UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended January 31, 2018

OR

Commission File Number: 001-37999

 

REV Group, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

Registrant’s telephone number, including area code: (414) 290-0190

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of March 6, 2018, the registrant had 64,577,292 shares of common stock, $0.001 par value per share, outstanding.

 

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Table of Contents

 

 

 

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Cautionary Statement About Forward-Looking Statements

This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue,” “contemplate,” “aim” and other similar expressions, and include our segment net sales and other expectations described under “Overview” below, although not all forward-looking statements contain these identifying words. Investors are cautioned that forward-looking statements are inherently uncertain. A number of factors could cause actual results to differ materially from these statements, including, but not limited to increases in interest rates, availability of credit, low consumer confidence, availability of labor, significant increases in repurchase obligations, inadequate liquidity or capital resources, availability and price of fuel, a slowdown in the economy, increased material and component costs, availability of chassis and other key component parts, sales order cancellations, slower than anticipated sales of new or existing products, new product introductions by competitors, the effect of global tensions and integration of operations relating to mergers and acquisitions activities. Additional information concerning certain risks and uncertainties that could cause actual results to differ materially from that projected or suggested is contained in the “Risk Factors” section in our filings with the U.S. Securities and Exchange Commission (“SEC”). We disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained in this Form 10-Q or to reflect any changes in expectations after the date of this release or any change in events, conditions or circumstances on which any statement is based, except as required by law.

Website and Social Media Disclosure

We use our website (www.revgroup.com) and corporate Twitter account (@revgroupinc) as routine channels of distribution of company information, including news releases, analyst presentations, and supplemental financial information, as a means of disclosing material non-public information and for complying with our disclosure obligations under SEC Regulation FD. Accordingly, investors should monitor our website and our corporate Twitter account in addition to following press releases, SEC filings and public conference calls and webcasts. Additionally, we provide notifications of news or announcements as part of our investor relations website. Investors and others can receive notifications of new information posted on our investor relations website in real time by signing up for email alerts.

 

None of the information provided on our website, in our press releases, public conference calls and webcasts, or through social media channels is incorporated into, or deemed to be a part of, this Quarterly Report on Form 10-Q or in any other report or document we file with the SEC, and any references to our website or our social media channels are intended to be inactive textual references only.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

REV Group, Inc. and Subsidiaries

Condensed Unaudited Consolidated Balance Sheets

(Dollars in thousands, except per share amounts)

 

 

See Notes to Condensed Unaudited Consolidated Financial Statements.

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REV Group, Inc. and Subsidiaries

Condensed Unaudited Consolidated Statements of Operations

(Dollars in thousands, except per share amounts)

 

 

See Notes to Condensed Unaudited Consolidated Financial Statements.

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REV Group, Inc. and Subsidiaries

Condensed Unaudited Consolidated Statements of Comprehensive Income (Loss)

(Dollars in thousands)

 

 

See Notes to Condensed Unaudited Consolidated Financial Statements.

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REV Group, Inc. and Subsidiaries

Condensed Unaudited Consolidated Statements of Cash Flows

(Dollars in thousands)

 

 

 

See Notes to Condensed Unaudited Consolidated Financial Statements.

 

 

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REV Group, Inc. and Subsidiaries

Condensed Unaudited Consolidated Statement of Shareholders’ Equity

(Dollars in thousands)

 

 

 

 

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REV Group, Inc. and Subsidiaries

Notes to the Condensed Unaudited Consolidated Financial Statements

 

Note 1. Basis of Presentation

The condensed unaudited consolidated financial statements include the accounts of REV Group, Inc. (“REV” or “the Company”) and all of its subsidiaries and are prepared in conformity within generally accepted accounting principles in the United States of America (“U.S. GAAP”). All significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying condensed unaudited consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly REV’s consolidated financial position as of January 31, 2018, and October 31, 2017, and the consolidated results of operations and comprehensive income (loss) for the three months ended January 31, 2018 and January 28, 2017 and the consolidated cash flows for the three months then ended. The condensed unaudited consolidated statements of income and comprehensive income for the three months ended January 31, 2018, and January 28, 2017 are not necessarily indicative of the results to be expected for the full year. The condensed unaudited consolidated balance sheet data as of October 31, 2017, was derived from audited financial statements, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Initial Public Offering: On January 26, 2017, the Company announced the pricing of an initial public offering (“IPO”) of shares of its common stock, which began trading on the New York Stock Exchange on January 27, 2017. On February 1, 2017, the Company completed the IPO of 12,500,000 shares of common stock at a price of $22.00 per share. The Company received $275.0 million in gross proceeds from the IPO, or $253.6 million in net proceeds after deducting the underwriting discount and expenses related to the IPO. The net proceeds of the IPO were used to pay down the Company’s existing debt. Immediately prior to closing of the IPO, the Company completed an 80-for-one stock split of its Class A common stock and Class B common stock and reclassified the Class A common stock and Class B common stock into a single class of common stock, which was the same class as the shares sold in the IPO.

Note 2. Acquisitions

Lance Camper Manufacturing Acquisition

On January 12, 2018, the Company acquired 100% of the common shares of Lance Camper Mfg. Corp. and its sister company Avery Transport, Inc. (collectively, “Lance” and the “Lance Acquisition”). Lance designs, engineers and manufactures truck campers, towable campers and toy haulers. This acquisition gives the Company a meaningful entrance into the high volume and rapidly growing towables segment of the recreational vehicle market. The purchase price for Lance was $57.9 million net of $7.4 million cash acquired, subject to an adjustment based on the level of net working capital at closing, as defined in the purchase agreement. The net cash consideration paid at closing was funded through the Company’s revolving credit facility. Lance is reported as part of the Recreation segment. The preliminary purchase price allocation resulted in goodwill of $49.8 million, which is deductible for income tax purposes.

The Lance Acquisition will be accounted for as a business combination using the acquisition method of accounting, whereby the purchase price will be allocated to tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated purchase price recorded as goodwill. 

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As of January 31, 2018, the Company had not completed its assessment of the fair value of all acquired assets and liabilities assumed, or of the determination of the final purchase price calculation, as defined in the purchase agreement. The estimated fair values are preliminary and based on the information that was available as of the date of the acquisition.

The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed for Lance (in thousands):

Net sales and operating income for the period from January 12, 2018 to January 31, 2018 attributable to Lance were $7.2 million and $0.7 million, respectively. The Company has not included pro forma financial information in this report as if the acquisition had occurred on November 1, 2016, since the operating results from Lance were not considered material to the Company’s operating results as a whole.

The Company will also pay up to an additional $10.0 million to the selling shareholders subsequent to the acquisition date in the form of deferred purchase price payable of $5.0 million on each of the 12 and 24 month anniversary dates of the acquisition date as per the agreement terms. This deferred payment will be recognized as an expense in the Company’s consolidated statement of income over the period of the agreement.

AutoAbility Acquisition

On September 6, 2017, the Company acquired certain assets and liabilities of AutoAbility, LLC (“AutoAbility” and the “AutoAbility Acquisition”). AutoAbility is a best-in-class mobility van “upfitter” that specializes in the manufacture of rear-access, wheelchair-accessible vehicles. The purchase price for AutoAbility was $2.0 million ($2.0 million net of cash acquired). The net cash consideration paid at closing was funded through the Company’s cash from operations. AutoAbility is reported as part of the Commercial segment.

The AutoAbility Acquisition has been accounted for as a business acquisition using the acquisition method of accounting, whereby the purchase price will be allocated to tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated purchase price recorded as goodwill which will be deductible for tax purposes.

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As of January 31, 2018, the Company had not completed its assessment of inventory and warranty liabilities which existed as of the date of acquisition, as well as the completion of the determination of the final purchase price calculation, as defined in the purchase agreement. Adjustments which may result from the completion of this assessment may result in a change in the value of deferred income tax assets and liabilities. The estimated fair values are preliminary and based on the information that was available as of the date of the acquisition.

Van-Mor Enterprises Inc. Acquisition

On May 15, 2017, the Company acquired certain real estate assets and operating assets and liabilities of Van-Mor Enterprises, Inc. (“Van-Mor” and the “Van-Mor Acquisition”). Van-Mor is a supplier of certain materials and components for the Company’s fire apparatus divisions. The purchase price for Van-Mor was $1.6 million. The net cash consideration paid at closing was funded through the Company’s cash from operations. Van-Mor is reported as part of the Fire & Emergency segment.

The Van-Mor Acquisition will be accounted for as a business acquisition using the acquisition method of accounting, whereby the purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated purchase price recorded as goodwill.

The Company acquired land and buildings which were valued at $1.2 million as of the closing date. The Company did not recognize any goodwill as a result of Van-Mor Acquisition.

Midwest Automotive Designs Acquisition

On April 13, 2017, the Company acquired certain assets and liabilities of Midwest Automotive Designs (“Midwest” and the “Midwest Acquisition”). Midwest manufactures Class B recreational vehicles (“RVs”) and luxury vans. This acquisition enhances the Company’s product offerings in both its Recreation and Commercial segments, by adding a selection of Class B recreational vehicles and multiple products for the luxury limousine, charter and tour bus markets. The final purchase price for Midwest was $34.9 million ($34.9 million net of cash acquired), which includes a subsequent adjustment of $0.5 million received from the seller based on the level of net working capital on the acquisition date. The net cash consideration paid at closing was funded through the Company’s revolving credit facility. Midwest is reported as part of the Recreation segment. The preliminary purchase price allocation resulted in goodwill of $12.8 million, which is deductible for income tax purposes.

The Midwest Acquisition will be accounted for as a business combination using the acquisition method of accounting, whereby the purchase price will be allocated to tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated purchase price recorded as goodwill. 

As of January 31, 2018, the Company had not completed its assessment of the fair value of inventory and warranty liabilities which existed as of the date of acquisition. Adjustments which may result from the completion of this assessment may result in a change in the value of deferred income tax assets and liabilities. The estimated fair values are preliminary and based on the information that was available as of the date of the acquisition.

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The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed for Midwest (in thousands):

 

 

Intangible assets acquired as a result of the Midwest Acquisition are as follows (in thousands):

 

Net sales and operating income for the three months ended January 31, 2018 attributable to Midwest were $14.0 million and $1.0 million, respectively. The Company has not included pro forma financial information in this report as if the acquisition had occurred on November 1, 2016, since the since the operating results from Midwest were not considered material to the Company’s operating results as a whole.

Ferrara Fire Apparatus Acquisition

On April 25, 2017, the Company acquired 100% of the common shares of Ferrara Fire Apparatus, Inc. (“Ferrara” and the “Ferrara Acquisition”). Ferrara is a leading custom fire apparatus and rescue vehicle manufacturer that engineers and manufactures vehicles for municipal and industrial customers. This acquisition enhances the Company’s emergency vehicle product offering, particularly with custom fire apparatus including pumpers, aerials, and industrial vehicles. The purchase price for Ferrara was $100.1 million ($97.1 million net of $3.0 million cash acquired), subject to an adjustment based on the level of net working capital at closing, as defined in the purchase agreement. The net cash consideration paid at closing was funded through the Company’s revolving credit facility and Term Loan. Ferrara is reported as part of the Fire & Emergency segment. The preliminary purchase price allocation resulted in goodwill of $32.7 million, which is not deductible for income tax purposes.

The Ferrara Acquisition will be accounted for as a business combination using the acquisition method of accounting, whereby the purchase price will be allocated to tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated purchase price recorded as goodwill. 

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As of January 31, 2018, the Company had not completed its assessment of the fair value of inventory and warranty liabilities which existed as of the date of acquisition, or of the determination of the final purchase price calculation, as defined in the purchase agreement. Adjustments which may result from the completion of this assessment may result in a change in the value of deferred income tax assets and liabilities. The estimated fair values are preliminary and based on the information that was available as of the date of the acquisition.

The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed for Ferrara (in thousands):

 

Intangible assets acquired as a result of the Ferrara Acquisition are as follows (in thousands):

 

Net sales and operating income for the three months ended January 31, 2018, attributable to Ferrara were $27.1 million and $0.1 million, respectively. The Company has not included pro forma financial information in this report as if the acquisition had occurred on November 1, 2016, since the operating results from Ferrara were not considered material to the Company’s operating results as a whole.

Renegade RV Acquisition

On December 30, 2016, the Company acquired 100% of the common shares of Kibbi, LLC, which operated as Renegade RV (“Renegade” and the “Renegade Acquisition”). Renegade is a leading manufacturer of Class C and “Super C” RVs and heavy-duty special application trailers. The purchase price for Renegade was $22.5 million ($21.0 million net of $1.6 million cash acquired), which included a $0.3 million payment to Renegade’s sellers based on the level of net working capital on the acquisition date. The net cash consideration paid at closing was funded through the Company’s revolving credit facility. Renegade is reported as part of the Recreation segment. The preliminary purchase price allocation resulted in goodwill of $4.2 million, which is not deductible for income tax purposes.

The Renegade Acquisition has been accounted for as a business combination using the acquisition method of accounting, whereby the purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated purchase price recorded as goodwill. Fair value measurements have been applied based on assumptions that market participants would use in pricing of the asset or liability.

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The following table summarizes the fair values of the assets acquired and liabilities assumed for Renegade (in thousands):

 

 

Intangible assets acquired as a result of the Renegade Acquisition are as follows (in thousands):

 

 

During the first quarter of fiscal year 2018, the Company completed its assessment of the fair values of intangible assets and recorded measurement period adjustments that resulted in a $1.3 million increase in intangible assets and a $2.1 million increase in deferred income tax liabilities with a corresponding net increase in goodwill of $0.8 million. The change in deferred income tax liabilities is related to the completion of the intangible asset valuation and income tax attributes as a result of a tax return filing.

 

Net sales and operating income for the three months ended January 31, 2018, attributable to Renegade were $28.3 million and $3.3 million, respectively. The Company has not included pro forma financial information in this report as if the acquisition had occurred on November 1, 2016, since the operating results from Renegade were not considered material to the Company’s operating results as a whole.

Note 3. Inventories

Inventories, net of reserves, consisted of the following (in thousands):

 

 

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Note 4. Property, Plant and Equipment

Property, plant and equipment consisted of the following (in thousands):

 

 

Depreciation expense was $6.2 million and $4.8 million for the three months ended January 31, 2018 and January 28, 2017, respectively.

Note 5. Goodwill and Intangible Assets

The table below represents goodwill by segment (in thousands):

 

 

The change in the net carrying value amount of goodwill consisted of the following (in thousands):

 

 

Intangible assets (excluding goodwill) consisted of the following (in thousands):

 

 

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Amortization expense was $4.8 million and $2.6 million for the three months ended January 31, 2018, and January 28, 2017, respectively.

Note 6. Other Current Liabilities

Other current liabilities consisted of the following (in thousands):

 

 

Note 7. Long-Term Debt

The Company was obligated under the following debt instruments (in thousands):

 

 

April 2017 ABL Facility

Effective April 25, 2017, the Company entered into a $350.0 million revolving credit and guaranty agreement (the “April 2017 ABL Facility” and “ABL Agreement”) with a syndicate of lenders. The April 2017 ABL Facility consists of: (i) Revolving Loans, (ii) Swing Line Loans, and (iii) Letters of Credit, aggregating up to a combined maximum of $350.0 million. The total amount borrowed under the April 2017 ABL Facility is subject to a $30.0 million sublimit for Swing Line loans and a $35.0 million sublimit for Letters of Credit, along with certain borrowing base and other customary restrictions as defined in the ABL Agreement. The Company incurred $4.9 million of debt issuance costs related to the April 2017 ABL Facility.

The April 2017 ABL Facility allows for incremental borrowing capacity in an aggregate amount of up to $100.0 million, plus the excess, if any, of the borrowing base then in effect over total commitments then in effect. Any such incremental borrowing capacity is subject to receiving additional commitments from lenders and certain other customary conditions. The April 2017 ABL Facility matures on April 25, 2022.

On December 22, 2017 the Company exercised its $100.0 million incremental commitment option under the April 2017 ABL Facility, which increased total borrowing capacity under the facility from $350.0 million to $450.0 million. The Company incurred $0.3 million of debt issuance costs related to the April 2017 ABL Facility.

Revolving Loans under the April 2017 ABL Facility bear interest at rates equal to, at the Company’s option, either a base rate plus an applicable margin, or a Eurodollar rate plus an applicable margin. Applicable interest rate margins are initially 0.75% for all base rate loans and 1.75% for all Eurodollar rate loans (with the Eurodollar rate having a floor of 0%), subject to adjustment based on utilization in accordance with the ABL Agreement. Interest is payable quarterly for all base rate loans, and is payable monthly or quarterly for all Eurodollar rate loans.

The lenders under the April 2017 ABL Facility have a first priority security interest in substantially all accounts receivable and inventory of the Company, and a second priority security interest in substantially all other assets of the Company.

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The Company may prepay principal, in whole or in part, at any time without penalty.

The April 2017 ABL Facility contains customary representations and warranties, affirmative and negative covenants, subject in certain cases to customary limitations, exceptions and exclusions. The April 2017 ABL Facility also contains certain customary events of default, which should such events occur, could result in the termination of the commitments under the April 2017 ABL Facility and the acceleration of all outstanding borrowings under it. The April 2017 ABL Facility contains a financial covenant restricting the Company from allowing its fixed charge coverage ratio to drop below 1.00 to 1.00 during a compliance period, which is triggered when the availability under the April 2017 ABL Facility falls below a threshold set forth in the credit agreement.

The Company was in compliance with all financial covenants under the April 2017 ABL Facility as of January 31, 2018.

October 2013 ABL Facility

Effective October 21, 2013, the Company entered into a $150.0 million senior secured revolving credit and guaranty agreement (the Asset Based Lending “ABL” or the “ABL Facility”) with a syndicate of lenders. The ABL Facility consisted of: (i) Revolving Loans, (ii) Swing Line Loans, and (iii) Letters of Credit, aggregating up to a combined maximum of $150.0 million. The total amount borrowed was subject to a $15.0 million sublimit for Swing Line Loans, and a $25.0 million sublimit for Letters of Credit, along with certain borrowing base and other customary restrictions as defined in the agreement. The Company incurred $3.5 million of debt issuance costs related to the ABL Facility.

On April 22, 2016, the Company exercised its $50.0 million Incremental Commitment option under the ABL Facility in conjunction with the KME Acquisition, which increased the borrowing capacity under the ABL Facility to $200.0 million at that time. All other terms and conditions remained unchanged.

On August 19, 2016, the Company amended the ABL Facility to add an Incremental Commitment option of $100.0 million (the “August 2016 Amendment”), and on that date exercised the Incremental Commitment option. The August 2016 Amendment increased the borrowing capacity under the ABL Facility to $300.0 million. All other terms and conditions remained unchanged.

On April 25, 2017, the Company repaid all outstanding loans and obligations under the ABL Facility in full, and the ABL Facility was terminated. In connection with the termination of the ABL Facility, the Company recorded a $0.7 million loss on early extinguishment of debt, which consisted entirely of the write-off of unamortized debt issuance costs.

All outstanding principal on the ABL Facility was due and payable on the maturity date of October 21, 2018, unless as otherwise amended per the terms of the agreement. Principal could be repaid at any time during the term of the ABL Facility without penalty.

Revolving Loans under the ABL Facility bore interest at rates equal to, at the Company’s option, either a Base Rate plus an Applicable Margin, or a Eurodollar Rate plus an Applicable Margin. Swing Line Loans under the ABL Facility bore interest at a rate equal to a Base Rate plus an Applicable Margin. Applicable Margins were initially set at 0.75% for Base Rate loans and Swing Line Loans, and 1.75% for Eurodollar loans, and were subject to subsequent adjustment as defined in the agreement. Interest was payable quarterly for all loans in which a Base Rate is applied, and was payable either monthly, quarterly, or semi-annually for all loans in which a Eurodollar Rate was applied.

Term Loan

Effective April 25, 2017, the Company entered into a $75.0 million term loan agreement (“Term Loan” and “Term Loan Agreement”), as Borrower with certain subsidiaries of the Company, as Guarantor Subsidiaries. Principal may be prepaid at any time during the term of the Term Loan without penalty. The Company incurred $2.0 million of debt issuance costs related to the Term Loan.

The Term Loan Agreement allows for incremental facilities in an aggregate amount of up to $125.0 million. Any such incremental facilities are subject to receiving additional commitments from lenders and certain other customary conditions. The Term Loan agreement requires annual payments of $0.8 million per year, with remaining principle payable at maturity, which is April 25, 2022.

Applicable interest rate margins for the Term Loan are initially 2.50% for base rate loans and 3.50% for Eurodollar rate loans (with the Eurodollar rate having a floor of 1.00%). Interest is payable quarterly for all base rate loans, and is payable monthly or quarterly for all Eurodollar rate loans.

The Company may voluntarily prepay principal, in whole or in part, at any time, without penalty. Beginning in fiscal year 2018, the Company is obligated to prepay certain minimum amounts based on the Company’s excess cash flow, as defined in the Term Loan Agreement. 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.

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The Term Loan Agreement contains customary representations and warranties, affirmative and negative covenants, in each case, subject to customary limitations, exceptions and exclusions. The Term Loan Agreement also contains certain customary events of default. The Term Loan Agreement requires the Company to maintain a specified secured leverage ratio as follows:

 

The Company was in compliance with all financial covenants under the Term Loan as of January 31, 2018.

Senior Secured Notes

On October 21, 2013, the Company issued (the “Offering”) $200.0 million in aggregate principal amount of its 8.5% Senior Secured Notes (the “Notes”). The net proceeds from the Offering, together with net proceeds from the Company’s ABL Facility (defined below), were used to finance the acquisition of the commercial bus business of Thor Industries, Inc. in fiscal year 2013 and to repay all outstanding debt existing at the time of the Offering.

The Notes were to mature on November 1, 2019. Interest accrued on the Notes at the rate of 8.5% per annum, payable semi-annually in arrears on May 1 and November 1 each year.

The Notes were guaranteed by all direct and indirect wholly owned domestic subsidiaries of the Company that guarantee debt under the Company’s previous ABL Facility described below. The Notes were secured by a first priority lien on substantially all of the guarantors’ assets other than accounts receivable and inventory, and related assets, pledged under the Company’s previous ABL Facility. The Notes were also secured by a second priority lien on substantially all of the collateral under the Company’s previous ABL Facility. The Notes were effectively subordinated to debt incurred under the Company’s previous ABL Facility, or other permitted debt facilities and obligations, as defined, to the extent of the value of the assets securing the Company’s previous ABL Facility.

On October 17, 2016, the Company completed an open market purchase of $20.0 million of its outstanding Notes, which were subsequently cancelled. The Company paid a premium of $0.4 million and accrued interest of $0.8 million as of the date of the purchase.

On or after November 1, of the years below, the Company was allowed to redeem all or a part of the Notes at the redemption prices set forth below plus accrued and unpaid interest on the Notes redeemed, to the applicable redemption date:

104.250% (November 1, 2016)

102.125% (November 1, 2017)

100.000% (November 1, 2018 and thereafter)

The Notes were issued with an applicable original issue discount (“OID”) of $1.2 million. The Company also incurred $9.0 million in associated debt issuance costs.

On January 17, 2017, the Company issued a Notice of Conditional Redemption, subject to the completion of the Company’s IPO, to redeem all the outstanding Notes at a redemption price of 104.250% plus accrued and unpaid interest. On February 16, 2017, the Company redeemed all Notes, which were outstanding as of that date, and retired the debt. As a result of this redemption, the Company recorded a $11.2 million loss associated with the early extinguishment of the debt, which consisted of a prepayment premium of $7.7 million, $3.1 million of unamortized debt issuance costs and $0.4 million of OID.

Note 8. Warranties

The Company’s products generally carry explicit warranties that extend from several months to several years, based on terms that are generally accepted in the marketplace. Selected components (such as engines, transmissions, tires, etc.) included in the Company’s end products may include warranties from original equipment manufacturers (“OEM”). These OEM warranties are passed on to the end customer of the Company’s products, and the customer deals directly with the applicable OEM for any issues encountered on those components.

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Changes in the Company’s warranty liability consisted of the following (in thousands):

 

 

Accrued warranty is classified in the Company’s consolidated balance sheets as follows (in thousands):

 

 

Provisions for estimated warranty and other related costs are recorded at the time of sale and are periodically adjusted to reflect actual experience. Certain warranty and other related claims involve matters of dispute that ultimately are resolved by negotiation, arbitration or litigation. At times, warranty issues arise that are beyond the scope of the Company’s historical experience. The potential liability for these issues is evaluated on a case by case basis.

Note 9. Employee Benefit Plan

The Company has a defined contribution 401(k) plan covering substantially all of U.S. employees. The plan allows employees to defer up to 100% of their employment income (subject to annual contribution limits imposed by the I.R.S.) after all taxes and applicable benefit deductions. Each employee who elects to participate is eligible to receive Company matching contributions that are based on employee contributions to the plans, subject to certain limitations. Amounts expensed for the Company’s matching and discretionary contributions were $2.2 million and $1.6 million for the three months ended January 31, 2018 and January 28, 2017, respectively.

Note 10. Derivative Financial Instruments and Hedging Activities

The Company is exposed to certain risks relating to its ongoing business operations. The primary risk related to cash flows, partially managed by using derivative instruments, is foreign currency exchange rate risk. Forward contracts on various foreign currencies are entered into to manage the foreign currency exchange rate risk on the collection of receivables denominated in foreign currencies. These derivatives typically require the exchange of a foreign currency for U.S. dollars at a fixed rate at a future date.

To protect against the reduction in value of forecasted foreign currency cash flows resulting from export sales, the Company has instituted a foreign currency cash flow hedging program. The Company hedges portions of its receivables denominated in foreign currencies with forward contracts. When the U.S. dollar weakens against foreign currencies, decreased foreign currency payments are offset by gains in the value of the forward contracts. Conversely, when the U.S. dollar strengthens against foreign currencies, increased foreign currency payments are offset by losses in the value of the forward contracts.

For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive income (loss) and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. The Company generally hedges its exposure to the variability in future cash flows for a maximum of 12 to 18 months.

The ineffective portion of cash flow hedges, which is the remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, or hedge components excluded from the assessment of effectiveness, is recognized immediately during the current period as a component of selling, general and administrative expenses in the Company’s consolidated statement of income.

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A net amount of $0.3 million recorded as loss in accumulated other comprehensive income (loss) is expected to be reclassified to earnings within the next 12 months. The Company had forward foreign exchange contracts with a gross notional value of $8.2 million and $7.8 million as of January 31, 2018 and October 31, 2017, respectively, designated as cash flow hedges.

Note 11. Shareholders’ Equity

Prior to the IPO, the Company’s certificate of incorporation allowed for the issuance of up to 46,000,000 Class A common shares and for the issuance of up to 43,200,000 Class B common shares. Concurrent with the closing of the Company’s IPO, the Company amended its certificate of incorporation to provide for the automatic reclassification of its Class A common stock and Class B common stock into a single class of common stock, of which 605,000,000 shares are designated as common stock, and 95,000,000 shares are designated as preferred stock and to effect an 80-for-one stock split.

Shareholder Rights: Prior to the Company’s IPO completed on February 1, 2017, all of the then shareholders of the Company were a party to the Amended Shareholders Agreement (the “Shareholders Agreement”) which governed the shareholders’ voting rights, right to transfer securities, rights in the event of a sale of the Company or other liquidity event and other special approval rights. Under the terms of the Shareholders Agreement, the Company was required (at the shareholder’s option) or had the option to purchase the shareholder’s common stock upon termination, disability, death or retirement if the shareholder was an employee. If an employee shareholder was terminated for cause or the employee shareholder departed for any reason other than death, disability or retirement, the purchase price of the common stock was the lesser of termination book value or cost. In the case of termination for any other reason and in the case of death, disability or retirement, the purchase price was a price per share equal to the fair market value as determined by the Company’s board of directors. In connection with the IPO, the Company entered into an amended and restated shareholders agreement with certain shareholders. The amended and restated shareholders agreement became effective upon completion of the IPO and replaced the Shareholders Agreement that was in effect immediately prior to the IPO.

Note 12. Earnings Per Share

Basic earnings per common share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding including shares of contingently redeemable common stock. Diluted EPS is computed by dividing net income by the weighted-average number of common shares outstanding assuming dilution. The difference between basic EPS and diluted EPS is the result of the dilutive effect of outstanding stock options and restricted stock units. The table below reconciles basic weighted-average common shares outstanding to diluted weighted-average shares outstanding for the three months ended January 31, 2018 and January 28, 2017:

 

The table below represents exclusions from the calculation of weighted-average shares outstanding assuming dilution due to the anti-dilutive effect of the common stock equivalents for the three months ended January 31, 2018 and January 28, 2017:

 

Note 13. Contingently Redeemable Common Stock

Prior to the Company’s IPO, shares of common stock held by employees were eligible to be put to the Company in accordance with the Shareholders Agreement if certain criteria (as defined in the Shareholders Agreement) were met and the former employee or his or her beneficiaries exercised the option to put the shares to the Company in accordance with the Shareholders Agreement. As these provisions were not certain of being met, the shares of common stock held by employees were considered contingently redeemable common stock and recorded as temporary equity on the Company’s consolidated balance sheet until the shares of common stock were either re-purchased by the Company or the put option expired. The put option expired 90 or 180 days after termination of

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employment, depending on the nature of the termination or upon the sale of the Company or an initial public offering of the Company’s common stock. The value of these shares of common stock was presented at fair value on the Company’s consolidated balance sheet. Prior to the Company’s IPO, the fair value of the Company’s common stock was calculated by estimating the Company’s enterprise value by applying an earnings multiple to the Company’s Adjusted EBITDA over the previous 12 months, and deducting outstanding net debt.

When the put option was exercised or expired, the shares were re-measured at fair value on that date and reclassified from temporary equity to shareholders’ equity. Changes in the fair value of the contingently redeemable shares of common stock were recorded in retained earnings.

In connection with the IPO, the put option of employee-owned shares of common stock was eliminated, resulting in the reclassification of $35.4 million to additional paid-in capital and 1,607,760 contingently redeemable shares to common shares outstanding.

Note 14. Stock Compensation

In April 2010, the Company’s board of directors approved the Allied Specialty Vehicles, Inc. 2010 Long-Term Incentive Plan (the “2010 Plan”). Under the 2010 Plan, key employees, including employees who may also be directors or officers of the Company, outside directors, key consultants and key contractors of the Company may be granted incentive stock options, nonqualified stock options, and other share-based awards. The 2010 Plan provides for the granting of options to purchase shares of the Company’s common stock at not less than the fair market value of such shares on the date of grant. Stock options terminate not more than ten years from the date of grant. The 2010 Plan allows acceleration of options upon certain events. The Company recognizes compensation expense for stock options, nonvested restricted stock and performance share awards over the requisite service period for vesting of the award, or to an employee’s eligible retirement date, if earlier and applicable. An aggregate of 8,000,000 shares were reserved for future awards under the 2010 Plan. At January 31, 2018, the Company had 4,253,440 remaining shares available for issuance under the 2010 Plan. With the approval of the 2016 Plan (defined below), the Company will no longer issue share-based awards under the 2010 Plan.

In January 2017, the Company’s board of directors approved the REV Group, Inc. 2016 Omnibus Incentive Plan (the “2016 Plan”). Under the 2016 Plan, key employees, including employees who may also be directors or officers of the Company, outside directors, key consultants and key contractors of the Company may be granted incentive stock options, nonqualified stock options, and other share-based awards. The 2016 Plan provides for the granting of options to purchase shares of the Company’s common stock at not less than the fair market value of such shares on the date of grant. Stock options terminate not more than ten years from the date of grant. The 2016 Plan allows acceleration of share awards upon certain events. The Company recognizes compensation expense for stock options, nonvested restricted stock and performance share awards over the requisite service period for vesting of the award, or to an employee’s eligible retirement date, if earlier and applicable. An aggregate of 8,000,000 shares were reserved for future awards under the 2016 Plan. At January 31, 2018, the Company had 7,990,312 remaining shares available for issuance under the 2016 Plan.

During the three months ended January 31, 2018, and January 28, 2017, the Company recorded stock-based compensation expense of $1.8 million and $25.5 million, respectively, as selling, general and administrative expenses in the Company’s consolidated statements of income.

Stock Option Awards: Stock options granted have a term of up to 10 years from the grant date. The vesting of these options are either immediate, upon a triggering event or over a period of time. Exercisability of the triggering event options is contingent upon the occurrence of a change in control of the Company, or in certain of the option grants, an initial public offering. The Company estimates the fair value of all stock option awards on the grant date by applying the Black-Scholes option-pricing valuation model. The application of this valuation model involves assumptions that are highly subjective, judgmental and sensitive in the determination of stock compensation cost. 

As a result of the Company’s IPO in January 2017, 1.2 million of stock options immediately vested. The Company recorded stock compensation expense of $4.4 million resulting from the vesting of these stock options. As of January 31, 2018, the Company could potentially recognize $0.3 million of stock compensation expense if certain performance targets were met or were expected by management to be achieved. As of January 31, 2018, the Company had $1.4 million of unrecognized stock compensation expense related to time based vesting stock options.

During the three months ended January 31, 2018 and January 28, 2017, the Company recorded stock compensation expense of $1.0 million and $3.3 million, respectively, to redeem performance based stock options. The amount paid per share to redeem these stock options was equal to the fair value of the Company’s common stock on the date of redemption less the stock option exercise price.

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Prior to the Company’s IPO, certain stock options outstanding which were considered liability share awards as the underlying shares were eligible to be sold back to the Company as a result of put rights in the Shareholders Agreement, within a period of time which would not subject the shareholder to the risks and rewards of share ownership for a reasonable period of time. Concurrent with the Company’s IPO, the Company’s Shareholders Agreement was terminated, and as such the put rights from that agreement were no longer available to the Company’s shareholders and no outstanding stock options were considered liability awards after that date. As such, the fair value of vested outstanding liability share awards, which was $26.5 million on the date of the Company’s IPO, were reclassified to additional paid-in capital during the first quarter of fiscal year 2017. In addition, upon completion of the Company’s IPO, 1,528,000 of outstanding liability option awards were vested. The vested portion of these outstanding options was re-measured at fair value based upon the $22.00 per share price of the Company’s IPO. The accelerated vesting of the liability awards and remeasurement of the liability to the $22.00 per share price resulted in additional stock compensation expense of $16.2 million during the first quarter of fiscal year 2017.

The change in the number of stock options outstanding consisted of the following:

During the three months ended January 31, 2018, the fair value of shares issued for stock options exercised was $13.4 million.

Restricted Stock Units Awards: The Company has granted restricted stock units to certain employees and non-employee directors. Restricted stock units will vest over four years for employees and over one year for certain employees and non-employee directors.

The change in the number of unvested restricted stock units outstanding consisted of the following:

During the three months ended January 31, 2018, the fair value of shares issued for vested restricted stock units was $0.4 million.

Performance Stock Units Awards: The Company has granted performance stock units to certain employees that will vest based upon the achievement of certain performance measures in fiscal years 2018 through 2020. Performance stock units that will vest based upon performance measures for fiscal year 2018 are considered granted as of January 31, 2018. Performance stock units for fiscal 2019 and beyond are subject to vesting provisions based on operating income targets providing for year over year growth and thus cannot be determined until prior year income is known. Those performance stock units are not included in the table below. These metrics will be established after the end of the current fiscal year.

The unvested performance stock units granted under the 2016 Plan have the right to accrue dividends, but not the right to vote. Dividends are paid in accordance with vesting of the associated performance stock units. All of the unvested performance stock units granted under the 2016 Plan vest upon the termination of participants in certain situations and following certain changes of control of the Company.

The change in the number of unvested performance stock units outstanding consisted of the following:

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Note 15. Restructuring Charges

In the third quarter of fiscal 2017, the Company restructured certain management positions in its Commercial segment and in its Corporate office, and incurred personnel costs, including severance and other employee benefit payments of $1.5 million. At January 31, 2018, a balance of $0.4 million of the restructuring costs remained unpaid.

In the first quarter of fiscal year 2018, the Company restructured certain management positions in its Recreation segment and in its Corporate office. Costs incurred consisted of $3.5 million of personnel costs, including severance, and other employee benefit payments, as well as facility moving expenses of $0.6 million in the Recreation segment. At January 31, 2018, a balance of $0.8 million of the restructuring costs remained unpaid.

A summary of the changes in the Company’s restructuring liability is as follows (in thousands):

 

 

Note 16. Income Taxes

For interim financial reporting, the Company estimates its annual effective tax rate based on the projected income for its entire fiscal year and records a provision (benefit) for income taxes on a quarterly basis based on its estimated annual effective income tax rate, adjusted for any discrete tax items.

The Company recorded income tax benefit of $13.8 million for the three months ended January 31, 2018, or 313.1% of pre-tax loss, compared to $7.8 million, or 37.1% of pre-tax loss, for the three months ended January 28, 2017. Results for the three months ended January 31, 2018 were favorably impacted by $12.7 million of net discrete tax benefits, including a $2.3 million benefit related to stock option exercises and vesting of restricted stock units under ASU 2016-09 and a $10.4 million benefit related to the remeasurement of net deferred tax liabilities as a result of new tax legislation in the United States. Results for the three months ended January 28, 2017 were favorably impacted by income tax incentives for U.S. manufacturing and research.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Reform Act”) was signed and enacted into law. The Tax Reform Act significantly revised the U.S. corporate income tax regime by, among other things, lowering the federal corporate tax rate from 35% to 21% effective January 1, 2018, while also repealing the deduction for domestic production activities and implementing a territorial tax system. As a fiscal year taxpayer, the Company’s federal statutory tax rate reduction is effective January 1, 2018; therefore, the Company’s fiscal year 2018 estimated annual effective tax rate reflects the benefit from the reduced U.S. federal rate of 23.3% for a partial year. A number of other provisions will not impact the Company until fiscal year 2019, such as elimination of the domestic manufacturing deduction and U.S. taxation of foreign earnings.

As a result of the Tax Reform Act, the Company recognized a non-cash estimated tax benefit of $10.4 million related to the remeasurement of the Company’s net deferred tax liabilities at the lower statutory rate based on the timing of expected reversals. In accordance with SEC Staff Accounting Bulletin No. 118, the Company recorded the estimated income tax impact of the Tax Reform Act. Although the $10.4 million tax benefit represents what the Company believes is a reasonable estimate of the income tax effects of the Tax Reform Act on its consolidated financial statements as of January 31, 2018, it is a provisional amount and will be impacted by the Company’s ongoing analysis of the legislation and full fiscal year 2018 financial results. Any adjustments to these provisional amounts will be reported as a component of income tax expense (benefit) in the reporting period in which any such adjustments are determined, which will be no later than the first quarter of fiscal year 2019.

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Because of the complexity of the new Global Intangible Low-Taxed Income (GILTI) tax rules, the Company continues to evaluate this provision of the Tax Reform Act and the application of ASC 740, Income Taxes. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred (the “period cost method”) or (2) factoring such amounts into the Company’s measurement of its deferred taxes (the ”deferred method”). The Company has not made a policy election related to potential GILTI tax as we continue to assess the impact of the legislation.

The Company periodically evaluates its valuation allowance requirements in light of changing facts and circumstances, and may adjust its deferred tax asset valuation allowances accordingly. It is reasonably possible that the Company will either add to, or reverse a portion of its existing deferred tax asset valuation allowances in the future. Such changes in the deferred tax asset valuation allowances will be reflected in the current operations through the Company’s effective income tax rate. During the three months ended January 31, 2018, there were no changes to the Company’s valuation allowances.

The Company’s liability for unrecognized tax benefits, including interest and penalties, was $3.1 million as of January 31, 2018 and $2.9 million as of October 31, 2017. The unrecognized tax benefits are presented in other long-term liabilities in the Company’s consolidated balance sheets with the exception of $0.2 million for the period ended January 31, 2018 which is presented in other current liabilities. During the next twelve months, it is reasonably possible that $1.1 million of the unrecognized tax benefits, if recognized, would affect the annual effective income tax rate. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes in its consolidated statement of income.

The Company regularly assesses the likelihood of an adverse outcome resulting from examinations to determine the adequacy of its tax reserves. As of January 31, 2018, the Company believes that it is more likely than not that the tax positions it has taken will be sustained upon the resolution of its audits resulting in no material impact on its consolidated financial position and the results of operations and cash flows. However, the final determination with respect to any tax audits, and any related litigation, could be materially different from the Company’s estimates and/or from its historical income tax provisions and income tax liabilities and could have a material effect on operating results and/or cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, and/or interest assessments related to income tax examinations.

Note 17. Commitments and Contingencies

Market Risks: The Company is contingently liable under bid, performance and specialty bonds and has open standby letters of credit issued by the Company’s banks in favor of third parties as follows (in thousands):

 

 

Chassis Contingent Liabilities: The Company obtains certain vehicle chassis from automobile manufacturers under converter pool agreements. These agreements generally provide that the manufacturer will supply chassis at the Company’s various production facilities under the terms and conditions set forth in the agreement. The manufacturer does not transfer the certificate of origin to the Company and, accordingly, the chassis are treated as consigned inventory of the automobile manufacturer. Upon being put into production, the Company becomes obligated to pay the manufacturer for the chassis. Chassis are typically converted and delivered to customers within 90 to 120 days of receipt. If the chassis are not converted within this timeframe of delivery, the Company generally purchases the chassis and records the inventory or the Company is obligated to begin paying an interest charge on this inventory until purchased. The Company’s contingent liability under such agreements for future chassis inventory purchases was $67.4 million and $85.9 million at January 31, 2018 and October 31, 2017, respectively.

Repurchase Commitments: The Company has entered into repurchase agreements with certain lending institutions. The repurchase commitments are on an individual unit basis with a term from the date it is financed by the lending institution through payment date by the dealer or other customer, generally not exceeding two years. The Company’s outstanding obligations under such agreements were $257.9 million and $288.5 million as of January 31, 2018 and October 31, 2017, respectively. This value represents the gross value of all vehicles under repurchase agreements and does not take into consideration proceeds that would be received upon resale of repossessed vehicles, which would be used to reduce the Company’s ultimate net liability. Such agreements are customary in the industries in which the Company operates and the Company’s exposure to loss under such agreements is limited by the potential loss on the resale value of the inventory which is required to be repurchased. Losses incurred under such arrangements have not been

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significant and the Company expects this pattern to continue into the future. The reserve for losses included in other liabilities on contracts outstanding at January 31, 2018 and October 31, 2017 is immaterial.

Guarantee Arrangements: The Company is party to multiple agreements whereby it guarantees indebtedness of others, including losses under loss pool agreements. The Company estimated that its maximum loss exposure under these contracts was $0.6 million at January 31, 2018 and October 31, 2017. Under the terms of these and various related agreements and upon the occurrence of certain events, the Company generally has the ability to, among other things, take possession of the underlying collateral. If the financial condition of the customers and/or dealers were to deteriorate and result in their inability to make payments, then additional accruals may be required. While the Company does not expect to experience losses under these agreements that are materially in excess of the amounts reserved, it cannot provide any assurance that the financial condition of the third parties will not deteriorate resulting in the third party’s inability to meet their obligations.

In the event that this occurs, the Company cannot guarantee that the collateral underlying the agreements will be available or sufficient to avoid losses materially in excess of the amounts reserved. Any losses under these guarantees would generally be mitigated by the value of any underlying collateral, including financed equipment, and are generally subject to the finance company’s ability to provide the Company clear title to foreclosed equipment and other conditions. During periods of economic weakness, collateral values generally decline and can contribute to higher exposure to losses.

Other Matters: The Company is subject to certain legal proceedings that arise in the ordinary course of business. Although the final results of all such matters and claims cannot be predicted with certainty, management believes that the ultimate resolution of all such matters and claims will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows. Actual results could vary, among other things, due to the uncertainties involved in litigation.

Note 18. Related Party Transactions

During the three months ended January 31, 2018 and January 28, 2017, the Company reimbursed expenses of its primary equity holder in the amount of $0.2 million and $0.1 million, respectively. These expenses are included in selling, general and administrative expenses in the Company’s consolidated statements of income.

Certain production facilities and offices for two of the Company’s subsidiaries are leased from related parties owned by certain members of management. Rent expense under these arrangements totaled $0.2 million and $0.2 million for the three months ended January 31, 2018, and January 28, 2017, respectively.

The Company engaged with an information technology, software and consulting company (the “IT Consulting Company”) in which the Company’s CEO had a material equity interest. The IT Consulting Company provided software development and installation to the Company. The Company made payments of $1.4 million during the three months ended January 28, 2017 to the IT Consulting Company. The amounts paid to the IT Consulting Company included payments which are made to another unrelated consulting company. Excluding the payments to this unrelated consulting company, the payments made to the IT Consulting Company were $0.6 million during the three months ended January 28, 2017. The Company’s CEO has recused himself from receiving any direct economic benefit from the payments made to the IT Consulting Company for the services rendered to the Company. On October 27, 2017 the IT Consulting Company was sold to an unrelated third party and therefore any future consulting business that the Company has undertaken or will undertake with the IT Consulting Company after such date will not be considered a related party transaction.

Note 19. Business Segment Information

The Company is organized into three reportable segments based on management’s process for making operating decisions, allocating capital and measuring performance, and based on the similarity of products, customers served, common use of facilities, and economic characteristics. The Company’s segments are as follows:

Fire & Emergency: This segment includes KME, E-One, Inc., Ferrara, American Emergency Vehicles, Inc., Leader Emergency Vehicles, Inc., Horton Enterprises, Inc. and Wheeled Coach, Inc. These business units manufacture and market commercial and custom fire and emergency vehicles primarily for fire departments, airports, other governmental units, contractors, hospitals and other care providers in the United States and other countries.

Commercial: This segment includes Collins Bus, Champion Bus, Inc., Goshen Coach, Inc., ENC, ElDorado National (Kansas), Inc., Revability, Capacity and Lay-Mor. Collins Bus manufactures, markets and distributes school buses, normally referred to as Type A school buses, as well as shuttle buses used for churches, transit authorities, hotels and resorts, retirement centers and other similar uses. Champion Bus, Inc., Goshen Coach, Inc., ENC, ElDorado National (Kansas), Inc. and Revability manufacture, market and distribute shuttle buses and mobility vans for transit, airport car rental and hotel/motel shuttles, tour and charter operations and other

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uses under several well-established brand names. Capacity manufactures, markets and distributes trucks used in terminal type operations, i.e., rail yards, warehouses, rail terminals and shipping terminals/ports. Lay-Mor manufactures, markets and distributes industrial sweepers for both the commercial and rental markets.

Recreation: This segment includes REV Recreation Group, Inc. (“RRG”), Goldshield Fiberglass, Inc. (“Goldshield”), Renegade, Midwest and Lance Camper, and their respective manufacturing facilities, service and parts divisions. RRG primarily manufactures, markets and distributes Class A and Class C mobile RVs in both gas and diesel models. Renegade primarily manufacturers Class C and Super C RVs and heavy-duty special application trailers. Goldshield manufactures, markets and distributes fiberglass reinforced molded parts to a diverse cross section of original equipment manufacturers and other commercial and industrial customers, including various components for RRG, which is one of Goldshield’s primary customers. Midwest manufactures Class B RVs and luxury vans. Lance designs, engineers and manufactures truck campers, towable campers and toy haulers.

For purposes of measuring financial performance of its business segments, the Company does not allocate to individual business segments costs or items that are of a corporate nature. The caption “Corporate and Other” includes corporate office expenses, results of insignificant operations, intersegment eliminations and income and expense not allocated to reportable segments.

Identifiable assets of the business segments exclude general corporate assets, which principally consist of cash and cash equivalents, certain property, plant and equipment and certain other assets pertaining to corporate and other centralized activities.

Intersegment sales generally include amounts invoiced by a segment for work performed for another segment. Amounts are based on actual work performed and agreed-upon pricing which is intended to be reflective of the contribution made by the supplying business segment. All intersegment transactions have been eliminated in consolidation.

In considering the financial performance of the business, the chief operating decision maker analyzes the primary financial performance measure of Adjusted EBITDA. Adjusted EBITDA is defined as net income for the relevant period before depreciation and amortization, interest expense and provision for income taxes, as adjusted for transaction expenses, sponsor expenses, restructuring costs, loss on early extinguishment of debt, legal settlements, non-cash purchase accounting expenses, stock based compensation expense and deferred purchase price payment which the Company believes are not indicative of the Company’s ongoing operating performance. Adjusted EBITDA is not a measure defined by U.S. GAAP, but is computed using amounts that are determined in accordance with U.S. GAAP. A reconciliation of this performance measure to income before provision for income taxes is included below.

The Company believes that Adjusted EBITDA is useful to investors and used by management for measuring profitability because the measure excludes the impact of certain items which management believes has less bearing on the Company’s core operating performance. The Company believes that utilizing Adjusted EBITDA allows for a more meaningful comparison of operating fundamentals between companies within the Company’s industry by eliminating the impact of capital structure and taxation differences between the companies.

The Company also adjusts for exceptional items which are determined to be those that in management’s judgment need to be disclosed by virtue of their size, nature or incidence, which include non-cash items and items settled in cash. In determining whether an event or transaction is exceptional, management considers quantitative as well as qualitative factors such as the frequency or predictability of occurrence. This is consistent with the way that financial performance is measured by management and reported to our Board of Directors, assists in providing a meaningful analysis of the Company’s operating performance and used as a measurement in incentive compensation for management.

Selected financial information of the Company’s segments for the three months ended January 31, 2018 and January 28, 2017, is as follows (in thousands):

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Provided below is a reconciliation of segment Adjusted EBITDA to loss before benefit for income taxes (in thousands):

 

 

Note 20. Comprehensive Income

Comprehensive income includes all changes in equity during a period except those that resulted from investments by or distributions to the Company’s shareholders. Other comprehensive income or loss refers to revenues, expenses, gains and losses that are included in comprehensive income, but excluded from net income as these amounts are recorded directly as an adjustment to shareholders’ equity.

The components of accumulated other comprehensive income (loss) are as follows (in thousands):

 

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This management’s discussion and analysis should be read in conjunction with the Unaudited Consolidated Financial Statements contained in this Form 10-Q as well as the Management’s Discussion and Analysis and Risk Factors and audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K filed on December 21, 2017 and in Part II, Item 1A of this Quarterly Report on Form 10-Q.

Overview

REV is a leading designer, manufacturer and distributor of specialty vehicles and related aftermarket parts and services. We provide customized vehicle solutions for applications including: essential needs (ambulances, fire apparatus, school buses, mobility vans and municipal transit buses), industrial and commercial (terminal trucks, cut-away buses and street sweepers) and consumer leisure (recreational vehicles “RVs” and luxury buses). Our brand portfolio consists of 30 well-established principal vehicle brands including many of the most recognizable names within our served markets. 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 59% of our net sales during the first quarter of fiscal year 2018 came from products where we believe we hold such share positions.

During the first quarter of fiscal year 2018, our net sales were $514.9 million, which were $71.9 million, or 16.2%, greater than the same period in the prior year. This increase in net sales was due to increases in all of our segments. In our Fire & Emergency (“F&E”) segment, we expect net sales to increase in fiscal year 2018 at a rate slightly better than the sales percent increase for the overall company due to increased unit volume, as a result of the full year impact of the Ferrara Fire Apparatus (“Ferrara”) acquisition (which was acquired in April 2017), and strong end-market demand across both our fire and ambulance product lines. In our Commercial segment for fiscal year 2018, we expect net sales to increase at a rate below the net sales percent increase for the entire company due to the relative growth in the various end markets served by the Commercial segment. In our Recreation segment, we expect net sales to increase in fiscal year 2018 at a rate higher than the net sales percent increase for the overall company as a result of higher unit sales volume in Class C RV units due to end market demand growth, expectation for continued growth in market share across all RV classes and as a result of the Renegade, Midwest Automotive Designs (“Midwest”) and Lance Camper Manufacturing (“Lance”) acquisitions.

Gross profit and gross margin percentage were $52.6 million and 10.2%, respectively, during the first quarter of fiscal year 2018. Gross profit was $5.0 million higher than the first quarter of fiscal year 2017. Gross profit percentage was 50 basis points lower than the first quarter of fiscal year 2017. This decrease in gross profit percentage was primarily due to a sales mix in our Fire & Emergency and Commercial segments, offset by increased gross profit from our Recreation segment.

Selling, general and administrative expenses (“SG&A”) in the first quarter of fiscal year 2018 were $41.0 million which is a decrease of $15.5 million compared to the first quarter of fiscal year 2017. This decrease was primarily due to lower stock-based compensation expense, offset by SG&A expenses from acquired companies. The decrease in stock-based compensation expense was primarily due to larger than normal expense in fiscal year 2017 as a result of our initial public offering (“IPO”).

Amortization of intangible assets was $4.7 million during the first quarter of fiscal year 2018, compared to $2.6 million during the first quarter of fiscal year 2017. The increase in amortization expense was due primarily to the amortization of the intangible assets recorded as part of the acquisition of Renegade in December 2016 and the acquisition of Ferrara and Midwest in April 2017. The Company has not recorded any amortization expense for intangible assets acquired in the acquisition of Lance because as of January 31, 2018, the valuation of intangible assets acquired is not complete and the amount would be immaterial. We expect amortization expense to be $16 to $18 million in fiscal year 2018.

Interest expense was $5.4 million in the first quarter of fiscal year 2018, which is a decrease of $2.1 million compared to the first quarter of fiscal year 2017. Interest expense during the quarter was comprised of interest for the Company’s term loan agreement (“Term Loan” and “Term Loan Agreement”), ABL Facility, chassis pool interest expense, and interest paid to customers for advance payments.

Net income was $9.4 million in the first quarter of fiscal year 2018, compared to net loss of $13.3 million in the first quarter of fiscal year 2017. Adjusted net income in the first quarter of fiscal year 2018 was $9.7 million, which is a 72.0% increase over $5.7 million in the first quarter of fiscal year 2017.

Diluted net income per common share was $0.14 for the first quarter of fiscal year 2018 compared to a loss of $0.26 in the first quarter of fiscal year 2017. Adjusted diluted net income per common share was $0.15 per share for the first quarter of fiscal year 2018, which is a 36.4% increase from $0.11 in the first quarter of fiscal year 2017 even with greater weighted average shares outstanding

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during the current year quarter versus the prior year. A reconciliation of net income (loss) to adjusted net income is included in section “Adjusted EBITDA and Adjusted Net Income” below.

Adjusted EBITDA was $21.3 million during the first quarter of fiscal year 2018, an increase of $0.2 million or 0.9%, from $21.1 million during the first quarter of fiscal year 2017. This increase in Adjusted EBITDA was the result of acquisitions and higher net sales and gross profit from certain business segments offset by reductions in gross profit in other businesses described below. A detailed reconciliation of net income to Adjusted EBITDA is included in section “Adjusted EBITDA and Adjusted Net Income” below.

Capital expenditures were $13.6 million in the first quarter of fiscal year 2018, which were primarily comprised of expenditures for our ongoing ERP system implementation, manufacturing facility equipment and improvements, new product tooling, and the continued rollout of our online parts sales infrastructure.

Segments

We serve a diversified customer base primarily in the United States through the following segments:

Fire & Emergency – The Fire & Emergency segment sells fire apparatus equipment under the Emergency One, Kovatch Mobile Equipment and Ferrara brands and ambulances under the American Emergency Vehicles, Horton Emergency Vehicles, Leader Emergency Vehicles, Marque, McCoy Miller, Road Rescue, Wheeled Coach 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 typically favored for non-emergency patient transportation), 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 small tank to extinguish fires), ladder trucks (fire apparatus with stainless steel or aluminum ladders), tanker trucks and rescue 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. In April 2017, we acquired Ferrara Fire Apparatus, a leader in custom fire apparatus and rescue vehicles.

Commercial – Our Commercial segment serves the bus market through the following principal brands: Collins Bus, Goshen Coach, ENC, ElDorado National, Krystal Coach, Federal Coach, Champion and World Trans. We serve the terminal truck market through the Capacity brand, the sweeper market through the Lay-Mor brand and the mobility van market through our Revability brand. We are a leading producer of small- and medium-sized buses, Type A school buses, transit buses, terminal trucks and street sweepers in the United States. Our products in the Commercial segment include cut-away buses (customized body built on various types and sizes of commercial chassis), transit buses (large municipal buses where we build our own chassis and body), luxury buses (bus-style limo or high-end luxury conversions), street sweepers (three- and four-wheel versions used in road construction activities), terminal trucks (specialized vehicle which moves freight in warehouses or intermodal yards and ports), Type A school buses (small school bus built on commercial chassis), and mobility vans (mini-van converted to be utilized by wheelchair passengers). Within each market segment, we produce a large number of customized configurations to address the diverse needs of our customers.

Recreation – Our Recreation segment serves the RV market through six principal brands: American Coach, Fleetwood RV, Monaco Coach, 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 six brands, REV provides a variety of highly recognized models such as: American Eagle, Signature, Marquis, Bounder and Pace Arrow, 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), a line of heavy-duty special application trailers, and, as a result of the acquisition of Midwest, Class B RVs (motorhomes built out on a van chassis). The Recreation segment also includes Goldshield Fiberglass, which produces a wide range of custom molded fiberglass products for the RV and broader industrial markets. In December 2016, we acquired Renegade RV, a leader in the “Super C” segment of the RV market and producer of a line of heavy-duty special application trailers. In April 2017, we acquired Midwest, a leading producer of Class B RVs and custom luxury vans. In January 2018, we acquired Lance, a producer of truck campers, towable campers and toy haulers.

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Factors Affecting Our Performance

The primary factors affecting our results of operations include:

General Economic Conditions

Our business is impacted by the U.S. economic environment, employment levels, consumer confidence, municipal spending, changes in interest rates and instability in securities markets around the world, among other factors. In particular, changes in the U.S. economic climate can impact demand in key end markets.

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. The 2008 recession caused consumers to reduce their discretionary spending, which negatively affected sales volumes for RVs. Terminal truck sales volumes are also impacted by economic conditions and industrial output, as these factors impact our end-market customers for these products, which include shipping ports, trucking/distribution hubs and rail terminal operators. Although RV and terminal truck sales have increased in recent years, these markets are affected by general U.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, our Fire & Emergency and Commercial segments are also impacted by the overall economic environment. Local tax revenues are an important source of funding for fire and emergency response departments. As fire and emergency products and school buses are typically a larger cost item for municipalities and their service life is relatively long, their purchase is more deferrable, which can result in reduced demand for our 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.

Cost Management Initiatives

Our recent operating results reflect the impact of our ongoing initiatives to lower our operating costs to expand our profit margins. Purchased materials, including chassis, represent our largest component of costs of sales. We operate a centralized strategic procurement organization dedicated to reducing our overall level of materials spend across our three segments, while simplifying and standardizing suppliers and parts.

Impact of Acquisitions

For the past several years, a significant component of our growth has been the addition of businesses or business units through acquisitions. 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, changes to production processes at acquired facilities to implement manufacturing improvements and other restructuring initiatives. The benefits of these integration efforts may not positively impact our financial results until subsequent periods. Operational and financial integration of our recently acquired businesses could be ongoing.

In accordance with GAAP, 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.

Stock Compensation Expense

As a result of our IPO, outstanding stock options which had previously been recorded as a liability on the Company’s balance sheet were reclassified to permanent equity. On the date of the IPO, vesting of 846,000 of these liability awards were accelerated, and there were 1,528,000 of vested liability option awards. All liability option awards were re-measured at fair value based upon the IPO offering price of $22.00 per share. Also as a result of the IPO, the Company recorded stock compensation expense of $13.3 million due to the change in fair value of the liability option awards and $8.9 million due to stock options which immediately vested.

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Key Performance Indicators

In assessing the performance of our business, we consider a variety of operational and financial measures. These measures include net sales, units sold, selling, general and administrative expenses, Adjusted EBITDA and Adjusted Net Income. In assessing segment performance, our chief executive officer, as the chief operating decision maker, analyzes the primary financial measure of Adjusted EBITDA.

Net Sales and Units Sold

We evaluate net sales and units sold because it helps us measure the impact of economic trends, the effectiveness of our marketing, the response of customers to new product launches and model changes, and the effect of competition over a given period. We recognize revenue for sales of completed vehicles upon shipment or delivery and acceptance by the dealer or customer as specified by the relevant dealer or customer purchase order.

Our units represent a wide range of products at various price points, with higher value-added units at higher price points typically resulting in higher gross margins. Additionally, large orders of similar units typically provide operational efficiencies that contribute to higher gross margins. As such, our management also utilizes unit volume sales mix to analyze our business.

Selling, General and Administrative Expenses

We evaluate our selling, general and administrative expenses in order to identify areas where we can further invest or create savings. Such investments or spending reductions could include items such as third-party services and cost of administrative processes. These expenses consist primarily of personnel costs, sales and marketing expenses, as well as other expenses associated with facilities unrelated to our manufacturing and supply chain network, internal management expenses and expenses for finance, information systems, legal, business development, human resources, purchasing and other administrative costs.

The components of our selling, general and administrative expenses may not be identical to those of our competitors. As a result, data in this document regarding our operating and administrative expenses may not be comparable to similar expenses of our competitors. We expect that our selling, general and administrative expenses will increase in future periods as we grow our businesses and due to additional legal, accounting, insurance and other expenses we expect to incur as a result of being a public company.

Adjusted EBITDA and Adjusted Net Income

Adjusted EBITDA and Adjusted Net Income are the primary metrics we use to evaluate the financial performance of our business. Adjusted EBITDA and Adjusted Net Income are also frequently used by analysts, investors and other interested parties to evaluate companies in our markets. We believe that Adjusted EBITDA and Adjusted Net Income are useful performance measures and we use them to facilitate a comparison of our operating performance on a consistent basis from period to period and to provide for a more complete understanding of factors and trends affecting our business. In addition to Adjusted EBITDA and Adjusted Net Income, we also utilize the metric of Adjusted EBITDA as a percentage of net sales as a complimentary measurement of performance among our businesses and versus our competitors. We also use Adjusted EBITDA and Adjusted Net Income as primary methods for planning and forecasting overall expected performance and for evaluating on a quarterly and annual basis actual results against such expectations, and as a performance evaluation metric in determining achievement of certain compensation programs and plans for employees, including our senior executives.

Adjusted EBITDA and Adjusted Net Income are not presentations made in accordance with GAAP, nor are they measures of financial condition or liquidity and they should not be considered as an alternative to net cash provided by (used in) operating activities or net income, respectively, for the period determined in accordance with GAAP. See “Adjusted EBITDA and Adjusted Net Income” below for a discussion of our use of Adjusted EBITDA and Adjusted Net Income and reconciliations of these measures to their most directly comparable GAAP measure.

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Results of Operations

Three Months Ended January 31, 2018 Compared with Three Months Ended January 28, 2017

 

 

Net Sales. Consolidated net sales were $514.9 million for the three months ended January 31, 2018, an increase of $71.9 million, or 16.2%, from $442.9 million for the three months ended January 28, 2017. The increase in consolidated net sales was due to an increase in net sales in all of our segments. The increase in net sales in the Recreation segment was due to increased unit sales volumes and net sales from acquired companies. The increase in our F&E segment net sales was due to increased sales of fire and ambulance units in the quarter, and net sales from Ferrara, which was acquired in April 2017. The increase in our Commercial segment net sales was primarily due to higher shuttle bus unit volumes compared to the prior year period.

Cost of Sales. Consolidated cost of sales as a percentage of net sales was 89.8% for the three months ended January 31, 2018 as compared to 89.3% for the three months ended January 28, 2017.

Gross Profit. Consolidated gross profit was $52.6 million for the three months ended January 31, 2018, an increase of $5.0 million, or 10.6% from $47.5 million for the three months ended January 28, 2017. Consolidated gross profit, as a percentage of net sales, was 10.2% and 10.7% for the three months ended January 31, 2018 and January 28, 2017, respectively. The decrease in gross profit, as a percentage of net sales, was due to the negative sales mix in our F&E and Commercial segments offset by positive sales mix in our Recreation segment.

Selling, General and Administrative. Consolidated selling, general and administrative expenses were $41.0 million for the three months ended January 31, 2018, a decrease of $15.5 million, or 27.4%, from $56.5 million for the three months ended January 28, 2017. Selling, general and administrative expenses, as a percentage of net sales, were 7.9% and 12.8% for the three months ended January 31, 2018 and January 28, 2017, respectively. The decrease in selling, general and administrative expenses was due primarily to lower stock-based compensation expense offset by higher corporate expenses and additional expenses from acquired companies. The decrease in stock-based compensation expense was due to larger than normal expense in fiscal year 2017 as a result of our IPO. The increase in corporate expenses is due to higher payroll and employee benefits to support enterprise-wide initiatives and the timing of our annual dealer summit, which took place in the first quarter of fiscal year 2018, but occurred during the second quarter of the prior year.

Research and Development. Consolidated research and development costs were $1.7 million for the three months ended January 31, 2018, an increase of $0.5 million, or 44.5% from $1.2 million for the three months ended January 28, 2017.

Restructuring. Consolidated restructuring costs were $4.1 million for the three months ended January 31, 2018, compared to $0.9 million for the three months ended January 28, 2017. Restructuring expenses in the current year quarter represent costs incurred to restructure certain management positions in our Recreation segment and in our Corporate office, consisting of personnel costs, including severance and other employee benefit payments, as well as facility moving expenses in the Recreation segment.

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Restructuring expenses in the prior year included costs incurred to restructure certain management positions in our Commercial segment and in our Corporate office, consisting of personnel costs, including severance and other employee benefit payments.

Amortization of Intangible Assets. Consolidated amortization of intangible assets was $4.7 million for the three months ended January 31, 2018, compared to $2.6 million for the three months ended January 28, 2017. The increase in amortization expense was due to the amortization of the intangible assets recorded as part of the acquisitions of Renegade in December 2016 and Midwest and Ferrara in April 2017.

Interest Expense. Consolidated interest expense was $5.4 million for the three months ended January 31, 2018, a decrease of $2.1 million, or 27.6% from $7.5 million for the three months ended January 28, 2017. Interest expense decreased primarily due to the repayment of our Notes in February 2017 with the net proceeds from our IPO.

Income Taxes. Consolidated income tax benefit was $13.8 million for the three months ended January 31, 2018, or 313.1% of pre-tax loss, compared to $7.8 million, or 37.1% of pre-tax loss, for the three months ended January 28, 2017. Results for the three months ended January 31, 2018 were favorably impacted by $12.7 million of net discrete tax benefits, including a $2.3 million benefit related to stock option exercises and vesting of restricted stock units under ASU 2016-09 and a $10.4 million benefit related to the remeasurement of net deferred tax liabilities as a result of new tax legislation in the United States. The first quarter of fiscal year 2018 tax rate before discrete items of 26.3% was significantly lower than the prior year quarter as a result of the U.S. tax legislation. Results for the first quarter of fiscal year 2017 were favorably impacted by income tax incentives for U.S. manufacturing and research incentives.

On December 22, 2017, the Tax Reform Act was signed and enacted into law and is effective for tax years beginning on or after January 1, 2018, with the exception of certain provisions. The Tax Reform Act reduces the U.S. corporate rate from 35% to 21%. A number of other provisions will not impact the Company until fiscal year 2019, such as elimination of the domestic manufacturing deduction and U.S. taxation of foreign earnings. As a result of the Tax Reform Act, the Company recognized a non-cash estimated tax benefit of $10.4 million related to the remeasurement of the Company’s net deferred tax liabilities at the lower statutory rate based on the timing of expected reversals. Although the $10.4 million tax benefit represents what the Company believes is a reasonable estimate of the income tax effects of the Tax Reform Act on its consolidated financial statements as of January 31, 2018, it is a provisional amount and will be impacted by the Company’s ongoing analysis of the legislation and full fiscal year 2018 financial results. Any adjustments to these provisional amounts will be reported as a component of income tax expense (benefit) in the reporting period in which any such adjustments are determined, which will be no later than the first quarter of fiscal year 2019.

Net Income. Consolidated net income was $9.4 million for the three months ended January 31, 2018, an increase of $22.7 million, or 170.8% from a net loss of $13.3 million for the three months ended January 28, 2017.

Adjusted Net Income. Consolidated Adjusted Net Income was $9.7 million for the three months ended January 31, 2018, an increase of $4.1 million, or 72.0% from $5.7 million for the three months ended January 28, 2017.

Adjusted EBITDA. Consolidated Adjusted EBITDA was $21.3 million for the three months ended January 31, 2018, an increase of $0.2 million, or 0.9%, from $21.1 million for the three months ended January 28, 2017. The increase in Adjusted EBITDA was primarily due to an increase in gross profit, offset partially by an increase in selling, general and administrative expenses.

Fire & Emergency Segment

 

 

Net Sales. F&E segment net sales were $215.3 million for the three months ended January 31, 2018, an increase of $29.9 million, or 16.1%, from $185.4 million for the three months ended January 28, 2017. Net sales increased due to net sales from Ferrara, which was acquired in April 2017 in addition to an increase in ambulance units compared to the prior year period.

Adjusted EBITDA. F&E segment Adjusted EBITDA was $18.2 million for the three months ended January 31, 2018, an increase of $1.5 million, or 8.7%, from $16.7 million for the three months ended January 28, 2017. The increase in Adjusted EBITDA was due to results from Ferrara, improved pricing and net material cost reductions, offset by a negative sales mix in our ambulance businesses. In addition, these increases were partially offset by increased selling, general, and administrative expenses from Ferrara.

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Commercial Segment

 

 

Net Sales. Commercial segment net sales were $132.2 million for the three months ended January 31, 2018, an increase of $2.0 million, or 1.5%, from $130.2 million for the three months ended January 28, 2017. The increase in net sales was primarily due to an increase in all Commercial segment unit sales, except school bus compared to the prior year period.

Adjusted EBITDA. Commercial segment Adjusted EBITDA was $4.5 million for the three months ended January 31, 2018, a decrease of $3.7 million, or 45.4%, from $8.2 million for the three months ended January 28, 2017. This decrease was primarily due to the shift in sales mix described above away from school bus as well as costs incurred to support shuttle bus manufacturing process improvement activities.

Recreation Segment

 

 

 

Net Sales. Recreation segment net sales were $167.2 million for the three months ended January 31, 2018, an increase of $40.5 million, or 32.0%, from $126.7 million for the three months ended January 28, 2017. The increase in net sales was due to an increase in unit sales and sales from acquired companies.

Adjusted EBITDA. Recreation segment Adjusted EBITDA was $8.2 million for the three months ended January 31, 2018, an increase of $5.4 million, or 194.0%, from $2.8 million for the three months ended January 28, 2017. The increase in Adjusted EBITDA was primarily due to an increase in sales and gross profit slightly offset by an increase in selling, general and administrative expenses from acquired companies. The increase in gross profit was due to higher unit sales volumes from acquired companies, higher volumes of our other RV products, and lower cost of materials.

Backlog

Backlog represents orders received from dealers or directly from end customers. Backlog does not include purchase options or verbal orders. The following table presents a summary of our backlog by segment (in thousands):

 

 

Each of our segments has a backlog of new vehicle and parts orders that generally extends out from two to twelve months in duration, but in the case of multi-year contracts, backlog can extend beyond twelve months. We expect that $180.2 million of our current backlog will not be produced and sold within the next twelve months following January 31, 2018.

Our businesses take orders from our dealers and end customers that are evidenced by a contract, firm purchase order or reserved production slot for delivery of one or many vehicles with a given specification over a period of time. These orders are placed in our backlog and reported at the aggregate selling prices, net of discounts or allowances, at the time the order is received.

 

As of January 31, 2018, our backlog was $1,241.9 million compared to $1,101.6 million as of October 31, 2017. The increase in Recreation backlog was partially due to the current year acquisition of Lance.

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Liquidity and Capital Resources

General

Our primary requirements for liquidity and capital are working capital (including inventory), acquiring machinery and equipment, acquiring and building manufacturing facilities, the improvement and expansion of existing manufacturing facilities, debt service payments, regular quarterly dividend 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 revolving credit facility.

We believe that our sources of liquidity and capital will be sufficient to finance our continued operations, growth strategy, cash dividends and additional expenses we expect to incur as a public company. However, we cannot assure you that our cash provided by operating activities and borrowings under our 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 our 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 we obtain additional capital 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. We cannot assure you that we will be able to obtain refinancing or additional financing on favorable terms or at all.

Working capital at January 31, 2018 (defined as current assets, excluding cash, minus current liabilities, excluding current portion of long-term debt) was $389.3 million compared to $299.7 million at October 31, 2017. The increase in working capital was primarily due to the normal seasonal increase in inventory compared to the prior year-end, as well as the timing of payments of accounts payable.

Long-term debt, excluding current maturities, at January 31, 2018 was $371.5 million compared to $229.1 million at October 31, 2017. Long-term debt increased primarily due to the increase in working capital described above, increased borrowings to fund the acquisition of Lance and capital expenditures in the first three months of 2018.

Cash Flow

The following table shows summary cash flows for the three months ended January 31, 2018 and January 28, 2017 (in thousands):

 

 

Net Cash Used in Operating Activities

Net cash used in operating activities for the three months ended January 31, 2018 was $72.7 million, compared to $33.7 million for the three months ended January 28, 2017. The increase in cash used in operating activities for the three months ended January 31, 2018, compared to the prior year period was primarily due to higher cash outflows for accounts payable and an increase in inventory, which was partially offset by increased cash inflows from accounts receivable and lower payments for other liabilities.

The higher cash outflows for accounts payable in the current year was due primarily to timing of payments to vendors. The increase in inventory was due to increased sales volumes and the timing of vehicle production. Higher cash inflows from accounts receivable was due to increased sales in the fourth quarter of fiscal year 2017 and the impact of the change in the Company’s year-end date to the end of a calendar month in fiscal 2017. Lower cash outflows for other liabilities in the three months ended January 31, 2018, compared to the prior year period was due to the timing of income tax payments, which were $10.4 million lower in the first three months of fiscal year 2018 versus the prior year period, and lower payments for interest, which were $5.3 million lower than the prior year period.

Excluding non-cash stock based compensation expense and restructuring costs, operating income decreased by $5.9 million in the three months ended January 31, 2018 compared to the prior year period.

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Net Cash Used in Investing Activities

Net cash used in investing activities for the three months ended January 31, 2018 was $72.9 million, compared to $38.3 million for the three months ended January 28, 2017. The increase in net cash used in investing activities for the three months ended January 31, 2018, compared to the prior year period, was primarily due to an increase in payments for business acquisitions, offset by lower purchases of property, plant and equipment and higher cash proceeds from the sale of property, plant and equipment. For the three months ended January 31, 2018, the Company completed the acquisition of Lance, compared to the prior year period, when the Company completed the acquisition of Renegade.

Net Cash Provided by Financing Activities

Net cash provided by financing activities for the three months ended January 31, 2018 was $140.4 million, which primarily consisted of net proceeds from borrowings from our revolving credit facility to support acquisitions and working capital requirements. Net cash provided by financing activities for the three months ended January 28, 2017 was $76.3 million, which primarily consisted of net borrowings from our revolving credit facility, and $3.2 million of payments to redeem stock options.

On February 28, 2018, the Company paid a cash dividend of $3.2 million to holders of record as of January 26, 2018.

On March 7, 2018, our board of directors declared a cash dividend of $0.05 per share on our common stock, payable in respect of the first quarter of fiscal year 2018. The dividend is payable on May 31, 2018 to holders of record as of April 30, 2018. Subject to legally available funds and the discretion of our board of directors, we expect to pay a quarterly cash dividend at the rate of $0.05 per share on our common stock. We expect to pay this quarterly dividend on or about the last day of the first month following each fiscal quarter to shareholders of record on the last day of such fiscal quarter. Our dividend policy has certain risks and limitations, particularly with respect to liquidity, and we may not pay dividends according to our policy, or at all. We cannot assure you that we will declare dividends or have sufficient funds to pay dividends on our common stock in the future.

Offering of Common Stock

On January 26, 2017, the Company announced an initial public offering (“IPO”) of our common stock which began trading on the New York Stock Exchange under the ticker symbol “REVG”. On February 1, 2017, the Company completed the offering of 12,500,000 shares of common stock at a price of $22.00 per share and the Company received $275.0 million in gross proceeds from the IPO, or $253.6 million in net proceeds after deducting the underwriting discount and expenses related to the offering. The net proceeds of the IPO were used to partially pay down the Company’s existing debt. The Company redeemed the entire outstanding balance of its Senior Secured Notes, including a prepayment premium and accrued interest, plus it partially paid down the then outstanding balance of its revolving credit facility.

Term Loan

On April 25, 2017, we entered into a $75.0 million term loan (“Term Loan” or “Term Loan Agreement”), as Borrower, certain subsidiaries of the Company, as Guarantor Subsidiaries. Principal may be prepaid at any time during the term of the Term Loan without penalty. The Company incurred $2.0 million in debt issuance costs related to the Term Loan. The Term Loan Agreement expires on April 25, 2022.

April 2017 ABL Facility

On April 25, 2017, we entered into a new $350.0 million ABL revolving credit agreement with a syndicate of lenders (the “April 2017 ABL Facility” and “ABL Agreement”). The April 2017 ABL Facility provides for revolving loans and letters of credit in an aggregate amount of up to $350.0 million. The total April 2017 ABL Facility is subject to a $30.0 million sublimit for swing line loans and a $35.0 million sublimit for letters of credit, along with certain borrowing base and other customary restrictions as defined in the ABL Agreement. The April 2017 ABL Facility expires on April 25, 2022.

On December 22, 2017 the Company exercised its $100.0 million incremental commitment option under the April 2017 ABL Facility, which increased the facility to $450.0 million.

Funds from the April 2017 ABL Facility were used to repay borrowings on the previous ABL Facility and to fund the Ferrara acquisition.

Principal may be repaid at any time during the term of the ABL Facility without penalty.

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The April 2017 ABL Facility contains certain financial covenants. We were in compliance with all financial covenants under the ABL Facility as of January 31, 2018.

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. Neither Adjusted EBITDA nor Adjusted Net Income is a measure defined by GAAP. The most directly comparable GAAP measure to EBITDA, Adjusted EBITDA and Adjusted Net Income is net income for the relevant period.

We believe Adjusted EBITDA and Adjusted Net Income are useful to investors and are used by our management for measuring profitability because 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 specialty vehicle 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 further adjust net income for the following items: non-cash depreciation and amortization, interest expense and benefit for income taxes. Stock-based compensation expense is excluded from both Adjusted Net Income and Adjusted EBITDA because it is an expense that is measured based upon external inputs such as our current share price and the movement of share price of peer companies, 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 need to be disclosed by virtue of their size, nature or incidence, which include non-cash items and items settled in cash. In determining whether an event or transaction is exceptional, management considers quantitative as well as qualitative factors such as the frequency or predictability of occurrence. This is consistent with the way that financial performance is measured by management and reported to our Board of Directors, assists in providing a meaningful analysis of our operating performance and used as a measurement in incentive compensation for management. Based on the foregoing factors, management considers the adjustment for non-cash purchase accounting, legal settlements and deferred purchase price payment to be exceptional items.

Adjusted EBITDA and Adjusted Net Income have limitations as analytical tools. These are not presentations made in accordance with GAAP, nor are they measures of financial condition and they should not be considered as an alternative to net income or net loss for the period determined in accordance with GAAP. 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 with GAAP. Moreover, such measures do not reflect:

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The following table reconciles net income (loss) to Adjusted EBITDA for the periods presented (in thousands):

 

 

Restructuring expenses in the prior year quarter included costs incurred to restructure certain management positions in its Commercial segment and in its Corporate office, consisting of personnel costs, including severance and other employee benefit payments.

During the first quarter of fiscal year 2018, transaction expenses consisted primarily of costs related to the inception of our Chery Joint venture and expenses related to the Lance acquisition.

During the first quarter of fiscal year 2017, these transaction expenses consisted primarily of costs related to the Renegade acquisition.

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The following table reconciles net income (loss) to Adjusted Net Income for the periods presented (in thousands):

 

 

During the first quarter of fiscal year 2018, transaction expenses consisted primarily of costs related to the inception of our Chery Joint venture and expenses related to the Lance acquisition.

During the first quarter of fiscal year 2017, these transaction expenses consisted primarily of costs related to the Renegade acquisition.

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

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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.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates, assumptions and judgments that affect amounts of assets and liabilities reported in the 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 policies to be the most critical in understanding the judgments that are involved in preparing our consolidated financial statements.

Revenue Recognition

We recognize revenue for sales of vehicles, parts and other finished products when contract terms are met, collectability is reasonably assured and a product is shipped or risk of ownership has been transferred to and accepted by the customer. In certain instances, risk of ownership and title passes when the product has been completed in accordance with purchase order specifications and has been tendered for delivery to the customer. Periodically, certain customers request bill and hold transactions. In those cases, revenue is recognized after all provisions of Accounting Standard Codification 605, “Revenue Recognition”, are met including the customer has been notified that the products have been completed according to the customer specifications, the vehicles have passed all of our quality control inspections, and are ready for delivery.

Revenue from service agreements is recognized as earned when services are rendered. Intercompany sales are eliminated upon consolidation. Provisions are made for discounts, returns and sales allowances based on management’s best estimate and the historical experience of each business unit. Sales are recorded net of amounts invoiced for taxes imposed on the customer, such as excise or value-added taxes.

Customer advances include amounts received in advance of the completion of vehicles or in advance of services being rendered. Such customer advances are recorded as current liabilities in our consolidated balance sheet until the vehicle is shipped or the service rendered.

Income Taxes

We account for income taxes under the guidance of Accounting Standard Codification 740, “Income Taxes.” Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We record a valuation allowance on deferred tax assets for which utilization is not more likely than not. Management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities, and the valuation allowance recorded against our net deferred tax assets.

We recognize liabilities for uncertain income tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as we must determine the probability of various possible outcomes. We reevaluate these uncertain tax positions on a quarterly basis or when new information becomes available to management. These reevaluations are based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, successfully settled issues under audit, expirations due to statutes, and new audit activity. Such a change in recognition or measurement could result in the recognition of a tax benefit or an increase to the tax accrual.

Stock Compensation Expense

Stock compensation expense is recorded over the term of the associated stock option grants, which is generally up to 10 years from the grant date, and is measured based upon the estimation of the fair value of all stock option awards on the grant date by applying the Black-Scholes option-pricing valuation model (the “Black-Scholes Model”). The application of the Black-Scholes Model requires us to make certain assumptions such as the fair value of our common stock on the grant date, forfeitures of option grants and

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the rate of dividend payments on our common stock. Other assumptions utilized in the Black-Scholes Model include volatility of the share price of select peer public companies and the risk free rate.

Prior to the IPO, the fair value of our common stock was calculated by determining our enterprise value by applying an earnings multiple to our Adjusted EBITDA over the previous 12 months, and deducting outstanding debt, then dividing by the number of shares of common stock outstanding. The assumption for forfeitures is based upon historical experience. As we have not historically paid dividends on our common stock, we have previously assumed a 0% dividend rate for all outstanding stock options.

Prior to the IPO, our stockholders were party to a shareholders agreement that was amended and restated in its entirety. Due to provisions in that shareholders agreement, employee shareholders were allowed to put his or her shares to us under certain circumstances. As such, certain outstanding stock options were considered liability awards and were recorded at fair value and recognized as a liability on our consolidated balance sheet. As a result of our IPO, the aforementioned put rights expired and the outstanding options were no longer considered liability awards and the fair value of the options was reclassified to additional paid-in capital.

Stock compensation expense for restricted and performance stock awards is recorded over the vesting period based on the grant date fair value of the awards. The grant date fair value is equal to the closing share price on the date of grant.

Business Combinations

Acquisitions are accounted for using purchase accounting. The purchase price of an acquired company is allocated between tangible and intangible assets acquired and liabilities assumed from the acquired business, in each case based on their estimated fair values. Any excess consideration transferred is recorded as goodwill. A bargain purchase gain is recognized to the extent the estimated fair value of the net assets acquired exceeds the purchase price. The results of operations of the acquired businesses are included in our operating results from the date of acquisition.

Assets acquired and liabilities assumed generally include tangible and intangible assets, as well as contingent assets and liabilities. When available, the estimated fair values of these assets and liabilities are determined based on observable inputs, such as quoted market prices, information from comparable transactions, offers made by other prospective acquirers (in such cases where we may have certain rights to acquire additional interests in existing investments) and the replacement cost of assets in the same condition or stage of usefulness (Level 1 and 2). Unobservable inputs, such as expected future cash flows or internally developed estimates of value (Level 3), are used if observable inputs are not available.

Accounts Receivable

Accounts receivable consist of amounts billed and currently due from customers. We extend credit to customers in the normal course of business and maintain an allowance for doubtful accounts resulting from the inability or unwillingness of customers to make required payments. Management determines the allowance for doubtful accounts by evaluating individual customer receivables and considering a customer’s financial condition, credit history and current economic conditions. Each fiscal quarter, we prepare an analysis of our ability to collect outstanding receivables that provides a basis for an allowance estimate for doubtful accounts. In connection with this analysis, we evaluate the age of accounts receivable, past collection history, current financial conditions of key customers and economic conditions.

Based on this evaluation, we establish a reserve for specific accounts receivable that are believed to be uncollectible, as well as an estimate of uncollectible receivables not specifically known. Historical trends and our current knowledge of potential collection problems provide us with sufficient information to establish a reasonable estimate for an allowance for doubtful accounts. Receivables are written off when management determines collection is highly unlikely and collection efforts have ceased. Recoveries of receivables previously written off are recorded when received.

Goodwill and Indefinite-Lived Intangible Assets

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.

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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. 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 the income approach and involves the use of significant estimates and assumptions. The income approach involves discounting management’s projections of future cash flows and a terminal value discounted at a discount rate which approximates the Company’s weighted-average cost of capital (“WACC”). Key assumptions used in the income approach include future sales growth, gross margin and operating expenses trends, depreciation 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 future. The WACC incorporates equity and debt return rates observed in the market for a group of comparable public companies in the industry, and is determined using an average debt to equity ratio of selected comparable public companies, and is also adjusted for risk premiums and the Company’s capital structure. The terminal value is based upon the projected cash flow for the final projected year, and is calculated using estimates of growth of the net cash flows based on the Company’s estimate of stable 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 method which requires the determination of fair value based on if the Company was licensing the right to the trade name in exchange for a royalty fee. The Company utilizes the income approach to determine future revenues to which to apply a royalty rate. The royalty rate is based on research of industry and market data related to transactions involving the licensing of comparable intangible assets. In considering the value of trade names, the Company looks to relative age, consistent use, quality, expansion possibilities, relative profitability and relative market potential.

Long-Lived Assets, Including Definite-Lived Intangibles

Property, plant and equipment and definite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If an analysis is necessitated by the occurrence of a triggering event, we compare the carrying amount of the asset group with the estimated undiscounted future cash flows expected to result from the use of the asset group. If the carrying amount of the asset group exceeds the estimated expected undiscounted future cash flows, we measure the amount of the impairment by comparing the carrying amount of the asset group with its estimated fair value. Such analyses necessarily involve significant judgments and estimations on our part.

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 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.

Segment Reporting

For purposes of business segment performance measurement, we do not allocate to individual business segments costs or items that are of a non-operating nature or organizational or functional expenses of a corporate nature. The caption “Corporate and Other” includes corporate office expenses, including stock-based compensation expense, results of insignificant operations, intersegment eliminations and income and expenses not allocated to reportable segments. Identifiable assets of the business segments exclude

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general corporate assets, which principally consist of cash and cash equivalents, certain property, plant and equipment and certain other assets pertaining to corporate and other centralized activities.

Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” (Topic 606) (“ASU 2014-09”), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. This standard will supersede most current revenue recognition guidance. Under the new standard, entities are required to identify the contract with a customer, identify the separate performance obligations in the contract, determine the transaction price, allocate the transaction price to the separate performance obligations in the contract and recognize the appropriate amount of revenue when (or as) the entity satisfies each performance obligation. ASU 2014-09 will become effective for fiscal years beginning after December 15, 2017 (the Company’s fiscal year 2019). We are currently evaluating the impact of ASU 2014-09 on our consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory” (“ASU 2015-11”). Under ASU 2015-11, entities should measure inventory that is not measured using last-in, first-out or the retail inventory method, including inventory that is measured using first-in, first-out or average cost, at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 is effective for reporting periods beginning after December 15, 2016 (the Company’s fiscal year 2018), and is to be applied prospectively. The adoption of ASU 2015-11 did not have a material effect on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting (Topic 718)” (“ASU 2016-09”), which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for the related income taxes, forfeitures, statutory tax withholding requirements and classification in the statement of cash flows. We adopted ASU 2016-09 in the first quarter of fiscal year 2018. As a result of the adoption, the Company recorded $2.3 million of excess tax benefits for stock option exercises and RSU vesting as a reduction of our income tax provision in our consolidated financial statements. The provisions regarding forfeitures did not impact us, as we recognized forfeitures when they occurred prior to adoption of ASU 2016-09.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The amendments in this update require, among other things, that lessees recognize the following for all leases (with the exception of leases with a duration of less than 12 months) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-to-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We expect to adopt ASU 2016-02 in the first quarter of fiscal year 2019 and are currently evaluating the impact of ASU 2016-02 to our consolidated financial statements.

In August 2015, the FASB issued ASU No. 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements” (“ASU 2015-15”), which clarifies the guidance set forth in ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”), issued in April 2015. ASU 2015-03 requires that debt issuance costs related to a recognized liability be presented on the statements of operations as a direct reduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected. ASU 2015-15 provides additional guidance regarding debt issuance costs associated with line-of-credit arrangements, stating that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred issuance costs ratably over the term of the line-of-credit arrangement. ASU 2015-03 is effective for reporting periods beginning after December 15, 2015 (the Company’s fiscal year 2017), and early adoption is permitted. In fiscal year 2016, we adopted ASU 2015-03 and ASU 2015-15 and debt issuance costs are presented as a direct deduction from the carrying amount of the related debt liability for all periods presented. The adoption of ASU 2015-03 and ASU 2015-15 did not have a material effect our consolidated financial statements.

In September 2015, the FASB issued ASU No. 2015-16, “Business Combinations (Topic 805)—Simplifying the Accounting for Measurement-Period Adjustments” (“ASU 2015-16”). ASU 2015-16 requires that an acquirer in a business combination recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, rather than as retrospective adjustments. ASU 2015-16 is effective for fiscal years beginning after December 15, 2015 (the Company’s fiscal year 2017), including interim periods within those fiscal years. ASU 2015-16 should be applied prospectively to adjustments to provisional amounts that occur after the effective date of ASU 2015-16 with earlier application

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permitted for financial statements that have not been issued. The adoption of ASU 2015-16 did not have a material impact on our consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There have been no material changes in our exposure to interest rate risk, foreign exchange risk and commodity price risk from the information provided in the Company’s registration statement on Form S-1 filed in connection with its IPO.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

In accordance with Rule 13a-15(b) of the Exchange Act, the Company’s management evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the quarter ended January 31, 2018. Based upon their evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the quarter ended January 31, 2018 to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the Securities and Exchange Commission rules and forms, and to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

The Company is subject to certain legal proceedings that arise in the ordinary course of business. Although the final results of all such matters and claims cannot be predicted with certainty, management believes that the ultimate resolution of all such matters and claims will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows. Actual results could vary, among other things, due to the uncertainties involved in litigation.

Item 1A. Risk Factors.

The following risk updates and supplements the corresponding risk factor set forth under the heading “Risk Factors—Risks Relating to Our Business” in the Company’s Annual Report on Form 10-K filed on December 21, 2017.  

Changes to tax laws or exposure to additional tax liabilities may have a negative impact on our operating results.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Reform Act”) was enacted in the United States. The Tax Reform Act makes broad and complex changes to U.S. law, and in certain instances, lacks clarity and is subject to interpretation until additional Internal Revenue Service guidance is issued. In the absence of guidance on various uncertainties and ambiguities in the application of certain provisions of the Tax Reform Act, we will use what we believe are reasonable interpretations and assumptions in applying the Tax Reform Act. However, it is possible that the ultimate impact of the Tax Reform Act may differ from the Company’s estimates due to changes in the interpretations and assumptions made as well as any forthcoming regulatory guidance. The Company will continue to assess the provisions of the Tax Reform Act and the anticipated impact to its income tax expense and will disclose the anticipated impact on its consolidated financial statements in future financial filings until the final impact is determined.

In addition, we regularly undergo tax audits in various jurisdictions in which we operate. Although we believe that our income tax provisions and accruals are reasonable and in accordance with GAAP, and that we prepare our tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audits and any related litigation, could be materially different from our historical income tax provisions and accruals. The results of a tax audit or litigation could materially affect our operating results and cash flows in the periods for which that determination is made. In addition, future period net income may be adversely impacted by litigation costs, settlements, penalties and interest assessments.

Any of these occurrences could have a negative impact on our operating results.

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Item 6. Exhibits.

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

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Exhibit 31.1

CERTIFICATION PURSUANT TO

RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Tim Sullivan, certify that:

 

 

 

 

Exhibit 31.2

CERTIFICATION PURSUANT TO

RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Dean J. Nolden certify that:

 

 

 

 

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of REV Group, Inc. (the “Company”) on Form 10-Q for the period ended January 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

 

 

 

 

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of REV Group, Inc. (the “Company”) on Form 10-Q for the period ended January 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: