our revenue is generated through contracts with our customers. We may recognize revenue over time or at a point in time when or as obligations under the terms of a contract with our customer are satisfied, depending on the terms and features of the contract and the products supplied. Our contracts generally do not have any significant variable consideration. The collectability of consideration on the contract is reasonably assured before revenue is recognized. On certain vehicles, payment may be received in advance of us satisfying our performance obligations. Such payments are recorded in Customer deposits on the Consolidated Balance Sheets. The corresponding performance obligations are generally satisfied within one year of the contract inception. In such cases, we have elected to apply the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component. The financing impact on contracts that contain performance obligations that are not expected to be satisfied within one year are expected to be immaterial to our consolidated financial statements. We have elected to utilize the practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred because the amortization period for the prepaid costs that would have otherwise been deferred and amortized is one year or less.
Revenue recognized in a current period from performance obligations satisfied in a prior period, if any, is immaterial to our consolidated financial statements. We use an observable price to allocate the stand-alone selling price to separate performance obligations within a contract or a cost-plus margin approach when an observable price is not available. The estimated costs to fulfill our base warranties are recognized as expense when the products are sold (see “
Note 10 – Commitments and Contingent Liabilities
” for further information on warranties). Our contracts with customers do not contain a provision for product returns, except for contracts related to certain parts sales.
Revenue for parts sales for all segments is recognized at the time that control and risk of ownership has passed to the customer, which is generally, when the ordered part is shipped to the customer. Historical return rates on parts sales have been immaterial. Accordingly, no return reserve has been recorded. Instead, returns are recognized as a reduction of revenue at the time that they are received.
For certain of our vehicles and chassis, we sell separately priced service contracts that provide roadside assistance or extend certain warranty coverage beyond our base warranty agreements. These separately priced contracts range from 1 to 6 years from the date of the shipment of the related vehicle or chassis. We receive payment with the shipment of the related vehicle or at the inception of the extended service contract, if later, and recognize revenue over the coverage term of the agreement, generally on a straight-line basis, which approximates the pattern of costs expected to be incurred in satisfying the obligations under the contract.
Distinct revenue recognition policies for our segments are as follows:
Fleet Vehicles and Services
Our walk-in vans and truck bodies are generally built on a chassis that is owned and controlled by the customer. Due to the customer ownership of the chassis, the performance obligation for these walk-in vans and truck bodies is satisfied as the vehicles are built. Accordingly, the revenue and corresponding cost of products sold associated with these contracts are recognized over time based on the inputs completed for a given performance obligation during the reporting period. Certain contracts will specify that a walk-in van or truck body is to be built on a chassis that we purchase and subsequently sell to the customer. The revenue on these contracts is recognized at the time that the performance obligation is satisfied and control and risk of ownership has passed to the customer, which is generally upon shipment of the vehicle from our manufacturing facility to the customer or receipt of the vehicle by the customer, depending on contract terms. We have elected to treat shipping and handling costs subsequent to transfer of control as fulfillment activities and, accordingly, recognize these costs as the revenue is recognized.
Revenue for up-fit and field service contracts is recognized over time, as equipment is installed in the customer’s vehicle or repairs and enhancements are made to customer’s vehicles. Revenue and the corresponding cost of products sold is estimated based on the inputs completed for a given performance obligation. Our performance obligation for up-fit and field service contracts is satisfied when the equipment installation or repairs and enhancements of the customer’s vehicle has been completed. Payment on our fleet vehicles and services performance obligations is received an average of 35 days after revenue is recognized.
Emergency Response Vehicles
Our emergency response chassis and apparatuses are generally manufactured to order based on customer-supplied specifications. Due to the custom nature of the products and the attributes of the contracts, we do not have a ready alternative use for our emergency response chassis and apparatuses and we have an enforceable right to payment on the contracts. Accordingly, performance obligations for these custom ordered chassis and apparatuses are satisfied as the apparatuses and chassis are built. We recognize revenue and the corresponding cost of products sold on these contracts over time based on the inputs completed for a given performance obligation during the reporting period. We have elected to treat shipping and handling costs subsequent to transfer of control as fulfillment activities and, accordingly, recognize these costs as the revenue is recognized. Payment is received an average of 48 days following the recognition of revenue for chassis and 103 days for complete apparatuses.
SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
Revenue on certain emergency response chassis and apparatuses that are sold from stock or utilized as demonstration units is recognized at the point in time when the chassis and apparatus is shipped. Revenue related to modifications made to trucks sold from stock or that were utilized as demonstration units is recognized over time as the modifications are completed. Payment is received an average of 60 days following the recognition of revenue for stock or demonstrator units.
Specialty Chassis and Vehicles
We recognize revenue and the corresponding cost of products sold on the sale of motor home chassis when the performance obligation is completed and control and risk of ownership of the chassis has passed to our customer, which is generally upon shipment of the chassis to the customer.
Revenue and the corresponding cost of products sold associated with other specialty chassis is recognized over time based on the inputs completed for a given performance obligation during the reporting period. The performance obligations for other specialty chassis contracts are satisfied as the products are assembled. Payment is received an average of 24 days following the recognition of revenue for other specialty chassis.
Prior to the adoption of Accounting Standards Update 2014-09, Revenue from Contracts with Customers and with additional subsequent updates issued (“ASU 2014-09” or “ASC 606”), we recognized revenue in accordance with authoritative guidelines, including those of the Securities and Exchange Commission (“SEC”). Accordingly, revenue was recognized when title to the product and risk of ownership passed to the buyer. In certain instances, risk of ownership and title passed when the product had been completed in accordance with purchase order specifications and had been tendered for delivery to the customer. On certain customer requested bill and hold transactions, revenue recognition occurred after the customer had been notified that the products had been completed according to the customer specifications, had passed all of our quality control inspections, and were ready for delivery. All sales were shown net of returns, discounts and sales incentive programs, which historically have not been significant. The collectability of any related receivable was reasonably assured before revenue was recognized.
Business Combinations
. When acquiring other businesses, we recognize identifiable assets acquired and liabilities assumed at their acquisition date estimated fair values, and separately from any goodwill that may be required to be recognized. Goodwill, when recognizable, is measured as the excess amount of any consideration transferred, which is measured at fair value, over the acquisition date fair values of the identifiable assets acquired and liabilities assumed. Amounts recorded in a business combination may change during the measurement period, which is a period not to exceed one year from the date of acquisition, as additional information about conditions existing at the acquisition date becomes available.
Accounting for such acquisitions requires us to make significant assumptions and estimates and, although we believe any estimates and assumptions we make are reasonable and appropriate at the time they are made, unanticipated events and circumstances may arise that affect their accuracy, which may cause actual results to differ from those estimated by us. When necessary, we will adjust the values of the assets acquired and liabilities assumed against the goodwill or acquisition gain, as initially recorded, for a period of up to one year after the acquisition date.
Costs incurred to effect an acquisition, such as legal, accounting, valuation or other third-party costs, as well as internal general and administrative costs incurred are charged to expense in the periods incurred.
Shipping and Handling of Products
. Costs incurred related to the shipment and handling of products are classified in cost of products sold. Amounts billed to customers for shipping and handling of products are included in sales.
Cash and Cash Equivalents
include cash on hand, cash on deposit, treasuries and money market funds. We consider all investments purchased with an original maturity of three months or less to be cash equivalents.
Accounts Receivable
. Our receivables are subject to credit risk, and we do not typically require collateral on our accounts receivable. We perform periodic credit evaluations of our customers’ financial condition and generally require a security interest in the products sold. Receivables generally are due within 30 to 60 days. We maintain an allowance for customer accounts that reduces receivables to amounts that are expected to be collected. In estimating the allowance for doubtful accounts, management makes certain assumptions regarding the risk of uncollectable open receivable accounts. This risk factor is applied to the balance on accounts that are aged over 90 days: generally, this reserve has an estimated range from 10-25%. The risk percentage applied to the aged accounts may change based on conditions such as: general economic conditions, industry-specific economic conditions, historical and anticipated customer performance, historical experience with write-offs and the level of past-due amounts from year to year. However, generally our assumptions are consistent year-over-year and there has been little adjustment made to the percentages used. In addition, in the event there are certain known risk factors with an open account, we may increase the allowance to include estimated losses on such “specific” account balances. The “specific” reserves are identified by a periodic review of the aged accounts receivable. If there is an account in question, credit checks are made and there is communication with the customer, along with other means to try to assess if a specific reserve is required. The inclusion of the “specific” reserve has caused the greatest fluctuation in the allowance for doubtful accounts balance historically. Past due accounts are written off when collectability is determined to be no longer assured.
SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
Inventories
are stated at the lower of first-in, first-out cost or net realizable value. Estimated inventory allowances for slow-moving inventory are based upon current assessments about future demands, market conditions and related management initiatives. If market conditions are less favorable than those projected by management, additional inventory allowances may be required.
Contract Assets
arise upon the transfer of goods or services to a customer before the customer pays consideration. The Company will present the contract as either a contract asset or as a receivable, depending on the nature of the entity’s right to consideration for its performance. Contract assets are a right to consideration in exchange for goods or services that the Company has transferred to a customer, when the right is conditioned on something other than the passage of time.
Property, Plant and Equipment
is stated at cost and the related assets are depreciated over their estimated useful lives on a straight-line basis for financial statement purposes and an accelerated method for income tax purposes. Cost includes an amount of interest associated with significant capital projects. Estimated useful lives range from 20 years for buildings and improvements, 3 to 15 years for plant machinery and equipment, 3 to 7 years for furniture and fixtures and 3 to 5 years for vehicles. Leasehold improvements are depreciated over the shorter of the lease term or the estimated useful life of the asset. Maintenance and repair costs are charged to earnings, while expenditures that increase asset lives are capitalized. We review our property, plant and equipment, along with all other long-lived assets that have finite lives, including finite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Assets held-for-sale are recorded at the lower of historical depreciated cost or the estimated fair value less costs to sell. See Note 6,
Property, Plant and Equipment
for further information on our property and equipment.
Related Party Transactions.
We purchase certain components used in the manufacture of our products from parties that could be considered related to us because one or more of our executive officers or board members is also an executive officer or board member of the related party. See Note 17,
Related Party Transactions
, for more information regarding our transactions with related parties.
Goodwill and Other Intangible Assets
. Goodwill represents the excess of the cost of a business combination over the fair value of the net assets acquired. Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to impairment tests on an annual basis, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Goodwill is allocated to the reporting unit from which it was created. A reporting unit is an operating segment or sub-segment to which goodwill is assigned when initially recorded. We review indefinite lived intangible assets annually for impairment by comparing the carrying value of those assets to their fair value.
Other intangible assets with finite lives are amortized over their estimated useful lives and are tested for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.
We perform our annual goodwill and indefinite lived intangible assets impairment test as of October 1 and monitor for interim triggering events on an ongoing basis. For goodwill we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Under authoritative guidance, we are not required to calculate the fair value of a reporting unit unless we determine that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. We have the option to bypass the qualitative assessment and proceed to a quantitative impairment test.
If we elect to bypass the qualitative assessment for a reporting unit, or if after completing the assessment we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we perform a quantitative impairment test, whereby we compare the fair value of a reporting unit with its carrying amount, including goodwill. The fair value of the reporting unit is determined by estimating the future cash flows of the reporting unit to which the goodwill relates, and then discounting the future cash flows at a market-participant-derived weighted-average cost of capital (“WACC”). In determining the estimated future cash flows, we consider current and projected future levels of income based on our plans for that business; business trends, prospects and market and economic conditions; and market-participant considerations. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered to not be impaired. If the carrying amount of the reporting unit exceeds its estimated fair value, an impairment loss is recognized in an amount equal to the excess, up to the carrying value of the goodwill.
We evaluate the recoverability of our indefinite lived intangible assets, which consist of our Utilimaster and Smeal trade names, based on estimates of future royalty payments that are avoided through our ownership of the trade names, discounted to their present value. In determining the estimated fair value of the trade names, we consider current and projected future levels of revenue based on our plans for Utilimaster and Smeal, business trends, prospects and market and economic conditions.
Significant judgments inherent in these assessments and analyses include assumptions about macroeconomic and industry conditions, appropriate sales growth rates, WACC and the amount of expected future net cash flows. The judgments and assumptions used in the estimate of fair value are generally consistent with the projections and assumptions that are used in current operating plans. Such assumptions are subject to change because of changing economic and competitive conditions. The determination of fair value is highly sensitive to differences between estimated and actual cash flows and changes in the related discount rate used to evaluate the fair value of the reporting units and trade names.
SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
See Note 5,
Goodwill and Intangible Assets,
for further details on our goodwill and other intangible assets.
Warranties
. Our policy is to record a provision for the estimated cost of warranty-related claims at the time of the sale, and periodically adjust the warranty liability to reflect actual experience. The amount of warranty liability accrued reflects management’s best estimate of the expected future cost of honoring our obligations under the warranty agreements. Expense related to warranty liabilities accrued for product sales, as well as adjustments to pre-existing warranty liabilities, are reflected within Cost of products sold on our Consolidated Statements of Operations. Our estimates are based on historical experience, the number of units involved and the extent of features and components included in product models. See Note 10,
Commitments and Contingent Liabilities
, for further information regarding warranties.
Deposits from Customers
. We sometimes receive advance payments from customers for product orders and record these amounts as liabilities. We accept such deposits when presented by customers seeking improved pricing in connection with orders that are placed for products to be manufactured and sold at a future date. Revenue associated with these deposits is recognized over time based on the inputs completed for a given performance obligation during the reporting period or deferred and recognized upon shipment of the related product to the customer depending on the terms of the contract.
Research and Development
. Our research and development costs, which consist of compensation costs, travel and entertainment, administrative expenses and new product development among other items, are expensed as incurred.
Taxes on Income
. We recognize deferred income tax assets and liabilities using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. Deferred tax liabilities generally represent tax expense recognized for which payment has been deferred, or expenses which have been deducted in our tax returns but which have not yet been recognized as an expense in our financial statements.
We establish valuation allowances for deferred income tax assets in accordance with GAAP, which provides that such valuation allowances shall be established unless realization of the income tax benefits is more likely than not. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. At each reporting period, we consider the scheduled reversal of deferred tax liabilities, available taxes in carryback periods, tax planning strategies and projected future taxable income in making this assessment.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The determination is based on the technical merits of the position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. Although we believe the estimates are reasonable, no assurance can be given that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals.
Interest and penalties attributable to income taxes are recorded as a component of income taxes.
See Note 8,
Taxes on Income
, for further details on our income taxes.
SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
Earnings Per Share
. Basic earnings per share is based on the weighted average number of common shares, share equivalents of stock appreciation rights (“SAR”s) and participating securities outstanding during the period. Diluted earnings per share also include the dilutive effect of additional potential common shares issuable from stock options and are determined using the treasury stock method. Basic earnings per share represents net earnings divided by basic weighted average number of common shares outstanding during the period, including the average dilutive effect of our SARs outstanding during the period determined using the treasury stock method. Diluted earnings per share represents net earnings divided by diluted weighted average number of common shares outstanding, which includes the average dilutive effect of our stock options outstanding during the period. Our unvested stock awards are included in the number of shares outstanding for both basic and diluted earnings per share calculations, unless a net loss is reported, in which situation unvested stock awards are excluded from the number of shares outstanding for both basic and diluted earnings per share calculations. See Note 15,
Earnings Per Share,
for further details.
Stock Incentive Plans
. Share based payment compensation costs for equity-based awards is measured on the grant date based on the estimated fair value of the award at that date, and is recognized over the requisite service period, net of estimated forfeitures. Fair value of stock option and stock appreciation rights awards are estimated using a closed option valuation (Black-Scholes) model. Fair value of restricted stock awards is based upon the quoted market price of the common stock on the date of grant. Our incentive stock plans are described in more detail in Note 13,
Stock Based Compensation
.
Fair Value
. We are required to disclose the estimated fair value of our financial instruments. The carrying value at December 31, 2018 and 2017 of cash and cash equivalents, accounts receivable and accounts payable approximate their fair value due to their short-term nature. The carrying value of variable rate debt instruments approximate their fair value based on their relative terms and market rates.
Segment Reporting.
We identify our reportable segments based on our management structure and the financial data utilized by the chief operating decision makers to assess segment performance and allocate resources among our operating units. We have three reportable segments: Fleet Vehicles and Services, Emergency Response Vehicles and Specialty Chassis and Vehicles. More detailed information about our reportable segments can be found in Note 16,
Business Segments
.
Supplemental Disclosures of Cash Flow Information.
Cash paid for interest was $630, $619 and $309 for 2018, 2017 and 2016. Cash paid (received) for income taxes, net of refunds, was $5,054, $0 and $2,232 for 2018, 2017 and 2016. Non-cash investing in 2018 included the issuance of the Company’s capital stock in the amount of $1,950 and a contingent liability for the value of future consideration of $2,832 in conjunction with our acquisition of SRUS. Non-cash investing in 2017 included $7,391 forgiveness of accounts receivable in conjunction with our acquisition of Smeal. See Note 2 for further information about these acquisitions.
New Accounting Standards
In February 2017 the FASB issued Accounting Standards Update No. 2017-05,
Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20)
(“ASU 2017-05”). ASU 2017-05 is intended to provide guidance for when gains and losses on nonfinancial assets should be applied to a financial asset by defining the term “nonfinancial asset”. ASU 2017-05 became effective for us beginning in the first quarter of 2018. The adoption of the provisions of ASU 2017-05 did not have an impact on our consolidated financial position, results of operations or cash flows.
In June 2016, the FASB issued Accounting Standards Update 2016-13,
Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments
(“ASU 2016-13”). ASU 2016-13 is intended to introduce a revised approach to the recognition and measurement of credit losses, emphasizing an updated model based on expected losses rather than incurred losses. The provisions of this standard are effective for reporting periods beginning after December 15, 2019 and early adoption is permitted. The adoption of the provisions of ASU 2016-13 are not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02,
Leases
(“ASU 2016-02”). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available.
We substantially completed our assessment of the impacts of the new lease standard during the fourth quarter. We have determined that the adoption of ASU 2016-02 will result in recognizing right of use assets and liabilities on the consolidated statement of financial position for leases currently classified as operating leases. We expect to utilize the following practical expedients:
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ASC 842-10-15-37 to elect not to separate non-lease components from lease components and instead will account for each separate lease component and any non-lease components associated with a lease component as a single lease component for all leases except for leases of land and buildings;
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ASC 842-10-65-1(c)(2) to retrospectively record the right of use assets and lease liabilities as of January 1, 2019 with any cumulative effect of the initial application recorded to retained earnings;
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ASC 842-10-65-1(f) package of practical expedients to not reassess whether any expired or existing contracts are or contain leases, not reassess the lease classification for any expired or existing leases, and not reassess initial direct costs for any existing leases; and
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ASC 842-10-65-1(g) to use hindsight in determining the lease term (that is, when considering lessee options to extend or terminate the lease and to purchase the underlying asset) and in assessing impairment of the company’s right-of-use assets.
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ASC 842-20-25-2 to exclude short-term leases from the balance sheet.
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We expect that the disclosures in the notes to our consolidated financial statements related to leases will be significantly expanded under the new standard, specifically:
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ASC 842-20-50-1 general disclosures about the Company’s leases, the significant judgments made in applying the requirements in this standard to those leases, and the amounts recognized in the consolidated financial statements relating to those leases.
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ASC 842-20-50-3 requiring a general description of the leases, the existence and terms and conditions of options to extend or terminate the lease including narrative disclosure about the options that are recognized as part of its right-of-use assets and lease liabilities and those that are not, information about leases that have not yet commenced but that create significant rights and obligations for the company, significant assumptions and judgments made in determining whether a contract contains a lease, the allocation of the consideration in a contract between lease and non-lease components and the determination of discount rates for leases.
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ASC 842-20-50-4 requiring the disclosure for each period presented in the consolidated financial statements relating to the Company’s total lease cost, which includes both amounts recognized in profit or loss during the period and any amounts capitalized as part of the cost of another asset and the cash flows arising from lease transactions for finance leasing cost, segregated between the amortization of the right-of-use assets and interest on the lease liabilities; operating lease costs; and short-term lease costs; amounts segregated between those for finance and operating leases for cash paid for amounts included in the measurement of lease liabilities, segregated between operating and financing cash flows, supplemental noncash information on lease liabilities arising from obtaining right-of-use assets, the weighted-average remaining lease term and the weighted-average discount rate.
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ASC 842-20-50-6 requires a maturity analysis of the Company’s finance lease and operating lease liabilities, separately, showing the undiscounted cash flows on an annual basis for each of the first five years and a total amount for the remaining years.
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ASC 842-20-50-8 requires the Company to disclose the fact that it elected to exclude short term leases from the balance sheet and disclose the amount of short term lease commitments if the lease expense for the period does not reasonably reflect the entity’s short term lease commitments.
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ASC 842-20-50-9 requires the Company to disclose their election of the practical expedient to not separate lease components from non-lease components and indicate which class of assets it has elected to apply the practical expedient.
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It is expected that certain other provisions of ASC 842 not mentioned above will not significantly impact the Company.
We will adopt ASU 2016-02 as of January 1, 2019 using the modified retrospective approach. As a result, in the first quarter of 2019 we expect to record right of use assets for operating leases of approximately $13,600 and for financing leases of approximately $700. The decrease to retained earnings is expected to be approximately $200, reflecting the cumulative impact of the accounting change.
SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
We are unable to precisely quantify the impact to expenses for future periods since expenses recognized in those periods will depend on the actual leasing levels in those periods, but we do not expect those expenses from recognizing right of use assets and lease liabilities to change significantly.
In May 2014, the FASB issued Accounting Standards Update 2014-09,
Revenue from Contracts with Customers
(“ASU 2014-09” or “ASC 606”). Subsequently the FASB provided additional guidance to clarify certain aspects of the standard in Accounting Standards Updates No. 2016-08
, Revenue from Contracts with Customers (ASU 2014-09), Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
; No. 2016-10,
Revenue from Contracts with Customers (ASU 2014-09), Identifying Performance Obligations and Licensing
; and No. 2016-12,
Revenue from Contracts with Customers (ASU 2014-09), Narrow-Scope Improvements and Practical Expedients
. ASU 2014-09, as amended, is based on the principle that revenue should be recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. We adopted ASU 2014-09 as of January 1, 2018 using the modified retrospective approach. See the
“Adoption of Revenue Recognition Accounting Policy”
section below for a description of the impact of the adoption of the provisions of ASU 2014-09 on our consolidated financial position, results of operations and cash flows.
In March 2016, the FASB issued Accounting Standards Update No. 2016-08,
Revenue from Contracts with Customers (ASU
2014
-
09
), Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
(“ASU 2016-08”). ASU 2016-08 clarifies the implementation guidance for principal-versus-agent considerations in the revenue recognition standard. A principal-versus-agent consideration applies to sales that involve two or more suppliers to a customer. Each participant in the sale must determine whether they control the good or service and are entitled to the gross amount of the transaction or are acting as an agent and should collect only a fee or commission for arranging the sale. ASU 2016-08 will go into effect when the revenue standard issued in ASU 2014-09 becomes effective. We adopted ASU 2014-09 as of January 1, 2018 using the modified retrospective approach. See the
“Adoption of Revenue Recognition Accounting Policy”
section below for a description of the impact of the adoption of the provisions of ASU 2014-09 on our consolidated financial position, results of operations and cash flows.
In April 2016, the FASB issued Accounting Standards Update No. 2016-10,
Revenue from Contracts with Customers (ASU
2014
-
09
), Identifying Performance Obligations and Licensing
(“ASU 2016-10”). ASU 2016-10 clarifies the implementation guidance in ASU 2014-09 for identifying performance obligations and determining when to recognize revenue on licensing agreements for intellectual property. ASU 2016-10 removes the requirement to assess whether promised goods or services are performance obligations if they are immaterial to the contract with the customer and allows an entity to elect to account for shipping and handling activities that occur after the customer has obtained control of a good as an activity to fulfill the promise to transfer the good rather than as an additional promised service. ASU 2016-10 also includes implementation guidance on determining whether a license granted by an entity provides a customer with a right to use the intellectual property, which is satisfied at a point in time, or a right to access the intellectual property, which is satisfied over time. ASU 2016-10 will go into effect when the revenue standard issued in ASU 2014-09 becomes effective. We adopted ASU 2014-09 as of January 1, 2018 using the modified retrospective approach. See the
“Adoption of Revenue Recognition Accounting Policy”
section below for a description of the impact of the adoption of the provisions of ASU 2014-09 on our consolidated financial position, results of operations and cash flows.
In May 2016, the FASB issued Accounting Standards Update No. 2016-12,
Revenue from Contracts with Customers (ASU
2014
-
09
), Narrow-Scope Improvements and Practical Expedients
(“ASU 2016-12”). ASU 2016-12 clarifies the implementation guidance on assessing collectability, presentation of sales taxes, non-cash consideration and completed contracts and contract modifications at transition. ASU 2016-12 will go into effect when the revenue standard issued in ASU 2014-09 becomes effective. We adopted ASU 2014-09 as of January 1, 2018 using the modified retrospective approach. See the
“Adoption of Revenue Recognition Accounting Policy”
section below for a description of the impact of the adoption of the provisions of ASU 2014-09 on our consolidated financial position, results of operations and cash flows.
SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
Adoption of Revenue Recognition Accounting Policy
Except for the changes below, we have consistently applied the accounting policies to all periods presented in these consolidated financial statements. We adopted ASC 606 with a date of initial application of January 1, 2018. As a result, we changed our accounting policy for revenue recognition as detailed above under the "Revenue Recognition" section.
We applied ASC 606 using the cumulative effect method to all contracts not completed at the date of initial application by recognizing the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of retained earnings at January 1, 2018. Therefore, the comparative information has not been adjusted and continues to be reported under prior revenue recognition guidance.
SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
The tables below present the impacts of our adoption of the new revenue standard on our income statement and balance sheet.
|
|
Three Months Ended December 31, 2018
|
|
|
|
As Reported
|
|
|
Balances
Without
Adoption of
ASC 606
|
|
|
Effect of
Change
Higher/(Lower)
|
|
Income Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
232,961
|
|
|
$
|
240,182
|
|
|
$
|
(7,221
|
)
|
Cost of products sold
|
|
|
209,150
|
|
|
|
215,144
|
|
|
|
(5,994
|
)
|
Taxes (benefit)
|
|
|
(266
|
)
|
|
|
35
|
|
|
|
(301
|
)
|
Net earnings
|
|
|
1,833
|
|
|
|
2,759
|
|
|
|
(926
|
)
|
|
|
Year Ended December 31, 2018
|
|
|
|
As Reported
|
|
|
Balances
Without
Adoption of
ASC 606
|
|
|
Effect of
Change
Higher/(Lower)
|
|
Income Statement
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
816,164
|
|
|
$
|
828,988
|
|
|
$
|
(12,824
|
)
|
Cost of products sold
|
|
|
717,607
|
|
|
|
730,010
|
|
|
|
(12,403
|
)
|
Taxes
|
|
|
2,261
|
|
|
|
2,335
|
|
|
|
(74
|
)
|
Net earnings
|
|
|
15,012
|
|
|
|
15,359
|
|
|
|
(347
|
)
|
SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
|
|
December 31, 2018
|
|
|
|
As
Reported
|
|
|
Balances
Without
Adoption of
ASC 606
|
|
|
Effect of
Change
Higher/(Lower)
|
|
Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract assets
|
|
$
|
36,027
|
|
|
$
|
-
|
|
|
$
|
36,027
|
|
Inventories
|
|
|
69,992
|
|
|
|
109,096
|
|
|
|
(39,104
|
)
|
Net deferred tax asset
|
|
|
7,141
|
|
|
|
8,038
|
|
|
|
(897
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits from customers
|
|
|
22,632
|
|
|
|
30,150
|
|
|
|
(7,518
|
)
|
Other current liabilities and accrued expenses
|
|
|
12,396
|
|
|
|
12,173
|
|
|
|
223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
103,571
|
|
|
|
100,250
|
|
|
|
3,321
|
|
The table below presents the cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of ASC 606.
|
|
December 31,
2017
|
|
|
Transition
adjustments
|
|
|
January 1,
2018
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract assets
|
|
$
|
-
|
|
|
$
|
30,559
|
|
|
$
|
30,559
|
|
Inventory
|
|
|
77,692
|
|
|
|
(32,933
|
)
|
|
|
44,759
|
|
Net deferred tax asset
|
|
|
7,284
|
|
|
|
(897
|
)
|
|
|
6,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits from customers
|
|
|
25,422
|
|
|
|
(7,234
|
)
|
|
|
18,188
|
|
Other current liabilities and accrued expenses
|
|
|
12,071
|
|
|
|
295
|
|
|
|
12,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
88,855
|
|
|
|
3,668
|
|
|
|
92,523
|
|
Contract assets and liabilities
The tables below disclose changes in contract assets and liabilities as of the periods indicated.
Contract assets
|
|
|
|
|
Opening balance (January 1, 2018)
|
|
$
|
30,559
|
|
Reclassification of the beginning contract assets to receivables, as the result of rights to consideration becoming unconditional
|
|
|
(30,559
|
)
|
Contract assets recognized, net of reclassification to receivables
|
|
|
36,027
|
|
Net change
|
|
|
5,468
|
|
Ending balance (December 31, 2018)
|
|
$
|
36,027
|
|
SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
Contract liabilities
|
|
|
|
|
Opening balance (January 1, 2018)
|
|
$
|
18,188
|
|
Reclassification of the beginning contract liabilities to revenue, as the result of performance obligations satisfied
|
|
|
(15,490
|
)
|
Cash received in advance and not recognized as revenue
|
|
|
19,934
|
|
Net change
|
|
|
4,444
|
|
Ending balance (December 31, 2018)
|
|
$
|
22,632
|
|
The aggregate amount of the transaction price allocated to remaining performance obligations in existing contracts that are yet to be completed are expected to be recognized as revenue in the following annual time-periods:
|
|
1-12 Months
(1)
|
|
|
13 Months
and beyond
(1)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Revenue expected to be recognized as of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fleet Vehicles and Services
|
|
$
|
218,775
|
|
|
$
|
-
|
|
|
$
|
218,775
|
|
Emergency Response Vehicles
|
|
|
211,524
|
|
|
|
5,842
|
|
|
|
217,366
|
|
Specialty Chassis and Vehicles
|
|
|
37,691
|
|
|
|
32
|
|
|
|
37,723
|
|
Total
|
|
$
|
467,990
|
|
|
$
|
5,874
|
|
|
$
|
473,864
|
|
|
(1)
|
Revenue above includes amounts related to extended warranties and roadside assistance contracts of $190 and $35 for one to 12 months and $650 and $32 for 13 months and beyond, respectively.
|
For performance obligations that are satisfied over time, revenue is expected to be recognized evenly over the time period to complete the contract due to the assembly line nature of the business operations. For performance obligations that are satisfied at a point in time, revenue is expected to be recognized when the customer obtains control of the product, which is generally upon shipment from our facility. No amounts have been excluded from the transaction prices above related to the guidance on constraining estimates of variable consideration.
In the following tables, revenue is disaggregated by primary geographical market and timing of revenue recognition for the twelve months ended December 31, 2018. The tables also include a reconciliation of the disaggregated revenue with the reportable segments.
|
|
Year Ended December 31, 2018
|
|
|
|
Fleet
Vehicles
and
Services
|
|
|
Emergency
Response
Vehicles
|
|
|
Specialty
Chassis
and
Vehicles
|
|
|
Total
Reportable
Segments
|
|
|
Other
|
|
|
Total
|
|
Primary geographical markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
367,730
|
|
|
$
|
209,307
|
|
|
$
|
191,814
|
|
|
$
|
768,851
|
|
|
$
|
(10,221
|
)
|
|
$
|
758,630
|
|
Other
|
|
|
19,819
|
|
|
|
36,330
|
|
|
|
1,385
|
|
|
|
57,534
|
|
|
|
-
|
|
|
|
57,534
|
|
Total sales
|
|
$
|
387,549
|
|
|
$
|
245,637
|
|
|
$
|
193,199
|
|
|
$
|
826,385
|
|
|
$
|
(10,221
|
)
|
|
$
|
816,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of revenue recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products transferred at a point in time
|
|
$
|
113,576
|
|
|
$
|
21,183
|
|
|
$
|
160,408
|
|
|
$
|
295,167
|
|
|
$
|
-
|
|
|
$
|
295,167
|
|
Products and services transferred over time
|
|
|
273,973
|
|
|
|
224,454
|
|
|
|
32,791
|
|
|
|
531,218
|
|
|
|
(10,221
|
)
|
|
|
520,997
|
|
Total sales
|
|
$
|
387,549
|
|
|
$
|
245,637
|
|
|
$
|
193,199
|
|
|
$
|
826,385
|
|
|
$
|
(10,221
|
)
|
|
$
|
816,164
|
|
SPARTAN MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
|
|
Year Ended December 31, 2017
|
|
|
|
Fleet
Vehicles
and
Services
|
|
|
Emergency
Response
Vehicles
|
|
|
Specialty
Chassis
and
Vehicles
|
|
|
Total
Reportable
Segments
|
|
|
Other
|
|
|
Total
|
|
Primary geographical markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
238,267
|
|
|
$
|
235,085
|
|
|
$
|
158,246
|
|
|
$
|
631,598
|
|
|
$
|
(5,657
|
)
|
|
$
|
625,941
|
|
Other
|
|
|
12,828
|
|
|
|
67,765
|
|
|
|
564
|
|
|
|
81,157
|
|
|
|
-
|
|
|
|
81,157
|
|
Total sales
|
|
$
|
251,095
|
|
|
$
|
302,850
|
|
|
$
|
158,810
|
|
|
$
|
712,755
|
|
|
$
|
(5,657
|
)
|
|
$
|
707,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of revenue recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products transferred at a point in time
|
|
$
|
251,095
|
|
|
$
|
302,850
|
|
|
$
|
158,810
|
|
|
$
|
712,755
|
|
|
$
|
(5,657
|
)
|
|
$
|
707,098
|
|
Products and services transferred over time
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total sales
|
|
$
|
251,095
|
|
|
$
|
302,850
|
|
|
$
|
158,810
|
|
|
$
|
712,755
|
|
|
$
|
(5,657
|
)
|
|
$
|
707,098
|
|
|
|
Year Ended December 31, 2016
|
|
|
|
Fleet
Vehicles
and
Services
|
|
|
Emergency
Response
Vehicles
|
|
|
Specialty
Chassis
and
Vehicles
|
|
|
Total
Reportable
Segments
|
|
|
Other
|
|
|
Total
|
|
Primary geographical markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
272,088
|
|
|
$
|
158,195
|
|
|
$
|
134,125
|
|
|
$
|
564,408
|
|
|
$
|
(5,347
|
)
|
|
$
|
559,061
|
|
Other
|
|
|
6,301
|
|
|
|
24,786
|
|
|
|
629
|
|
|
|
31,716
|
|
|
|
-
|
|
|
|
31,716
|
|
Total sales
|
|
$
|
278,389
|
|
|
$
|
182,981
|
|
|
$
|
134,754
|
|
|
$
|
596,124
|
|
|
$
|
(5,347
|
)
|
|
$
|
590,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of revenue recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products transferred at a point in time
|
|
$
|
278,389
|
|
|
$
|
182,981
|
|
|
$
|
134,754
|
|
|
$
|
596,124
|
|
|
$
|
(5,347
|
)
|
|
$
|
590,777
|
|
Products and services transferred over time
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total sales
|
|
$
|
278,389
|
|
|
$
|
182,981
|
|
|
$
|
134,754
|
|
|
$
|
596,124
|
|
|
$
|
(5,347
|
)
|
|
$
|
590,777
|
|