UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| OR |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-33582
THE SHYFT GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
Michigan |
| 38-2078923 |
41280 Bridge Street |
|
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Registrant’s Telephone Number, Including Area Code: (517) 543-6400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock | SHYF | NASDAQ Global Select Market |
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 every Interactive Data File required to be submitted 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 such files).
Yes | ☒ | No | ☐ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☒ | |
Non-accelerated filer | ☐ | Smaller Reporting Company | ☐ | |
Emerging Growth Company | ☐ |
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 Exchange Act Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding at October 29, |
Common |
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INDEX
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Item 1. | ||||
Condensed Consolidated Balance Sheets – September 30, | ||||
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||
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Item 3. |
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Item 4. |
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| Item 1. | Legal Proceedings | 36 | ||
Item 1A. |
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Item 2. |
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| Item 6. |
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This Form 10-Q contains somereport may contain forward-looking statements 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 forward-looking statements involve important known and unknown risks, uncertainties and other factors and can be identified by phrases usingthe use of forward-looking words such as “estimate,” “anticipate,” “believe,” “project,” “expect,” “intend,”, “predict,” “potential,” “future,” “may,” “will”, “should”“will,” “should,” or other comparable words, or by discussions of strategy that may involve risks and similar expressions or words.uncertainties. The Shyft Group, Inc.’s (the “Company”, “we”, “us”, or “our”) future results, performance or achievements may differ materially from the results, performance or achievements discussed in the forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“Risk Factors”) that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements.
Financial Statements |
THE SHYFT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except par value)thousands)
September 30, 2020 | December 31, 2019 | September 30, 2021 | December 31, 2020 | |||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 43,055 | $ | 19,349 | $ | 14,549 | $ | 20,995 | ||||||||
Accounts receivable, less allowance of $198 and $228 | 99,461 | 58,874 | ||||||||||||||
Accounts receivable, less allowance of $145 and $116 | 67,607 | 64,695 | ||||||||||||||
Contract assets | 9,667 | 10,898 | 42,459 | 9,414 | ||||||||||||
Inventories, net | 43,076 | 59,456 | 81,901 | 46,428 | ||||||||||||
Other receivables – chassis pool agreements | 12,741 | 8,162 | 3,995 | 6,503 | ||||||||||||
Other current assets | 9,490 | 5,344 | 8,569 | 8,172 | ||||||||||||
Current assets held for sale | 0 | 90,725 | ||||||||||||||
Total current assets | 217,490 | 252,808 | 219,080 | 156,207 | ||||||||||||
Property, plant and equipment, net | 37,360 | 40,074 | 57,374 | 45,734 | ||||||||||||
Right of use assets – operating leases | 35,529 | 32,147 | 44,303 | 43,430 | ||||||||||||
Goodwill | 43,480 | 43,632 | 48,881 | 49,481 | ||||||||||||
Intangible assets, net | 51,662 | 54,061 | 53,832 | 56,386 | ||||||||||||
Other assets | 1,938 | 2,295 | 1,180 | 2,052 | ||||||||||||
Net deferred tax asset | 7,660 | 25,520 | 5,625 | 5,759 | ||||||||||||
TOTAL ASSETS | $ | 395,119 | $ | 450,537 | $ | 430,275 | $ | 359,049 | ||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 63,433 | $ | 54,713 | $ | 89,601 | $ | 47,487 | ||||||||
Accrued warranty | 5,564 | 5,694 | 7,548 | 5,633 | ||||||||||||
Accrued compensation and related taxes | 15,421 | 15,841 | 18,045 | 17,134 | ||||||||||||
Deposits from customers | 650 | 2,640 | 2,148 | 756 | ||||||||||||
Operating lease liability | 6,273 | 5,162 | 7,632 | 7,508 | ||||||||||||
Other current liabilities and accrued expenses | 6,731 | 15,967 | 10,631 | 8,121 | ||||||||||||
Short-term debt – chassis pool agreements | 12,741 | 8,162 | 3,995 | 6,503 | ||||||||||||
Current portion of long-term debt | 220 | 177 | 238 | 221 | ||||||||||||
Current liabilities held for sale | 0 | 49,601 | ||||||||||||||
Total current liabilities | 111,033 | 157,957 | 139,838 | 93,363 | ||||||||||||
Other non-current liabilities | 6,063 | 4,922 | 5,095 | 5,447 | ||||||||||||
Long-term operating lease liability | 29,836 | 27,241 | 37,532 | 36,662 | ||||||||||||
Long-term debt, less current portion | 48,522 | 88,670 | 694 | 23,418 | ||||||||||||
Total liabilities | 195,454 | 278,790 | 183,159 | 158,890 | ||||||||||||
Commitments and contingent liabilities | ||||||||||||||||
Shareholders’ equity: | ||||||||||||||||
Preferred stock, no par value: 2,000 shares authorized (none issued) | 0 | 0 | ||||||||||||||
Common stock, $0.01 par value; 80,000 shares authorized; 35,550 and 35,343 outstanding | 355 | 353 | ||||||||||||||
Additional paid in capital | 90,362 | 85,148 | ||||||||||||||
Preferred stock; 2,000 shares authorized (none issued) | 0 | 0 | ||||||||||||||
Common stock; 80,000 shares authorized; 35,342 and 35,344 outstanding | 94,312 | 91,044 | ||||||||||||||
Retained earnings | 109,288 | 86,764 | 151,873 | 109,286 | ||||||||||||
Total The Shyft Group, Inc. shareholders’ equity | 200,005 | 172,265 | ||||||||||||||
Total The Shyft Group, Inc. shareholders’ equity | 246,185 | 200,330 | ||||||||||||||
Non-controlling interest | (340 | ) | (518 | ) | 931 | (171 | ) | |||||||||
Total shareholders’ equity | 199,665 | 171,747 | ||||||||||||||
Total shareholders’ equity | 247,116 | 200,159 | ||||||||||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 395,119 | $ | 450,537 | $ | 430,275 | $ | 359,049 | ||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
THE SHYFT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
Sales | $ | 203,473 | $ | 224,703 | $ | 504,391 | $ | 576,582 | ||||||||
Cost of products sold | 152,723 | 186,674 | 393,335 | 496,974 | ||||||||||||
Gross profit | 50,750 | 38,029 | 111,056 | 79,608 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 824 | 1,103 | 3,496 | 3,475 | ||||||||||||
Selling, general and administrative | 23,525 | 19,812 | 69,534 | 46,815 | ||||||||||||
Total operating expenses | 24,349 | 20,915 | 73,030 | 50,290 | ||||||||||||
Operating income | 26,401 | 17,114 | 38,026 | 29,318 | ||||||||||||
Other income (expense): | ||||||||||||||||
Interest expense | (11 | ) | (144 | ) | (1,202 | ) | (831 | ) | ||||||||
Interest and other income | 238 | 473 | 243 | 947 | ||||||||||||
Total other income (expense) | 227 | 329 | (959 | ) | 116 | |||||||||||
Income from continuing operations before income taxes | 26,628 | 17,443 | 37,067 | 29,434 | ||||||||||||
Income tax expense | 7,253 | 4,317 | 7,084 | 6,929 | ||||||||||||
Income from continuing operations | 19,375 | 13,126 | 29,983 | 22,505 | ||||||||||||
Loss from discontinued operations, net of income taxes | (598 | ) | (2,711 | ) | (4,619 | ) | (7,264 | ) | ||||||||
Net income | 18,777 | 10,415 | 25,364 | 15,241 | ||||||||||||
Less: net income (loss) attributable to non-controlling interest | 41 | 61 | 178 | (14 | ) | |||||||||||
Net income attributable to The Shyft Group, Inc. | $ | 18,736 | $ | 10,354 | $ | 25,186 | $ | 15,255 | ||||||||
Basic earnings (loss) per share | ||||||||||||||||
Continuing operations | $ | 0.55 | $ | 0.37 | $ | 0.84 | $ | 0.64 | ||||||||
Discontinued operations | (0.02 | ) | (0.08 | ) | (0.13 | ) | (0.21 | ) | ||||||||
Basic earnings per share | $ | 0.53 | $ | 0.29 | $ | 0.71 | $ | 0.43 | ||||||||
Diluted earnings (loss) per share | ||||||||||||||||
Continuing operations | $ | 0.54 | $ | 0.37 | $ | 0.83 | $ | 0.64 | ||||||||
Discontinued operations | (0.02 | ) | (0.08 | ) | (0.13 | ) | (0.21 | ) | ||||||||
Diluted earnings per share | $ | 0.52 | $ | 0.29 | $ | 0.70 | $ | 0.43 | ||||||||
Basic weighted average common shares outstanding | 35,559 | 35,317 | 35,491 | 35,311 | ||||||||||||
Diluted weighted average common shares outstanding | 35,989 | 35,463 | 35,794 | 35,355 | ||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Sales | $ | 272,622 | $ | 203,473 | $ | 714,492 | $ | 504,391 | ||||||||
Cost of products sold | 216,564 | 152,723 | 566,542 | 393,335 | ||||||||||||
Gross profit | 56,058 | 50,750 | 147,950 | 111,056 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 2,582 | 824 | 4,304 | 3,496 | ||||||||||||
Selling, general and administrative | 25,368 | 23,525 | 78,645 | 69,534 | ||||||||||||
Total operating expenses | 27,950 | 24,349 | 82,949 | 73,030 | ||||||||||||
Operating income | 28,108 | 26,401 | 65,001 | 38,026 | ||||||||||||
Other income (expense): | ||||||||||||||||
Interest expense | (253 | ) | (11 | ) | (310 | ) | (1,202 | ) | ||||||||
Interest and other income | 54 | 238 | 743 | 243 | ||||||||||||
Total other income (expense) | (199 | ) | 227 | 433 | (959 | ) | ||||||||||
| Income from continuing operations before income taxes | 27,909 | 26,628 | 65,434 | 37,067 | ||||||||||||
Income tax expense | 6,910 | 7,253 | 15,952 | 7,084 | ||||||||||||
Income from continuing operations | 20,999 | 19,375 | 49,482 | 29,983 | ||||||||||||
Income (loss) from discontinued operations, net of income taxes | 0 | (926 | ) | 81 | (4,947 | ) | ||||||||||
Net income | 20,999 | 18,449 | 49,563 | 25,036 | ||||||||||||
Less: net income attributable to non-controlling interest | 77 | 41 | 1,102 | 178 | ||||||||||||
Net income attributable to The Shyft Group Inc. | $ | 20,922 | $ | 18,408 | $ | 48,461 | $ | 24,858 | ||||||||
Basic earnings (loss) per share | ||||||||||||||||
Continuing operations | $ | 0.59 | $ | 0.55 | $ | 1.37 | $ | 0.84 | ||||||||
Discontinued operations | 0 | (0.03 | ) | 0 | (0.14 | ) | ||||||||||
Basic earnings per share | $ | 0.59 | $ | 0.52 | $ | 1.37 | $ | 0.70 | ||||||||
Diluted earnings (loss) per share | ||||||||||||||||
Continuing operations | $ | 0.58 | $ | 0.54 | $ | 1.34 | $ | 0.83 | ||||||||
Discontinued operations | 0 | (0.03 | ) | 0 | (0.14 | ) | ||||||||||
Diluted earnings per share | $ | 0.58 | $ | 0.51 | $ | 1.34 | $ | 0.69 | ||||||||
Basic weighted average common shares outstanding | 35,346 | 35,559 | 35,330 | 35,491 | ||||||||||||
Diluted weighted average common shares outstanding | 36,074 | 35,989 | 36,024 | 35,794 | ||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
THE SHYFT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Nine Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||
2020 | 2019 | 2021 | 2020 | ||||||||||||||
Cash flows from operating activities: | |||||||||||||||||
Net income | $ | 25,364 | $ | 15,241 | $ | 49,563 | $ | 25,036 | |||||||||
Adjustments to reconcile net income to net cash used in operating activities: | |||||||||||||||||
Depreciation and amortization | 11,122 | 7,731 | 8,312 | 11,122 | |||||||||||||
| Non-cash stock based compensation expense | 6,571 | 6,322 | |||||||||||||||
| Deferred income taxes | 17,859 | (594 | ) | 134 | 17,859 | ||||||||||||
| Non-cash stock based compensation expense | 6,322 | 3,767 | |||||||||||||||
| Loss on sale of business | 2,901 | 0 | 0 | 2,901 | |||||||||||||
| (Gain) on disposal of assets | (104 | ) | 0 | ||||||||||||||
| Loss from write-off of construction in process | 2,430 | 0 | 0 | 2,430 | |||||||||||||
| Changes in accounts receivable and contract assets | (40,027 | ) | (11,527 | ) | (35,842 | ) | (33,355 | ) | |||||||||
| Changes in inventories | 12,527 | (10,934 | ) | (35,473 | ) | 12,527 | |||||||||||
| Changes in accounts payable | (1,265 | ) | 4,393 | 43,230 | (7,263 | ) | |||||||||||
| Changes in accrued compensation and related taxes | (423 | ) | 6,211 | 910 | (423 | ) | |||||||||||
| Changes in accrued warranty | (130 | ) | 1,896 | 1,626 | (130 | ) | |||||||||||
| Change in other assets and liabilities | (16,033 | ) | (9,950 | ) | 3,396 | (16,033 | ) | ||||||||||
Total adjustments | (4,717 | ) | (9,007 | ) | |||||||||||||
Net cash provided by operating activities | 20,647 | 6,234 | 42,323 | 20,993 | |||||||||||||
Cash flows from investing activities: | |||||||||||||||||
Purchases of property, plant and equipment | (8,325 | ) | (7,500 | ) | (18,238 | ) | (8,325 | ) | |||||||||
| Proceeds from sale of property, plant and equipment | 16 | 0 | |||||||||||||||
| Acquisition of business, net of cash acquired | 152 | (89,650 | ) | 904 | 152 | ||||||||||||
Proceeds from sale of business | 55,000 | 0 | 0 | 55,000 | |||||||||||||
Net cash provided by (used in) investing activities | 46,827 | (97,150 | ) | ||||||||||||||
Net cash provided by (used in) investing activities | (17,318 | ) | 46,827 | ||||||||||||||
Cash flows from financing activities: | |||||||||||||||||
Proceeds from long-term debt | 16,000 | 92,000 | 25,000 | 16,000 | |||||||||||||
Payments on long-term debt | (56,000 | ) | (10,102 | ) | (47,400 | ) | (56,000 | ) | |||||||||
| Payment of dividends | (2,662 | ) | (1,777 | ) | (2,660 | ) | (2,662 | ) | |||||||||
Purchase and retirement of common stock | 0 | (793 | ) | (3,348 | ) | 0 | |||||||||||
Cash used in the exercise and vesting of stock incentive awards | (1,106 | ) | (832 | ) | |||||||||||||
Net cash provided by (used) in financing activities | (43,768 | ) | 78,496 | ||||||||||||||
Exercise and vesting of stock incentive awards | (3,043 | ) | (1,106 | ) | |||||||||||||
Net cash used in financing activities | (31,451 | ) | (43,768 | ) | |||||||||||||
Net increase (decrease) in cash and cash equivalents | 23,706 | (12,420 | ) | ||||||||||||||
Net increase (decrease) in cash and cash equivalents | (6,446 | ) | 24,052 | ||||||||||||||
Cash and cash equivalents at beginning of period | 19,349 | 27,439 | 20,995 | 19,349 | |||||||||||||
Cash and cash equivalents at end of period | $ | 43,055 | $ | 15,019 | $ | 14,549 | $ | 43,401 | |||||||||
Note: Consolidated Statements of Cash Flows include continuing operations and discontinued operations for all periods presented.
See accompanying Notes to Condensed Consolidated Financial Statements.
THE SHYFT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (Unaudited)
(In thousands)
Number of Shares | Common Stock | Additional Paid In Capital | Retained Earnings | Non- Controlling Interest | Total Shareholders’ Equity | |||||||||||||||||||
Balance at December 31, 2019 | 35,344 | $ | 353 | $ | 85,148 | $ | 86,764 | $ | (518 | ) | $ | 171,747 | ||||||||||||
Issuance of common stock and tax impact of stock incentive plan | 4 | 0 | 55 | 0 | 0 | 55 | ||||||||||||||||||
Issuance of restricted stock, net of cancellation | 127 | 1 | 0 | 0 | 0 | 1 | ||||||||||||||||||
Non-cash stock based compensation expense | - | 0 | 2,132 | 0 | 0 | 2,132 | ||||||||||||||||||
Net income | - | 0 | 0 | 7,811 | 67 | 7,878 | ||||||||||||||||||
Balance at March 31, 2020 | 35,475 | 354 | 87,335 | 94,575 | (451 | ) | 181,813 | |||||||||||||||||
| Issuance of common stock and tax impact of stock incentive plan | 4 | 0 | (1,209 | ) | 0 | 0 | (1,209 | ) | ||||||||||||||||
| Issuance of restricted stock, net of cancellation | 80 | 1 | (2 | ) | 0 | 0 | (1 | ) | ||||||||||||||||
| Dividends declared ($0.05 per share) | - | 0 | 0 | (1,775 | ) | 0 | (1,775 | ) | ||||||||||||||||
| Non-cash stock based compensation expense | - | 0 | 2,126 | 0 | 0 | 2,126 | ||||||||||||||||||
| Net income (loss) | - | 0 | 0 | (1,361 | ) | 70 | (1,291 | ) | ||||||||||||||||
| Balance at June 30, 2020 | 35,559 | 355 | 88,250 | 91,439 | (381 | ) | 179,663 | |||||||||||||||||
| Issuance of common stock and tax impact of stock incentive plan | 3 | 0 | 48 | 0 | 0 | 48 | ||||||||||||||||||
| Issuance of restricted stock, net of cancellation | (12 | ) | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||
| Dividends declared ($0.025 per share) | - | 0 | 0 | (887 | ) | 0 | (887 | ) | ||||||||||||||||
| Non-cash stock based compensation expense | - | 0 | 2,064 | 0 | 0 | 2,064 | ||||||||||||||||||
| Net income | - | 0 | 0 | 18,736 | 41 | 18,777 | ||||||||||||||||||
| Balance at September 30, 2020 | 35,550 | $ | 355 | $ | 90,362 | $ | 109,288 | $ | (340 | ) | $ | 199,665 | ||||||||||||
Number of Shares | Common Stock | Additional Paid In Capital | Retained Earnings | Non- Controlling Interest | Total Shareholders’ Equity | |||||||||||||||||||
Balance at January 1, 2021 | 35,344 | $ | 91,044 | $ | - | $ | 109,286 | $ | (171 | ) | $ | 200,159 | ||||||||||||
Issuance of common stock and tax impact of stock incentive plan | 3 | (2,255 | ) | - | - | - | (2,255 | ) | ||||||||||||||||
| Dividends declared ($0.025 per share) | - | - | - | (983 | ) | - | (983 | ) | ||||||||||||||||
| Purchase and retirement of common stock | (100 | ) | (260 | ) | - | (3,088 | ) | - | (3,348 | ) | ||||||||||||||
Issuance of restricted stock, net of cancellation | 61 | - | - | - | - | - | ||||||||||||||||||
Non-cash stock based compensation expense | - | 1,642 | - | - | - | 1,642 | ||||||||||||||||||
Net income | - | - | - | 11,576 | 35 | 11,611 | ||||||||||||||||||
Balance at March 31, 2021 | 35,308 | $ | 90,171 | $ | - | $ | 116,791 | $ | (136 | ) | $ | 206,826 | ||||||||||||
| Issuance of common stock and tax impact of stock incentive plan | 2 | (712 | ) | - | - | - | (712 | ) | ||||||||||||||||
| Dividends declared ($0.025 per share) | - | - | - | (901 | ) | - | (901 | ) | ||||||||||||||||
| Issuance of restricted stock, net of cancellation | 36 | - | - | - | - | - | ||||||||||||||||||
| Non-cash stock based compensation expense | - | 2,850 | - | - | - | 2,850 | ||||||||||||||||||
| Net income | - | - | - | 15,963 | 990 | 16,953 | ||||||||||||||||||
| Balance at June 30, 2021 | 35,346 | $ | 92,309 | $ | - | $ | 131,853 | $ | 854 | $ | 225,016 | |||||||||||||
| Issuance of common stock and tax impact of stock incentive plan | 3 | (76 | ) | - | - | - | (76 | ) | ||||||||||||||||
| Dividends declared ($0.025 per share) | - | - | - | (902 | ) | - | (902 | ) | ||||||||||||||||
| Issuance of restricted stock, net of cancellation | (7 | ) | - | - | - | - | - | |||||||||||||||||
| Non-cash stock based compensation expense | - | 2,079 | - | - | - | 2,079 | ||||||||||||||||||
| Net income | - | - | - | 20,922 | 77 | 20,999 | ||||||||||||||||||
| Balance at September 30, 2021 | 35,342 | $ | 94,312 | $ | - | $ | 151,873 | $ | 931 | $ | 247,116 | |||||||||||||
Number of Shares | Common Stock | Additional Paid In Capital | Retained Earnings | Non- Controlling Interest | Total Shareholders’ Equity | |||||||||||||||||||
Balance at December 31, 2018 | 35,321 | $ | 353 | $ | 82,816 | $ | 103,571 | $ | (658 | ) | $ | 186,082 | ||||||||||||
Transition adjustment for adoption of new lease standard | - | 0 | 0 | (113 | ) | 0 | (113 | ) | ||||||||||||||||
Balance at December 31, 2018, adjusted | 35,321 | 353 | 82,816 | 103,458 | (658 | ) | 185,969 | |||||||||||||||||
Issuance of common stock and tax impact of stock incentive plan | 9 | 0 | (922 | ) | 0 | 0 | (922 | ) | ||||||||||||||||
Issuance of restricted stock, net of cancellation | 121 | 1 | (1 | ) | 0 | 0 | 0 | |||||||||||||||||
Purchase and retirement of common stock | (101 | ) | (1 | ) | (236 | ) | (556 | ) | 0 | (793 | ) | |||||||||||||
Non-cash stock based compensation expense | - | 0 | 860 | 0 | 0 | 860 | ||||||||||||||||||
Net income | - | 0 | 0 | 1,397 | 140 | 1,537 | ||||||||||||||||||
Balance at March 31, 2019 | 35,350 | 353 | 82,517 | 104,299 | (518 | ) | 186,651 | |||||||||||||||||
| Issuance of common stock and tax impact of stock incentive plan | 8 | 0 | 28 | 0 | 0 | 28 | ||||||||||||||||||
| Issuance of restricted stock, net of cancellation | (42 | ) | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||
| Issuance of common stock related to investment in subsidiary | (247 | ) | (2 | ) | (1,946 | ) | 0 | 0 | (1,948 | ) | ||||||||||||||
| Dividends declared ($0.05 per share) | - | 0 | 0 | (1,777 | ) | 0 | (1,777 | ) | ||||||||||||||||
| Non-cash stock based compensation expense | 247 | 2 | 1,341 | 0 | 0 | 1,343 | ||||||||||||||||||
| Net income (loss) | - | 0 | 0 | 3,504 | (215 | ) | 3,289 | |||||||||||||||||
| Balance at June 30, 2019 | 35,316 | 353 | 81,940 | 106,026 | (733 | ) | 187,586 | |||||||||||||||||
| Issuance of common stock and tax impact of stock incentive plan | 6 | 0 | 62 | 0 | 0 | 62 | ||||||||||||||||||
| Issuance of restricted stock, net of cancellation | 11 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
| Non-cash stock based compensation expense | - | 0 | 1,563 | 0 | 0 | 1,563 | ||||||||||||||||||
| Net income | - | 0 | 0 | 10,354 | 61 | 10,415 | ||||||||||||||||||
| Balance at September 30, 2019 | 35,333 | $ | 353 | $ | 83,565 | $ | 116,380 | $ | (672 | ) | $ | 199,626 | ||||||||||||
Number of Shares | Common Stock | Additional Paid In Capital | Retained Earnings | Non- Controlling Interest | Total Shareholders' Equity | |||||||||||||||||||
Balance at January 1, 2020 | 35,344 | $ | 353 | $ | 85,148 | $ | 86,764 | $ | (518 | ) | $ | 171,747 | ||||||||||||
Issuance of common stock and tax impact of stock incentive plan | 4 | - | 55 | - | - | 55 | ||||||||||||||||||
Issuance of restricted stock, net of cancellation | 127 | 1 | - | - | - | 1 | ||||||||||||||||||
Non-cash stock based compensation expense | - | - | 2,132 | - | - | 2,132 | ||||||||||||||||||
Net income | - | - | - | 7,811 | 67 | 7,878 | ||||||||||||||||||
Balance at March 31, 2020 | 35,475 | $ | 354 | $ | 87,335 | $ | 94,575 | $ | (451 | ) | $ | 181,813 | ||||||||||||
| Issuance of common stock and tax impact of stock incentive plan | 4 | - | (1,209 | ) | - | - | (1,209 | ) | ||||||||||||||||
| Dividends declared ($0.05 per share) | - | - | - | (1,775 | ) | - | (1,775 | ) | ||||||||||||||||
| Issuance of restricted stock, net of cancellation | 80 | 1 | (2 | ) | - | - | (1 | ) | ||||||||||||||||
| Non-cash stock based compensation expense | - | - | 2,126 | - | - | 2,126 | ||||||||||||||||||
| Net income (loss) | - | - | - | (1,361 | ) | 70 | (1,291 | ) | ||||||||||||||||
| Balance at June 30, 2020 | 35,559 | $ | 355 | $ | 88,250 | $ | 91,439 | $ | (381 | ) | $ | 179,663 | ||||||||||||
| Issuance of common stock and tax impact of stock incentive plan | 3 | - | 48 | - | - | 48 | ||||||||||||||||||
| Dividends declared ($0.025 per share) | - | - | - | (887 | ) | - | (887 | ) | ||||||||||||||||
| Issuance of restricted stock, net of cancellation | (12 | ) | - | - | - | - | - | |||||||||||||||||
| Non-cash stock based compensation expense | - | - | 2,064 | - | - | 2,064 | ||||||||||||||||||
| Net income | - | - | - | 18,408 | 41 | 18,449 | ||||||||||||||||||
| Balance at September 30, 2020 | 35,550 | $ | 355 | $ | 90,362 | $ | 108,960 | $ | (340 | ) | $ | 199,337 | ||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
THE SHYFT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Effective June 1, 2020, our corporate name has changed to The Shyft Group, Inc. (f/k/a Spartan Motors, Inc.). The new corporate name reflects the next phase of our business transformation with an increased focus on higher growth commercial, retail, and service specialty vehicle markets.
For a description of key accounting policies followed, refer to the notes to The Shyft Group, Inc. consolidated financial statements for the year ended December 31, 2019,2020, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16,2020.25, 2021.
Nature of Operations
We are a niche market leader in specialty vehicle manufacturing and assembly for the commercial vehicle (including last-mile delivery, specialty service and vocation-specific upfit segments) and recreational vehicle industries. Our products include walk-in vans and truck bodies used in e-commerce/parcel delivery, upfit equipment used in the mobile retail and utility trades, luxury Class A diesel motor home chassis military vehicles, and contract manufacturing and assembly services. We also supply replacement parts and offer repair, maintenance, field service and refurbishment services for the vehicles that we manufacture. Our operating activities are conducted through our wholly-owned operating subsidiary, The Shyft Group USA, Inc., with locations in Novi, Charlotte and Plymouth, Michigan; Bristol, Indiana; Waterville, Maine; Ephrata, Pennsylvania; North Charleston, South Carolina; Pompano Beach and West Palm Beach, Florida; Ephrata, Pennsylvania; Bristol, Indiana; North Charleston, South Carolina; Kansas City, Missouri; Montebello, Carson and Sacramento,McClellan Park, California; Mesa, Arizona; Dallas and Weatherford, Texas; and Saltillo, Mexico.
Our Bristol, Indiana location manufactures vehicles used in the parcel delivery, mobile retail and trades and construction industries, and supplies related aftermarket parts and services under the Utilimaster brand name. Our Kansas City, Missouri; Pompano Beach and West Palm Beach, Florida; Ephrata, Pennsylvania; North Charleston, South Carolina; Montebello, California; and Saltillo, Mexico locations sell and install equipment used in commercial and fleet vehicles. Our Charlotte, Michigan location manufactures heavy-duty chassis and vehicles, and supplies aftermarket parts and accessories under the Spartan Chassis brand name. Our Carson and Sacramento, California; Mesa, Arizona; and Dallas and Weatherford, Texas locations manufacture service truck bodies and accessories under the Royal Truck Body brand name.
The accompanying unaudited interim condensed consolidated financial statements reflect all normal and recurring adjustments that are necessary for the fair presentation of our financial position as of September 30, 2020,2021, and our results of operations and cash flows for the three and nine months ended September 30, 2020.2021. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2019.2020. The results of operations for the three and nine months ended September 30, 20202021, are not necessarily indicative of the results expected for the full year.
Recent Developments
OnIn January 30,March 2020, the President of the United States declared the coronavirus (“COVID-19”) outbreak a national emergency, as the World Health Organization (“WHO”) announceddetermined it was a global health emergency because of a new strain of coronavirus (“COVID-19”). On March 11, 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.pandemic. The pandemic has had a significant impact on macroeconomic conditions. To limit the spread of COVID-19, governments have taken various actions including the issuance of stay-at-home orders and social distancing guidelines. While the Company’s plants continued to operate as essential businesses, starting March 23, 2020, certain of our manufacturing facilities were temporarily suspended or cut back on operating levels and shifts as a result of government orders. AsSince the third quarter of June 30, 2020, approximately 90% of our facilities were at full or modified production levels and as of September 30, 2020, all of our facilities were at full or modified production levels. However, additional suspensions and cutbacks may occur as the impacts from COVID-19 and related responses continue to developevolve within our global supply chain and customer base. The Company is taking a variety of measures to maintain operations with as minimal impact as possible to promote the safety and security of our employees,associates, including increased frequency of cleaning and disinfecting of facilities, social distancing, remote working when possible, travel restrictions and limitations on visitor access to facilities. We took actions to align operations and spending across our business in response to uncertainty caused by the COVID-19 outbreak during 2020. This included actions that primarily impacted the second quarter of 2020, such as temporary salary reductions for executive management and the Board of Directors, furloughs of a portion of our workforce, freezing employee requisitions and minimizing capital expenditures to critical investments.
THE SHYFT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
The full impact of the COVID-19 outbreak continues to evolve as of the date of this filing. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the impact of the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2020.
In 2019, we performed a quantitative assessment and concluded each of our reporting units and indefinite life intangible assets had excess fair value over their carrying value. However, during the nine months ended September 30, 2020, we observed negative macroeconomic indicators resulting from the COVID-19 pandemic, which could have a direct impact on our business. We determined this constituted a triggering event that required an assessment to determine if an impairment loss may have occurred. Therefore, we qualitatively assessed whether it was more likely than not that goodwill and indefinite life intangible assets were impaired as of September 30, 2020. We reviewed our previous forecasts and assumptions based on our current projections, which are subject to various risks and uncertainties, including projected revenue, projected operational profit, terminal growth rates, and the cost of capital. Based on our interim impairment assessment as of September 30, 2020, we have determined that our goodwill and indefinite life intangible assets are not impaired. The Company’s assumptions about future conditions important to its assessment of potential impairment of its goodwill and indefinite life intangible assets, including the impacts of the COVID-19 pandemic, are subject to uncertainty, and the Company will continue to monitor these conditions in future periods as new information becomes available, and will update its analyses accordingly.
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. As a result, the Company recorded an income tax benefit of $2,610 in the first quarter of 2020 (see "Note 10 – Taxes on Income") and has also made provision to defer the employer side social security payments for the remaining portion of 2020, to be paid in two equal installment payments in 2021 and 2022. We will continue to examine the potential impacts of the CARES Act and other future legislation on our business, results of operations, financial condition and liquidity.periods.
On October 1, 2020, the Company completed its acquisitionacquired substantially all of the assets and certain liabilities of F3 MFG Inc. (“F3”through the Company’s subsidiary, The Shyft Group DuraMag LLC (“DuraMag”). F3DuraMag is a leading aluminum truck body and accessory manufacturer, and itsDuraMag operations include aluminum manufacturing, finishing, assembly, and installation of DuraMag contractor, service, and van bodies, as well as Magnum branded truck accessories including headache racks (also known as cab protection racks or rear racks). F3DuraMag operates out of Waterville, Maine and that location is expected to continue to serve as the business’ primary manufacturing and assembly facility for both product lines. The addition of DuraMag aluminum bodies to the Company's product offerings follows the Company’s recent2019 acquisition of Royal Truck Body ("Royal"), a West Coast and Southwestern USU.S. steel truck body maker. Combined, these acquisitions elevate the Company to a leading position as a national service body manufacturer. F3 will beDuraMag is part of our Specialty Vehicle segment (f/k/a Specialty Chassis and Vehicles).
On February 1, 2020, continues to go to market under the Company completed its sale of the Emergency ResponseDuraMag and Vehicle (“ERV”) business for $55,000 cash subject to certain post-closing adjustments. In September 2020, the Company finalized the post-close net working capital adjustment and subsequently paid $7,500 on October 1, 2020. The ERV business consisted of the emergency response cab-chassis and apparatus operations in Charlotte, Michigan, and the Spartan apparatus operations in Brandon, South Dakota; Snyder and Neligh, Nebraska; and Ephrata, Pennsylvania. See "Note 2 – Discontinued Operations" for further discussion regarding this transaction.
On September 9, 2019, the Company completed its acquisition of Fortress Resources, LLC d/b/a Royal Truck Body. Royal is a leading California-based designer, manufacturer and installer of service truck bodies and accessories. Royal manufactures and assembles truck body options for various trades, service truck bodies, stake body trucks, contractor trucks, and dump bed trucks. Royal is the largest service body company in the western United States with its principal facility in Carson, California. Royal has additional manufacturing, assembly, and service space in branch locations in Sacramento, California; Mesa, Arizona; and Dallas and Weatherford, Texas. This acquisition allowed us to quickly expand our footprint in the western United States supporting our strategy of coast-to-coast manufacturing and distribution. Royal is part of our Specialty Vehicles segment.Magnum brands.
THE SHYFT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
Recently Adopted Accounting Standards
InEffective June 2016,January 1, 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 is intended to introduce a revised approach to the recognition and measurement of credit losses, emphasizing an updated model based on expected losses rather than incurred losses. The provisions of this standard are effective for reporting periods beginning after December 15, 2019. The Companywe adopted ASU 2016-13 in the first quarter of 2020, and it had no material impact on our consolidated financial position, results of operations or cash flows.
Accounting StandardsNot Yet Adopted
In December 2019, the FASB issued Accounting Standards Update No.2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 is intended to simplifyand all related amendments, which simplifies the accounting for income taxes by removing certain exceptions to the general principles of Topic 740 and improving consistent application of Generally Accepted Accounting Principles ("GAAP") for other areas of Topic 740 by clarifying and amending existing guidance. The provisions of this standard are effective for reporting periods beginning after December 15, 2020 and early adoption is permitted. The adoption of the provisions of ASU 2019-12 isdid not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
Supplemental Disclosures of Cash Flow Information
Non-cash investing in the nine months ended September 30, 2021, included $394 of capital expenditures. The Company has chassis pool agreements, where it participates in chassis converter pools that are non-cash arrangements and they are offsetting between current assets and current liabilities on the Company’s Consolidated Balance Sheets. See "Note 5 – Debt" for further information about the chassis pool agreements.
Immaterial Revision of Previously Issued Condensed Consolidated Financial Statements
During the fourth quarter of 2020, errors in the accounting for transactions associated with the divestiture of the Company’s ERV business were identified. These errors related to the quarterly condensed consolidated financial statements for the period ended September 30, 2020 resulting in the adjustment of certain balance sheet and statement of operations financial statement accounts, as disclosed in Note 1 – Nature of Operations and Basis of Presentation of our Annual Report on Form 10-K for the year ended December 31, 2020. The Company assessed the materiality of these errors considering both qualitative and quantitative factors and determined that for the period ended September 30, 2020, the errors were not material.
The tables below present the impact of the revisions on the Company’s condensed consolidated financial statements:
Three Months Ended September 30, 2020 | ||||||||||||
As Previously Reported | Adjustment | As Revised | ||||||||||
Loss from discontinued operations, net of income taxes | $ | (598 | ) | $ | (328 | ) | $ | (926 | ) | |||
Net income | 18,777 | (328 | ) | 18,449 | ||||||||
Net income attributable to The Shyft Group, Inc. | 18,736 | (328 | ) | 18,408 | ||||||||
| Basic earnings (loss) per share | ||||||||||||
| Continuing operations | $ | 0.55 | $ | 0 | $ | 0.55 | ||||||
| Discontinued operations | (0.02 | ) | (0.01 | ) | (0.03 | ) | ||||||
| Basic earnings per share | $ | 0.53 | $ | (0.01 | ) | $ | 0.52 | |||||
| Diluted earnings (loss) per share | ||||||||||||
| Continuing operations | $ | 0.54 | $ | 0 | $ | 0.54 | ||||||
| Discontinued operations | (0.02 | ) | (0.01 | ) | (0.03 | ) | ||||||
| Basic earnings per share | $ | 0.52 | $ | (0.01 | ) | $ | 0.51 | |||||
Nine Months Ended September 30, 2020 | ||||||||||||
As Previously Reported | Adjustment | As Revised | ||||||||||
Loss from discontinued operations, net of income taxes | $ | (4,619 | ) | $ | (328 | ) | $ | (4,947 | ) | |||
Net income | 25,364 | (328 | ) | 25,036 | ||||||||
Net income attributable to The Shyft Group, Inc. | 25,186 | (328 | ) | 24,858 | ||||||||
| Basic earnings (loss) per share | ||||||||||||
| Continuing operations | $ | 0.84 | $ | 0 | $ | 0.84 | ||||||
| Discontinued operations | (0.13 | ) | (0.01 | ) | (0.14 | ) | ||||||
| Basic earnings per share | $ | 0.71 | $ | (0.01 | ) | $ | 0.70 | |||||
THE SHYFT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
Nine Months Ended September 30, 2020 | ||||||||||||
As Previously Reported | Adjustment | As Revised | ||||||||||
| Diluted earnings (loss) per share | ||||||||||||
| Continuing operations | $ | 0.83 | $ | 0 | $ | 0.83 | ||||||
| Discontinued operations | (0.13 | ) | (0.01 | ) | (0.14 | ) | ||||||
| Basic earnings per share | $ | 0.70 | $ | (0.01 | ) | $ | 0.69 | |||||
NOTE 2 – DISCONTINUED OPERATIONS
On February 1, 2020, we completed the sale of our ERVemergency response vehicle ("ERV") business for $55,000 cash subject to certain post-closing adjustments. In September 2020, the Company finalized the post-close net working capital adjustment and subsequently paid $7,500 on October 1, 2020. The Company recognized a loss on sale of $763 and $2,901 in the three and nine months ended September 30, 2020, respectively, which are portions of the Loss from discontinued operations, net of tax in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020. Operations. The ERV business included the emergency response chassis operations in Charlotte, Michigan, and the Spartan apparatus operations in Brandon, South Dakota; Snyder and Neligh, Nebraska; and Ephrata, Pennsylvania. The ERV business met the accounting criteria for held for sale classification as of December 31, 2019. The results of the ERV business have been reclassified to LossIncome (loss) from discontinued operations, net of tax in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 20202020. andWe continue to have an open Transition Services Agreement with the buyer for the provision of certain transition support services, which will continue for certain services into 2019.2022.
The lossIncome (loss) from discontinued operations presented in the Condensed Consolidated Statement of Operations are summarized below:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Sales | $ | 0 | $ | 0 | 0 | $ | 19,167 | |||||||||
Cost of products sold | 0 | 0 | 0 | 18,678 | ||||||||||||
Gross profit | 0 | 0 | 0 | 489 | ||||||||||||
Operating expenses | 0 | 0 | 0 | 4,404 | ||||||||||||
Operating loss | 0 | 0 | 0 | (3,915 | ) | |||||||||||
Other income (expense) | 0 | (1,200 | ) | 109 | (3,338 | ) | ||||||||||
Loss from discontinued operations before taxes | 0 | (1,200 | ) | 109 | (7,253 | ) | ||||||||||
Income tax (expense) benefit | 0 | 274 | (28 | ) | 2,306 | |||||||||||
Net income (loss) from discontinued operations | $ | 0 | $ | (926 | ) | $ | 81 | $ | (4,947 | ) | ||||||
Total depreciation and amortization and capital expenditures for the three and nine months ended September 30, 2020 and 2019 is as follows:discontinued operations are summarized below:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Sales | $ | 0 | $ | 64,248 | $ | 19,167 | $ | 194,268 | ||||||||
Cost of products sold | 0 | 60,101 | 18,678 | 180,302 | ||||||||||||
Gross profit | 0 | 4,147 | 489 | 13,966 | ||||||||||||
Operating expenses | 0 | 7,758 | 4,404 | 24,674 | ||||||||||||
Operating loss | 0 | (3,611 | ) | (3,915 | ) | (10,708 | ) | |||||||||
Other income (expense) | (763 | ) | 7 | (2,901 | ) | 1,015 | ||||||||||
Loss from discontinued operations before taxes | (763 | ) | (3,604 | ) | (6,816 | ) | (9,693 | ) | ||||||||
Income tax benefit | 165 | 893 | 2,197 | 2,429 | ||||||||||||
Net loss from discontinued operations | $ | (598 | ) | $ | (2,711 | ) | $ | (4,619 | ) | $ | (7,264 | ) | ||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Depreciation and amortization | $ | 0 | $ | 0 | $ | 0 | $ | 284 | ||||||||
Capital expenditures | $ | 0 | $ | 0 | $ | 0 | $ | 84 |
| |||||||
THE SHYFT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
In the annual goodwill and intangible assets impairment test as of October 1, 2019, we determined that the fair value of our ERV business and Smeal trade name were less than their carrying values due to under-performance in 2019 which was expected to continue in future periods. As a result, we recorded impairment expense of $13,856 to write off the goodwill and indefinite lived intangible assets. In conjunction with the classification of the ERV business as held for sale as of December 31, 2019, we recorded a loss of $39,275 to write down the carrying values of the associated assets and liabilities to their fair values less estimated costs to sell of $3,604. The assets and liabilities of the discontinued operations are presented separately under the captions Current assets held for sale and Current liabilities held for sale in the Condensed Consolidated Balance Sheets as of December 31, 2019. As of September 30, 2020, due to the sale of the ERV business, there were no assets or liabilities related to discontinued operations on the Condensed Consolidated Balance Sheets.
Assets and Liabilities held for sale in the Condensed Consolidated Balance Sheet were as follows:
December 31, | ||||
2019 | ||||
Assets: | ||||
Accounts receivable, net | $ | 30,760 | ||
Contract assets | 36,740 | |||
Inventories, net | 32,329 | |||
Other current assets | 1,142 | |||
Property, plant and equipment | 21,967 | |||
Right of use assets – operating leases | 5,960 | |||
Intangible assets | 1,050 | |||
Other noncurrent assets | 52 | |||
Impairment of carrying value | (39,275 | ) | ||
Total current assets held for sale | $ | 90,725 | ||
Liabilities: | ||||
| Accounts payable | $ | 4,213 | ||
| Accrued warranty | 11,347 | |||
| Accrued compensation and related taxes | 3,047 | |||
| Deposits from customers | 21,409 | |||
| Operating lease liability | 727 | |||
Other current liabilities | 3,495 | |||
| Long-term operating lease liability | 5,363 | |||
| Total current liabilities held for sale | $ | 49,601 | ||
Total depreciation and amortization and capital expenditures for the discontinued operations for the three and nine months ended September 30, 2020 and 2019 were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
Depreciation and amortization | $ | 0 | $ | 1,238 | $ | 284 | $ | 3,686 | ||||||||
Capital expenditures | $ | 0 | $ | 674 | $ | 84 | $ | 2,218 | ||||||||
THE SHYFT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
NOTE 3 – ACQUISITION ACTIVITIES
On October 1, 2020, the Company completed its acquisitionacquired substantially all of the assets and certain liabilities of F3 MFG Inc. F3through the Company’s subsidiary, The Shyft Group DuraMag LLC (“DuraMag”). DuraMag is a leading, aluminum truck body and accessory manufacturer, and F3DuraMag operations include aluminum manufacturing, finishing, assembly, and installation of DuraMag contractor, service, and van bodies, as well as Magnum branded headache racks (also known as cab protection racks or rear racks). The Company paid $18,250$18,203 in cash, whichsubject to a net working capital adjustment. The net working capital adjustment was finalized in January 2021, resulting in a decrease to the purchase price of $404. In addition, certain indemnity claims made by the Company pursuant to the purchase agreement were settled in June 2021, resulting in a decrease to the purchase price of $500. The acquisition was partially financed by borrowing from our existing line of credit, as described in "Note 5 – Debt"Debt". F3 will beDuraMag is part of our Specialty Vehicle segment.
On September 9, 2019, the Company completed the acquisition of Fortress Resources, LLC d/b/a Royal Truck Body pursuant to which the Company acquired all the outstanding equity interests of Royal. The Company paid $89,217 in cash, which was financed by borrowing from our existing line of credit, as described in "Note 5 – Debt".
Purchase Price Allocation
The RoyalDuraMag acquisition was accounted for using the acquisition method of accounting with the purchase price allocated to the assets purchased and liabilities assumed based upon their estimated fair values at the date of acquisition. Identifiable intangible assets include customer relationships, DuraMag and Magnum trade names and trademarks, patentedunpatented technology and non-competition agreements. The excess of the purchase price over the estimated fair values of the net tangible and intangible assets acquired of $27,476$5,401 was recorded as goodwill, which is expected to be deductible for tax purposes.
The fair valuevalues of the net assets acquired were based on a preliminary valuation and the estimates and assumptions were subject to change within the measurement period. In the secondthird quarter of 2020,2021, the Company agreedfinalized the purchase price allocation for adjustments related to a working capital adjustment with the seller and made certain adjustments which resulted in a decrease to goodwillaccrued warranty of $152. The$289. As of September 30, 2021, the valuation and the estimates and assumptions were finalized, during the quarter ended September 30, 2020, as the measurement period has concluded.
As of September 30, 2020,2021, the final allocation of purchase price to assets acquired and liabilities assumed is as follows:
Cash and cash equivalents | $ | 431 | ||
Accounts receivable, less allowance | 5,019 | |||
Contract assets | 1,499 | |||
Inventory | 6,453 | |||
Other receivables – chassis pool agreements | 10,424 | |||
Property, plant and equipment, net | 4,980 | |||
Right of use assets-operating leases | 12,767 | |||
Intangible assets, net | 47,150 | |||
Goodwill | 27,324 | |||
Total assets acquired | 116,047 | |||
Accounts payable | (1,658 | ) | ||
Customer prepayments | (255 | ) | ||
Accrued warranty | (98 | ) | ||
Operating lease liabilities | (1,693 | ) | ||
Accrued compensation and related taxes | (569 | ) | ||
Other current liabilities and accrued expenses | (30 | ) | ||
Short-term debt – chassis pool agreements | (10,424 | ) | ||
Long-term operating lease liability | (11,074 | ) | ||
Long-term debt, less current portion | (1,029 | ) | ||
Total liabilities assumed | (26,830) | |||
Total purchase price | $ | 89,217 |
Accounts receivable | $ | 2,315 | ||
Inventories | 3,659 | |||
| Other current assets | 15 | |||
Property, plant and equipment | 2,949 | |||
Right of use assets-operating leases | 8,469 | |||
Intangible assets | 5,590 | |||
Goodwill | 5,401 | |||
Total assets acquired | 28,398 | |||
Accounts payable | (1,662 | ) | ||
| Accrued warranty | (289 | ) | ||
Accrued compensation and related taxes | (434 | ) | ||
Current operating lease liabilities | (644 | ) | ||
Other current liabilities and accrued expenses | (241 | ) | ||
Long-term operating lease liability | (7,825 | ) | ||
Long-term debt | (4 | ) | ||
Total liabilities assumed | (11,099 | ) | ||
Total purchase price | $ | 17,299 |
THE SHYFT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
Goodwill and Intangible Assets Assigned
Intangible assets totaling $47,150$5,590 have provisionally been assigned to customer relationships, trade names and trademarks, patentedunpatented technology and non-competition agreements as a result of the acquisition and consist of the following (in thousands):following:
Amount | Useful Life | Amount | Useful Life | |||||||
Customer relationships | $ | 30,000 | 15 Years | $ | 2,200 | 15 Years | ||||
Trade names and trademarks | 13,000 | Indefinite | 2,420 | Indefinite | ||||||
Patented technology | 2,200 | 8 Years | ||||||||
Unpatented technology | 540 | 9 Years | ||||||||
Non-competition agreements | 1,950 | 5 Years | 430 | 6 Years | ||||||
| $ | 47,150 | $ | 5,590 | |||||||
The Company amortizes the customer relationships utilizing an accelerated approach and amortizes patentedunpatented technology and non-competition agreementagreements assets utilizing a straight-line approach. Amortization expense, including the intangible assets, recorded from the RoyalDuraMag acquisition is $666$70 and $1,999$209 for the three and nine months ended September 30, 2020.2021.
Goodwill consists of operational synergies that are expected to be realized in both the short and long-term and the opportunity to enter into new markets which will enable us to increase value to our customers and shareholders. Key areas of expected cost savings include an expanded dealer network, complementary product portfolios and manufacturing and supply chain work process improvements.
Due to its insignificant size relative to the Company, supplemental pro forma financial information of the combined entity for the prior reporting period is not provided.
NOTE 4 – INVENTORIES
Inventories are summarized as follows:
September 30, 2020 | December 31, | September 30, 2021 | December 31, | |||||||||||||
Finished goods | $ | 3,441 | $ | 4,764 | $ | 5,119 | $ | 4,200 | ||||||||
Work in process | 1,594 | 1,773 | 7,078 | 1,908 | ||||||||||||
Raw materials and purchased components | 44,982 | 57,679 | 72,176 | 46,576 | ||||||||||||
Reserve | (6,941 | ) | (4,760 | ) | (2,472 | ) | (6,256 | ) | ||||||||
Total inventories, net | $ | 43,076 | $ | 59,456 | $ | 81,901 | $ | 46,428 | ||||||||
NOTE 5 – DEBT
Short-term debt consists of the following:
September 30, | December 31, | September 30, | December 31, | |||||||||||||
Chassis pool agreements | $ | 12,741 | $ | 8,162 | $ | 3,995 | $ | 6,503 | ||||||||
Total short-term debt | $ | 12,741 | $ | 8,162 | $ | 3,995 | $ | 6,503 | ||||||||
THE SHYFT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
Chassis Pool Agreements
The Company obtains certain vehicle chassis for its walk-in vans, truck bodies and specialty vehicles directly from the chassis manufacturers under converter pool agreements. Chassis are obtained from the manufacturers based on orders from customers, and in some cases, for unallocated orders. The agreements generally state that the manufacturer will provide a supply of chassis to be maintained at the Company’s facilities with the condition that we will store such chassis and will not move, sell, or otherwise dispose of such chassis except under the terms of the agreement. In addition, the manufacturer typically retains the sole authority to authorize commencement of work on the chassis and to make certain other decisions with respect to the chassis including the terms and pricing of sales of the chassis to the manufacturer’s dealers. The manufacturer also does not transfer the certificate of origin to the Company nor permit the Company to sell or transfer the chassis to anyone other than the manufacturer (for ultimate resale to a dealer).
THE SHYFT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
Although the Company is party to related finance agreements with manufacturers, the Company has not historically settled any related obligations in cash, nor does it expect to do so in the future. Instead, the obligation is settled by the manufacturer upon reassignment of the chassis to an accepted dealer, and the dealer is invoiced for the chassis by the manufacturer. Accordingly, as of September 30, 20202021 and December 31, 2019,2020, the Company’s outstanding chassis converter pool with manufacturers totaled $12,741$3,995 and $8,162, respectively. The$6,503, respectively and the Company has included this financing agreement on the Company’s Condensed Consolidated Balance Sheets within Other receivables – chassis pool agreements and Short-term debt – chassis pool agreements.agreements. Typically, chassis are converted and delivered to customers within 90 days of the receipt of the chassis by the Company. The chassis converter pool is a non-cash arrangement and is offsetting between Current assets and Current liabilities on the Company’s Condensed Consolidated Balance Sheets.
Long-term debt consists of the following:
September 30, | December 31, | September 30, | December 31, | |||||||||||||
Line of credit revolver | $ | 47,400 | $ | 87,400 | $ | 0 | $ | 22,400 | ||||||||
Finance lease obligation | 519 | 496 | 355 | 473 | ||||||||||||
Other | 823 | 951 | 577 | 766 | ||||||||||||
Total debt | 48,742 | 88,847 | 932 | 23,639 | ||||||||||||
Less current portion of long-term debt | (220 | ) | (177 | ) | (238 | ) | (221 | ) | ||||||||
Total long-term debt | $ | 48,522 | $ | 88,670 | $ | 694 | $ | 23,418 | ||||||||
Line of Credit Revolver
On August 8, 2018, we entered into a Credit Agreement (the "Credit Agreement") by and among us and certain of our subsidiaries as borrowers, Wells Fargo Bank, National Association ("Wells Fargo"), as administrative agent, and the lenders party thereto consisting of Wells Fargo, JPMorgan Chase Bank, N.A. and PNC Bank National Association (the "Lenders"). Subsequently, the Credit Agreement was amended on May 14, 2019, September 9, 2019 and September 25, 2019 and certain of our other subsidiaries executed guaranties guarantying the borrowers’ obligations under the Credit Agreement. Concurrent with the close of the sale of the ERV business and effective January 31, 2020, the Credit Agreement was further amended by a fourth amendment, which released certain of our subsidiaries that were sold as part of the ERV business. The Credit Agreement was subsequently amended further on April 20, 2021 and July 16, 2021 pursuant to a fifth amendment and sixth amendment, respectively, to make certain changes to the subfacility limits pursuant to the Credit Agreement. The substantive business terms of the Credit Agreement remain in place and were not changed by any of the fourth amendment.amendments noted above.
THE SHYFT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
As a result, at September 30, 2020,2021, under the Credit Agreement, as amended, we may borrow up to $175,000 from the Lenders under a secured revolving credit facility which matures August 8, 2023. We may also request an increase in the facility of up to $50,000 in the aggregate, subject to customary conditions. The credit facility is also available for the issuance of letters of credit of up to $20,000 and swing line loans of up to $30,000,$10,000, subject to certain limitations and restrictions. restrictions as of September 30, 2021. This revolving credit facility carries an interest rate of either (i) the highest of prime rate, the federal funds effective rate from time to time plus 0.5%, or the one month adjusted LIBOR plus 1.0%; or (ii) adjusted LIBOR, in each case plus a margin based upon our ratio of debt to earnings from time to time. The applicable borrowing rate including margin was 1.44%1.34% (or one-month LIBOR plus 1.25%) at September 30, 2020.2021. The credit facility is secured by security interests in, and liens on, all assets of the borrowers and guarantors, other than real property and certain other excluded assets. At September 30, 2020 2021and December 31, 2019,2020, we had outstanding letters of credit totaling $760 and $525, respectively, related to our workers’ compensation insurance.
Under the terms of our Credit Agreement, available borrowings (exclusive of outstanding borrowings) totaled $100,681$169,240 and $60,499$125,836 at September 30, 20202021 and December 31, 2019,2020, respectively. The Credit Agreement requires us to maintain certain financial ratios and other financial covenants; prohibits us from incurring additional indebtedness; limits certain acquisitions, investments, advances or loans; limits our ability to pay dividends in certain circumstances; and restricts substantial asset sales, all subject to certain exceptions and baskets. At September 30, 20202021 and December 31, 2019,2020, we were in compliance with all covenants in our Credit Agreement.
In the three months ended September 30, 2020 the Company paid down $10,000 of long-term debt. In the nine months ended September 30, 2020 the Company paid down $40,000 of long-term debt, net of borrowings.
THE SHYFT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
NOTE 6 – REVENUE
The tables below disclose changesChanges in our contract assets and liabilities for the nine months ended September 30, 20202021 and 2019.2020 are summarized below:
September 30, 2020 | September 30, 2019 | September 30, 2021 | September 30, 2020 | |||||||||||||
Contract Assets | ||||||||||||||||
Contract assets, beginning of period | $ | 10,898 | $ | 9,229 | $ | 9,414 | $ | 10,898 | ||||||||
Reclassification of the beginning contract assets to receivables, as the result of rights to consideration becoming unconditional | (10,777 | ) | (9,229 | ) | (9,414 | ) | (10,777 | ) | ||||||||
Contract assets recognized, net of reclassification to receivables | 9,546 | 12,432 | 42,459 | 9,546 | ||||||||||||
Contract assets, end of period | $ | 9,667 | $ | 12,432 | $ | 42,459 | $ | 9,667 | ||||||||
Contract Liabilities | ||||||||||||||||
Contract liabilities, beginning of period | $ | 2,640 | $ | 871 | $ | 756 | $ | 2,640 | ||||||||
Reclassification of the beginning contract liabilities to revenue, as the result of performance obligations satisfied | (2,370 | ) | (871 | ) | (743 | ) | (2,370 | ) | ||||||||
Cash received in advance and not recognized as revenue | 380 | 1,737 | 2,135 | 380 | ||||||||||||
| Contract liabilities, end of period | $ | 650 | $ | 1,737 | $ | 2,148 | $ | 650 | ||||||||
The aggregate amount of the transaction price allocated to remaining performance obligations in existing contracts that are yet to be completed in the Fleet Vehicles and Services (“FVS”) and Specialty Vehicles (“SV”) segments are $228,870$758,518 and $51,756$94,042 respectively, with substantially all revenue expected to be recognized within one year as of September 30, 2020.2021.
THE SHYFT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
In the following tables, revenue is disaggregated by primary geographical market and timing of revenue recognition for the three and nine months ended September 30, 2020 and 2019.recognition. The tables also include a reconciliation of the disaggregated revenue with the reportable segments.
Three Months Ended September 30, 2020 | Three Months Ended September 30, 2021 | |||||||||||||||||||||||||||||||||||||||
FVS | SV | Total Reportable Segments | Other | Total | FVS | SV | Total Reportable Segments | Other | Total | |||||||||||||||||||||||||||||||
Primary geographical markets | ||||||||||||||||||||||||||||||||||||||||
United States | $ | 144,420 | $ | 58,263 | $ | 202,683 | $ | 0 | $ | 202,683 | $ | 194,067 | $ | 74,077 | $ | 268,144 | $ | 0 | $ | 268,144 | ||||||||||||||||||||
Other | 770 | 20 | 790 | 0 | 790 | 4,473 | 5 | 4,478 | 0 | 4,478 | ||||||||||||||||||||||||||||||
Total sales | $ | 145,190 | $ | 58,283 | $ | 203,473 | $ | 0 | $ | 203,473 | $ | 198,540 | $ | 74,082 | $ | 272,622 | $ | 0 | $ | 272,622 | ||||||||||||||||||||
Timing of revenue recognition | ||||||||||||||||||||||||||||||||||||||||
Products transferred at a point in time | $ | 11,075 | $ | 40,962 | $ | 52,037 | $ | 0 | $ | 52,037 | $ | 11,773 | $ | 47,462 | $ | 59,235 | $ | 0 | $ | 59,235 | ||||||||||||||||||||
Products and services transferred over time | 134,115 | 17,321 | 151,436 | 0 | 151,436 | 186,767 | 26,620 | 213,387 | 0 | 213,387 | ||||||||||||||||||||||||||||||
Total sales | $ | 145,190 | $ | 58,283 | $ | 203,473 | $ | 0 | $ | 203,473 | $ | 198,540 | $ | 74,082 | $ | 272,622 | $ | 0 | $ | 272,622 | ||||||||||||||||||||
Three Months Ended September 30, 2020 | ||||||||||||||||||||
FVS | SV | Total Reportable Segments | Other | Total | ||||||||||||||||
Primary geographical markets | ||||||||||||||||||||
United States | $ | 144,420 | $ | 58,263 | $ | 202,683 | $ | 0 | $ | 202,683 | ||||||||||
Other | 770 | 20 | 790 | 0 | 790 | |||||||||||||||
Total sales | $ | 145,190 | $ | 58,283 | $ | 203,473 | $ | 0 | $ | 203,473 | ||||||||||
Timing of revenue recognition | ||||||||||||||||||||
Products transferred at a point in time | $ | 11,075 | $ | 40,962 | $ | 52,037 | $ | 0 | $ | 52,037 | ||||||||||
Products and services transferred over time | 134,115 | 17,321 | 151,436 | 0 | 151,436 | |||||||||||||||
Total sales | $ | 145,190 | $ | 58,283 | $ | 203,473 | $ | 0 | $ | 203,473 | ||||||||||
THE SHYFT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2021 | |||||||||||||||||||||||||||||||||||||||
FVS | SV | Total Reportable Segments | Other | Total | FVS | SV | Total Reportable Segments | Other | Total | |||||||||||||||||||||||||||||||
Primary geographical markets | ||||||||||||||||||||||||||||||||||||||||
United States | $ | 176,689 | $ | 45,072 | $ | 221,761 | $ | 0 | $ | 221,761 | $ | 490,382 | $ | 215,951 | $ | 706,333 | $ | 0 | $ | 706,333 | ||||||||||||||||||||
Other | 2,905 | 37 | 2,942 | 0 | 2,942 | 8,104 | 55 | 8,159 | 0 | 8,159 | ||||||||||||||||||||||||||||||
Total sales | $ | 179,594 | $ | 45,109 | $ | 224,703 | $ | 0 | $ | 224,703 | $ | 498,486 | $ | 216,006 | $ | 714,492 | $ | 0 | $ | 714,492 | ||||||||||||||||||||
Timing of revenue recognition | ||||||||||||||||||||||||||||||||||||||||
Products transferred at a point in time | $ | 41,830 | $ | 35,824 | $ | 77,654 | $ | 0 | $ | 77,654 | $ | 32,842 | $ | 133,092 | $ | 165,934 | $ | 0 | $ | 165,934 | ||||||||||||||||||||
Products and services transferred over time | 137,764 | 9,285 | 147,049 | 0 | 147,049 | 465,644 | 82,914 | 548,558 | 0 | 548,558 | ||||||||||||||||||||||||||||||
Total sales | $ | 179,594 | $ | 45,109 | $ | 224,703 | $ | 0 | $ | 224,703 | $ | 498,486 | $ | 216,006 | $ | 714,492 | $ | 0 | $ | 714,492 | ||||||||||||||||||||
Nine Months Ended September 30, 2020 | ||||||||||||||||||||
FVS | SV | Total Reportable Segments | Other | Total | ||||||||||||||||
Primary geographical markets | ||||||||||||||||||||
United States | $ | 373,501 | $ | 126,032 | $ | 499,533 | $ | 0 | $ | 499,533 | ||||||||||
Other | 4,615 | 243 | 4,858 | 0 | 4,858 | |||||||||||||||
Total sales | $ | 378,116 | $ | 126,275 | $ | 504,391 | $ | 0 | $ | 504,391 | ||||||||||
Timing of revenue recognition | ||||||||||||||||||||
Products transferred at a point in time | $ | 44,611 | $ | 81,729 | $ | 126,340 | $ | 0 | $ | 126,340 | ||||||||||
Products and services transferred over time | 333,505 | 44,546 | 378,051 | 0 | 378,051 | |||||||||||||||
Total sales | $ | 378,116 | $ | 126,275 | $ | 504,391 | $ | 0 | $ | 504,391 |
| |||||||||
Nine Months Ended September 30, 2019 | ||||||||||||||||||||
FVS | SV | Total Reportable Segments | Other | Total | ||||||||||||||||
Primary geographical markets | ||||||||||||||||||||
United States | $ | 426,984 | $ | 138,418 | $ | 565,402 | $ | (5,280 | ) | $ | 560,122 | |||||||||
Other | 16,361 | 99 | 16,460 | 0 | 16,460 | |||||||||||||||
Total sales | $ | 443,345 | $ | 138,517 | $ | 581,862 | $ | (5,280 | ) | $ | 576,582 | |||||||||
Timing of revenue recognition | ||||||||||||||||||||
Products transferred at a point in time | $ | 146,146 | $ | 109,626 | $ | 255,772 | $ | (5,280 | ) | $ | 250,492 | |||||||||
Products and services transferred over time | 297,199 | 28,891 | 326,090 | 0 | 326,090 | |||||||||||||||
Total sales | $ | 443,345 | $ | 138,517 | $ | 581,862 | $ | (5,280 | ) | $ | 576,582 | |||||||||
NOTE 7 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized by major classifications as follows:
September 30, 2021 | December 31, 2020 | |||||||
Land and improvements | $ | 8,721 | $ | 8,721 | ||||
Buildings and improvements | 44,810 | 40,077 | ||||||
Plant machinery and equipment | 49,076 | 41,054 | ||||||
Furniture and fixtures | 18,588 | 16,259 | ||||||
Vehicles | 2,590 | 2,404 | ||||||
Construction in process | 10,986 | 8,724 | ||||||
Subtotal | 134,771 | 117,239 | ||||||
Less accumulated depreciation | (77,397 | ) | (71,505 | ) | ||||
Total property, plant and equipment, net | $ | 57,374 | $ | 45,734 | ||||
THE SHYFT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
NOTE 7 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized by major classifications as follows:
September 30, 2020 | December 31, 2019 | |||||||
Land and improvements | $ | 8,721 | $ | 8,692 | ||||
Buildings and improvements | 39,715 | 38,653 | ||||||
Plant machinery and equipment | 37,896 | 33,348 | ||||||
Furniture and fixtures | 21,969 | 21,416 | ||||||
Vehicles | 2,004 | 1,872 | ||||||
Construction in process | 2,589 | 3,527 | ||||||
Subtotal | 112,894 | 107,508 | ||||||
Less accumulated depreciation | (75,534 | ) | (67,434 | ) | ||||
Total property, plant and equipment, net | $ | 37,360 | $ | 40,074 | ||||
We recorded depreciation expense of $2,179$2,138 and $818$2,179 during the three months ended September 30, 20202021 and 2019,2020, respectively, and $8,440$5,778 and $3,545$8,440 during the nine months ended September 30, 20202021 and 2019,2020, respectively. In the second quarter of 2020, we committed to a plan to phase out the use of an ERP system at certain locations and determined that the estimated useful lives for the related assets had shortened. As a result, in the second quarter of 2020,we recorded depreciation expense of $2,330 attributable to accelerated depreciation and loss of $2,430 from write-off of related construction in process. In the third quarter of 2020, we recorded related depreciation expense of $365. The total after-tax impact on Income (loss) from continuing operations iswas an expense of $274 and $3,873 for the three and nine months ended September 30, 2020, respectively.
NOTE 8 – LEASES
We have operating and finance leases for land, buildings and certain equipment. Our leases have remaining lease terms of one year to 1719 years, some of which include options to extend the leases for up to 1015 years. Our leases do not contain residual value guarantees. Assets recorded under finance leases were immaterial (See "Note 5 – Debt").
Operating lease expenses are classified as Cost of products sold and Operating expenses on the Condensed Consolidated Statements of Operations. The components of lease expense were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
Operating leases | $ | 1,551 | $ | 984 | $ | 4,657 | $ | 2,327 | ||||||||
Short-term leases(1) | 75 | 109 | 159 | 165 | ||||||||||||
Total lease expense | $ | 1,626 | $ | 1,093 | $ | 4,816 | $ | 2,492 | ||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Operating leases | $ | 2,048 | $ | 1,551 | $ | 5,984 | $ | 4,657 | ||||||||
Short-term leases(1) | 135 | 75 | 301 | 159 | ||||||||||||
Total lease expense | $ | 2,183 | $ | 1,626 | $ | 6,285 | $ | 4,816 | ||||||||
(1) Includes expenses for month-to-month equipment leases, which are classified as short-term as the Company is not reasonably certain to renew the lease term beyond one month.
The weighted average remaining lease term and weighted average discount rate were as follows:
September 30, | Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||||||
Weighted average remaining lease term of operating leases (in years) | 7.7 | 9.0 | 9.2 | 7.7 | ||||||||||||
Weighted average discount rate of operating leases | 3.4 | % | 4.0 | % | 3.0 | % | 3.4 | % | ||||||||
Supplemental cash flow information related to leases was as follows:
Nine Months Ended September 30, | ||||||||
2021 | 2020 | |||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
Operating cash flow for operating leases | $ | 5,870 | $ | 4,531 | ||||
Right of use assets obtained in exchange for lease obligations: | ||||||||
Operating leases | $ | 6,305 | $ | 7,283 | ||||
| Finance leases | $ | 106 | $ | 136 | ||||
THE SHYFT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
Supplemental cash flow information related to leases was as follows:
Nine Months Ended September 30, | ||||||||
2020 | 2019 | |||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
Operating cash flow for operating leases | $ | 4,531 | $ | 2,785 | ||||
Right of use assets obtained in exchange for lease obligations: | ||||||||
| Operating leases | $ | 7,283 | $ | 2,340 | ||||
Finance leases | $ | 136 | $ | 0 | ||||
Maturities of operating lease liabilities as of September 30, 20202021 are as follows:
Years ending December 31: | ||||||||
| 2020(1) | $ | 1,582 | ||||||
2021 | 6,380 | |||||||
2021(1) | $ | 2,022 | ||||||
2022 | 6,036 | 7,607 | ||||||
2023 | 6,027 | 7,342 | ||||||
2024 | 5,767 | 7,014 | ||||||
2025 | 6,247 | |||||||
Thereafter | 15,424 | 21,636 | ||||||
Total lease payments | 41,216 | 51,868 | ||||||
Less: imputed interest | (5,107 | ) | (6,704 | ) | ||||
Total lease liabilities | $ | 36,109 | $ | 45,164 | ||||
(1) Excluding the nine months ended September 30, 2020.2021.
NOTE 9 – COMMITMENTS AND CONTINGENT LIABILITIES
Under the terms of the Credit Agreement we have the ability to issue letters of credit totaling $20,000. We had outstanding letters of credit totaling $525 at September 30, 2020 and December 31, 2019 related to our workers’ compensation insurance.
At September 30, 2020,2021, we and our subsidiaries were parties, both as plaintiff and defendant, to a number of lawsuits and claims arising out of the normal course of our businesses. In the opinion of management, our financial position, future operating results or cash flows will not be materially affected by the final outcome of these legal proceedings.
Warranty Related
We provide limited warranties against assembly/construction defects. These warranties generally provide for the replacement or repair of defective parts or workmanship for a specified period following the date of sale. The end users also may receive limited warranties from suppliers of components that are incorporated into our chassis and vehicles.
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 our historical experience. We provide 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 our historical experience. An estimate of possible penalty or loss, if any, cannot be made at this time.
Changes in our warranty liability are summarized below:
Nine Months Ended September 30, | ||||||||
2021 | 2020 | |||||||
Balance of accrued warranty at January 1 | $ | 5,633 | $ | 5,694 | ||||
Provisions for current period sales | 2,720 | 2,687 | ||||||
Cash settlements | (3,052 | ) | (2,411 | ) | ||||
Changes in liability for pre-existing warranties | 1,958 | (406 | ) | |||||
| Acquired | 289 | 0 | ||||||
Balance of accrued warranty at September 30 | $ | 7,548 | $ | 5,564 | ||||
THE SHYFT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
Changes in our warranty liability during the nine months ended September 30, 2020 and 2019 were as follows:
Nine Months Ended September 30, | ||||||||
2020 | 2019 | |||||||
Balance of accrued warranty at January 1 | $ | 5,694 | $ | 4,407 | ||||
Warranties issued during the period | 2,687 | 3,589 | ||||||
Cash settlements made during the period | (2,411 | ) | (2,625 | ) | ||||
Changes in liability for pre-existing warranties during the period, including expirations | (406 | ) | 199 | |||||
Balance of accrued warranty at September 30 | $ | 5,564 | $ | 5,570 | ||||
Spartan-Gimaex Joint Venture
In February 2015, the Company and Gimaex Holding, Inc. mutually agreedinitiated discussions to begin discussions regarding the dissolution ofdissolve the Spartan-Gimaex joint venture. In June 2015, Further to legal proceedings initiated by the Company and Gimaex Holding, Inc. entered into court proceedings to determine the terms of the dissolution. In February 2017, by agreement of the parties, the court proceeding was dismissed with prejudice and the judge entered an order to this effect as the parties agreed to seek a dissolution plan on their own. In late 2019, the Company initiated additional court proceedings to dissolve and liquidate the joint venture. In April of 2020, as a result of a default judgment,venture, the court appointed the Company was appointed as liquidating trustee of the Gimaex joint venture, butventure. As of noSeptember 2021, dissolution terms have been determined as of the date of this Form 10-Q. Costs associated withliquidation is substantially complete, and the wind-down will be impacted by the final dissolution terms. In accordance with accounting guidance, the costs we have accrued so far represent the low end of the range of the estimated total charges that we believe we may incur related to the wind-down. While we are unable to determine the final cost of the wind-down with certainty at this time, we may incur additional charges, depending on the final terms of the dissolution. Such charges areCompany does not expected to beexpect any material impact to our future operating results.
EPA Information Request
In May 2020, the Company received a letter from the United States Environmental Protection Agency (“EPA”) requesting certain information as part of an EPA investigation regarding a potential failure to affix emissions labels on vehicles to determine the Company’s compliance with applicable laws and regulations. This information request pertains to chassis, vocational vehicles, and vehicles that the Company manufactured or imported into the USU.S. between January 1, 2017 to the date the Company received the request in May 2020. The Company responded to the EPA’s request and furnished the requested materials in the third quarter of 2020. An estimate of possible penalties or loss, if any, cannot be made at this time.
NOTE 10 – TAXES ON INCOME
Our effective income tax rate was 24.8% and 27.2% for the three months ended September 30, 2021 and 2020, respectively, compared to 24.4% and 19.1% for the nine months ended September 30, 2021 and 2020, respectively.
The effective tax rate of 24.8% and 24.4% for the three and nine months ended September 30, 2020,2021, respectively, compared to 24.7% and 23.5% foris higher than the three and nine months ended September 30, 2019, respectively. U.S. statutory tax rate of 21% primarily because of state income taxes at their statutory rates.
The effective tax rate of 27.2% for the three months ended September 30, 2020 is higher than the US statutory tax rate of 21% primarily because of state income taxes at their statutory rates and the unfavorable impact of certain non-deductible compensation expense on our effective tax rate.
The effective tax rate for the nine months ended September 30, 2020 reflects the favorable impact of certain provisions of the CARESCoronavirus Aid, Relief, and Economic Security (“CARES”) Act upon the income tax expense as computed based on current statutory income tax rates. Enacted on March 27, 2020, the CARES Act amended certain provisions of the tax code to allow the five-year carryback of tax basis net operating losses (“NOL”) incurred in the years 2018 through 2020. The closing of the sale of the ERV business during the first quarter of 2020 put the Company into a tax basis NOL position for the year as a result of the reversal of deferred tax assets that were recorded in 2019. Under the CARES Act, the Company will carryhas carried the NOL back to offset taxable income incurred in years prior to 2018 when the federal corporate income tax rate was 35%, as compared to the 21% tax rate at which the deferred tax assets were originally recorded. The Company recorded a $2,610 current period tax benefit resulting from the rate difference as a component of Income tax benefit in the first quarter of 2020.
THE SHYFT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
The effective tax rate for the three months ended September 30, 2019 reflects the impact of current statutory income tax rates on our Income before taxes. The effective tax rate for the nine months ended September 30, 2019 was primarily impacted by a discrete tax benefit recorded in the first quarter related to additional state tax credits from prior years becoming available for utilization in future tax returns, with a net reduction in income tax expense of $296.
NOTE 11 – BUSINESS SEGMENTS
We identify our reportable segments based on our management structure and the financial data utilized by our chief operating decision maker to assess segment performance and allocate resources among our operating units. We have two2 reportable segments: Fleet Vehicles and Services and Specialty Vehicles. Effective the second quarter of 2020, the Company renamed its Specialty Chassis and Vehicles segment to Specialty Vehicles.
We evaluate the performance of our reportable segments based on Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) and it is calculated by excluding items that we believe to be infrequent or not indicative of our continuingunderlying operating performance.performance, as well as certain non-cash expenses. We define Adjusted EBITDA as income from continuing operations before interest, income taxes, depreciation and amortization, as adjusted to eliminate the impact of restructuring charges, acquisition related expenses and adjustments, non-cash stock-based compensation expenses, and other gains and losses not reflective of our ongoing operations. Adjusted EBITDA for all prior periods presented has been recast to conform to the current presentation.
THE SHYFT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
The accounting policies of the segments are the same as those described, or referred to, in "Note 1 – Nature of Operations and Basis of Presentation"Presentation". Assets and related depreciation expense in the column labeled “Eliminations and Other” pertain to capital assets maintained at the corporate level. Eliminations for inter-segment sales are shown in the column labeled “Eliminations and Other”. Segment loss from operationsAdjusted EBITDA in the “Eliminations and Other” column contains corporate related expenses not allocable to the operating segments. Interest expense and Income tax expense (benefit) are not included in the information utilized by the chief operating decision makersmaker to assess segment performance and allocate resources, and accordingly, are excluded from the segment results presented below.
Three Months Ended September 30, 2020
Three Months Ended September 30, 2021 | ||||||||||||||||
| Segment | ||||||||||||||||
FVS | SV | Eliminations and Other | Consolidated | |||||||||||||
Fleet vehicle sales | $ | 189,591 | $ | 0 | $ | 0 | $ | 189,591 | ||||||||
Motor home chassis sales | 0 | 42,507 | 0 | 42,507 | ||||||||||||
Other specialty vehicle sales | 0 | 26,620 | 0 | 26,620 | ||||||||||||
Aftermarket parts and accessories sales | 8,949 | 4,955 | 0 | 13,904 | ||||||||||||
Total sales | $ | 198,540 | $ | 74,082 | $ | 0 | $ | 272,622 | ||||||||
Depreciation and amortization expense | $ | 924 | $ | 1,505 | $ | 553 | $ | 2,982 | ||||||||
Adjusted EBITDA | 36,813 | 5,827 | (8,900 | ) | 33,740 | |||||||||||
Segment assets | 200,358 | 199,997 | 29,920 | 430,275 | ||||||||||||
Capital expenditures | 3,844 | 465 | 882 | 5,191 | ||||||||||||
Three Months Ended September 30, 2020 | ||||||||||||||||||||||||||||||||
Segment | Segment | |||||||||||||||||||||||||||||||
FVS | SV | Eliminations and Other | Consolidated | FVS | SV | Eliminations and Other | Consolidated | |||||||||||||||||||||||||
Fleet vehicle sales | $ | 136,382 | $ | 0 | $ | 0 | $ | 136,382 | $ | 136,382 | $ | 0 | $ | 0 | $ | 136,382 | ||||||||||||||||
Motor home chassis sales | 0 | 38,190 | 0 | 38,190 | 0 | 38,190 | 0 | 38,190 | ||||||||||||||||||||||||
Other specialty vehicle sales | 0 | 17,601 | 0 | 17,601 | 0 | 17,601 | 0 | 17,601 | ||||||||||||||||||||||||
Aftermarket parts and accessories sales | 8,808 | 2,492 | 0 | 11,300 | 8,808 | 2,492 | 0 | 11,300 | ||||||||||||||||||||||||
Total sales | $ | 145,190 | $ | 58,283 | $ | 0 | $ | 203,473 | $ | 145,190 | $ | 58,283 | $ | 0 | $ | 203,473 | ||||||||||||||||
Depreciation and amortization expense | $ | 934 | $ | 1,412 | $ | 632 | $ | 2,978 | $ | 934 | $ | 1,412 | $ | 632 | $ | 2,978 | ||||||||||||||||
Adjusted EBITDA | 33,237 | 7,183 | (7,827 | ) | 32,593 | 33,237 | 7,183 | (7,827 | ) | 32,593 | ||||||||||||||||||||||
Segment assets | 165,216 | 155,429 | 74,474 | 395,119 | 165,216 | 149,103 | 74,474 | 388,793 | ||||||||||||||||||||||||
Capital expenditures | 1,482 | 371 | 505 | 2,358 | 1,482 | 371 | 505 | 2,358 | ||||||||||||||||||||||||
THE SHYFT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
Three Months Ended September 30, 2019
Segment | ||||||||||||||||
FVS | SV | Eliminations and Other | Consolidated | |||||||||||||
Fleet vehicle sales | $ | 172,530 | $ | 0 | $ | 0 | $ | 172,530 | ||||||||
Motor home chassis sales | 0 | 33,038 | 0 | 33,038 | ||||||||||||
Other specialty vehicle sales | 0 | 9,370 | 0 | 9,370 | ||||||||||||
Aftermarket parts and accessories sales | 7,064 | 2,701 | 0 | 9,765 | ||||||||||||
Total sales | $ | 179,594 | $ | 45,109 | $ | 0 | $ | 224,703 | ||||||||
Depreciation and amortization expense | $ | 641 | $ | 372 | $ | 440 | $ | 1,453 | ||||||||
Adjusted EBITDA | 24,689 | 4,079 | (6,443 | ) | 22,325 | |||||||||||
Segment assets | 147,168 | 159,295 | 69,390 | 375,853 | ||||||||||||
Capital expenditures | 1,166 | 1,184 | 759 | 3,109 | ||||||||||||
Nine Months Ended September 30, 2020
Segment | ||||||||||||||||
FVS | SV | Eliminations and Other | Consolidated | |||||||||||||
Fleet vehicle sales | $ | 351,117 | $ | 0 | $ | 0 | $ | 351,117 | ||||||||
Motor home chassis sales | 0 | 74,840 | 0 | 74,840 | ||||||||||||
Other specialty vehicle sales | 0 | 45,316 | 0 | 45,316 | ||||||||||||
Aftermarket parts and accessories sales | 26,999 | 6,119 | 0 | 33,118 | ||||||||||||
Total sales | $ | 378,116 | $ | 126,275 | $ | 0 | $ | 504,391 | ||||||||
Depreciation and amortization expense | $ | 2,591 | $ | 4,313 | $ | 3,934 | $ | 10,838 | ||||||||
Adjusted EBITDA | 68,625 | 12,123 | (20,429 | ) | 60,319 | |||||||||||
Segment assets | 165,216 | 155,429 | 74,474 | 395,119 | ||||||||||||
Capital expenditures | 5,306 | 2,060 | 875 | 8,241 | ||||||||||||
Nine Months Ended September 30, 2019
Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||
Segment | Segment | |||||||||||||||||||||||||||||||
FVS | SV | Eliminations and Other | Consolidated | FVS | SV | Eliminations and Other | Consolidated | |||||||||||||||||||||||||
Fleet vehicle sales | $ | 380,079 | $ | 5,280 | $ | (5,280 | ) | $ | 380,079 | $ | 474,292 | $ | 0 | $ | 0 | $ | 474,292 | |||||||||||||||
Motor home chassis sales | 0 | 101,977 | 0 | 101,977 | 0 | 118,666 | 0 | 118,666 | ||||||||||||||||||||||||
Other specialty vehicle sales | 0 | 23,543 | 0 | 23,543 | 0 | 82,914 | 0 | 82,914 | ||||||||||||||||||||||||
Aftermarket parts and accessories sales | 63,266 | 7,717 | 0 | 70,983 | 24,194 | 14,426 | 0 | 38,620 | ||||||||||||||||||||||||
Total sales | $ | 443,345 | $ | 138,517 | $ | (5,280 | ) | $ | 576,582 | $ | 498,486 | $ | 216,006 | $ | 0 | $ | 714,492 | |||||||||||||||
Depreciation and amortization expense | $ | 1,795 | $ | 1,119 | $ | 1,131 | $ | 4,045 | $ | 2,302 | $ | 4,645 | $ | 1,365 | $ | 8,312 | ||||||||||||||||
Adjusted EBITDA | 39,584 | 14,110 | (13,235 | ) | 40,459 | 83,310 | 21,480 | (23,309 | ) | 81,481 | ||||||||||||||||||||||
Segment assets | 147,168 | 159,295 | 69,390 | 375,853 | 200,358 | 199,997 | 29,920 | 430,275 | ||||||||||||||||||||||||
Capital expenditures | 1,864 | 1,490 | 1,928 | 5,282 | 12,489 | 3,153 | 1,485 | 17,127 | ||||||||||||||||||||||||
Nine Months Ended September 30, 2020 | ||||||||||||||||
Segment | ||||||||||||||||
FVS | SV | Eliminations and Other | Consolidated | |||||||||||||
Fleet vehicle sales | $ | 351,117 | $ | 0 | $ | 0 | $ | 351,117 | ||||||||
Motor home chassis sales | 0 | 74,840 | 0 | 74,840 | ||||||||||||
Other specialty vehicle sales | 0 | 45,316 | 0 | 45,316 | ||||||||||||
Aftermarket parts and accessories sales | 26,999 | 6,119 | 0 | 33,118 | ||||||||||||
Total sales | $ | 378,116 | $ | 126,275 | $ | 0 | $ | 504,391 | ||||||||
Depreciation and amortization expense | $ | 2,591 | $ | 4,313 | $ | 3,934 | $ | 10,838 | ||||||||
Adjusted EBITDA | 68,625 | 12,123 | (20,429 | ) | 60,319 | |||||||||||
Segment assets | 165,216 | 149,103 | 74,474 | 388,793 | ||||||||||||
Capital expenditures | 5,306 | 2,060 | 875 | 8,241 | ||||||||||||
THE SHYFT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
The table below presents the reconciliation of our income from continuing operations to Adjusted EBITDA. Adjusted EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income. Adjusted EBITDA may have limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. In addition, although we have excluded certain charges in calculating Adjusted EBITDA, we may in the future incur expenses similar to these adjustments, despite our assessment that such expenses are infrequent and/or not indicative of our regular, ongoing operating performance. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or infrequent items.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Income from continuing operations | $ | 20,999 | $ | 19,375 | $ | 49,482 | $ | 29,983 | ||||||||
Net (income) attributable to non-controlling interest | (77 | ) | (41 | ) | (1,102 | ) | (178 | ) | ||||||||
Add (subtract): | ||||||||||||||||
Interest expense | 253 | 11 | 310 | 1,202 | ||||||||||||
Depreciation and amortization expense | 2,982 | 2,978 | 8,312 | 10,838 | ||||||||||||
Income tax expense | 6,910 | 7,253 | 15,952 | 7,084 | ||||||||||||
Restructuring and other related charges | 0 | 303 | 505 | 1,857 | ||||||||||||
Acquisition related expenses and adjustments | 594 | 650 | 808 | 922 | ||||||||||||
Non-cash stock based compensation expense | 2,079 | 2,064 | 6,571 | 6,181 | ||||||||||||
| Loss from liquidation of JV | 0 | 0 | 643 | 0 | ||||||||||||
| Loss from write-off of construction in process | 0 | 0 | 0 | 2,430 | ||||||||||||
Adjusted EBITDA | $ | 33,740 | $ | 32,593 | $ | 81,481 | $ | 60,319 | ||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
Income from continuing operations | $ | 19,375 | $ | 13,126 | $ | 29,983 | $ | 22,505 | ||||||||
Net (income) loss attributable to non-controlling interest | (41 | ) | (61 | ) | (178 | ) | 14 | |||||||||
Add (subtract): | ||||||||||||||||
Interest expense | 11 | 144 | 1,202 | 831 | ||||||||||||
| Income tax expense | 7,253 | 4,317 | 7,084 | 6,929 | ||||||||||||
| Depreciation and amortization expense | 2,978 | 1,453 | 10,838 | 4,045 | ||||||||||||
Restructuring and other related charges | 303 | 243 | 1,857 | 270 | ||||||||||||
Acquisition related expenses and adjustments | 650 | 1,522 | 922 | 1,987 | ||||||||||||
Non-cash stock based compensation expense | 2,064 | 1,581 | 6,181 | 3,878 | ||||||||||||
| Loss from write-off of construction in process | 0 | 0 | 2,430 | 0 | ||||||||||||
Adjusted EBITDA | $ | 32,593 | $ | 22,325 | $ | 60,319 | $ | 40,459 | ||||||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Effective June 1, 2020, our corporate name has changed to The Shyft Group, Inc. (f/k/a Spartan Motors, Inc.). The new corporate name reflects the next phase of our business transformation with an increased focus on higher growth commercial, retail, and service specialty vehicle markets.
The Shyft Group, Inc. was organized as a Michigan corporation on September 18, 1975, and is headquartered in Novi, Michigan.
The Company is We are a niche market leader in specialty vehicle manufacturing and assembly for the commercial vehicle (including last-mile delivery, specialty service and vocation-specific upfit segments) and recreational vehicle industries. Our products include walk-in vans and truck bodies used in e-commerce/parcel delivery, upfit equipment used in the mobile retail and utility trades, service and vocational truck bodies, luxury Class A diesel motor home chassis military vehicles, and contract manufacturing and assembly services. We also supply replacement parts and offer repair, maintenance, field service and refurbishment services for the vehicles that we manufacture. Our operating activities are conducted through our wholly-owned operating subsidiary, The Shyft Group USA, Inc., with locations in Novi, Charlotte and Plymouth, Michigan; Bristol, Indiana; Waterville, Maine; Ephrata, Pennsylvania; North Charleston, South Carolina; Pompano Beach and West Palm Beach, Florida; Ephrata, Pennsylvania; Bristol, Indiana; North Charleston, South Carolina; Kansas City, Missouri; Montebello, Carson and Sacramento,McClellan Park, California; Mesa, Arizona; Dallas and Weatherford, Texas; and Saltillo, Mexico.
Our vehicles, parts and services are sold to commercial users, original equipment manufacturers (OEMs)("OEMs"), dealers, individual end users, and municipalities and other governmental entities. Our diversification across several sectors provides numerous opportunities while reducing overall risk as the various markets we serve tend to have different cyclicality. We have an innovative team focused on building lasting relationships with our customers by designing and delivering market leading specialty vehicles, vehicle components, and services. Additionally, our business structure provides the agilityis agile and able to quickly respond to market needs, take advantage of strategic opportunities when they arise and correctly size and scale operations to ensure stability and growth. Our expansion of equipment upfit services in our Fleet Vehicles and Services segment, and the growing opportunities that we have capitalized on in last mile delivery as a result of the rapidly changing e-commerce market, are excellent examples of our ability to generate growth and profitability by quickly fulfilling customer needs.needs and operating efficiently.
Recent Developments
On January 30,In March 2020, the President of the United States declared the COVID-19 outbreak a national emergency, as the World Health Organization (“WHO”) announceddetermined it was a global health emergency because of a new strain of coronavirus (“COVID-19”). On March 11, 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.pandemic. The pandemic has had a significant impact on macroeconomic conditions. To limit the spread of COVID-19, governments have taken various actions including the issuance of stay-at-home orders and social distancing guidelines. While the Company’s plants continued to operate as essential businesses, starting March 23, 2020 certain of our manufacturing facilities were temporarily suspended or cut back on operating levels and shifts as a result of government orders. AsSince the third quarter of June 30, 2020, approximately 90% of our facilities were at full or modified production levels and as of September 30, 2020, all of our facilities were at full or modified production levels. However, additional suspensions and cutbacks may occur as the impacts from COVID-19 and related responses continue to developevolve within our global supply chain and customer base. The Company is taking a variety of measures to maintain operations with as minimal impact as possible to promote the safety and security of our employees,associates, including increased frequency of cleaning and disinfecting of facilities, social distancing, remote working when possible, travel restrictions and limitations on visitor access to facilities. We took actions to align operations and spending across our business in response to uncertainty caused by the COVID-19 outbreak during 2020. This included actions that primarily impacted the second quarter of 2020, such as temporary salary reductions for executive management and the Board of Directors, furloughs of a portion of our workforce, freezing employee requisitions and minimizing capital expenditures to critical investments.
The full impact of the COVID-19 outbreak continues to evolve as of the date of this filing. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the impact of the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolutionnature of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2020.
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. As a result, the Company recorded an income tax benefit of $2.6 million in the first quarter of 2020 (see "Note 10 – Taxes on Income") and has also made provision to defer the employer side social security payments for the remaining portion of 2020, to be paid in two equal installment payments in 2021 and 2022. We will continue to examine the potential impacts of the CARES Act on our business, results of operations, financial condition and liquidity.future periods.
On October 1, 2020, the Company completed its acquisitionacquired substantially all of the assets and certain liabilities of F3 MFG Inc. through the Company’s subsidiary, The Shyft Group DuraMag LLC (“F3”DuraMag”). F3DuraMag is a leading aluminum truck body and accessory manufacturer, and F3DuraMag operations include aluminum manufacturing, finishing, assembly, and installation of DuraMag contractor, service, and van bodies, as well as Magnum branded truck accessories including headache racks (also known as cab protection racks or rear racks). F3DuraMag operates out of Waterville, Maine and that location is expected to continue to serve as the business’ primary manufacturing and assembly facility for both product lines. The addition of DuraMag aluminum bodies to the Company's product offerings follows the Company’s recent2019 acquisition of Royal Truck Body ("Royal"), a West Coast and Southwestern USU.S. steel truck body maker. Combined, these acquisitions elevate the Company to a leading position as a national service body manufacturer. F3 will beDuraMag is part of our Specialty Vehicle segment (f/k/a Specialty Chassis and Vehicles).continues to go to market under the DuraMag and Magnum brands.
On February 1, 2020, the Company completed its sale
Executive Overview
● | Revenue of $272.6 million in the third quarter of 2021, an increase of 34.0% compared to $203.5 million in the third quarter of |
● | Gross Margin of 20.6% in the third quarter of 2021, compared to 24.9% in the third quarter of |
● | Operating expense of $28.0 million, or 10.3% of sales in the third quarter of 2021, compared to $24.3 million, or 12.0% of sales in the third quarter of |
● | Operating income of $28.1 million in the third quarter of 2021, compared to $26.4 million in the third quarter of |
● | Income tax expense of $6.9 million in the third quarter of 2021, compared to $7.3 million in the third quarter of |
● | Income from continuing operations of $21.0 million in the third quarter of 2021, compared to $19.4 million in the third quarter of | |
| ● | Diluted earnings per share from continuing operations of $0.58 in the third quarter of 2021, compared to $0.54 in the third quarter of |
● | Order backlog of $852.6 million at September 30, 2021, an increase of $572.0 million or 203.8% from our backlog of $280.6 million at September 30, |
We believe we are well positioned to take advantage of long-term opportunities and continue our efforts to bring product innovations to each of the markets that we serve. Some of our recent innovations, strategic developments and strengths include:
● | In June 2021, we announced the creation of Shyft Innovations™, our dedicated mobility research and development team, initially focused on introducing a Class 3 purpose-built flat modular EV chassis to any specialty vehicle body builder. The EV-powered chassis features customizable length and wheelbase, making it well suited for a variety of vehicle types. The chassis’ modular design will accommodate multiple gross vehicle weight rating classifications, based on build out and usage. With this high degree of configurability, the all-electric chassis is adaptable to last mile delivery, work truck, mass transit, recreational vehicle, and other emerging EV markets. |
● | The introduction of the Velocity |
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● | The introduction of the Velocity |
● | Our continued expansion into the equipment upfit market for vehicles used in the parcel delivery, grocery, trades, and construction industries. This rapidly expanding market offers an opportunity to add value to current and new customers for our fleet vehicles and vehicles produced by other original equipment manufacturers. |
● | The introduction of |
● | The introduction of the |
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● | The strength of our balance sheet and access to |
The following section provides a narrative discussion about our financial condition and results of operations. Certain amounts in the narrative may not sum due to rounding. The comments should be read in conjunction with our Condensed Consolidated Financial Statements and related Notes thereto included in Item 1 of this Form 10-Q and in conjunction with our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2020.25, 2021.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the components of the Company’s Condensed Consolidated Statements of Operations as a percentage of sales (percentages may not sum due to rounding):
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||
Sales | 100.0% | 100.0% | 100.0% | 100.0% | 100.0 | 100.0 | 100.0 | 100.0 | ||||||||||||||||||||||||
Cost of products sold | 75.1% | 83.1% | 78.0% | 86.2% | 79.4 | 75.1 | 79.3 | 78.0 | ||||||||||||||||||||||||
Gross profit | 24.9% | 16.9% | 22.0% | 13.8% | 20.6 | 24.9 | 20.7 | 22.0 | ||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||
Research and development | 0.4% | 0.5% | 0.7% | 0.6% | 0.9 | 0.4 | 0.6 | 0.7 | ||||||||||||||||||||||||
Selling, general and administrative | 11.6% | 8.8% | 13.8% | 8.1% | 9.3 | 11.6 | 11.0 | 13.8 | ||||||||||||||||||||||||
Operating income | 13.0% | 7.6% | 7.5% | 5.1% | 10.3 | 13.0 | 9.1 | 7.5 | ||||||||||||||||||||||||
Other income (expense), net | 0.1% | 0.2% | (0.2% | ) | 0.0% | (0.1 | ) | 0.1 | 0.1 | (0.2 | ) | |||||||||||||||||||||
Income from continuing operations before income taxes | 13.1% | 7.8% | 7.3% | 5.1% | 10.2 | 13.1 | 9.2 | 7.3 | ||||||||||||||||||||||||
Income tax expense | 3.6% | 1.9% | 1.4% | 1.2% | 2.5 | 3.6 | 2.2 | 1.4 | ||||||||||||||||||||||||
Income from continuing operations | 9.5% | 5.8% | 5.9% | 3.9% | 7.7 | 9.5 | 6.9 | 5.9 | ||||||||||||||||||||||||
Loss from discontinued operations, net of income taxes | (0.3% | ) | (1.2% | ) | (0.9% | ) | (1.3% | ) | ||||||||||||||||||||||||
Income (loss) from discontinued operations, net of income taxes | - | (0.3 | ) | - | (0.9 | ) | ||||||||||||||||||||||||||
Non-controlling interest | 0.0% | 0.0% | 0.0% | 0.0% | - | - | 0.2 | - | ||||||||||||||||||||||||
Net income attributable to The Shyft Group, Inc. | 9.2% | 4.6% | 5.0% | 2.6% | 7.7 | 9.2 | 6.8 | 5.0 | ||||||||||||||||||||||||
Quarter Ended September 30,, 2020 2021 Compared to the Quarter Ended September 30, 2020, 2019
Sales
For the quarter ended September 30, 2020,2021, we reported consolidated sales of $203.5$272.6 million, compared to $224.7$203.5 million for the third quarter of 2019, a decrease2020, an increase of $21.2$69.1 million or 9.4%34.0%. This decreaseThe increase reflects afavorable sales volume decrease of $11.4 milliondriven by strong demand, acquired business and favorable pricing versus lower sales in our Fleet Vehicles and Services segment and a decrease of $23.0 million in pass through Chassis revenue. These decreases were partially offset by a $13.2 million sales volume increase in our Specialty Vehicles segment.the COVID-19 impacted prior period.
Cost of Products Sold
Cost of products sold was $216.6 million in the third quarter of 2021, compared to $152.7 million in the third quarter of 2020, compared to $186.7 million in the third quarteran increase of 2019, a decrease of $34.0$63.9 million or 18.2%41.8%. Cost of products sold decreased $23.0increased $57.6 million due to lower pass through Chassis material, $0.2higher sales volumes including acquired business and $10.6 million due to the lower unit sales volumes, $6.6 million due to favorable product mix, $1.9 million due tohigher material, labor and other costs, partially offset by productivity and other cost reductions and productivity improvements, $2.3 million due to lower supplier and other costs. As a percentage of sales, cost of products sold decreased to 75.1% in the third quarter of 2020, compared to 83.1% in the third quarter of 2019.$4.3 million.
Gross Profit
Gross profit was $50.7$56.1 million for the third quarter of 2021, compared to $50.8 million for the third quarter of 2020, compared to $38.0 million for the third quarter of 2019, an increase of $12.7$5.3 million, or 33.5%10.5%. Favorable product mix of $6.6Gross profit increased $17.7 million impact fromdue to higher sales volumesvolume including acquired business and productivity and other cost reductions of $1.9$4.3 million, productivity improvements of $1.9 million, lower supplierpartially offset by higher material, labor and other costs of $2.3$10.6 million drove the gross profit improvements. Gross margin increased to 24.9% from 16.9% over the same period in 2019.and unfavorable product mix that more than offset pricing increases for a negative impact of $6.1 million.
Operating Expenses
Operating expense wasexpenses were $28.0 million for the third quarter of 2021, compared to $24.3 million for the third quarter of 2020, compared to $20.9 million for the third quarter of 2019, an increase of $3.4$3.7 million or 16.4%14.8%. Research and development expense in the third quarter of 20202021 was $0.8$2.6 million, compared to $1.1 million in the third quarter of 2019. Selling, general and administrative expense was $23.5$0.8 million in the third quarter of 2020, an increase of $1.8 million primarily related to the electric vehicle development initiatives. Selling, general and administrative expense was $25.4 million in the third quarter of 2021, compared to $19.8$23.5 million for the third quarter of 2019,2020, an increase of $3.7$1.9 million, or 18.7%. Thisprimarily driven by an increase was primarily duein compensation expense related to $1.7growth and acquisition of $1.3 million in additional salaried employees and incentive compensationversus cost reduction actions taken in the third quarter of 2020. The remaining increase2020 and higher professional services of $1.6 million is related to manufacturing facilities acquired in 2019.$0.5 million.
Other Income (Expense)
Interest expense was $0.3 million for the third quarter of 2021, compared to an insignificant amount for the third quarter of 2020, driven by higher finance lease costs. Other income was $0.1 million in the third quarter of 2021, compared to $0.1$0.2 million for the third quarter of 2019, driven by lower borrowings. Other income was $0.2 million in the third quarter of 2020 compared to $0.5 million for the third quarter of 2019.2020.
Income Tax Expense
Our effective income tax rate was 24.8% in the third quarter of 2021, compared to 27.2% in the third quarter of 2020, compared to 24.7% in the third quarter of 2019. The effective tax rate of 27.2% for the three months ended September 30, 2020 compares unfavorably to the comparable period in 2019 primarily because of certain non-deductible compensation expense in 2020. The effective tax raterates for the three months ended September 30, 2019 reflects2021 and 2020 reflect the impact of current statutory income tax rates on our Income before taxes. The 2021 effective tax rate compared favorably to the comparable period in 2020 primarily due to a favorable change in the effect on the rate from estimated R&D credits and certain non-deductible executive compensation.
Income from Continuing Operations
Income from continuing operations for the quarter ended September 30, 20202021 increased by $6.3$1.6 million or 47.6%, to $19.4$21.0 million compared to $13.1$19.4 million for the quarter ended September 30, 2019.2020. On a diluted per share basis, income from continuing operations increased $0.17$0.04 to $0.54$0.58 in the third quarter of 20202021 compared to $0.37$0.54 per share in the third quarter of 2019.2020. Driving this increase were the factors noted above.
LossIncome (Loss) from Discontinued Operations
LossIncome from discontinued operations, net of income taxes for the quarter ended September 30, 2020 decreased2021 increased by $2.1 million, or 77.9%, to $0.6$0.9 million compared to $2.7Loss from discontinued operations of $0.9 million for the quarter ended September 30, 20192020 due to the completion of the sale of the ERV business in February 2020.
Adjusted EBITDA
Our consolidated Adjusted EBITDA in the third quarter of 20202021 was $32.6$33.7 million, compared to $22.3$32.6 million for the third quarter of 2019,2020, an increase of $10.3$1.1 million or 46.0%3.5%.
The table below describes the changes in Adjusted EBITDA for the three months ended September 30, 20202021 compared to the same period of 20192020 (in millions):
Adjusted EBITDA three months ended September 30, 2019 | $ | 22.3 | ||
Sales volume | 1.9 | |||
Sales pricing/mix | 6.6 | |||
Supplier, other cost decreases, and favorable productivity | 6.3 | |||
General and administrative costs and other | (4.5 | ) | ||
Adjusted EBITDA three months ended September 30, 2020 | $ | 32.6 |
Adjusted EBITDA three months ended September 30, 2020 | $ | 32.6 | ||
Sales volume including acquired business | 17.7 | |||
Product pricing and mix | (6.1 | ) | ||
Productivity net of material, labor and other costs | (6.3 | ) | ||
General and administrative costs and other | (4.2 | ) | ||
Adjusted EBITDA three months ended September 30, 2021 | $ | 33.7 |
Order Backlog
Our order backlog by reportable segment as of September 30, 2020 compared to September 30, 2019 is summarized in the following table (in thousands):
September 30, 2020 | September 30, 2019 | September 30, 2021 | September 30, 2020 | |||||||||||||
Fleet Vehicles and Services | $ | 228,870 | $ | 223,753 | $ | 758,518 | $ | 228,870 | ||||||||
Specialty Vehicles | 51,756 | 39,947 | 94,042 | 51,756 | ||||||||||||
Total consolidated | $ | 280,626 | $ | 263,700 | $ | 852,560 | $ | 280,626 | ||||||||
The consolidated backlog at September 30, 2021, totaled $852.6 million, up 203.8%, compared to $280.6 million at September 30, 2020, which reflects strong demand for vehicles across the Company’s product portfolio.
Our Fleet Vehicles and Services backlog increased by $5.1$529.6 million, or 2.3%231.4%, which reflects strong demand for vehicles across the Company’s product portfolio. Our Specialty Vehicles segment backlog increased by $11.8$42.3 million, or 29.6%81.7%, due to increased motor home chassis and service truck body orders.
The segment backlog at September 30, 2020, totaled $280.6 million, up 6.4%, compared to $263.7 million at September 30, 2019, which reflects strong demand for vehicles across the Company’s product portfolio.
Orders in the backlog are subject to modification, cancellation or rescheduling by customers. Although the backlog of unfilled orders is one of many indicators of market demand, several factors, such as changes in production rates, available capacity, new product introductions, supply of chassis, and competitive pricing actions, may affect actual sales. Accordingly, a comparison of backlog from period-to-period is not necessarily indicative of eventual actual shipments.
Nine Months Ended September 30,, 2020 2021 Compared to the Nine Months Ended September 30, 2020, 2019
Sales
For the nine months ended September 30, 2020,2021, we reported consolidated sales of $504.4$714.5 million, compared to $576.6$504.4 million for the first nine months ended September 30, 2019, a decrease of $72.22020, an increase of $210.1 million or 12.5%41.7%. This decreaseThe increase reflects afavorable sales volume decrease of $12.2 milliondriven by strong demand and acquired business versus lower sales in our Specialty Vehicles segment and a $91.4 million decrease in pass through Chassis revenue. These decreases were partially offset by a $26.2 million sales volume increases in our Fleet Vehicles and Services segment and lower intersegment revenues. Revenue was negativelythe COVID-19 impacted during the second quarter of 2020 by COVID-19 related production shut-downs due to chassis and component shortages. Please refer to our segment discussion below for further information about segment sales.prior period.
Cost of Products Sold
Cost of products sold was $566.5 million in the first nine months of 2021, compared to $393.3 million in the first nine months ended September 30,of 2020, compared to $497.0 million in the nine months ended September 30, 2019, a decreasean increase of $103.6$173.2 million or 20.9%44.0%. Cost of products sold decreased by $91.4increased $174.5 million due to lower pass through Chassishigher sales volumes including acquired business, $2.3 million of pre-production costs and $10.7 million of higher material $21.4 million due to product mix and $4.4 million due to reductions in supplier and otherlabor costs. These decreasesincreases were partially offset by $12.9 million due to higher unit sales volumesproductivity and new business. As a percentagecost reductions of sales, cost of products sold decreased to 78.0% in the nine months ended September 30, 2020, compared to 86.2% in the nine months ended September 30, 2019.$14.3 million.
Gross Profit
Gross profit was $148.0 million for the first nine months of 2021, compared to $111.1 million for the first nine months ended September 30,of 2020, compared to $79.6 million for the nine months ended, September 30, 2019, an increase of $31.5$36.9 million, or 39.5%33.2%. The increase wasGross profit increased $46.2 million due to increasedhigher sales volume including acquired business and $14.3 million of $5.5productivity and other cost reductions. These increases were partially offset by higher material, labor and other costs of $10.6 million, pre-production costs of $2.3 million, and $21.4 million driven primarily by favorableunfavorable product mix and $4.4 million due to reductions in supplier and other costs. Gross margin increased to 22.0% from 13.8% over the same period.pricing of $10.7 million.
Operating Expenses
Operating expense wasexpenses were $82.9 million for the first nine months of 2021, compared to $73.0 million for the first nine months ended September 30,of 2020, compared to $50.3 million for the nine months ended September 30, 2019, an increase of $22.7$9.9 million or 45.2%13.6%. Research and development expense in the first nine months of 2021 was $4.3 million, compared to $3.5 million in the first nine months ended September 30,of 2020, flatan increase of $0.8 million primarily related to the nine months ended September 30, 2019.electric vehicle development initiatives. Selling, general and administrative expense was $69.5$78.6 million in the first nine months ended September 30, 2020,of 2021, compared to $46.8$69.5 million for the first nine months ended September 30, 2019,of 2020, an increase of $22.7$9.1 million, or 48.5%. Thisprimarily driven by an increase was primarily duein compensation expense related to $11.2growth and acquisition of $9.4 million versus cost reduction actions taken in the first nine months of 2020 and higher professional services of $4.2 million. These increases were partially offset by the accelerated depreciation of the ERP system and write-off of related construction in process of $4.5 million in additional salaried employees, incentive compensation, increased severance coststhe second quarter of 2020 that did not recur in 2020 related to the realignment of the Company after the sale of the ERV business and $5.2 million for the write-down of an ERP system. The remaining increase of $6.3 million is related to manufacturing facilities acquired in 2019.
2021.
Other Income (Expense)
Interest expense was $1.2 million for the nine months ended September 30, 2020, compared to $0.8 million for the nine months ended September 30, 2019, driven by higher borrowing primarily related to the Royal acquisition and incremental liquidity borrowing in response to the market uncertainty caused by the coronavirus outbreak. Interest and other income was $0.2 million for the nine months ended September 30, 2020 compared to interest and other income of $0.9 million for the nine months ended September 30, 2019.
Other Income (Expense)
Interest expense was $0.3 million for the first nine months of 2021, compared to $1.2 million for the first nine months of 2020, driven by lower borrowings and interest support more than offsetting periodic expense. Other income was $0.7 million in the first nine months of 2021 compared to $0.2 million for the first nine months of 2020.
Income Tax Expense
Our effective income tax rate was 24.4% in the first nine months of 2021, compared to 19.1% in the first nine months of 2020. The effective tax rate for 2021 reflects the impact of current statutory income tax rates on our Income before taxes partially offset by a discrete tax benefit related to the difference in stock compensation expense recognized for book purposes and tax purposes upon vesting.
The effective tax rate for the nine months ended September 30, 2020, compared2021 compares unfavorably to 23.5% in the nine months ended September 30, 2019. Our effective income tax ratecomparable period in 2020 compares favorably to 2019 due to ana favorable adjustment recorded in 2020 as a resultbecause of provisions of the CARES Act allowing the carryback of tax net operating losses (“NOL”) incurred in the years 2018 through 2020 for five years. The sale of our ERV business in 2020 placed the Company into a tax NOL position because of the reversal of certain deferred tax assets recorded in 2019. As a result, we will carry this NOL has been carried back to offset taxable income in years when the federal corporate income tax rate was 35%, as opposed to the 21% rate in effect at the time the deferred tax assets were recorded. The resultant favorable tax rate differential allowed us to record a $2.6 million current year tax benefit as a discrete item. Our effective income tax rate in 2019 was favorably impacted by a discrete tax benefit related to additional state tax credits from prior years becoming available for utilization in future tax returns, with a net reduction in income tax expense of $0.3 million.
Income from Continuing OperationsOperations
Income from continuing operations for the nine months ended September 30, 20202021, increased by $7.5$19.5 million, or 33.2%65.0%, to $30.0$49.5 million compared to $22.5$30.0 million for the nine months ended September 30, 2019.2020. On a diluted per share basis, income from continuing operations increased $0.19$0.51 to $0.83$1.34 in the first nine months ended September 30, 2020of 2021 compared to $0.64$0.83 per share in the first nine months ended September 30, 2019.of 2020. Driving this increase were the factors noted above.
LossIncome (Loss) from Discontinued OperationsOperations
LossIncome from discontinued operations, net of income taxes for the nine months ended September 30, 2020 decreased2021 increased by $2.7$5.0 million or 36.4%, to $4.6$0.1 million compared to $7.3Loss from discontinued operations of $4.9 million for the nine months ended September 30, 20192020 due to the completion of the sale of the ERV business in February 2020.
Adjusted EBITDA
Our consolidated Adjusted EBITDA infor the nine months ended September 30, 20202021 was $60.3$81.5 million, compared to $40.5$60.3 million for the nine months ended September 30, 2019,2020, an increase of $19.8$21.2 million or 49.1%35.1%.
The table below describes the changes in Adjusted EBITDA for the nine months ended September 30, 20202021 compared to the same period of 20192020 (in millions):
Adjusted EBITDA nine months ended September 30, 2019 | $ | 40.5 | ||
Sales volume | 5.5 | |||
Sales pricing/mix | 21.4 | |||
Supplier, other cost decreases, and favorable productivity | 4.4 | |||
General and administrative costs and other | (11.5 | ) | ||
Adjusted EBITDA nine months ended September 30, 2020 | $ | 60.3 |
Adjusted EBITDA nine months ended September 30, 2020 | $ | 60.3 | ||
Sales volume including acquired business | 46.2 | |||
| Product pricing and mix | (10.7 | ) | ||
Productivity net of material, labor and other costs | 3.7 | |||
| Pre-production costs | (2.3 | ) | ||
General and administrative costs and other | (15.7 | ) | ||
Adjusted EBITDA nine months ended September 30, 2021 | $ | 81.5 |
Reconciliation of Non-GAAP Financial Measures
This report presents Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization), which is a non-GAAP financial measure. This non-GAAP measure is calculated by excluding items that we believe to be infrequent or not indicative of our continuingunderlying operating performance.performance, as well as certain non-cash expenses. We define Adjusted EBITDA as income from continuing operations before interest, income taxes, depreciation and amortization, as adjusted to eliminate the impact of restructuring charges, acquisition related expenses and adjustments, non-cash stock-based compensation expenses, and other gains and losses not reflective of our ongoing operations. Adjusted EBITDA for all prior periods presented has been recast to conform to the current presentation.
We present the non-GAAP measure Adjusted EBITDA because we consider it to be an important supplemental measure of our performance. The presentation of Adjusted EBITDA enables investors to better understand our operations by removing items that we believe are not representative of our continuing operations and may distort our longer-term operating trends. We believe this measure to be useful to improve the comparability of our results from period to period and with our competitors, as well as to show ongoing results from operations distinct from items that are infrequent or not indicative of our continuing operating performance. We believe that presenting this non-GAAP measure is useful to investors because it permits investors to view performance using the same tools that management uses to budget, make operating and strategic decisions, and evaluate our historical performance. We believe that the presentation of this non-GAAP measure, when considered together with the corresponding GAAP financial measures and the reconciliations to that measure, provides investors with additional understanding of the factors and trends affecting our business than could be obtained in the absence of this disclosure.
Our management usesWe use Adjusted EBITDA to evaluate the performance of and allocate resources to our segments. Adjusted EBITDA is also used, along with other financial and non-financial measures, for purposes of determining annual incentive compensation for our management team and long-term incentive compensation for certain members of our management team.
The following table reconciles Income from continuing operations to Adjusted EBITDA for the periods indicated.
Financial Summary (Non-GAAP) Consolidated (In thousands, Unaudited) |
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | September 30, | September 30, | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||
Income from continuing operations | $ | 19,375 | $ | 13,126 | $ | 29,983 | $ | 22,505 | $ | 20,999 | $ | 19,375 | $ | 49,482 | $ | 29,983 | ||||||||||||||||
Net (income) loss attributable to non-controlling interest | (41 | ) | (61 | ) | (178 | ) | 14 | |||||||||||||||||||||||||
Net (income) attributable to non-controlling interest | (77 | ) | (41 | ) | (1,102 | ) | (178 | ) | ||||||||||||||||||||||||
Add (subtract): | ||||||||||||||||||||||||||||||||
Interest expense | 11 | 144 | 1,202 | 831 | 253 | 11 | 310 | 1,202 | ||||||||||||||||||||||||
Depreciation and amortization expense | 2,982 | 2,978 | 8,312 | 10,838 | ||||||||||||||||||||||||||||
| Income tax expense | 7,253 | 4,317 | 7,084 | 6,929 | 6,910 | 7,253 | 15,952 | 7,084 | ||||||||||||||||||||||||
| Depreciation and amortization expense | 2,978 | 1,453 | 10,838 | 4,045 | ||||||||||||||||||||||||||||
Restructuring and other related charges | 303 | 243 | 1,857 | 270 | - | 303 | 505 | 1,857 | ||||||||||||||||||||||||
Acquisition related expenses and adjustments | 650 | 1,522 | 922 | 1,987 | 594 | 650 | 808 | 922 | ||||||||||||||||||||||||
Non-cash stock based compensation expense | 2,064 | 1,581 | 6,181 | 3,878 | 2,079 | 2,064 | 6,571 | 6,181 | ||||||||||||||||||||||||
| Loss from liquidation of JV | - | - | 643 | - | ||||||||||||||||||||||||||||
| Loss from write-off of construction in process | - | - | 2,430 | - | - | - | - | 2,430 | ||||||||||||||||||||||||
Adjusted EBITDA | $ | 32,593 | $ | 22,325 | $ | 60,319 | $ | 40,459 | $ | 33,740 | $ | 32,593 | $ | 81,481 | $ | 60,319 | ||||||||||||||||
Our Segments
We identify our reportable segments based on our management structure and the financial data utilized by our chief operating decision maker to assess segment performance and allocate resources among our operating units. We have two reportable segments: Fleet Vehicles and Services ("FVS") and Specialty Vehicles ("SV").
For certain financial information related to each segment, see "Note 11 – Business Segments"Segments," of the Notes to Condensed Consolidated Financial Statements appearing in Item 1 of this Form 10-Q.
Fleet Vehicles and Services
Financial Data | ||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||
Three Months Ended September 30, | ||||||||||||||||
2020 | 2019 | |||||||||||||||
Amount | Percentage | Amount | Percentage | |||||||||||||
Sales | $ | 145,190 | 100.0 | % | $ | 179,594 | 100.0 | % | ||||||||
Adjusted EBITDA | 33,237 | 22.9 | % | 24,689 | 13.7 | % | ||||||||||
Comparison of the Three-Month Periods Ended September 30, 2020and 2019
Financial Data | ||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||
Three Months Ended September 30, | ||||||||||||||||
2021 | 2020 | |||||||||||||||
Amount | Percentage | Amount | Percentage | |||||||||||||
Sales | $ | 198,540 | 100.0 | % | $ | 145,190 | 100.0 | % | ||||||||
Adjusted EBITDA | 36,813 | 18.5 | % | 33,237 | 22.9 | % | ||||||||||
Sales in our FVS segment were $198.5 million for the third quarter of 2021, compared to $145.2 million for the third quarter of 2020, compared to $179.6 million for the third quarteran increase of 2019, a decrease of $34.4$53.3 million or 19.2%, driven by decreased vehicle36.7%. This increase was due to a sales volume of $11.4 millionincrease and a decrease of $23.0 million in pass through chassis revenue.favorable pricing.
Adjusted EBITDA in our FVS segment for the third quarter of 20202021 was $33.2$36.8 million compared to $24.7$33.2 million in the third quarter of 2019,2020, an increase of $8.5 million. Favorable product mix of $6.8$3.6 million lower supplier costsor 10.8%. This increase was due to $15.2 million in higher sales volumes and insourcing of $1.8 million, productivity improvements and other cost reductions of $0.8$4.3 million, partially offset by higher material and labor costs of $7.5 million, unfavorable pricing and mix of $6.6 million and lower healthcare costs$1.8 million of $1.4 million more than offset a $2.5 million unfavorable impact of decreased volume.higher operating expense.
Financial Data | ||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||
Nine Months Ended September 30, | ||||||||||||||||
2020 | 2019 | |||||||||||||||
Amount | Percentage | Amount | Percentage | |||||||||||||
Sales | $ | 378,116 | 100.0 | % | $ | 443,345 | 100.0 | % | ||||||||
Adjusted EBITDA | 68,625 | 18.1 | % | 39,584 | 8.9 | % | ||||||||||
Comparison of the Nine-Month Periods Ended September 30, 2020and 2019
Financial Data | ||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||
Nine Months Ended September 30, | ||||||||||||||||
2021 | 2020 | |||||||||||||||
Amount | Percentage | Amount | Percentage | |||||||||||||
Sales | $ | 498,486 | 100.0 | % | $ | 378,116 | 100.0 | % | ||||||||
Adjusted EBITDA | 83,310 | 16.7 | % | 68,625 | 18.1 | % | ||||||||||
Sales in our FVS segment were $498.5 million for the nine months ended September 30, 2021, compared to $378.1 million for the nine months ended September 30, 2020, compared to $443.3 million for the nine months ended September 30, 2019, a decreasean increase of $65.2$120.4 million or 14.7%, driven by31.8%. This increase was due to a decrease of $91.4 million in pass through Chassis revenuesales volume increase, partially offset by increased vehicle sales of $26.2 million.pricing.
Adjusted EBITDA in our FVS segment for the nine months ended September 30, 20202021, was $68.6$83.3 million compared to $39.6$68.6 million infor the nine months ended September 30, 2019,2020, an increase of $29.0 million. Higher unit$14.7 million or 21.4%. This increase was due to $29.5 million in higher sales volume drove a $3.2volumes, and other productivity and cost reductions of $9.4 million, increase, favorable product mix added $23.2 million, a reduction in supplier costs added $3.2 million and productivity improvements contributed $1.3 million to the increased profitability. These increases were partially offset by a $1.9higher material and labor costs of $7.5 million, increase in sellingunfavorable pricing and administrativemix of $10.7 million, $2.3 million of pre-production costs, related to our growth and initiatives.$3.7 million of increased operating expense.
Specialty Vehicles
Financial Data | ||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||
Three Months Ended September 30, | ||||||||||||||||
2020 | 2019 | |||||||||||||||
Amount | Percentage | Amount | Percentage | |||||||||||||
Sales | $ | 58,283 | 100.0 | % | $ | 45,109 | 100.0 | % | ||||||||
Adjusted EBITDA | 7,183 | 12.3 | % | 4,079 | 9.0 | % | ||||||||||
Comparison of the Three-Month Periods Ended September 30, 2020and 2019
Financial Data | ||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||
Three Months Ended September 30, | ||||||||||||||||
2021 | 2020 | |||||||||||||||
Amount | Percentage | Amount | Percentage | |||||||||||||
Sales | $ | 74,082 | 100.0 | % | $ | 58,283 | 100.0 | % | ||||||||
Adjusted EBITDA | 5,827 | 7.9 | % | 7,183 | 12.3 | % | ||||||||||
Sales in our SV segment were $74.1 million in the third quarter of 2021, compared to $58.3 million in the third quarter of 2020, compared to $45.1 million in the third quarter ended 2019, an increase of $13.2$15.8 million or 29.2%27.1%. This increase was driven by unitdue to a sales volume increases of $13.2 million in motor home chassisincrease including acquired business and from new business.favorable pricing.
Adjusted EBITDA for our SV segment for the third quarter of 20202021 was $7.2$5.8 million, compared to $4.1$7.2 million in the third quarter of 2019, an increase2020, a decrease of $3.1$1.4 million or 76.1%18.9%. This increasedecrease was primarily driven by unit sales volume increases ofdue to $3.1 million in motor home chassishigher material and from new business.labor costs and $1.3 million of higher operating expenses due to acquisition. These higher costs were partially offset by $2.5 million in higher sales volumes including acquired business and favorable pricing and mix of $0.5 million.
Financial Data | ||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||
Nine Months Ended September 30, | ||||||||||||||||
2020 | 2019 | |||||||||||||||
Amount | Percentage | Amount | Percentage | |||||||||||||
Sales | $ | 126,275 | 100.0 | % | $ | 138,517 | 100.0 | % | ||||||||
Adjusted EBITDA | 12,123 | 9.6 | % | 14,110 | 10.2 | % | ||||||||||
Comparison of the Nine-Month Periods Ended September 30, 2020and 2019
Financial Data | ||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||
Nine Months Ended September 30, | ||||||||||||||||
2021 | 2020 | |||||||||||||||
Amount | Percentage | Amount | Percentage | |||||||||||||
Sales | $ | 216,006 | 100.0 | % | $ | 126,275 | 100.0 | % | ||||||||
Adjusted EBITDA | 21,480 | 9.9 | % | 12,123 | 9.6 | % | ||||||||||
Sales in our SV segment were $216.0 million for the nine months ended September 30, 2021, compared to $126.3 million infor the nine months ended September 30, 2020, compared to $138.5 million in the nine months ended September 30, 2019, a decreasean increase of $12.2$89.7 million or 8.8%71.1%. This decreaseincrease was driven by unitdue to a sales volume decreases of $12.2 million in motor home chassis, in other specialty vehicles,increase including acquired business and from new business.favorable pricing.
Adjusted EBITDA for our SV segment for the nine months ended September 30, 20202021, was $12.1$21.5 million, compared to $14.1$12.1 million infor the nine months ended September 30, 2019, a decrease2020, an increase of $2.0$9.4 million or 14.1%77.2%. This decreaseincrease was driven by unit sales volume decreases of $1.4due to $13.3 million in motor home chassis, other specialty vehicles, and from newhigher sales volumes including acquired business and $1.8 millionfavorable pricing and mix of unfavorable mix$0.3 million. These increases were partially offset by otherhigher material and labor costs of $1.2 million.$3.1 million and $1.1 million of higher operating expenses due to acquisition.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Cash and cash equivalents increaseddecreased by $23.7$6.5 million to $43.1$14.5 million at September 30, 2020,2021, compared to $19.4$21.0 million at December 31, 2019.2020. These funds, in addition to cash generated from future operations and available credit facilities, are expected to be sufficient to finance the Company’sour foreseeable liquidity and capital needs.needs, including potential future acquisitions.
Cash Flow from Operating Activities
We generated $20.6$42.3 million of cash forfrom operating activities during the nine months ended September 30, 2020,2021, an increase in cash provided of $14.4$21.3 million from $6.2$21.0 million of cash provided by operationsoperating activities during the nine months ended September 30, 2019.2020. Cash flow from operating activities increased due to a $39.8$1.2 million increasedecrease in higher net income adjusted for non-cash charges to operations and a $22.5 million increase in the change in net working capital. The change in net working capital is primarily attributable to a $50.5 million increase in the change in payables and a $19.4 million increase in the change in other liabilities partially offset by a $25.4$48.0 million decrease in the change in net working capital (primarilyinventories.
These changes were primarily driven by increased sales of $210.1 million, or 41.7% in the netnine months ended September 30, 2021, compared to the same period in 2020, driven by strong demand in the current period and the comparatively lower sales resulting from the impact of the COVID-19 pandemic in the comparative period. Corresponding increases in the change in receivables, inventories, and payables resulted from the need to fulfill increased sales in the current period and production in the third quarter of 2021 related to the ramp up of production of new Velocity vehicles. As of September 30, 2021, contract assets inventories, payables, accrued compensation, accrued warranty,increased $33.1 million to $42.5 million compared to $9.4 million as of December 31, 2020, primarily due to increased production and other assets and liabilities).
See the Financial Condition section contained in Item 2 of this Form 10-Q for further information regarding balance sheet line items that impacted cash flows for the nine-month period ended September 30, 2020. Also see the Condensed Consolidated Statements of Cash Flows contained in Item 1 of this Form 10-Q for the other various factors that represented the remaining fluctuation of cash from operations between the periods.industry wide supply chain constraints.
Cash Flow from Investing Activities
We generated $46.8used $17.3 million of cash fromfor investing activities during the nine months ended September 30, 2020, primarily attributable to the sale2021, a decrease of the ERV business. This is a $144.0cash used of $64.1 million increase compared to the $97.2from $46.8 million usedof cash provided by investing activities during the nine months ended September 30, 2019.2020. Cash flow from investing activities decreased primarily due to a $9.9 million increase in purchases of property, plant and equipment and $55.0 million of proceeds from the sale of the ERV business not repeated in the current period.
Cash Flow from Financing Activities
We used $43.8$31.5 million of cash for financing activities during the nine months ended September 30, 2020, compared to $78.52021, a decrease of cash used of $12.3 million generatedfrom $43.8 million of cash used by financing activities during the nine months ended September 30, 2019. This increase2020. Cash flow used in cash used is mainlyfinancing activities decreased primarily due to a net reduction$17.6 million decrease in borrowingpayments on the line of credit revolver.
Contingent Obligations
Spartan-Gimaex joint venture
In February 2015, the Company and Gimaex Holding, Inc. mutually agreed to begin discussions regarding the dissolution of the Spartan-Gimaex joint venture. In June 2015, the Company and Gimaex Holding, Inc. entered into court proceedings to determine the terms of the dissolution. In February 2017,long-term debt, partially offset by agreement of the parties, the court proceeding was dismissed with prejudice and the judge entered an order to this effect as the parties agreed to seek a dissolution plan on their own. In late 2019, the Company initiated additional court proceedings to dissolve and liquidate the joint venture. In April of 2020, as a result of a default judgment, the Company was appointed as liquidating trustee of the Gimaex joint venture, but no dissolution terms have been determined as of the date of this Form 10-Q. Costs associated with the wind-down will be impacted by the final dissolution terms. In accordance with accounting guidance, the costs we have accrued so far represent the low end of the range of the estimated total charges that we believe we may incur related to the wind-down. While we are unable to determine the final cost of the wind-down with certainty at this time, we may incur additional charges, depending on the final terms of the dissolution. Such charges are not expected to be material to our future operating results.
EPA Information Request
In May 2020, the Company received a letter from the United States Environmental Protection Agency (“EPA”) requesting certain information as part of an EPA investigation regarding a potential failure to affix emissions labels on vehicles to determine the Company’s compliance with applicable laws and regulations. This information request pertains to chassis, vocational vehicles, and vehicles that the Company manufactured or imported into the US between January 1, 2017 to the date the Company received the request in May 2020. The Company responded to the EPA’s request and furnished the requested materials$3.3 million increase in the third quarterpurchase and retirement of 2020. An estimatecommon stock and $1.9 million increase in exercise and vesting of possible penalties or loss, if any, cannot be made at this time.stock awards.
Debt
On August 8, 2018, we entered into a Credit Agreement (the "Credit Agreement") by and among us and certain of our subsidiaries as borrowers, Wells Fargo Bank, National Association ("Wells Fargo"), as administrative agent, and the lenders party thereto consisting of Wells Fargo, JPMorgan Chase Bank, N.A. and PNC Bank National Association (the "Lenders"). Subsequently, the Credit Agreement was amended on May 14, 2019, September 9, 2019 and September 25, 2019 and certain of our other subsidiaries executed guaranties guarantying the borrowers’ obligations under the Credit Agreement. Concurrent with the close of the sale of the ERV business and effective January 31, 2020, the Credit Agreement was further amended by a fourth amendment, which released certain of our subsidiaries that were sold as part of the ERV business. The Credit Agreement was subsequently amended further on April 20, 2021 and July 16, 2021 pursuant to a fifth amendment and sixth amendment, respectively, to make certain changes to the subfacility limits pursuant to the Credit Agreement. The substantive business terms of the Credit Agreement remain in place and were not changed by any of the fourth amendment.amendments noted above.
As a result, at September 30, 2020,2021, under the Credit Agreement, as amended, we may borrow up to $175.0 million from the Lenders under a secured revolving credit facility which matures August 8, 2023. We may also request an increase in the facility of up to $50.0 million in the aggregate, subject to customary conditions. The credit facility is also available for the issuance of letters of credit of up to $20.0 million and swing line loans of up to $30.0$10.0 million subject to certain limitations and restrictions.restrictions as of September 30, 2021. This revolving credit facility carries an interest rate of either (i) the highest of prime rate, the federal funds effective rate from time to time plus 0.5%, or the one month adjusted LIBOR plus 1.0%; or (ii) adjusted LIBOR, in each case plus a margin based upon our ratio of debt to earnings from time to time. The applicable borrowing rate including margin was 1.44%1.34% (or one-month LIBOR plus 1.25%) at September 30, 2020.2021. The credit facility is secured by security interests in, and liens on, all assets of the borrowers and guarantors, other than real property and certain other excluded assets. At September 30, 20202021, and December 31, 2019,2020, we had outstanding letters of credit totaling $0.8 million and $0.5 million, respectively, related to our workers’ compensation insurance.
Under the terms of our Credit Agreement, available borrowings (exclusive of outstanding borrowings) totaled $100.7$169.2 million and $60.5$125.8 million at September 30, 20202021 and December 31, 2019,2020, respectively. The Credit Agreement requires us to maintain certain financial ratios and other financial covenants; prohibits us from incurring additional indebtedness; limits certain acquisitions, investments, advances or loans; limits our ability to pay dividends in certain circumstances; and restricts substantial asset sales, all subject to certain exceptions and baskets. At September 30, 20202021 and December 31, 2019,2020, we were in compliance with all covenants in our Credit Agreement.
In the three months ended September 30, 2020 the Company paid down $10.0 million
Equity Securities
On April 28, 2016, our Board of Directors authorized the repurchase of up to 1.0 million shares of our common stock in open market transactions. At September 30, 20202021 there were 0.80.4 million shares remaining under this repurchase authorization. If we were to repurchase the remaining 0.80.4 million shares of stock under the repurchase program, it would cost us approximately $16.1$16.9 million based on the closing price of our stock on October 29, 2020.2021. We believe that we have sufficient resources to fund any potential stock buyback in which we may engage.
Dividends
The amounts or timing of any dividends are subject to earnings, financial condition, liquidity, capital requirements and such other factors as our Board of Directors deems relevant. In August 2020, the Board of Directors approved the change of the frequency of dividend payments from semi-annual to quarterly. We declared dividends on our outstanding common shares in 20192020 and 20202021 as shown in the table below.
Date dividend declared | Record date | Payment date | Dividend per share ($) | |||||
May 6, 2019 | May 17, 2019 | Jun. 17, 2019 | $ | 0.050 | ||||
Nov. 4, 2019 | Nov. 14, 2019 | Dec. 16, 2019 | $ | 0.050 | ||||
| May 8, 2020 | May 18, 2020 | Jun. 18, 2020 | $ | 0.050 | ||||
| Aug. 6, 2020 | Aug. 18, 2020 | Sep. 18, 2020 | $ | 0.025 | ||||
Date dividend declared | Record date | Payment date | Dividend per share ($) | |||||
| Aug. 6, 2020 | Aug. 18, 2021 | Sep. 15, 2021 | $ | 0.025 | ||||
| May 7, 2021 | May 18, 2021 | June 18, 2021 | $ | 0.025 | ||||
| Feb. 15, 2021 | Feb. 25, 2021 | Mar. 25, 2021 | $ | 0.025 | ||||
| Nov. 6, 2020 | Nov. 18, 2020 | Dec. 18, 2020 | $ | 0.025 | ||||
| Aug. 6, 2020 | Aug. 18, 2020 | Sep. 18, 2020 | $ | 0.025 | ||||
| May 8, 2020 | May 18, 2020 | Jun. 18, 2020 | $ | 0.050 | ||||
EFFECT OF INFLATION
Inflation affects us in two principal ways. First, our revolving credit agreement is generally tied to the prime and LIBOR interest rates so that increases in those interest rates would be translated into additional interest expense. Second, general inflation impacts prices paid for labor, parts and supplies. Whenever possible, we attempt to cover increased costs of production and capital by adjusting the prices of our products. However, we generally do not attempt to negotiate inflation-based price adjustment provisions into our contracts. Since order lead times can be as much as ninetwelve months, we have limited ability to pass on cost increases to our customers on a short-term basis. In addition, the markets we serve are competitive in nature, and competition limits our ability to pass through cost increases in many cases. We strive to minimize the effect of inflation through cost reductions and improved productivity. Refer to the Commodities Risk section in Item 3 of this Form 10-Q for further information regarding commodity cost fluctuations.
Quantitative and Qualitative Disclosures About Market Risk. |
Interest Rate Risk
We are exposed to market risks related to changes in interest rates and the effect of such a change on outstanding variable rate short-term and long-term debt. At September 30, 2020,2021, we had $48.7 million inno debt outstanding under our variable rate short-term and long-term debt agreements. An increase of 100 basis points in interest rates would not result in additional interest expense of $0.5 million on an annualized basis for our floating rate debt.basis. We believe that we have sufficient financial resources to accommodate this hypothetical increase in interest rates. We do not enter into market-risk-sensitive instruments for trading or other purposes.
The interest rate charged on our outstanding borrowings pursuant to our credit facility is currently based on LIBOR, as described in Part 1, Item 1, "Note 5 – Debt" of this Form 10-Q. Our credit facility provides for the transition to a replacement for LIBOR, and it also provides for an alternative to LIBOR, as described in Part 1, Item 1, "Note 5 – Debt" of this Form 10-Q. If LIBOR ceases to exist, our interest expense may increase. It is also possible that the overall financing market may be disrupted as a result of the phase-out or replacement of LIBOR with SOFR or any other reference rate. Increased interest expense and/or disruption in the financial market could have a material adverse effect on our business, financial condition, or results of operations.
Commodities Risk
We are also exposed to changes in the prices of raw materials, primarily steel and aluminum, along with components that are made from these raw materials. We generally do not enter into derivative instruments for the purpose of managing exposures associated with fluctuations in steel and aluminum prices. We do, from time to time, engage in pre-buys of components that are impacted by changes in steel, aluminum and other commodity prices in order to mitigate our exposure to such price increases and align our costs with prices quoted in specific customer orders. We also actively manage our material supply sourcing and may employ various methods to limit risk associated with commodity cost fluctuations due to normal market conditions and other factors including tariffs. Changes in input costs have impacted our results for the three months ended September 30, 2020 and may continue to do so during the remainder of 2020 and beyond. See Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part 1, Item 2 of this Form 10-Q for information on the impacts of changes in input costs during the three and nine months ended September 30, 2020.2021.
We do not believe that there has been a material change in the nature or categories of the primary market risk exposures or in the particular markets that present our primary risk of loss. As of the date of this report, we do not know of or expect any material changes in the general nature of our primary market risk exposure in the short-term.
Prevailing interest rates, interest rate relationships and commodity costs are primarily determined by market factors that are beyond our control. All information provided in response to this item consists of forward-looking statements. Reference is made to the section captioned “Forward-Looking Statements” before Part I of this Quarterly Report on Form 10-Q for a discussion of the limitations on our responsibility for such statements.
Controls and Procedures. |
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of September 30, 2020.2021. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective due to a material weakness in our internal control over financial reporting that was disclosed in the Annual Report on Form 10-K for the year ended December 31, 2019.2020.
Notwithstanding the identified material weakness, management has concluded that the condensed consolidated financial statements included in this Form 10-Q fairly present in all material respects our financial condition, results of operations and cash flows as of and for the periods presented in accordance with USU.S. generally accepted accounting principles.
Remediation
We are executing against the remediation plan previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2019.2020. The material weakness will not be considered remediated until the applicable control operates for a sufficient period of time and management has concluded, through testing, that the control objective is achieved. We are currently on scheduletracking to our action plan for remediation of this material weakness prior to the end of fiscal 2020.year 2021.
Changes in Internal Control over Financial Reporting
OtherIn response to the COVID-19 pandemic, we have required certain employees, some of whom are involved in the operation of our internal controls over financial reporting, to work from home. Despite this change and other than the remediation efforts discussed above, there have been no changes in our internal control over financial reporting that occurred during the third quarterfirst nine months of fiscal 20202021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We are continually monitoring and assessing the COVID-19 pandemic on our internal controls to minimize any impact it may have on their design and operating effectiveness.
Legal Proceedings |
See “Note 9 – Commitments and Contingent Obligations,” included in Part I, Item 1, “Notes to Unaudited Consolidated Financial Statements,” within this quarterly report on Form 10-Q.
Item 1A. | Risk Factors |
We have included in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019,2020, a description of certain risks and uncertainties that could affect our business, future performance or financial condition (the “Risk Factors”). There have been no material changes from the disclosure provided in the Form 10-K for the year ended December 31, 20192020 with respect to the Risk Factors except as set forth below.Factors. Investors should consider the Risk Factors prior to making an investment decision with respect to our stock.
Our results of operations are likely to be adversely affected by the circumstances relating to the COVID-19 pandemic.
We have manufacturing and other operations in locations subject to public health crises. Our suppliers and customers also have operations in locations exposed to similar dangers. A public health event could disrupt our operations, our customers’ or our suppliers’ operations and could adversely affect our results of operations and financial condition.
Our global suppliers of raw materials expose us to risks associated with public health crises, such as pandemics and epidemics, which could harm our business and cause operating results to suffer. For example, the ongoing coronavirus outbreak at the beginning of 2020 may impact our suppliers’ ability to provide raw materials. An extended plant shut-down or supply chain disruption due to the coronavirus outbreak may also impact our ability to fulfill orders.
At this point, the extent to which the coronavirus may impact our liquidity, financial condition, and results of operations is uncertain.
Unregistered Sales of Equity Securities and Use of Proceeds |
Issuer Purchases of Equity Securities
On April 28, 2016, our Board of Directors authorized the repurchase of up to 1.0 million shares of our common stock in open market transactions. During the quarter ended September 30, 2020,2021, no shares were repurchased under this authorization.
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| Total Number of Purchased Publicly Plans or |
Shares that Purchased Plans or Programs(2) | Total | Average | Total Number of Purchased Publicly Plans or | Number of Shares that Purchased Plans or Programs(1) | ||||||||||||||||||||||||
| July 1 to July 31 | - | $ | - | - | 808,994 | 257 | $ | 38.26 | - | 408,994 | ||||||||||||||||||||||
| August 1 to August 31 | 171 | 11.22 | - | 808,994 | - | - | - | 408,994 | ||||||||||||||||||||||||
| September 1 to September 30 | 2,046 | 19.66 | - | 808,994 | 1,765 | 42.87 | - | 408,994 | ||||||||||||||||||||||||
| Total | 2,217 | $ | - | - | 808,994 | 2,022 | - | 408,994 | ||||||||||||||||||||||||
(1)During the quarter ended September 30, 2020, 2,217 shares were delivered by associates in satisfaction of tax withholding obligations that occurred upon the vesting of restricted shares. These shares are not repurchased pursuant to the Board of Directors authorization disclosed above.
(2)This column reflects the number of shares that may yet be purchased pursuant to the April 28, 2016 Board of Directors authorization described above.
During the quarter ended September 30, 2021, 2,022 shares were delivered by associates in satisfaction of tax withholding obligations that occurred upon the vesting of restricted shares.
Exhibits. |
(a) Exhibits. The following exhibits are filed as a part of this report on Form 10-Q:
Exhibit No. |
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31.2 |
| Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act. |
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32 |
| Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. § 1350. |
101.INS | Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (Embedded within the Inline XBRL document and included in Exhibit 101) |
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.
Date: November | THE SHYFT GROUP, INC. | |
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| By | /s/ Jonathan C. Douyard |
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| Jonathan C. Douyard |