UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________

FORM 10-Q

Commission File Number 000-13611

SPARTAN MOTORS, INC.
(Exact Name of Registrant as Specified in Its Charter)

Registrant’s Telephone Number, Including Area Code:  (517) 543-6400

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.

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).

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.

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

SPARTAN MOTORS, INC.

INDEX
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FORWARD-LOOKING STATEMENTS

There are certain statements within this Report that are not historical facts.  These statements are called “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements involve important known and unknown risks, uncertainties and other factors and can be identified by phrases using “estimate,” “anticipate,” “believe,” “project,” “expect,” “intend,” “predict,” “potential,” “future,” “may,” “should” and similar expressions or words. Our future results, performance or achievements may differ materially from the results, performance or achievements discussed in the forward-looking statements. There are numerous factors that could cause actual results to differ materially from the results discussed in forward-looking statements, including, among others:

This list provides examples of factors that could affect the results described by forward-looking statements contained in this Report.  However, this list is not intended to be all inclusive.  The risk factors disclosed in Item 1A “Risk Factors” of Part II of this Quarterly Report on Form 10-Q and of Part I – Item A of our Annual Report on Form 10-K for the year ended December 31, 2009, include all known risks our management believes could materially affect the results described by forward-looking statements contained in this Report.  However, those risks may not be the only risks we face.  Our business, operations, and financial performance could also be affected by additional factors that are not presently known to us or that we currently consider to be immaterial to our operations.  In addition, new risks may emerge from time to time that may cause actual results to differ materially from those contained in any forward-looking statements.  We believe that the forward-looking statements contained in this Report are reasonable.  However, given these risks and uncertainties, we cannot provide you with any guarantee that the anticipated results will be achieved. All forward-looking statements in this Report are expressly qualified in their entirety by the cautionary statements contained in this Section and you are cautioned not to place undue reliance on the forward-looking statements contained in this Report as a prediction of actual results. We disclaim any obligation to update or revise information contained in any forward-looking statement to reflect developments or information obtained after the date this Report is filed with the Securities and Exchange Commission.

SPARTAN MOTORS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)

  See Accompanying Notes to Condensed Consolidated Financial Statements.

SPARTAN MOTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

 See Accompanying Notes to Condensed Consolidated Financial Statements.

SPARTAN MOTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

See Accompanying Notes to Condensed Consolidated Financial Statements.

  See Accompanying Notes to Condensed Consolidated Financial Statements.

SPARTAN MOTORS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands)

 (Unaudited)

See Accompanying Notes to Condensed Consolidated Financial Statements.

NOTE 1 - GENERAL AND SUMMARY OF ACCOUNTING POLICIES

For a description of key accounting policies followed refer to the notes to the Spartan Motors, Inc. (the “Company”) consolidated financial statements for the year ended December 31, 2009, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2010.  There have been no changes in such accounting policies.

The accompanying unaudited interim condensed consolidated financial statements reflect all normal and recurring adjustments that are necessary for the fair presentation of the Company’s financial position as of September 30, 2010, the results of operations for the three and nine month periods ended September 30, 2010 and 2009, and the cash flows for the nine month periods ended September 30, 2010 and 2009.

The financial results for the three and nine month periods ended September 30, 2010 include the financial results of Utilimaster which was acquired on November 30, 2009.  See Note 2 - Acquisition Activities for further detail.

In June 2010, the Company’s Board of Directors approved a plan to exit from Road Rescue, Inc. (“Road Rescue”), a wholly-owned subsidiary of the Company previously reported within the former Emergency Vehicle Team reportable segment.  In September 2010, the Company completed the sale of substantially all of the assets of Road Rescue.  For all periods presented, the operating results and assets and liabilities related to Road Rescue that were sold have been classified as discontinued operations.  Additionally, results of the discontinued operations are excluded from the accompanying notes to the condensed consolidated financial statements for all periods presented, unless noted otherwise. See Note 3 - Discontinued Operations for further detail.

For reporting purposes, the Company has redefined its reportable segments to be Specialized Vehicles, and Delivery & Service Vehicles.  Reportable segments are identified based on differences in products, services and markets served and how the chief operating decision makers utilize financial data and make decisions to allocate resources.  More detailed information about the reporting segments can be found at Note 9 - Business Segments.

The results of operations for the nine month period ended September 30, 2010 are not necessarily indicative of the results to be expected for the full year.

The Company is required to disclose the fair value of its financial instruments in accordance with Financial Accounting Standards Board (FASB) Codification relating to “Disclosures about Fair Values of Financial Instruments.”  The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and the Company’s fixed and variable rate debt instruments approximate their fair value at September 30, 2010 and December 31, 2009. 

Certain amounts in the prior periods’ financial statements have been reclassified to conform to the current period’s presentation.  The changes include the breakout of the discontinued operations, restructuring charges and the redefined reportable segments.

SPARTAN MOTORS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share amounts)

NOTE 2 – ACQUISITION ACTIVITIES

On November 30, 2009, the Company completed the acquisition of Utilimaster Holdings, Inc. (“Holdings”), a Delaware corporation.  Pursuant to the November 18, 2009 Agreement and Plan of Merger (the “Merger Agreement”), SMI Sub, Inc., a direct wholly-owned subsidiary of the Company, merged with and into Holdings.  As a result of this merger, the Company became the sole shareholder of Holdings, the surviving corporation in the merger and the owner of 100% of the capital stock of Utilimaster Corporation, a Delaware corporation (“Utilimaster”), a wholly-owned subsidiary of Holdings.

The Company expects the acquisition of Utilimaster will further diversify its revenue stream through new markets that offer growth potential and are not directly dependent on government funding or consumer spending.  The Company believes the acquisition also allows the Company to gain entry into the North American delivery and service market, add fabrication and vehicle body expertise, benefit from Utilimaster’s strong brand, market share position, and solid customer base, and create opportunities to leverage future growth in the Company’s chassis business. 

This acquisition was accounted for using the purchase method of accounting and the purchase price of $44.5 million was allocated to the assets purchased and liabilities assumed based upon their estimated fair values at the date of acquisition. Identifiable intangible assets acquired included a trade-name, a project in development, customer relationships, backlog and certain non-compete agreements.  The excess of the purchase price over the estimated fair values of the net tangible and intangible assets acquired, which approximated $15.9 million, was recorded as goodwill, which is not expected to be deductible for tax purposes. The Company has recorded an estimate for contingent consideration related to performance based earn-out payments per the Merger Agreement, valued in accordance with accounting guidance for business combinations and updated to its fair value at September 30, 2010 which approximates $1.7 million.  The year to date fair value adjustment through September 30, 2010, amounting to $0.2 million, was reflected as a charge to operating income.

Included in the Company’s results for the three and nine month periods ended September 30, 2010 are net sales of $27,616 and $73,825, and net income from operations of $25 and a net loss from operations of $2,378, respectively, from Utilimaster.  See Note 9 - Business Segments, for further detail on Utilimaster’s third quarter and year to date 2010 results.

NOTE 3 – DISCONTINUED OPERATIONS

As described in Note 1 - General and Summary of Accounting Policies, in June 2010 the Company’s Board of Directors decided to discontinue the operations of Road Rescue and hold the assets for sale.  The exit of the Road Rescue operations was driven by the realignment of the Company’s cost structure and a focus on areas of the business that generate profitable market share.   Exiting this business will allow the Company to concentrate efforts and resources on business opportunities with the best long-term growth potential and focus more on core operations. 

SPARTAN MOTORS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share amounts)

On September 20, 2010, the Company completed the sale of substantially all of the assets and related liabilities of its Road Rescue operations to an unrelated party for $8.0 million, consisting of $7,067 in cash, net of an estimated net working capital adjustment of $572 and selling costs of $361.  As a result, during the three months ended September 30, 2010 the Company recognized a pre-tax gain on sale of $545 which is recorded in the Condensed Consolidated Statements of Income under Net loss from discontinued operations.  The estimated net working capital adjustment is subject to a final adjustment expected to be completed during the Company’s fourth quarter of 2010.  The acquiring entity will not be a related party to the Company following the completion of the sale. 

As a result of the decision to hold Road Rescue for sale, certain assets and liabilities were reclassified as assets and liabilities associated with discontinued operations.  Certain assets were adjusted to their estimated fair value and associated exit costs incurred were recorded, in accordance with FASB Codification related to “Discontinued Operations”.  The following assets and liabilities have been segregated and included in assets from discontinued operations or liabilities from discontinued operations, as appropriate, in the Condensed Consolidated Balance Sheet:

For the nine months ended September 30, 2010, Road Rescue’s pre-tax loss from operations includes asset impairment charges of $2,138, including a $1,746 write-down in the book value of the building used by Road Rescue to its estimated fair value, and exit costs of $392.  Road Rescue’s pre-tax loss for the three months ended September 30, 2010 includes a reversal of $263 for exit costs accrued during the second quarter in anticipation of the shut-down of Road Rescue, which were not required due to the sale in September.  The following table details the results of discontinued operations reported in the Condensed Consolidated Statements of Income within Net loss from discontinued operations:

SPARTAN MOTORS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share amounts)

NOTE 4 – INVENTORIES

Inventories are summarized as follows:

Included in the “Raw materials and purchased components” line item above are transitional engines purchased in preparation for the 2010 engine emissions regulatory change.  These engines amounted to approximately $8,750 and $22,530 at September 30, 2010 and December 31, 2009, respectively.  As of September 30, 2010, customer deposits related to these engines approximate $3,151.

The Company also has a number of demonstration units as part of its sales and training program.  These demonstration units are included in the “Finished goods” line item above, and amounted to approximately $11,663 and $12,854 at September 30, 2010 and December 31, 2009, respectively.

NOTE 5 - GOODWILL AND INTANGIBLE ASSETS

The Company acquired Utilimaster on November 30, 2009.  See Note 2 - Acquisition Activities, for further details related to this acquisition.  The difference between the consideration paid and the acquisition-date fair value of the identifiable assets acquired and liabilities assumed was recognized as goodwill, as disclosed in the table below. Due to the short period of time that has

SPARTAN MOTORS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share amounts)

elapsed since the acquisition of Utilimaster, it is the Company’s assessment that the goodwill at Utilimaster is not impaired.  The goodwill at Utilimaster will be evaluated as part of the next annual assessment which will occur as of October 1, 2010.  For the nine months ended September 30, 2010, the Company recorded an immaterial goodwill adjustment related to agreed-upon net working capital pursuant to the Merger Agreement. 

In conjunction with the acquisition of Utilimaster, the Company acquired other intangible assets, besides goodwill.  Prior to this acquisition, the only other recorded intangible was the goodwill related to Crimson Fire, Inc., included in the Specialty Vehicles reportable segment.  The Company recorded $468 of intangible asset amortization expense in the nine months ended September 30, 2010.  The amortizable intangible assets are being amortized over their remaining lives consistent with the pattern of economic benefits estimated to be received.  The product development project intangible acquired with Utilimaster will be amortized on a similar basis once it has been completed, which is estimated to be in late 2011.   The intangible asset related to non-compete agreements is being amortized on a straight-line basis, while the other intangible assets, except for the trade name which has an indefinite life, are being amortized based on the pattern of estimated after-tax operating income generated. 

The following table provides information regarding the Company’s other intangible assets, all of which were acquired as part of the Utilimaster acquisition:

The estimated remaining amortization associated with finite-lived intangible assets is expected to be expensed as follows:

SPARTAN MOTORS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share amounts)

NOTE 6 - WARRANTIES

The Company’s products generally carry limited warranties based on terms that are generally accepted in the marketplace.  Some components included in the Company’s end products (such as engines, transmissions, tires, etc.) may include manufacturers’ warranties.  These manufacturers’ warranties are generally passed onto the end customer of the Company’s products.

The Company’s policy is to record a provision for the estimated cost of warranty-related claims at the time of the sale and periodically adjust the provision and liability to reflect actual experience.  The amount of warranty liability accrued reflects management’s best estimate of the expected future cost of honoring the Company’s obligations under the warranty agreements. Historically, the cost of fulfilling the Company’s warranty obligations has principally involved replacement parts and labor for field retrofit campaigns.  The Company’s estimates are based on historical experience, the number of units involved and the extent of features and components included in product models.  The estimates for military vehicles were adjusted during the second quarter of 2009 to reflect actual experience specific to these vehicles, whereas prior estimates were based on the Company’s actual experience with commercial vehicles due to the limited availability of vehicle specific data.  This adjustment resulted in a net reduction of the warranty liability of approximately $1,364 in 2009 and is included in the “changes in liability for pre-existing warranties” below.

Certain warranty and other related claims involve matters of dispute that ultimately are resolved by negotiation, arbitration or litigation.  Infrequently, a material warranty issue can arise which is beyond the scope of the Company’s historical experience.  The Company provides for any such warranty issues as they become known and are estimable.  It is reasonably possible that additional warranty and other related claims could arise from disputes or other matters beyond the scope of the Company’s historical experience. 

Changes in the Company’s warranty liability were as follows for the nine months ended September 30:

Warranty accrued during the nine month period ended September 30, 2010 includes approximately $1,456 related to Utilimaster, which was acquired on November 30, 2009.  Of the warranties accrued during the period, $452 was from Utilimaster that would not have been present in the corresponding period of 2009. 

Changes in pre-existing warranties accrued during the period were driven up compared to the respective period of 2009 primarily due to the $1,364 positive adjustment related to the military vehicles recorded in 2009 as detailed above.  For the current nine month period, the overall product sales mix shifted toward products which experience higher warranty claims than those sold in same period of 2009.

SPARTAN MOTORS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share amounts)

NOTE 7 – DEBT

Long-term debt consists of the following:

The long-term debt due is as follows: $20 in 2011; $46 in 2012; $50 in 2013; $26 in 2014; $5,000 in 2015 and thereafter.

(1)   The Company’s primary line of credit is a $70.0 million unsecured revolving line with JPMorgan Chase Bank and Wells Fargo Bank, expiring on November 30, 2012. Both lending institutions equally share this commitment. This line carries an interest rate equal to the Eurodollar rate plus an applicable margin.  There was nothing outstanding on this line on September 30, 2010, therefore the net available to borrow was $70.0 million, at September 30, 2010.

(2)   The Company leases certain office equipment, computer hardware and material handling equipment classified as capital leases.  Future minimum lease payments required under these leases having initial or remaining non cancelable lease terms in excess of one year amount to:  $27 in 2010, $102 in 2011, $46 in 2012, $50 in 2013 and $26 in years thereafter.

As of November 30, 2009, the Company entered into a private shelf agreement with Prudential Investment Management, Inc.  The Company had $15.0 million of private placement notes outstanding as of September 30, 2010 and December 31, 2009 under the agreement.  The agreement allows the Company to borrow up to an additional $45.0 million to be issued in $5.0 million minimum increments.  The interest rate for any draws will be determined based on applicable rates at the time of issuance.

Under the terms of the primary line of credit agreement and the private shelf agreement, the Company is required to maintain certain financial ratios and other financial conditions. The agreements also prohibit the Company from incurring additional indebtedness; limit certain acquisitions, investments, advances and loans; and restrict substantial asset sales.  At September 30, 2010 and December 31, 2009, the Company was in compliance with all debt covenants.

SPARTAN MOTORS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share amounts)

NOTE 8 – COMMITMENTS AND CONTINGENT LIABILITIES

Under the terms of its credit agreement with its banks, the Company has the ability to issue letters of credit totaling $2.5 million. As of September 30, 2010 the balance outstanding was $1,010 and as of December 31, 2009 the balance outstanding was $998.

Spartan Chassis, Inc. (“Spartan Chassis”) is currently in negotiations with a customer regarding certain supply contracts Spartan Chassis has completed but for which the customer is now claiming a post-delivery price adjustment.  Throughout the course of Spartan Chassis's relationship with this customer (dating back to 2006), Spartan Chassis always sold products to the customer on what Spartan Chassis believed to be a “fixed price” basis.  This price was then used in the customer's purchase order and was paid to Spartan Chassis in the ordinary course of business by the customer following delivery of the product by Spartan Chassis.  In the spring of 2009, for the first time, the customer notified Spartan Chassis of the customer's claim that the pricing for certain orders made by the customer, filled by Spartan Chassis, and paid for by the customer, had not been “definitized” and was yet to be agreed upon by the parties.  Spartan Chassis believes the pricing for all of the contested orders was, in fact, agreed-upon by the parties and is vigorously disputing this claim by the customer. Spartan Chassis and the customer are engaged in negotiations in an attempt to resolve the dispute.  To date, no resolution has been reached and the Company's liability, if any, with respect to this matter remains uncertain. 

At September 30, 2010, the Company and its subsidiaries were parties, both as plaintiff and defendant, to a number of lawsuits and claims arising out of the normal course of their businesses.  In the opinion of management, the financial position, future operating results or cash flows of the Company will not be materially affected by the final outcome of these legal proceedings.

NOTE 9 - BUSINESS SEGMENTS

In 2009 and prior periods, the Company segregated its operations into three reportable business segments: Spartan Chassis, the EVTeam, and Utilimaster.  During the second quarter of 2010, resulting from a change in the Company’s strategic focus by its chief decision makers, it began reporting based on two new segments: Delivery & Service Vehicles, consisting of Utilimaster, and Specialty Vehicles, which consists of the Company’s fire truck chassis, motorhome chassis, defense vehicles, fire truck bodies and aftermarket parts and assemblies.  The segment financials have been conformed to reflect the change in reportable segments for all periods presented.

The Delivery & Service Vehicles segment focuses on designing and manufacturing walk-in vans for the delivery and service market and the production of commercial truck bodies.  The Specialty Vehicle segment consists of Crimson Fire, Crimson Fire Aerials and Spartan Chassis.  This segment engineers and manufactures emergency response chassis and motorhome chassis, as well as fire truck bodies, defense vehicles and aftermarket parts and assemblies.  Assets and related depreciation expense, along with interest expense, in the column labeled “Other” pertains to capital assets and debt maintained at the corporate level.  Appropriate expense amounts are allocated to the two reportable segments and are included in their reported earnings or loss from operations.  Segment loss from operations in the “Other” column contains the related eliminations for the allocation, as well as corporate related expenses not allocable to the operating segments.

SPARTAN MOTORS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share amounts)

The accounting policies of the segments are the same as those described, or referred to, in Note 1 - General and Summary of Accounting Policies. Sales and other financial information by business segment are as follows:

SPARTAN MOTORS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share amounts)

Three Months Ended September 30, 2009

(1)  Amounts restated retrospectively for segment reclassification and discontinued operations.

Nine Months Ended September 30, 2010