SUPREME INDUSTRIES INC

For the three months ended July 1, 2017, the Company recorded income tax expense of $2.4 million at an effective tax rate of 27.9%, compared with $4.2 million at an effective tax rate of 33.7% for the three months ended June 25, 2016.  For the six months ended July 1, 2017, the Company recorded income tax expense of $3.3 million at an effective tax rate of 29.0%, compared with $6.1 million at an effective tax rate of 33.4% for the six months ended June 25, 2016.  The decrease in the effective tax rate for the three and six months ended July 1, 2017 was the result of the adoption of ASU 2016-09 regarding the discrete treatment of excess tax benefits from the vesting of share-based payments.  Additionally, the rates differ from the federal statutory rate because of varying state income tax rates and permanent federal income tax differences including benefits from a captive insurance company and the allowable domestic manufacturer deduction.

In March 2016, the FASB issued ASU 2016-09, Compensation — Stock Compensation.  This ASU provides guidance for share-based payments, which simplifies (i) the income tax consequences related to exercised or vested share-based payment awards; (ii) the classification of awards as assets or liabilities; and (iii) the classification in the consolidated statements of cash flows. This guidance is effective for financial statements issued for annual and interim periods beginning after December 15, 2016 and early adoption is permitted. The Company adopted this new guidance in the second quarter of 2017 as required. The adoption did not have a material impact on the Company’s consolidated financial statements.

Gross profit in the second quarter of 2017 decreased to $19.1 million, down from $22.4 million in the second quarter of 2016.  The gross profit decrease was primarily due to a significantly higher proportion of lower-margin rental fleet sales in the 2017 quarter. Additionally, material costs, group health insurance and workers’ compensation expenses were notably higher in the second quarter of 2017, compared with 2016.  As a percentage of net sales, the second quarter of 2017 gross profit decreased to 20.0%, compared with 24.1% in the second quarter of 2016.  Gross profit in the first six months of 2017 decreased to $32.1 million, compared with $37.6 million in the same period of 2016.  For the six-month period of 2017, gross margin, as a percentage of net sales, decreased to 19.6%, compared with 23.1% for the first six months of 2016 and was adversely impacted by a lower-margin product mix, higher overhead expenses, and inefficiencies in the first quarter caused by delays in receiving customer-supplied chassis.

Truck body sales increased in the second quarter of 2017 by $3.3 million, or 3.7%, compared with the second quarter of 2016.  The sales growth for the quarter was primarily the result of a 39.1% increase in rental fleet truck sales when compared with the same period in 2016, which more than offset a decline in retail truck sales.  Specialty vehicle sales decreased in the second quarter of 2017 by $0.7 million, or 55.4% when compared with the same period in 2016, and the Company had no trolley sales during the second quarter of 2017 as a result of the sale of the product line.  The Company’s fiberglass facility supplies fiberglass reinforced plywood for use in the production of certain truck bodies and also sells product to third parties.  Sales to third parties during the second quarter of 2017 were unchanged compared with last year’s second quarter.  For the six months ended July 1, 2017, truck body sales increased $4.0 million, or 2.5%, which more than offset the decrease in specialty vehicle and trolley sales.  The net sales growth was the result of higher rental fleet truck sales which was offset in part by lower retail truck sales.  Additionally, truck sales for the first quarter of 2017 were unfavorably impacted by temporary delays in receiving customer-supplied chassis to commence rental fleet production.  Fiberglass reinforced plywood sales decreased $0.2 million for the first six months of 2017 when compared with same period last year.

Cash flows from operations represent the net income earned in the reported periods adjusted for non-cash charges and changes in operating assets and liabilities. Net cash used in operating activities totaled $4.7 million for the six months ended July 1, 2017, as compared with net cash used in operating activities of $1.5 million for the six months ended June 25, 2016. During the first six months of 2017, changes in operating assets and liabilities included a $13.3 million increase in accounts receivable due to increased sales volume compared with the end of 2016, primarily due to the timing of seasonal orders received from fleet truck customers. Additionally, inventories increased by $6.4 million to support our increased sales order backlog. These uses of cash were partially offset by a $4.1 million increase in trade accounts payable related to the higher level of inventories.