Spartan Motors Highlights Third Quarter Results
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Third Quarter Results
Spartan reported record third quarter net earnings of $14.7 million, or $0.45 per diluted share, on net sales of $237.5 million for the quarter ended Sep. 30, 2008, compared with net earnings of $2.6 million, or $0.08 per diluted share, on net sales of $148.9 million in the same quarter of 2007.
Through the first nine months of 2008, Spartan's sales increased 57.1 percent and net earnings grew 144.6 percent compared to the nine-month period in 2007. The company posted net earnings of $1.22 per diluted share for the first nine months of 2008, compared with net earnings per diluted share of $0.50 in the same period of 2007. Spartan's results for the first nine months of 2008 already exceed its best annual results ever.
"This was an excellent quarter for Spartan, especially given the tumultuous national economic environment," said John Sztykiel, president and CEO of Spartan Motors. "Our market diversification and flexible manufacturing model continue to allow us to grow and profitably compete in difficult times. During the quarter, we ramped up production rapidly and efficiently to complete a sizable military order.
"Last year's third quarter was our first substantial ramp up of military production, and our year-over-year improvement in gross margin reflects how far we have come in production efficiencies. This scalable business model will serve us well in the coming quarters, as two of our core markets face challenges. The RV market is difficult and while we have initiatives in place, it is a very challenging environment.
"Our military role is evolving from a rapid production and deployment stage to a long-term sustainment and partnership model, marked by smaller volumes of a wider range of mine-protected variants. Emergency-rescue continues to be a great foundation with tremendous opportunity, and we are focused on growing our success via new product launches, conquering the emissions change in 2010, and capitalizing on the continued disarray among some of our competitors in the industry. Our service, parts and accessories business is growing across our three core markets as we become more effective at maximizing value there."
Spartan reported gross margin of 18.1 percent in the third quarter of 2008, a 53.4 percent increase over the same period in 2007. Spartan attributed the year-over-year increase in gross profit to improved product mix, higher absorption of overhead due to increased sales and better production efficiencies for its specialty vehicle operations.
Spartan Motors reported consolidated backlog of approximately $183.8 million as of Sept. 30, 2008 and the company anticipates fulfilling its current backlog orders by July 2009.
Spartan Chassis
Sales at Spartan Chassis, the company's largest subsidiary and operating unit, increased 61.4 percent year-over year to $224.2 million for the current quarter. Spartan Chassis represented 94.4 percent of Spartan Motors' total consolidated sales in the 2008 third quarter, and third quarter earnings at Spartan Chassis improved 229.9 percent year-over-year.
Spartan's chassis sales to the Class A diesel motorhome market decreased 67.4 percent year-over-year in the quarter. Spartan's backlog for RV chassis decreased 65.2 percent year-over-year to $9.1 million as of Sept. 30, 2008. In comparison, the Recreational Vehicle Industry Association (RVIA) is reporting 2008 wholesale Class A motorhome shipments are down 46.9 percent through August, the latest data available. Sales of fire truck chassis in the quarter increased 20.9 percent compared to the same period in 2007, and backlog for fire truck chassis at the end of the 2008 third quarter was $70.8 million, a 5.6 percent year-over-year increase.
Other products sales, including specialty chassis for MRAP military vehicles, and Spartan Chassis' growing service, parts and accessories (SPA) business, increased 179.4 percent year-over-year in the third quarter of 2008. Reflected in this sales increase is a production shift of a portion of a large military order from the second quarter 2008 to the third quarter 2008. Other products backlog, which does not include service parts, was $46.0 million as of Sept. 30, 2008, compared to other product backlog of $228.8 million for the same date in 2007.
Emergency Vehicle Team (EVTeam)
Spartan's EVTeam operating unit, consisting of its Crimson Fire, Crimson Fire Aerials and Road Rescue subsidiaries, reported a 13.7 percent year-over-year increase in sales for the 2008 third quarter, and represented 5.6 percent of total company-wide sales in the quarter. Though the unit posted a net loss for the quarter, the EVTeam reported a 60.6 percent improvement in segment bottom-line compared to the third quarter of 2007, driven by higher volumes and improved operating efficiencies.
"The ambulance business is especially exciting today, as industry forecasts indicate a 17 percent year-over-year increase in shipments in 2009," said Sztykiel. "For emergency-rescue in general, every 1.4 seconds there is a call for help in the U.S., regardless of conditions in the economy."
Financial Position
Spartan reported an operating cash flow use in the current quarter of $11.2 million. The company ended the quarter with $6.9 million in cash and cash equivalents, as well as $74.3 million in long-term debt, including $47.5 million borrowed under Spartan's line of credit.
"A large portion of our debt and operating cash flow use during the quarter was due to working capital needed for the production of a sizable military vehicle order," said Jim Knapp, chief financial officer of Spartan Motors. "Our balance sheet is healthy, we have already paid back all of our borrowings under the line of credit as of Oct. 22. We expect to continue to generate cash in the fourth quarter as we reduce working capital, putting us on strong financial ground moving into 2009."
With the decline in the need for working capital, Spartan Motors will decrease its line of credit with J.P. Morgan Chase Bank from $75 million to $50 million by the end of 2008. In conjunction with this reduction, Spartan has negotiated an interest rate of 75 basis points over LIBOR for draws and a 20 basis point commitment fee on the unused portion of the line, with these rates/fees locked until the September 2010 maturity of the line of credit.
"The company took an opportunity to lock-in our borrowing costs under the line of credit until maturity. In return, we agreed to decrease the size of the line to eliminate unneeded capacity," said Knapp. "The result is we now have a right-sized line of credit with below current market rates for an extended period of time."
On a consolidated basis, Spartan posted a return on invested capital (ROIC) of 35.3 percent in the third quarter of 2008, compared to ROIC of 8.5 percent for the same quarter in 2007. Spartan defines return on invested capital as operating income less taxes, on an annualized basis, divided by total shareholders' equity.
Market Outlook
"The outlook for motorhome chassis remains uncertain, though there are indications that many dealers have reduced inventory to razor-thin levels, as the industry is reporting retail sales for Class A motorhomes are three times more than wholesale levels. This situation may bolster demand once the industry begins its eventual recovery," said Sztykiel. "Nonetheless, the motorhome chassis market is expected to be challenging over the next two to three quarters, and we have adjusted our operations accordingly.
"As we recently announced, we continue to see a number of smaller orders for mine-blast protected vehicles, and have expanded the number of MRAP variants using our products to more than 20 types of specialized vehicles operated by both the U.S. military and other allied militaries. We have also seen a significant growth of our service, parts and accessories business for military vehicles. The U.S. military currently plans for MRAPs to serve in its vehicle fleet beyond 2025.
"For our emergency-rescue business, we expect stable and consistent growth. We are also seeing increased interest in several of our new product introductions aimed at this market. Municipal spending is always a concern in difficult economic times, but we are pleased the Federal government is increasing spending for fire-rescue. The Federal government renewed funding for the Assistance to Firefighters Grant program, increasing it modestly to $565 million for 2009. In the past, these grants have driven 10 to 15 percent of industry fire trucks sales, and we expect this funding will help many municipalities purchase new vehicles.
Sztykiel concluded: "We are taking proactive steps to control our cost structure where markets dictate, though we are also positioned to take advantage of our opportunities for growth. Though economic turmoil is a concern for everyone, we are very pleased with our 2008 results. Looking ahead to the next two to three quarters, conditions will be difficult for the best of companies. Our strong balance sheet, coupled with our core capabilities - innovation, speed to market, flexibility, and service and support - have us well positioned to adapt and grow through tough industry and macro-economic conditions. As a company, we have been through uncertain times before, such as in 1991 and 2001, and each time we emerged even stronger. I expect this time will be no different."
Conference Call & Webcast
Spartan Motors will host a conference call for analysts and portfolio managers at 10 a.m. ET today to discuss these results and current business trends. To listen to a live webcast of the call, please visit SPARTAN, click on "Shareholders," and then on "Webcasts."
