REV GROUP, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should read the "Cautionary Statement About Forward-Looking Statements" and "Risk Factors" sections of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. This discussion and analysis should be read in conjunction with the accompanying audited consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K.
Overview
REV is a leading designer, manufacturer, and distributor of specialty vehicles and related aftermarket parts and services. We serve a diversified customer base, primarily inthe United States , through three segments: Fire & Emergency, Commercial, and Recreation. We provide customized vehicle solutions for applications, including essential needs for public services (ambulances, fire apparatus, school buses, and transit buses), commercial infrastructure (terminal trucks and industrial sweepers) and consumer leisure (recreational vehicles). Our diverse portfolio is made up of well-established principal vehicle brands, including many of the most recognizable names within their industry. Several of our brands pioneered their specialty vehicle product categories and date back more than 50 years. We believe that in most of our markets, we hold the first or second market share position and approximately 62% of our net sales during fiscal year 2020 came from products where we believe we hold such share positions. 39
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Segments
Fire & Emergency - The Fire & Emergency segment sells fire apparatus equipment
under the Emergency One ("E-ONE"), Kovatch Mobile Equipment ("KME") and Ferrara,
and ambulances under the American Emergency Vehicles ("AEV"), Horton Emergency
Vehicles ("Horton"), Leader Emergency Vehicles ("Leader"), Marque, McCoy Miller ,
Road Rescue, Wheeled Coach and Frontline brands. During the second quarter of
fiscal year 2020, we acquired Spartan Emergency Response ("Spartan ER") which
consists of Spartan Emergency Response, Smeal, and Ladder Tower brands. In
fiscal year 2020, we began a process to sunset the Marque, McCoy Miller and
Frontline brands. We believe we are the largest manufacturer by unit volume of
fire and emergency vehicles in the United States and have one of the industry's
broadest portfolios of products including Type I ambulances (aluminum body
mounted on a heavy truck-style chassis), Type II ambulances (van conversion
ambulance), Type III ambulances (aluminum body mounted on a van-style chassis),
pumpers (fire apparatus on a custom or commercial chassis with a water pump and
water tank to extinguish fires), ladder trucks (fire apparatus with stainless
steel or aluminum ladders), tanker trucks and rescue, aircraft rescue
firefighting ("ARFF"), custom cabs & chassis and other vehicles. Each of our
individual brands is distinctly positioned and targets certain price and feature
points in the market such that dealers often carry, and customers often buy more
than one REV Fire & Emergency product line.
Commercial - Our Commercial segment serves the bus market through the Collins
Bus and ENC brands. We serve the terminal truck market through the Capacity
brand and the sweeper market through the Lay-Mor brand. Our products in the
Commercial segment include transit buses (large municipal buses where we build
our own chassis and body), Type A school buses (small school bus built on
commercial chassis), sweepers (three- and four-wheel versions used in road
construction activities), and terminal trucks (specialized vehicles which move
freight in warehouses, intermodal yards, distribution and fulfillment centers
and ports). Within each market, we produce many customized configurations to
address the diverse needs of our customers. In the third quarter of fiscal year
2020, we sold our shuttle bus businesses which included Goshen Coach, ElDorado
National (Kansas) , Federal Coach, Champion and World Trans . Refer to Note 6,
Divestitures, Restructuring and Impairments, to our 2020 audited consolidated
financial statements appearing elsewhere in this Annual Report on Form 10-K.
Recreation - Our Recreation segment serves the RV market through the following
principal brands: American Coach, Fleetwood RV, Holiday Rambler, Renegade,
Midwest and Lance. We believe our brand portfolio contains some of the longest
standing, most recognized brands in the RV industry. Under these brands, REV
provides a variety of highly recognized motorized and towable RV models such as:
American Eagle, Bounder, Pace Arrow , Discovery LXE, Verona, Weekender and Lance,
among others. Our products in the Recreation segment include Class A motorized
RVs (motorhomes built on a heavy-duty chassis with either diesel or gas engine
configurations), Class C and "Super C" motorized RVs (motorhomes built on a
commercial truck or van chassis), Class B RVs (motorhomes built out within a van
chassis and high-end luxury van conversions), and towable travel trailers and
truck campers. The Recreation segment also includes Goldshield Fiberglass, which
produces a wide range of custom molded fiberglass products for the heavy-duty
truck, RV and broader industrial markets.
Factors Affecting Our Performance
The primary factors affecting our results of operations include:
General Economic Conditions
Our business is impacted by theU.S. economic environment, employment levels, consumer confidence, municipal spending, municipal tax receipts, changes in interest rates and instability in securities markets around the world, among other factors. In particular, changes in theU.S. economic climate can impact demand in key end markets. In addition, we are susceptible to supply chain disruptions resulting from the impact of tariffs and global macro-economic factors (refer to "Impact of COVID-19" section below), which can have a dramatic effect, either directly or indirectly, on the availability, lead-times and costs associated with raw materials and parts. RV purchases are discretionary in nature and therefore sensitive to the availability of financing, consumer confidence, unemployment levels, levels of disposable income and changing levels of consumer home equity, among other factors. RV markets are affected by generalU.S. and global economic conditions, which create risks that future economic downturns will further reduce consumer demand and negatively impact our sales. While less economically sensitive than the Recreation segment, the Fire & Emergency segment and the Commercial segment are also impacted by the overall economic environment. Local tax revenues are an important source of funding for fire and emergency response departments. Fire and emergency products and buses are typically a larger cost item for municipalities and their service life is relatively long, making the purchase more deferrable, which can result in reduced demand for our products. In addition to 40
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commercial demand, local, state and federal tax revenues can be an important source of funding for many of our bus products including Type A school buses and transit buses. Volatility in tax revenues or availability of funds via budgetary appropriation can have a negative impact on the demand for these products. A decrease in employment levels, consumer confidence or the availability of financing, or other adverse economic events, or the failure of actual demand for our products to meet our estimates, could negatively affect the demand for our products. Any decline in overall customer demand in markets in which we operate could have a material adverse effect on our operating performance.
Seasonality
In a typical year, our operating results are impacted by seasonality. Historically, the slowest sales volume quarter has been the first fiscal quarter when the purchasing seasons for vehicles, such as school buses, RVs and sweepers are the lowest due to the colder weather and the relatively long time until the summer vacation season, and the fact that the school year is underway with municipalities and school bus contractors utilizing their existing fleets to transport student populations. Sales of our products have typically been higher in the second, third and fourth fiscal quarters (with the fourth fiscal quarter typically being the strongest) due to better weather, the vacation season, buying habits of RV dealers and end-users, timing of government/municipal customer fiscal years, and the beginning of a new school year. Our quarterly results of operations, cash flows, and liquidity are likely to be impacted by these seasonal patterns. Sales and earnings for other vehicles that we produce, such as essential emergency vehicles and commercial bus fleets, are less seasonal, but fluctuations in sales of these vehicles can also be impacted by timing surrounding the fiscal years of municipalities and commercial customers, as well as the timing and amounts of multi-unit orders.
Impact of Acquisitions
We actively evaluate opportunities to improve and expand our business through targeted acquisitions that are consistent with our strategy. We also may dispose of certain components of our business that no longer fit within our overall strategy. Historically, a significant component of our growth has been through acquisitions of businesses. We typically incur upfront costs as we integrate acquired businesses and implement our operating philosophy at newly acquired companies, including consolidation of supplies and materials, purchases, improvements to production processes, and other restructuring initiatives. The benefits of these integration efforts and divestiture activities may not positively impact our financial results until subsequent periods. We recognize acquired assets and liabilities at fair value. This includes the recognition of identified intangible assets and goodwill which, in the case of definite-life intangible assets, are then amortized over their expected useful lives, which typically results in an increase in amortization expense. In addition, assets acquired and liabilities assumed generally include tangible assets as well as contingent assets and liabilities. During the second quarter of fiscal year 2020, we acquired Spartan ER, a leading designer, manufacturer and distributor of custom emergency response vehicles, cabs and chassis for the emergency response market. Refer to Note 3, Acquisitions, to our 2020 audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. In the third quarter of fiscal year 2020, we sold our shuttle bus businesses. Refer to Note 6, Divestitures, Restructuring and Impairments, to our 2020 audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. Impact of COVID-19 During our second quarter of fiscal year 2020, the novel coronavirus known as "COVID-19" spread throughout the world creating a global pandemic. The pandemic triggered a significant downturn in global commerce and these challenging market conditions may continue for an extended period of time. As a result of the spread of COVID-19, we have also experienced disruption and delays in our supply chain, customer demand changes, and logistics challenges, including our customers' ability to inspect and take delivery of vehicles. Many of the vehicles and parts we supply are vital to serving communities across our nation.The Cybersecurity and Infrastructure Security Agency (CISA), which implements the Secretary ofHomeland Security 's responsibilities, has designated our fire trucks, ambulances, transit and school buses and terminal trucks (representing roughly 70% of the vehicles we produce) as essential to the nation's health and safety, and are critical to the emergency service and transportation infrastructure. Our Recreation vehicles dealer network was significantly impacted by the pandemic and many of them closed temporarily before reopening in the third quarter of fiscal year 2020 when consumer demand for recreation vehicles began to accelerate due to an increase in consumer preference to vacation in a safe and socially distant manner. At the end of fiscal year 2020, backlog levels were significantly higher than the same period in the prior year.
We have taken a number of precautionary steps to safeguard our employees and our business from the effects of the outbreak of COVID-19, including closing Recreation vehicle manufacturing locations for 3-6 weeks and shuttle bus manufacturing locations for 2
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weeks (during the second quarter of fiscal year 2020), substantially limiting the presence of personnel in our offices and manufacturing locations, implementing travel restrictions and withdrawing from various industry events. We have requested that office employees work from home and implemented business continuity plans in an effort to minimize further business disruption and to protect our employees and operations. In addition, we have limited discretionary spending, furloughed salaried employees, deferred capital investments, suspended future quarterly dividends, replaced our Term Loan debt leverage ratio covenant with a fixed charge coverage ratio through fiscal year 2020, and temporarily lowered the salaries of our leadership team.
While the global market downturn, closures and limitations on movement are expected to be temporary, the duration of any demand changes, production and supply chain disruptions, and related financial impacts, cannot be reliably estimated at this time.
Results of Operations
The following table compares results for fiscal years 2020, 2019 and 2018
Fiscal Year Ended
October 31, October 31, October 31,
(in millions except per share data) 2020 2019 2018
Net sales $ 2,277.6 $ 2,403.7 $ 2,381.3
Gross profit 228.1 251.8 278.0
Selling, general and administrative 204.9 199.3 182.8
Restructuring 9.9 5.7 7.2
Impairment charges 12.1 8.9 35.6
Loss on sale of business 11.1 - -
Gain on acquisition of business (8.6 ) - -
Benefit for income taxes (15.6 ) (3.5 ) (10.8 )
Net (loss) income (30.5 ) (12.3 ) 13.0
Net (loss) income per common share
Basic $ (0.48 ) $ (0.20 ) $ 0.20
Diluted$ (0.48 ) $ (0.20 ) $
0.20
Dividends declared per common share
0.20
Adjusted EBITDA $ 67.5 $ 102.1 $ 148.0
Adjusted Net Income $ 9.5 $ 30.0 $ 72.7
Net Sales Fiscal Year Ended
October 31, October 31, October 31,
(in millions) 2020 Change 2019 Change 2018
Net sales $ 2,277.6 -5.2 % $ 2,403.7 0.9 % $ 2,381.3
Consolidated net sales decreased $126.1 million in fiscal year 2020 primarily
due to the divesture of two shuttle bus businesses and a decrease in organic net
sales in the Fire & Emergency ("F&E"), Commercial and Recreation segments
partially offset by the acquisition of Spartan Emergency Response ("Spartan
ER"). The decline in F&E organic net sales compared to fiscal year 2019 was
primarily the result of a decrease in fire truck and ambulance shipments
partially offset by increased price and mix within the Fire division. The
decrease in Commercial segment net sales for fiscal year 2020 compared to fiscal
year 2019 was primarily the result of decreased school bus shipments as
districts and contractors deferred purchases due to COVID-19 related school
closures, as well as a significant decline in sales of terminal trucks and
street sweepers that were in line with overall end market demand. The decrease
in Recreation segment net sales for fiscal year 2020 compared to fiscal year
2019 was primarily due to manufacturing shutdowns and stay-at-home orders
related to COVID-19 within the second quarter of fiscal year 2020.
Consolidated net sales increased $22.4 million in fiscal year 2019 primarily due
to an increase in net sales in the Fire & Emergency and Commercial segments,
partially offset by a decrease in net sales in the Recreation segment. The
increase in Commercial net sales compared to fiscal year 2018 was primarily due
to a broad-based increase in most of the segment's product categories. Sales of
school and transit buses as well as terminal trucks were all higher in fiscal
year 2019 as compared to fiscal year 2018. Growth drivers include new models and
end market strength in the Class A school bus product line and the delivery
against a larger municipal transit bus order. The increase in Fire & Emergency
net sales compared to the prior year period was primarily due to the impact of
unit mix and slightly higher shipments of fire trucks, partially offset by a
decrease in shipments of ambulances. The
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decrease in Recreation segment net sales in fiscal year 2019 compared to fiscal
year 2018 was primarily due to a decrease in shipment volumes of Class A
motorhomes, partially offset by delivering on existing backlogs in our other RV
categories.
Gross Profit Fiscal Year Ended
October 31, October 31, October 31,
(in millions) 2020 Change 2019 Change 2018
Gross profit $ 228.1 -9.4 % $ 251.8 -9.4 % $ 278.0
% of net sales 10.0 % 10.5 % 11.7 %
Consolidated gross profit decreased $23.7 million in fiscal year 2020 primarily
due to a reduction in gross profit in the Commercial and Recreation segments,
partially offset by an increase in gross profit in the F&E segment. Gross profit
in the Commercial segment was negatively impacted by lower production volumes of
terminal trucks, street sweepers and Type A school buses. Gross profit in the
Recreation segment was negatively impacted by temporary production shutdowns
related to COVID-19 and lingering supply chain disruptions. The increase in
gross profit in the F&E segment was primarily the result of the Spartan ER
acquisition as well as increased throughput at a primary fire plant, partially
offset by lower ambulance shipments and negative impacts due to absenteeism
related to COVID-19 within the segment.
Consolidated gross profit decreased $26.2 million in fiscal year 2019 primarily
due to a reduction in gross profit in the Fire & Emergency and Recreation
segments, partially offset by an improvement in gross profit in the Commercial
segment. Gross profit in the Fire & Emergency segment was negatively impacted by
initial production inefficiencies associated with the increase in capacity and
ramp up of production at our largest fire truck facility and inefficiencies
associated with timing of incoming orders at our largest Ambulance facility. The
decrease in gross profit in the Recreation segment was primarily due to lower
shipments and pricing of Class A motorhomes. The improvement in gross profit in
the Commercial segment was primarily due to increased shipments of higher margin
transit and school buses, and operational improvements within the Commercial
segment resulting from implementation of the REV Business System.
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Selling, General and Administrative Fiscal Year Ended
October 31, October 31, October 31,
(in millions) 2020 Change 2019 Change 2018
Selling, general and administrative $ 204.9 2.8 % $ 199.3 9.0 % $ 182.8
Consolidated selling, general and administrative ("SG&A") costs increased $5.6
million in fiscal year 2020 primarily due to the Spartan ER acquisition
partially offset by reduced discretionary spending as well as travel and trade
show related costs.
Consolidated SG&A costs increased $16.5 million in fiscal year 2019 primarily
due to higher legal costs driven by settlement activity, higher stock
compensation costs and insurance costs, and the impact of the acquisition of
Lance in January 2018 .
Restructuring Fiscal Year Ended
October 31, October 31, October 31,
(in millions) 2020 Change 2019 Change 2018
Restructuring $ 9.9 73.7 % $ 5.7 -20.8 % $ 7.2
Consolidated restructuring costs increased $4.2 million in fiscal year 2020.
Restructuring costs of $9.9 million resulted from the move from a centralized to
a decentralized aftermarket parts business, severance costs related to
reductions in force across all segments, dealer termination payments associated
with the sunset of certain ambulance brands, and lease termination costs related
to the closure of a Spartan ER facility.
Consolidated restructuring costs decreased $1.5 million in fiscal year 2019.
Restructuring costs for fiscal year 2019 of $5.7 million were primarily
attributable to headcount reductions in the F&E Segment and our corporate office
as well as a facility closure in the Recreation Segment and lease termination
costs. Restructuring costs for fiscal year 2018 of $7.2 million represent costs
incurred to restructure certain management positions in the Fire & Emergency,
Commercial and Recreation segments, our corporate office, as well as to relocate
our Class B RV production.
Impairment Charges Fiscal Year Ended
October 31, October 31, October 31,
(in millions) 2020 Change 2019 Change 2018
Impairment charges $ 12.1 36.0 % $ 8.9 -75.0 % $ 35.6
Impairment charges for fiscal year 2020 were related to the liquidation of the
Company's rental fleet, certain fixed assets associated with the
decentralization of the Company's aftermarket parts business and the value of
trade names associated with sunset of certain ambulance brands.
Impairment charges for fiscal year 2019 were primarily related to assets held for sale and other assets which were liquidated during the year.
Impairment charges for fiscal year 2018 included a non-cash impairment charge of$35.6 million related to assets held for sale and other assets that management intended to monetize or were otherwise impaired which included the Company's rental fleet, inventory from discontinued product lines and certain information system assets. Loss on sale of business Fiscal Year Ended October 31, October 31, October 31, (in millions) 2020 Change 2019 Change 2018 Loss on sale of business$ 11.1 n/m $ - n/m $ - In the third quarter of fiscal year 2020, we completed the sale of our shuttle bus businesses for$50.5 million in cash. As a result, we recorded a loss on sale of$11.1 million during fiscal year 2020. Refer to Note 6, Divestitures, Restructuring and Impairments, to our 2020 audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. Gain on acquisition of business Fiscal Year Ended October 31, October 31, October 31, (in millions) 2020 Change 2019 Change 2018 Gain on acquisition of business$ (8.6 ) n/m $ - n/m $ - 44
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Table of Contents During the second quarter of fiscal year 2020, we acquired Spartan ER for$47.3 million . We recorded the preliminary purchase accounting, which resulted in a gain on acquisition of$8.6 million . Refer to Note 3, Acquisitions, to our 2020 audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. Benefit for Income Taxes Fiscal Year Ended October 31, October 31, October 31, (in millions) 2020 Change 2019 Change 2018 Benefit for income taxes$ (15.6 ) 345.7 %$ (3.5 ) -67.6 %$ (10.8 ) Consolidated income tax benefit was$15.6 million or 33.8% of pretax loss and$3.5 million or 20.9% of pretax loss for fiscal years 2020 and 2019, respectively. Results for fiscal year 2020 were favorably impacted by tax benefits related to a loss carryback allowable under the CARES Act and the nontaxable gain on the acquisition of Spartan ER for$3.5 million and$2.2 million , respectively. Results for fiscal year 2019 were favorably impacted by incentives forU.S. research for$0.6 million and unfavorably impacted by share-based compensation tax deductions for$0.8 million . Consolidated income tax benefit was$3.5 million or 20.9% of pretax loss and$10.8 million or (478.7%) of pretax income for fiscal years 2019 and 2018, respectively. Results for fiscal year 2019 were favorably impacted by incentives forU.S. research for$0.6 million and unfavorably impacted by share-based compensation tax deductions for$0.8 million . Results for fiscal year 2018 were favorably impacted by the decrease in theU.S. tax rate and revaluation of net deferred tax liabilities of$11.3 million , both as a result of tax legislation inthe United States . Net (Loss) Income Fiscal Year Ended October 31, October 31, October 31, (in millions) 2020 Change 2019 Change 2018 Net (loss) income$ (30.5 ) 148.0 %$ (12.3 ) -194.6 %$ 13.0 Consolidated net loss increased$18.2 million in fiscal year 2020 primarily due to a reduction in gross profit described above plus increased restructuring, restructuring related and impairment charges attributable to severance costs related to reductions in force, leadership changes, decentralizing the Company's aftermarket parts business, the sunset of certain ambulance brands and liquidation of vehicles in our rental business, partially offset by lower interest expense and a greater tax benefit. The increase in the Company's tax benefit in fiscal year 2020 as compared to 2019, relates primarily to the aforementioned tax changes. Consolidated net loss decreased$25.3 million in fiscal year 2019 primarily due to the decrease in gross profit described above, along with higher legal costs driven by settlement activity, higher stock compensation and insurance costs, higher interest expense and a lower tax benefit compared to fiscal year 2018, and the impact of the acquisition of Lance inJanuary 2018 , partially offset by a decrease in non-cash impairment charges. The decrease in the Company's tax benefit in fiscal year 2019 as compared to 2018, relates primarily to fiscal year 2018 revaluation of net deferred tax liabilities as a result ofU.S. tax reform. Adjusted EBITDA Fiscal Year Ended October 31, October 31, October 31, (in millions) 2020 Change 2019 Change 2018 Adjusted EBITDA$ 67.5 -33.9 %$ 102.1 -31.0 %$ 148.0
Consolidated Adjusted EBITDA decreased
Consolidated Adjusted EBITDA decreased$45.9 million in fiscal year 2019 due to lower Adjusted EBITDA in the Fire &Emergency and Recreation segments, offset by higher Adjusted EBITDA in the Commercial segment.
Refer to the "Adjusted EBITDA and Adjusted Net Income" section of "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Annual Report on Form 10-K for a reconciliation of Net Income (Loss) to Adjusted EBITDA tables and related footnotes.
Adjusted Net Income Fiscal Year Ended
October 31, October 31, October 31,
(in millions) 2020 Change 2019 Change 2018
Adjusted Net Income $ 9.5 -68.3 % $ 30.0 -58.7 % $ 72.7
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Refer to the "Adjusted EBITDA and Adjusted Net Income" section of "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Annual Report on Form 10-K for a reconciliation of Net Income (Loss) to Adjusted Net Income tables and related footnotes.
Fire & Emergency Segment
Fiscal Year Ended
October 31, October 31, October 31,
(in millions) 2020 Change 2019 Change 2018
Net sales $ 1,132.0 17.0 % $ 967.9 1.2 % $ 956.6
Adjusted EBITDA 39.9 -7.6 % 43.2 -49.8 % 86.0
Adjusted EBITDA % of net sales 3.5 % 4.5 % 9.0 %
Net Sales . Fire & Emergency segment net sales increased $164.1 million in fiscal
year 2020. Excluding the impact of Spartan ER, Fire & Emergency net sales
decreased by $48.3 million , or 5.0% compared to the prior year period. The
decrease in sales was primarily related to lower shipments of fire trucks from
two other plants and lower shipments of ambulance units due to lingering
COVID-19 related supply chain disruptions and the timing of deliveries partially
offset by increased throughput and improved mix at a primary fire plant.
Fire & Emergency segment net sales increased $11.3 million in fiscal year 2019
primarily due to an increase in the volume of fire truck shipments and improved
pricing on fire trucks and ambulances, partially offset by a decrease in the
volume of ambulance shipments and a mix of fire trucks.
Adjusted EBITDA. Fire & Emergency segment Adjusted EBITDA decreased $3.3 million
in fiscal year 2020. Spartan ER contributed $12.8 million of Adjusted EBITDA
during the current fiscal year. Excluding the impact of Spartan ER, Fire &
Emergency Adjusted EBITDA decreased by $16.1 million , or 37.3% compared to the
prior year period. The decrease in profitability was primarily related to
inefficiencies at two fire plants and delayed deliveries of ambulance units due
to absenteeism and supply chain disruptions related to COVID-19, partially
offset by increased throughput at a large fire plant.
Fire & Emergency segment Adjusted EBITDA decreased $42.8 million in fiscal year
2019 and was negatively impacted primarily by the results of the Fire business
units and one of the Ambulance business units. Profitability at the largest Fire
business unit was negatively impacted by additional labor costs associated with
staffing and training for its production ramp. Profitability at the largest
Ambulance business unit was negatively impacted by the timing of incoming orders
that affected its production flow and that resulted in production and supply
chain inefficiencies, slightly offset by improved pricing. Profitability within
the segment was also impacted by unusually high healthcare cost experienced
during the fiscal year.
Commercial Segment
Fiscal Year Ended
October 31, October 31, October 31,
(in millions) 2020 Change 2019 Change 2018
Net sales $ 484.8 -32.7 % $ 720.0 12.8 % $ 638.5
Adjusted EBITDA 34.5 -38.4 % 56.0 47.0 % 38.1
Adjusted EBITDA % of net sales 7.1 % 7.8 % 6.0 %
Net Sales . Commercial segment net sales decreased $235.2 million in fiscal year
2020 primarily due to a reduction in net sales associated with the disposition
of our shuttle bus businesses. Excluding the impact of the shuttle bus
divestiture, net sales decreased by $100.5 million , or 20.6% compared to the
prior year. The decrease in net sales was primarily due to lower demand and
related shipments of Type A school buses due to uncertainty surrounding school
attendance policies, lower shipments of street sweepers related to reduced
capital budgets at large customers and lower shipments of terminal trucks.
Commercial segment net sales increased $81.5 million in fiscal year 2019
primarily due to an increase in volume of school and transit bus shipments, and
the mix benefit of one larger municipal transit bus order, partially offset by
lower volume and higher discounting on shuttle buses and the impact of the sale
of our mobility van business in the first quarter of fiscal year 2019.
Adjusted EBITDA. Commercial segment Adjusted EBITDA decreased $21.5 million in
fiscal year 2020. Adjusted EBITDA for the prior year period included $0.9
million of profitability attributable to the shuttle bus businesses. Excluding
the impact of the shuttle
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bus divestiture, Adjusted EBITDA decreased by$20.6 million , or 37.4% compared to the prior year. The decrease in Adjusted EBITDA compared to the prior year was primarily due to reduced production volume and shipments of Type A school buses, terminal trucks and street sweepers. Commercial segment Adjusted EBITDA increased$17.9 million in fiscal year 2019 primarily due to an increase in the volume of higher margin transit and school bus shipments, production efficiencies associated with our larger municipal transit bus order, and operational improvements supported by the implementation of the REV Business System throughout the segment, offset by unusually high healthcare cost experienced during the fiscal year. Recreation Segment Fiscal Year Ended October 31, October 31, October 31, (in millions) 2020 Change 2019 Change 2018 Net sales$ 657.8 -8.2 %$ 716.3 -11.8 %$ 811.9 Adjusted EBITDA 38.4 -17.9 % 46.8 -22.5 % 60.4 Adjusted EBITDA % of net sales 5.8 % 6.5 % 7.4 %Net Sales . Recreation segment net sales decreased$58.5 million in fiscal year 2020 primarily due to manufacturing shutdowns and Stay-At-Home orders related to COVID-19 within the second quarter of fiscal year 2020. Recreation segment net sales decreased$95.6 million in fiscal year 2019 primarily due to a decrease in shipment volumes of Class A motorhomes, partially offset by an increase in towable and camper sales resulting from the acquisition of Lance inJanuary 2018 and an increase in ClassB RV shipments. Adjusted EBITDA. Recreation segment Adjusted EBITDA decreased$8.4 million primarily due to lower shipments across most product categories due to temporary manufacturing shutdowns of all Recreation businesses during the second quarter of fiscal year 2020 and lingering supply chain disruptions through the remainder of the year. Recreation segment Adjusted EBITDA decreased$13.6 million in fiscal year 2019 primarily driven by a decrease in shipment volume of Class A motorhomes. Profitability in the other RV categories within the Recreation segment continued to be strong and was in line with the prior year. Profitability within the segment was also impacted by unusually high healthcare cost experienced during the fiscal year. Backlog
Backlog represents firm orders received from dealers or directly from end customers. The following table presents a summary of our backlog by segment:
Increase (Decrease)
October 31, October 31,
($ in millions) 2020 2019 $ %
Fire & Emergency $ 965.8 $ 832.7 $ 133.1 16.0 %
Commercial 273.8 317.3 (43.5 ) (13.7 )%
Recreation 538.9 167.0 371.9 222.7 %
Total Backlog $ 1,778.5 $ 1,317.0 $ 461.5 35.0 %
Each of our three segments has a backlog of new vehicle orders that generally extends out from two to twelve months in duration.
Orders from our dealers and end customers are evidenced by a contract, firm purchase order or reserved production slot for delivery of one or many vehicles. These orders are reported in our backlog at the aggregate selling prices, net of discounts or allowances. At the end of fiscal year 2020, our backlog was$1,778.5 million , compared to$1,317.0 million at the end of fiscal year 2019. The increase in total backlog was due to increases in Fire &Emergency and Recreation segment backlogs, partially offset by a decrease in the Commercial segment. The increase in Fire & Emergency segment backlog was primarily due to the acquisition of 47
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Spartan ER and increased ambulance orders partially offset by lower backlog resulting from increased throughput at a primary fire plant. The increase in Recreation segment backlog was the result of increased orders across all product categories. The decrease in Commercial segment backlog was primarily the result of the sale of two shuttle bus businesses, decreased school bus order intake and production against a large municipal transit order partially offset by increased order intake for terminal trucks and industrial sweepers.
Quarterly Results of Operations (Unaudited)
The following table sets forth selected unaudited quarterly statement of operations data for each of the quarters in fiscal years 2020 and 2019. The information for each of these quarters has been prepared on the same basis as our audited financial statements included elsewhere in this Annual Report on Form 10-K and, in the opinion of management, includes all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the results of operations for these periods in accordance with generally accepted accounting principles inthe United States ("U.S. GAAP"). This data should be read in conjunction with our audited financial statements and related notes included elsewhere in this Annual Report on Form 10-K. These quarterly operating results are not necessarily indicative of our operating results for a full year or any future period. Quarter Ended October 31, July 31, April 30, January 31, October 31, July 31, April 30, January 31, (in millions) 2020 2020 2020 2020 2019 2019 2019 2019 Net sales$ 616.3 $ 582.2 $ 547.0 $ 532.1 $ 652.9 $ 617.0 $ 615.0 $ 518.7 Gross profit 61.7 66.5 52.4 47.4 61.7 71.3 72.4 46.3 Operating (loss) income (2.1 ) 2.1 (13.5 ) (4.7 ) (5.0 ) 15.9 16.1 (11.2 ) Net (loss) income (10.2 ) (3.6 ) (7.6 ) (9.4 ) (9.0 ) 5.6 5.6 (14.6 ) Depreciation and amortization 9.4 9.2 10.9 10.8 10.7 10.9 11.6 12.2 Interest expense, net 5.4 5.7 7.3 7.3 8.2 8.4 8.0 7.8 (Benefit) provision for income taxes (2.4 ) (0.5 ) (10.1 ) (2.6 ) (3.5 ) 1.9 2.5 (4.4 ) EBITDA 2.2 10.8 0.5 6.1 6.4 26.8 27.7 1.0 Transaction expenses(a) 0.7 0.6 0.9 1.1 0.3 0.5 - 0.2 Sponsor expense reimbursement(b) 0.3 0.1 - 0.1 0.8 - 0.1 0.5 Restructuring costs(c) 3.9 2.5 2.9 0.6 1.5 1.3 1.8 1.1 Restructuring related charges(d) 6.6 0.7 3.2 - - - - - Stock-based compensation expense(e) 0.6 1.8 2.9 2.6 (0.1 ) 2.5 3.4 1.4 Legal matters(f) 0.2 0.1 1.4 0.1 2.3 0.8 2.4 2.1 Loss on sale of business (g) 1.8 0.5 8.8 - - - - - Gain on acquisition of business (h) 3.3 - (11.9 ) - - - - - Impairment charges(i) 8.4 3.7 - - 6.1 - 0.1 2.7 Losses (earnings) attributable to assets held for sale(j) - 0.6 (1.1 ) 0.6 1.4 1.0 - 1.7 Deferred purchase price payment(k) - - - 0.1 0.6 0.6 0.6 1.6 Adjusted EBITDA$ 28.0 $ 21.4 $ 7.6 $ 11.3 $ 19.3 $ 33.5 $ 36.1 $ 12.3 Net (loss) income per common share: Basic$ (0.16 ) $ (0.06 ) $ (0.12 ) $ (0.15 ) $ (0.14 ) $ 0.09 $ 0.09 $ (0.23 ) Diluted$ (0.16 ) $ (0.06 ) $ (0.12 ) $ (0.15 ) $ (0.14 ) $ 0.09 $ 0.09 $ (0.23 )
(a) Reflects costs incurred in connection with business acquisitions and capital
market transactions. These expenses consist primarily of legal, accounting
and due diligence expenses.
(b) Reflects the reimbursement of expenses to the Company's primary equity
holder.
(c) Restructuring costs for fiscal year 2020 resulted from the sunset of certain
ambulance brands, move from a centralized to a decentralized aftermarket
parts business, severance costs related to reductions in force across all
segments, and lease termination costs related to the closure of a Spartan ER
facility.
Restructuring costs for fiscal year 2019 of$5.7 million were primarily attributable to headcount reductions in the F&E Segment and our corporate office as well as a facility closure in the Recreation Segment and lease termination costs.
(d) Reflects costs that are directly attributable to restructuring activities,
including leadership changes and inventory liquidation associated with the
decentralization of the Company's aftermarket parts business, but do not meet
the definition of restructuring under ASC 420.
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(e) Reflects expenses associated with the vesting of equity awards and award
modifications.
(f) Reflects legal fees and costs incurred to litigate and settle legal claims
against us which are outside the normal course of business. Costs include
payments: (i) for fees and costs to litigate and settle non-ordinary course
product, intellectual property and employment disputes, and (ii) for fees and
costs to litigate the putative securities class actions and derivative action
pending against us and certain of our directors and officers.
(g) Reflects losses related to the sale of our shuttle bus businesses. Refer to
Note 6, Divestitures, Restructuring and Impairments, to our 2020 audited
consolidated financial statements appearing elsewhere in this Annual Report
on Form 10-K.
(h) Reflects gain on acquisition of Spartan ER. Refer to Note 3, Acquisitions, to
our 2020 audited consolidated financial statements appearing elsewhere in
this Annual Report on Form 10-K.
(i) Reflects impairment charges associated with the liquidation of all rental
vehicles, sunset of certain ambulance brands and decentralization of the
Company's aftermarket parts business. Refer to Note 6, Divestitures,
Restructuring and Impairments, to our 2020 audited consolidated financial
statements appearing elsewhere in this Annual Report on Form 10-K.
Non-cash impairment charges in the prior year were related to both the assets held for sale and other assets which were liquidated during the year.
(j) Adjusted EBITDA attributable to businesses that were classified as held for
sale, which represents shuttle bus businesses and REV Coach during fiscal
year 2020 and Revability during fiscal year 2019.
(k) Reflects the expense associated with the deferred purchase price payments to
sellers of Lance. The Company paid
2019 and
settle the deferred liability.
Liquidity and Capital Resources
General
Our primary requirements for liquidity and capital are working capital, the improvement and expansion of existing manufacturing facilities, debt service payments and general corporate needs. Historically, these cash requirements have been met through cash provided by operating activities, cash and cash equivalents and borrowings under our term loan and ABL credit facility. We believe that our sources of liquidity and capital will be sufficient to finance our continued operations, growth strategy and additional expenses we expect to continue to incur as a public company. However, we cannot assure you that cash provided by operating activities and borrowings under the current revolving credit facility will be sufficient to meet our future needs. If we are unable to generate sufficient cash flows from operations in the future, and if availability under the current revolving credit facility is not sufficient due to the size of our borrowing base or other external factors, we may have to obtain additional financing. If additional capital is obtained by issuing equity, the interests of our existing stockholders will be diluted. If we incur additional indebtedness, that indebtedness may contain financial and other covenants that may significantly restrict our operations or may involve higher overall interest rates. We cannot assure you that we will be able to obtain refinancing or additional financing on favorable terms or at all.
Cash Flow
The following table shows summary cash flows for fiscal years 2020, 2019 and
2018:
Fiscal Years Ended
October 31, October 31, October 31,
(in millions) 2020 2019 2018
Net cash provided by (used in) operating
activities $ 55.7 $ 52.5 $ (19.2 )
Net cash provided by (used in) investing
activities 1.7 0.2 (119.6 )
Net cash (used in) provided by financing
activities (49.3 ) (61.3 ) 132.9
Net increase (decrease) in cash and cash
equivalents $ 8.1 $ (8.6 ) $ (5.9 ) Net Cash Provided by (Used in) Operating Activities
Net cash provided by operating activities for fiscal year 2020 was$55.7 million , compared to$52.5 million for fiscal year 2019. The generation of positive cash from operating activities for fiscal year 2020 compared to the prior year was related to improved net working capital efficiency, specifically related to receivables and inventory. 49
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Net cash provided by operating activities for fiscal year 2019 was$52.5 million , compared to net cash used of$19.2 million for fiscal year 2018. The increase in cash provided by operating activities for fiscal year 2019 compared to the prior year was due to improved net working capital efficiency, offset by a decrease in net income.
Net Cash Provided by (Used in) Investing Activities
Net cash provided by investing activities for fiscal year 2020 was$1.7 million , compared to$0.2 million for fiscal year 2019. The increase in net cash provided by investing activities was primarily due to cash proceeds from the sale of shuttle bus, partially offset by cash used to purchase Spartan ER, and reductions in proceeds from asset sales and capital expenditures. Net cash provided by investing activities for fiscal year 2019 was$0.2 million , compared to net cash used of$119.6 million for fiscal year 2018. Net cash provided by investing activities for fiscal year 2019 of$0.2 million was primarily due to the sale of targeted assets, partially offset by cash used for capital expenditures. Net cash used in investing activities for fiscal year 2018 of$119.6 million was primarily due to business acquisition activity and capital expenditures. In fiscal year 2018, the Company completed the acquisition of Lance.
Net cash used in financing activities for fiscal year 2020 was$49.3 million , compared to$61.3 million for fiscal year 2019. The decrease in cash used was primarily due to no stock repurchases in fiscal year 2020 and a reduction in dividends paid. The net cash used in fiscal year 2020 was primarily to repay debt and pay dividends. Net cash used in financing activities for fiscal year 2019 was$61.3 million compared to cash provided by financing activities of$132.9 million for fiscal year 2018. Cash used in financing activities in fiscal year 2019 primarily consisted of net paydown of debt, repurchase of common stock and payment of cash dividends. Net cash provided by financing activities for fiscal year 2018 was$132.9 million , which primarily consisted of net borrowings from ourApril 2017 ABL Facility and incremental Term Loan borrowing of$50.0 million to fund the acquisition of Lance and other investing activities including capital expenditures, working capital requirements, and our share repurchase program. During fiscal year 2018, the Company paid cash dividends of$12.8 million .
Dividends
Subject to legally available funds and the discretion of our board of directors, we may or may not pay a quarterly cash dividend in the future on our common stock. During the fiscal year 2020, the Company paid cash dividends of$9.5 million . Our ability to pay dividends is limited under our Term Loan agreement, as amended onApril 29, 2020 . In order to pay dividends, the Company must have a leverage ratio, including the impact of the dividend, not to exceed 3.5 to 1.0. The Company announced the suspension of its quarterly dividend beginning the second quarter of fiscal year 2020 and will reassess at a future date.
Stock Repurchase Program
OnMarch 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 ofMarch 19, 2020 . OnSeptember 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 ofSeptember 4, 2020 . The Company's share repurchase program is executed from time to time through open market or through private transactions. Shares purchased under the share repurchase program are retired and returned to authorized and unissued status. During fiscal year 2019, the Company repurchased 717,597 shares under this repurchase program at a total cost of$8.3 million at an average price per share of$11.62 . There were no repurchases under this program during fiscal year 2020 and the program expired onSeptember 4, 2020 .
Term Loan
OnApril 25, 2017 , we entered into a$75.0 million term loan ("Term Loan" or "Term Loan Agreement") and incurred$2.0 million in debt issuance costs. The Term Loan Agreement expires onApril 25, 2022 . Certain subsidiaries of the Company are guarantors under the Term Loan. OnJuly 18, 2018 , the Company exercised a$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$0.6 million of debt issuance costs related to the incremental commitment option. Proceeds from the incremental commitment were used to repay a portion of the outstanding borrowings under theApril 2017 ABL Facility. 50
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OnMarch 29, 2019 , the Company exercised a$50.0 million incremental commitment option under the Term Loan Agreement, which increased total borrowing under the facility from$125.0 million to$175.0 million . The Company incurred an additional$0.8 million of debt issuance costs related to the incremental commitment option, which were deducted from proceeds received by the Company. Proceeds from the incremental commitment were used to repay a portion of the outstanding borrowings under theApril 2017 ABL Facility. OnOctober 18, 2019 , the Company amended the term loan agreement to raise the maximum leverage net ratio to 4.00 to 1.00 from 3.50 to 1.00. Additionally, the Company received a waiver related to the excess cash flow calculation payment for fiscal year 2019. The Company incurred$0.2 million of debt issuance costs related to the amendment.
On
OnApril 29, 2020 , the Company amended the term loan agreement to eliminate the maximum leverage ratio covenant and replace it with a fixed charge coverage ratio test with a minimum ratio of 1.25 to 1.00. The fixed charge coverage ratio covenant will remain in effect through the fourth quarter of fiscal year 2020. The maximum leverage ratio covenant will be reinstated at 5.25 to 1.00 starting in the first quarter of fiscal year 2021 and decline by 25 basis points each subsequent quarter, to a final level of 4.25 to 1.00 in first quarter of fiscal 2022. The applicable interest rate margins increased by 75 basis points corresponding with the amendment. The Company incurred$0.2 million of debt issuance costs related to the amendment. The Company may voluntarily prepay principal, in whole or in part, at any time, without penalty. The Company is obligated to prepay certain minimum amounts based on the Company's excess cash flow, as defined in the Term Loan Agreement. We were required to make a$1.6 million excess cash flow payment in fiscal year 2020. The Term Loan is also subject to mandatory prepayment if the Company or any of its restricted subsidiaries receives proceeds from certain events, including certain asset sales and casualty events, and the issuance of certain debt and equity interests. The Term Loan Agreement contains certain financial covenants. The Company was in compliance with all financial covenants under the Term Loan as ofOctober 31, 2020 .April 2017 ABL Facility OnApril 25, 2017 , we entered into a new$350.0 million revolving credit and guaranty agreement (the "April 2017 ABL Facility" or "ABL Agreement") with a syndicate of lenders. TheApril 2017 ABL Facility provides for revolving loans and letters of credit in an aggregate amount of up to$350.0 million . The totalApril 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. TheApril 2017 ABL Facility expires onApril 25, 2022 . OnDecember 22, 2017 , the Company exercised a$100.0 million incremental borrowing capacity option under theApril 2017 ABL Facility to fund the Lance Camper acquisition, 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 borrowing capacity option. OnJanuary 31, 2020 , the Company increased total borrowing capacity under the facility, in anticipation of its acquisition of Spartan ER, from$450.0 million to$500.0 million . The Company incurred an additional$0.4 million of debt issuance costs related to the incremental borrowing capacity option. Principal may be repaid at any time during the term of the ABL Facility without penalty. TheApril 2017 ABL Facility contains certain financial covenants. We were in compliance with all financial covenants under the ABL Facility as ofOctober 31, 2020 . As ofOctober 31, 2020 , our availability under theApril 2017 ABL Facility was$283.4 million .
Refer to Note 9, Long-Term Debt, to our 2020 audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
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Table of Contents Subsequent Events The Company evaluated subsequent events throughJanuary 7, 2021 , the date on which the financial statements were available to be issued, and determined there were no items to disclose. Contractual Obligations
Significant contractual commitments at
(in millions) 2021 2022 2023 2024 2025 Thereafter Total Debt(a)$ 1.7 $ 342.2 $ - $ - $ - $ -$ 343.9 Interest(b) 12.0 6.0 - - - - 18.0 Operating leases 9.4 7.6 4.8 2.8 1.0 2.4 28.0 Purchasing obligations(c) 20.0 9.5 8.0 8.0 8.0 - 53.5 Total commitments(d)$ 43.1 $ 365.3 $ 12.8 $ 10.8 $ 9.0 $ 2.4 $ 443.4
(a) Includes estimated principal payments due under our Term Loan and the April
2017 ABL Facility as of
(b) Based on interest rates in effect as of
(c) Includes obligations under non-cancellable purchase orders for raw materials
and chassis as of
(d) Unrecognized tax benefits totaling
excluding related interests and penalties, are not included in the table
because the timing of their resolution cannot be estimated. See Note 15,
Income Taxes, to our 2020 audited consolidated financial statements appearing
elsewhere in this Annual Report on Form 10-K for disclosures regarding
uncertain income tax positions under ASC Topic 740.
Adjusted EBITDA and Adjusted Net Income
In considering the financial performance of the business, management analyzes
the primary financial performance measures of Adjusted EBITDA and Adjusted Net
Income. Adjusted EBITDA is defined as net income for the relevant period before
depreciation and amortization, interest expense and provision for income taxes,
as adjusted for certain items described below that we believe are not indicative
of our ongoing operating performance. Adjusted Net Income is defined as net
income, as adjusted for certain items described below that we believe are not
indicative of our ongoing operating performance.
We believe Adjusted EBITDA and Adjusted Net Income are useful to investors
because these performance measures are used by our management and the Company's
Board of Directors for measuring and reporting the Company's financial
performance and as a measurement in incentive compensation for management. These
measures exclude the impact of certain items which we believe have less bearing
on our core operating performance because they are items that are not needed or
available to the Company's managers in the daily activities of their businesses.
We believe that the core operations of our business are those which can be
affected by our management in a particular period through their resource
allocation decisions that affect the underlying performance of our operations
conducted during that period. We also believe that decisions utilizing Adjusted
EBITDA and Adjusted Net Income allow for a more meaningful comparison of
operating fundamentals between companies within our markets by eliminating the
impact of capital structure and taxation differences between the companies.
To determine Adjusted EBITDA, we adjust Net Income for the following items:
non-cash depreciation and amortization, interest expense, income taxes and other
items as described below. Stock-based compensation expense and sponsor expense
reimbursement is excluded from both Adjusted Net Income and Adjusted EBITDA
because it is an expense, which cannot be impacted by our business managers.
Stock-based compensation expense also reflects a cost which may obscure trends
in our underlying vehicle businesses for a given period, due to the timing and
nature of the equity awards. We also adjust for exceptional items, which are
determined to be those that in management's judgment are not indicative of our
ongoing operating performance and need to be disclosed by virtue of their size,
nature or incidence, and 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.
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Adjusted EBITDA and Adjusted Net Income have limitations as analytical tools. These are not presentations made in accordance withU.S. GAAP, are not measures of financial condition and should not be considered as an alternative to net income or net loss for the period determined in accordance withU.S. GAAP. The most directly comparableU.S. GAAP measure to Adjusted EBITDA and Adjusted Net Income is Net Income for the relevant period. Adjusted EBITDA and Adjusted Net Income are not necessarily comparable to similarly titled measures used by other companies. As a result, you should not consider this performance measure in isolation from, or as a substitute analysis for, our results of operations as determined in accordance withU.S. GAAP. Moreover, such measures do not reflect:
• our cash expenditures, or future requirements for capital expenditures or
contractual commitments;
• changes in, or cash requirements for, our working capital needs;
• the cash requirements necessary to service interest or principal payments
on our debt;
• the cash requirements to pay our taxes.
The following table reconciles net (loss) income to Adjusted EBITDA for the
periods presented:
Fiscal Year Ended
October 31, October 31, October 31,
(in millions) 2020 2019 2018
Net (loss) income $ (30.5 ) $ (12.3 ) $ 13.0
Depreciation and amortization 40.2 45.4 45.5
Interest expense, net 25.7 32.4 25.3
Benefit for income taxes (15.6 ) (3.5 ) (12.2 )
EBITDA 19.8 62.0 71.6
Transaction expenses(a) 3.3 1.0 2.8
Sponsor expense reimbursement(b) 0.5 1.4 0.9
Restructuring costs(c) 9.9 5.7 7.0
Restructuring related charges(d) 10.5 - -
Stock-based compensation expense(e) 7.8 7.2 6.3
Legal matters(f) 1.8 7.7 5.5
Loss on sale of business(g) 11.1 - -
Gain on acquisition of business(h) (8.6 ) - -
Impairment charges(i) 12.1 8.9 35.6
Earnings (losses) attributable to assets held
for sale(j) (0.8 ) 4.7 9.9
Deferred purchase price payment(k) 0.1 3.5 6.0
First year public company costs(l) - - 1.5
Non-cash purchase accounting expense(m) - - 0.9
Adjusted EBITDA $ 67.5 $ 102.1 $ 148.0
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The following table reconciles net (loss) income to Adjusted Net Income for the
periods presented:
Fiscal Year Ended
October 31, October 31, October 31,
(in millions) 2020 2019 2018
Net (loss) income $ (30.5 ) $ (12.3 ) $ 13.0
Amortization of intangible assets 13.3 17.4 18.1
Transaction expenses(a) 3.3 1.0 2.8
Sponsor expense reimbursement(b) 0.5 1.4 0.9
Restructuring costs(c) 9.9 5.7 7.0
Restructuring related charges(d) 10.5 - -
Stock-based compensation expense(e) 7.8 7.2 6.3
Legal matters(f) 1.8 7.7 5.5
Loss on sale of business(g) 11.1 - -
Gain on acquisition of business(h) (8.6 ) - -
Impairment charges(i) 12.1 8.9 35.6
Earnings (losses) attributable to assets held
for sale(j) (0.8 ) 4.7 9.9
Deferred purchase price payment(k) 0.1 3.5 6.0
First year public company costs(l) - - 1.5
Non-cash purchase accounting expense(m) - - 0.9
Impact of tax rate change(n) (3.5 ) - (11.3 )
Income tax effect of adjustments(o) (17.5 ) (15.2 ) (23.5 )
Adjusted Net Income $ 9.5 $ 30.0 $ 72.7 (a) Reflects costs incurred in connection with business acquisitions and capital
market transactions. These expenses consist primarily of legal, accounting
and due diligence expenses.
(b) Reflects the reimbursement of expenses to the Company's primary equity
holder.
(c) Restructuring costs for fiscal year 2020 resulted from the sunset of certain
ambulance brands, move from a centralized to a decentralized aftermarket
parts business, severance costs related to reductions in force across all
segments, and lease termination costs related to the closure of a Spartan ER
facility.
Restructuring costs for fiscal year 2019 were primarily attributable to headcount reductions in the F&E Segment and our corporate office as well as a facility closure in the Recreation Segment and lease termination costs.
Restructuring costs for fiscal year 2018 represent costs incurred to restructure certain management positions in the Fire & Emergency,Commercial and Recreation segments, our corporate office, as well as to relocate our ClassB RV production.
(d) Reflects costs that are directly attributable to restructuring activities,
including leadership changes and inventory liquidation associated with the
decentralization of the Company's aftermarket parts business, but do not meet
the definition of restructuring under ASC 420.
(e) Reflects expenses associated with the vesting of equity awards and award
modifications.
(f) Reflects legal fees and costs incurred to litigate and settle legal claims
against us which are outside the normal course of business. Costs include
payments: (i) to settle certain claims arising from a putative class action
in the state of
non-ordinary course product, intellectual property and employment disputes
and (iii) for fees and costs to litigate the putative securities class
actions and derivative action pending against us and certain of our directors
and officers.
(g) Reflects losses related to the sale of our shuttle bus businesses. Refer to
Note 6, Divestitures, Restructuring and Impairments, to our 2020 audited
consolidated financial statements appearing elsewhere in this Annual Report
on Form 10-K.
(h) Reflects gain on acquisition of Spartan ER. Refer to Note 3, Acquisitions, to
our 2020 audited consolidated financial statements appearing elsewhere in
this Annual Report on Form 10-K.
(i) Reflects impairment charges associated with the liquidation of all rental
vehicles, sunset of certain ambulance brands and decentralization of the
Company's aftermarket parts business. Refer to Note 6, Divestitures,
Restructuring and Impairments, to our 2020 audited consolidated financial
statements appearing elsewhere in this Annual Report on Form 10-K.
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Non-cash impairment charges in fiscal years 2019 and 2018 were related to both the assets held for sale and other assets which were liquidated during the years.
(j) Adjusted EBITDA attributable to businesses that were classified as held for
sale during the respective period.
(k) Reflects the expense associated with the deferred purchase price payments to
sellers of Lance. The Company paid
2019 and
settle the deferred liability.
(l) Reflects one-time consulting and audit fees associated with the design and
implementation of internal controls over financial reporting to comply with
the provisions of the Sarbanes-Oxley Act.
(m) Reflects the amortization of the difference between the book value and fair
market value of certain acquired inventory that was subsequently sold after
the acquisition date.
(n) Reflects the provisional impact of net operating loss carrybacks as a result
of the CARES Act in fiscal year 2020. Refer to Note 15, Income Taxes, to our
2020 audited consolidated financial statements appearing elsewhere in this
Annual Report on Form 10-K. Fiscal year 2018 reflects the one-time
provisional impact of net deferred tax liability remeasurement as a result of
the
(o) Income tax effect of adjustments using a 26.5% effective income tax rate for
fiscal years 2020, 2019 and 2018, except for certain transaction expenses,
and losses attributable to assets held for sale.
Off-Balance Sheet Arrangements
We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating our business. With the exception of operating lease obligations, we do not have any off-balance sheet arrangements or relationships with entities that are not consolidated into or disclosed in our consolidated financial statements that have, or are reasonably likely to have, a material current or future effect on our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures and capital resources. In addition, we do not engage in trading activities involving non-exchange traded contracts. See Note 16, Commitments and Contingencies, to our 2020 audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K for additional discussion. Seasonality In a typical year, our operating results are impacted by seasonality. Historically, the slowest sales volume quarter has been the first fiscal quarter when the purchasing seasons for vehicles, such as school buses, RVs and sweepers are the lowest due to the colder weather and the relatively long time until the summer vacation season, and the fact that the school year is underway with municipalities and school bus contractors utilizing their existing fleets to transport student populations. Sales of our products have typically been higher in the second, third and fourth fiscal quarters (with the fourth fiscal quarter typically being the strongest) due to better weather, the vacation season, buying habits of RV dealers and end-users, timing of government/municipal customer fiscal years, and the beginning of a new school year. Our quarterly results of operations, cash flows, and liquidity are likely to be impacted by these seasonal patterns. Sales and earnings for other vehicles that we produce, such as essential emergency vehicles and commercial bus fleets, are less seasonal, but fluctuations in sales of these vehicles can also be impacted by timing surrounding the fiscal years of municipalities and commercial customers, as well as the timing and amounts of multi-unit orders.
Critical Accounting Policies and Estimates
Our significant accounting policies are described in Note 2 to our 2020 audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K for additional discussion. The preparation of consolidated financial statements in conformity withU.S. GAAP requires us to make estimates, assumptions and judgments that affect amounts of assets and liabilities reported in our consolidated financial statements, the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and reported amounts of revenues and expenses during the year. We believe our estimates and assumptions are reasonable; however, future results could differ from those estimates. We consider the following accounting estimates to be the most critical in understanding the judgments that are involved in preparing our consolidated financial statements.
Inventories
Inventories are stated at the lower of aggregate cost or net realizable value.
Cost is determined using the first-in, first-out ("FIFO") method. If inventory
costs exceed expected net realizable value due to obsolescence or quantities on
hand are in excess of expected demand, the Company records reserves for the
difference between the cost and the expected net realizable value. These
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reserves are recorded based on various factors, including recent sales history and sales forecasts, industry market conditions, vehicle model changes and general economic conditions.
The Company accounts for business combinations by estimating the fair value of consideration paid for acquired businesses, including contingent consideration, and assigning that amount to the fair values of assets acquired and liabilities assumed, with the remainder assigned to goodwill. If the fair value of assets acquired and liabilities assumed exceeds the fair value of consideration paid, a gain on bargain purchase is recognized. The estimates of fair values are determined utilizing customary valuation procedures and techniques, which require us, among other things, to estimate future cash flows and discount rates. Such analyses involve significant judgments and estimations.Goodwill and indefinite-lived intangible assets, consisting of trade names, are not amortized, however, the Company reviews goodwill and indefinite-lived intangible assets for impairment at least annually or more often if an event occurs or circumstances change which indicates that its carrying amount may not exceed its fair value. The annual impairment review is performed as of the first day of the fourth quarter of each fiscal year based upon information and estimates available at that time. To perform the impairment testing, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair values of the Company's reporting units or indefinite-lived intangible assets are less than their carrying amounts as a basis for determining whether or not to perform the quantitative impairment test. Qualitative testing includes the evaluation of economic conditions, financial performance and other factors such as key events when they occur. The Company then estimates the fair value of each reporting unit and each indefinite-lived intangible asset not meeting the qualitative criteria and compares their fair values to their carrying values. Under the quantitative method, the fair value of each reporting unit of the Company is determined by using primarily the income approach and involves the use of significant estimates and assumptions. The income approach involves discounting management's projections of future interim and terminal cash flows to a present value at a risk-adjusted discount rate which corresponds with the Company's and market-participant weighted-average cost of capital ("WACC"). Key assumptions used in the income approach include future sales growth, gross margin and operating expenses trends, depreciation and amortization expense, taxes, capital expenditures and changes in working capital. Projected future cash flows are based on income forecasts and management's knowledge of the current operating environment and expectations for the Company on a going-forward basis. The WACC represents a blended cost of equity and debt capital applicable to the Company based on observed market participant rates of return for a group of comparable public companies in the industry, utilizes market participant capital structure assumptions by reference to the industry's average debt to total invested capital ratios, and is also being adjusted for relative risk premiums specific to each reporting unit tested. The terminal residual value is based upon the projected cash flow for the final projected year and is calculated using a capitalization rate based on estimates of growth of the net cash flows based on the Company's estimate of sustainable growth for each financial reporting unit. The inputs and assumptions used in the determination of fair value are considered Level 3 inputs within the fair value hierarchy. If the fair value of any reporting unit, as calculated using the income approach, is less than its carrying value, the fair value of the implied goodwill is calculated as the difference between the fair value of the reporting unit and the fair value of the underlying assets and liabilities, excluding goodwill. An impairment charge is recorded for any excess of the carrying value of goodwill over the implied fair value for each reporting unit When determining the fair value of indefinite-lived trade names, the Company uses the relief-from-royalty ("RFR") method, within the income approach. The RFR method assumes that an intangible asset is valuable because the owner of the asset avoids the cost of licensing that asset. Under the RFR method, an estimate is made as to the appropriate royalty income that would be negotiated in an arm's-length transaction if the subject intangible asset were licensed from an independent third party. The royalty savings are then calculated by multiplying a royalty rate, expressed as a percentage of revenues, times a determined applicable level of future revenues provided per each trade name as estimated by the Company. The royalty rate is based on research of industry and market data related to transactions involving the licensing of comparable intangible assets. The resulting future royalty savings are then discounted to their present value equivalent utilizing market participant rates of return, adjusted for relative risk premiums specific to each trade name as well as the reporting unit housing it. In considering the fair value of trade names, the Company also considers relative age, consistent use, quality, expansion possibilities, relative profitability, relative market potential, and how a market participant may employ these intangible assets from a financial and economic point of view.
Warranty
Provisions for estimated warranty and other related costs are recorded in cost
of sales and are periodically adjusted to reflect actual experience. The amount
of accrued warranty liability reflects management's best estimate of the
expected future cost of honoring our obligations under our limited warranty
plans. The costs of fulfilling our warranty obligations principally involve
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replacement parts, labor and sometimes travel for any field retrofit or recall campaigns. Our estimates are based on historical experience, the number of units involved and the cost per claim. Also, each quarter we review actual warranty claims to determine if there are systemic effects that would require a field retrofit or recall campaign.
Recent Accounting Pronouncements
Refer to Note 2 to our 2020 audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K for a discussion of the impact of new accounting standards on the Company's consolidated financial statement.
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