10-Q 1 shyf20240331c_10q.htm FORM 10-Q shyf20240331c_10q.htm
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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
For the quarterly period ended March 31, 2024.

 

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                   to                                  

 

Commission File Number 001-33582

 

THE SHYFT GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)

 

Michigan
(State or Other Jurisdiction of 
Incorporation or Organization)

 

38-2078923
(I.R.S. Employer Identification No.)

41280 Bridge Street
Novi, Michigan
(Address of Principal Executive Offices)

 


48375
(Zip Code)

 

Registrant’s Telephone Number, Including Area Code: (517543-6400

 

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

The NASDAQ Stock Market LLC

 

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 April 19, 2024

Common Stock

34,374,065 shares

 

 
 

THE SHYFT GROUP, INC.

 

INDEX
 


 

 

Page

 

   

FORWARD-LOOKING STATEMENTS

3

 

 

   

PART I.  FINANCIAL INFORMATION

   
 

 

 

   
 

Item 1.

Financial Statements:

   
         
   

Condensed Consolidated Balance Sheets – March 31, 2024 and December 31, 2023 (Unaudited)

4  
   

 

   
   

Condensed Consolidated Statements of Operations – Three Months Ended March 31, 2024 and 2023 (Unaudited)

5  
   

 

   
   

Condensed Consolidated Statements of Cash Flows – Three Months Ended March 31, 2024 and 2023 (Unaudited)

6  
         
   

Condensed Consolidated Statement of Shareholders’ Equity – Three Months Ended March 31, 2024 and 2023 (Unaudited)

7  
   

 

   
   

Notes to Condensed Consolidated Financial Statements

8  
   

 

   
 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15  
 

 

 

   
 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

22  
 

 

 

   
 

Item 4.

Controls and Procedures

23  
 

 

 

   

PART II.  OTHER INFORMATION

   
         
  Item 1. Legal Proceedings 24  
         
 

Item 1A.

Risk Factors

24  
         
 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

24  
         
  Item 5. Other Information 24  
         

 

Item 6.

Exhibits

25  

 

 

 

   

SIGNATURES

26  

 

 

FORWARD-LOOKING STATEMENTS

 

This Form 10-Q contains some 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, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements involve important known and unknown risks, uncertainties and other factors and generally can be identified by phrases using “estimate,” “anticipate,” “believe,” “project,” “expect,” “intend,” “predict,” “potential,” “future,” “may,” “will,” “should” or similar expressions or words. 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.

 

Risk Factors include the risk factors listed and more fully described in Item 1A – Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the Securities and Exchange Commission on February 22, 2024, subject to any changes and updates disclosed in Part II, Item 1A – Risk Factors below, “Risk Factors”, as well as risk factors that we have discussed in previous public reports and other documents filed with the Securities and Exchange Commission. Those risk factors include the primary risks our management believes could materially affect the potential results described by forward-looking statements contained in this Form 10-Q. However, these risks may not be the only risks we face. Our business, operations, and financial performance could also be affected by additional factors that are not presently known to us or that we currently consider to be immaterial to our operations. In addition, new Risk Factors may emerge from time to time that may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, although we believe that the forward-looking statements contained in this Form 10-Q are reasonable, we cannot provide you with any guarantee that the results described in those forward-looking statements will be achieved. All forward-looking statements in this Form 10-Q are expressly qualified in their entirety by the cautionary statements contained in this section, and investors should not place undue reliance on forward-looking statements as a prediction of actual results. The Company undertakes no obligation to update or revise any forward-looking statements to reflect developments or information obtained after the date this Form 10-Q is filed with the Securities and Exchange Commission.

 

Trademarks and Service Marks

 

We own or have rights to trademarks, service marks or trade names that we use in connection with the operation of our business. Solely for convenience, some of the copyrights, trademarks, service marks and trade names referred to in this Quarterly Report on Form 10-Q are listed without the ©, ® and ™ symbols, but we will assert, to the fullest extent under applicable law, our rights to our copyrights, trademarks, service marks, trade names and domain names. The trademarks, service marks and trade names of other companies appearing in this Quarterly Report on Form 10-Q are, to our knowledge, the property of their respective owners.

 

3

 

PART I.  FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

THE SHYFT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

(In thousands) 

 

  

March 31,

  

December 31,

 
  2024  

2023

 

ASSETS

        

Current assets:

        

Cash and cash equivalents

 $13,251  $9,957 

Accounts receivable, less allowance of $277 and $276

  78,820   79,573 

Contract assets

  52,803   50,305 

Inventories

  97,931   105,135 

Other receivables – chassis pool agreements

  18,890   34,496 

Other current assets

  6,700   7,462 

Total current assets

  268,395   286,928 

Property, plant and equipment, net

  80,905   83,437 

Right of use assets operating leases

  45,078   45,827 

Goodwill

  48,880   48,880 

Intangible assets, net

  44,399   45,268 

Net deferred tax assets

  17,300   17,300 

Other assets

  2,724   2,409 

TOTAL ASSETS

 $507,681  $530,049 
         

LIABILITIES AND SHAREHOLDERS' EQUITY

        

Current liabilities:

        

Accounts payable

 $86,159  $99,855 

Accrued warranty

  8,212   7,231 

Accrued compensation and related taxes

  11,675   13,526 

Contract liabilities

  3,939   4,756 

Operating lease liability

  10,050   10,817 

Other current liabilities and accrued expenses

  12,605   11,965 

Short-term debt – chassis pool agreements

  18,890   34,496 

Current portion of long-term debt

  164   185 

Total current liabilities

  151,694   182,831 

Other non-current liabilities

  7,265   8,184 

Long-term operating lease liability

  36,776   36,724 

Long-term debt, less current portion

  65,121   50,144 

Total liabilities

  260,856   277,883 

Commitments and contingent liabilities

          

Shareholders' equity:

        

Preferred stock, no par value: 2,000 shares authorized (none issued)

  -   - 

Common stock, no par value: 80,000 shares authorized; 34,361 and 34,303 outstanding

  94,790   93,705 

Retained earnings

  152,035   158,461 

Total shareholders' equity

  246,825   252,166 

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

 $507,681  $530,049 

 

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

March 31,

 
   

2024

   

2023

 
                 

Sales

  $ 197,889     $ 243,439  

Cost of products sold

    163,827       200,515  

Gross profit

    34,062       42,924  
                 

Operating expenses:

               

Research and development

    3,719       6,949  

Selling, general and administrative

    32,273       32,289  

Total operating expenses

    35,992       39,238  
                 

Operating income (loss)

    (1,930 )     3,686  
                 

Other income (expense)

               

Interest expense

    (2,053 )     (1,648 )

Other income

    97       70  

Total other expense

    (1,956 )     (1,578 )
                 

Income (loss) before income taxes

    (3,886 )     2,108  

Income tax expense

    783       430  

Net income (loss)

    (4,669 )     1,678  

Less: net loss attributable to non-controlling interest

    -       32  
                 

Net income (loss) attributable to The Shyft Group Inc.

  $ (4,669 )   $ 1,710  
                 

Basic earnings (loss) per share

  $ (0.14 )   $ 0.05  

Diluted earnings (loss) per share

  $ (0.14 )   $ 0.05  
                 

Basic weighted average common shares outstanding

    34,319       35,058  

Diluted weighted average common shares outstanding

    34,319       35,340  

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

THE SHYFT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

 

   

Three Months Ended March 31,

 
    2024    

2023

 

Cash flows from operating activities:

               

Net income (loss)

  $ (4,669 )   $ 1,678  

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

               

Depreciation and amortization

    4,435       3,864  

Non-cash stock based compensation expense

    1,474       1,827  

Loss on disposal of assets

    66       -  

Changes in accounts receivable and contract assets

    (1,746 )     22,500  

Changes in inventories

    7,204       (9,147 )

Changes in accounts payable

    (10,119 )     (16,920 )

Changes in accrued compensation and related taxes

    (1,851 )     419  

Changes in accrued warranty

    981       (978 )

Change in other assets and liabilities

    268       2,644  

Net cash provided by (used in) operating activities

    (3,957 )     5,887  
                 

Cash flows from investing activities:

               

Purchases of property, plant and equipment

    (5,719 )     (4,469 )
Proceeds from sale of property, plant and equipment     75       25  

Acquisition of business, net of cash acquired

   

-

      (500 )

Net cash used in investing activities

    (5,644 )     (4,944 )
                 

Cash flows from financing activities:

               

Proceeds from long-term debt

    40,000       40,000  

Payments on long-term debt

    (25,000 )     (31,000 )

Payment of dividends

    (1,716 )     (1,878 )

Purchase and retirement of common stock

    -       (8,765 )

Exercise and vesting of stock incentive awards

    (389 )     (3,470 )

Net cash provided by (used in) financing activities

    12,895       (5,113 )
                 

Net increase (decrease) in cash and cash equivalents

    3,294       (4,170 )

Cash and cash equivalents at beginning of period

    9,957       11,548  

Cash and cash equivalents at end of period

  $ 13,251     $ 7,378  

 

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

  

Retained

Earnings

  

Non-

Controlling

Interest

  

Total

Shareholders’

Equity

 

Balance at January 1, 2024

  34,303  $93,705  $158,461  $-  $252,166 

Issuance of common stock and tax impact of stock incentive plan

  10   (389)  -   -   (389)

Dividends declared ($0.05 per share)

  -   -   (1,757)  -   (1,757)

Issuance of restricted stock, net of cancellation

  48   -   -   -   - 

Non-cash stock based compensation expense

  -   1,474   -   -   1,474 

Net loss

  -   -   (4,669)  -   (4,669)

Balance at March 31, 2024

  34,361  $94,790  $152,035  $-  $246,825 

 

 

  

Number of

Shares

  

Common

Stock

  

Retained

Earnings

  

Non-

Controlling

Interest

  

Total

Shareholders’

Equity

 

Balance at January 1, 2023

  35,066  $92,982  $175,611  $101  $268,694 

Issuance of common stock and tax impact of stock incentive plan

  5   (4,656)  -   -   (4,656)

Dividends declared ($0.05 per share)

  -   -   (1,820)  -   (1,820)

Purchase and retirement of common stock

  (349)  (893)  (7,872)  -   (8,765)

Issuance of restricted stock, net of cancellation

  193   -   -   -   - 

Non-cash stock based compensation expense

  -   1,827   -   -   1,827 

Net income (loss)

  -   -   1,710   (32)  1,678 

Balance at March 31, 2023

  34,915  $89,260  $167,629  $69  $256,958 

 

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

 

As used herein, the term “Company”, “we”, “us” or “our” refers to The Shyft Group, Inc. and its subsidiaries unless designated or identified otherwise.

 

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) 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 motorhome chassis 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 as well as truck accessories.

 

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 March 31, 2024, our results of operations for the three months ended March 31, 2024 and our cash flows for the three months ended March 31, 2024. 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, 2023 filed with the Securities and Exchange Commission on February 22, 2024. The results of operations for the three months ended March 31, 2024, are not necessarily indicative of the results expected for the full year.

 

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, 2023, included in our Annual Report on Form 10-K.

 

Supplemental Disclosures of Cash Flow Information

 

Non-cash investing in the three months ended March 31, 2024 and March 31, 2023 included $2,007 and $2,494 of capital expenditures, respectively. 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 3 – Debt" for further information about the chassis pool agreements.

 

NOTE 2 – INVENTORIES

 

Inventories are summarized as follows:

 

   

March 31,

2024

   

December 31,
2023

 

Finished goods

  $ 5,164     $ 9,374  

Work in process

    2,209       2,543  

Raw materials and purchased components

    90,558       93,218  

Total inventories

  $ 97,931     $ 105,135  
 

NOTE 3 – DEBT

 

Short-term debt consists of the following:

 

  

March 31,
2024

  

December 31,
2023

 

Chassis pool agreements

 $18,890  $34,496 

Total short-term debt

 $18,890  $34,496 

 

8

 

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, service 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).

 

Although the Company is party to related finance agreements with manufacturers, the Company has not historically settled related obligations in cash, except as required under our credit agreement. The obligation is usually settled by the manufacturer upon reassignment of the chassis to an accepted dealer, and the dealer is invoiced for the chassis by the manufacturer. 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. 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:

 

  

March 31,
2024

  

December 31,
2023

 

Line of credit revolver

 $65,000  $50,000 

Finance lease obligation

  285   329 

Total debt

  65,285   50,329 

Less current portion of long-term debt

  (164)  (185)

Total long-term debt

 $65,121  $50,144 

 

Revolving Credit Facility

 

On November 30, 2021, we entered into an Amended and Restated Credit Agreement (the "Credit Agreement") by and among us and certain of our subsidiaries as borrowers, Wells Fargo Bank, N.A., as administrative agent, and the lenders party thereto consisting of Wells Fargo, N.A., JPMorgan Chase Bank, N.A., PNC Bank, N.A. and Bank of America, N.A. (the "Lenders"). Certain of our other subsidiaries have executed guaranties guarantying the borrowers' obligations under the Credit Agreement.

 

On May 31, 2023, the Company amended the Credit Agreement to effectuate the transition of the underlying variable interest rate from LIBOR to the Secured Overnight Financing Rate ("SOFR"). Our interest expense is not expected to increase materially with this transition. 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.

 

On March 27, 2024, we entered into the Second Amendment to Amended and Restated Credit Agreement (the “Credit Agreement Amendment”). which amended the Credit Agreement. The Credit Agreement Amendment, among other things, (i) reduced the revolving credit commitments from $400,000 to $300,000, (ii) increased the applicable margin for term SOFR loans and base rate loans, (iii) adjusted the calculation of debt for purposes of determining the leverage ratio and (iv) temporarily increased the maximum leverage ratio.

 

Under the Credit Agreement, we may borrow up to $300,000 from the Lenders under a secured revolving credit facility which matures November 30, 2026. We may also request an increase in the facility of up to $200,000 in the aggregate, subject to customary conditions. The revolving credit facility is also available for the issuance of letters of credit of up to $20,000 and swing line loans of up to $15,000, subject to certain limitations and restrictions. The 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 SOFR including a credit spread adjustment plus 2.00%; or (ii) adjusted SOFR, in each case plus a margin based upon our ratio of debt to earnings from time to time. The applicable borrowing rate including the margin was 7.42% (or one-month SOFR including a credit spread adjustment plus 2.00%) at March 31, 2024.

  

9

  

THE SHYFT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

 

The revolving 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 March 31, 2024 and December 31, 2023, we had outstanding letters of credit totaling $1,550, related to our workers’ compensation insurance.

 

Under the terms of our Credit Agreement, available borrowings (exclusive of outstanding borrowings) totaled $48,155 and $83,243 at March 31, 2024 and December 31, 2023, 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 March 31, 2024 and December 31, 2023, we were in compliance with all financial covenants in our Credit Agreement.

 

NOTE 4 – REVENUE

 

Changes in our contract assets and liabilities for the three months ended March 31, 2024 and 2023 are summarized below:

 

  

March 31,

2024

  

March 31,

2023

 

Contract Assets

        

Contract assets, beginning of period

 $50,304  $86,993 

Reclassification of the beginning contract assets to receivables, as the result of rights to consideration becoming unconditional

   (37,163)  (66,340)

Contract assets recognized, net of reclassification to receivables

  39,662   39,441 

Contract assets, end of period

 $52,803  $60,094 
         

Contract Liabilities

        

Contract liabilities, beginning of period

 $4,756  $5,255 

Reclassification of the beginning contract liabilities to revenue, as the result of performance obligations satisfied

  (3,319)  (4,421)

Cash received in advance and not recognized as revenue

  2,502   6,885 

Contract liabilities, end of period

 $3,939  $7,719 

 

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 $356,089 and $83,334, respectively.

 

In the following tables, revenue is disaggregated by primary geographical market and timing of revenue recognition. The tables also include a reconciliation of the disaggregated revenue within the reportable segments.

 

  

Three Months Ended

March 31, 2024

 
  

FVS

  

SV

  

Eliminations and

Other

  

Total

 

Primary geographical markets

                

United States

 $81,369  $90,098  $-  $171,467 

Other

  26,390   32   -   26,422 

Total sales

 $107,759  $90,130  $-  $197,889 
                 

Timing of revenue recognition

                

Products transferred at a point in time

 $12,281  $42,757  $-  $55,038 

Products and services transferred over time

  95,478   47,373   -   142,851 

Total sales

 $107,759  $90,130  $-  $197,889 

   

10

 

THE SHYFT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except per share data)

 

  

Three Months Ended

March 31, 2023

 
  

FVS

  

SV

  

Eliminations and

Other

  

Total

 

Primary geographical markets

                

United States

 $154,028  $87,184  $(3,181) $238,031 

Other

  5,405   3   -   5,408 

Total sales

 $159,433  $87,187  $(3,181) $243,439 
                 

Timing of revenue recognition

                

Products transferred at a point in time

 $12,154  $37,562  $-  $49,716 

Products and services transferred over time

  147,279   49,625   (3,181)  193,723 

Total sales

 $159,433  $87,187  $(3,181) $243,439 
 

NOTE 5 – PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment are summarized by major classifications as follows:

 

   

March 31,

2024

   

December 31,

2023

 

Land and improvements

  $ 12,583     $ 12,578  

Buildings and improvements

    55,466       53,789  

Plant machinery and equipment

    61,188       60,517  

Furniture and fixtures

    19,460       19,474  

Vehicles

    2,157       2,015  

Construction in process

    8,190       10,570  

Subtotal

    159,044       158,943  

Accumulated depreciation

    (78,139 )     (75,506 )

Total property, plant and equipment, net

  $ 80,905     $ 83,437  

 

We recorded depreciation expense of $3,566 and $2,912 during the three months ended March 31, 2024 and 2023, respectively.

 

NOTE 6 – LEASES

 

We have operating and finance leases for land, buildings and certain equipment. Our leases have remaining lease terms of one year to 16 years, some of which include options to extend the leases for up to 15 years. Our leases do not contain residual value guarantees. Assets recorded under finance leases were immaterial (See "Note 3 – 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

 
  

March 31,

 
  

2024

  

2023

 

Operating leases

 $2,744  $2,964 

Short-term leases(1)

  318   252 

Total lease expense

 $3,062  $3,216 

 

(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.

 

11

 

THE SHYFT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

 

The weighted average remaining lease term and weighted average discount rate were as follows:

 

  

March 31,

 
  

2024

  

2023

 

Weighted average remaining lease term of operating leases (in years)

  7.0   7.9 

Weighted average discount rate of operating leases

  3.0%  2.8

%


Supplemental cash flow information related to leases was as follows:

 

  

Three Months Ended

March 31,

 
  

2024

  

2023

 

Cash paid for amounts included in the measurement of lease liabilities:

        

Operating cash flow for operating leases

 $2,918  $2,793 
         

Right of use assets obtained in exchange for lease obligations:

        

Operating leases

 $1,879  $3,975 
Finance leases $7  $65 

 

Maturities of operating lease liabilities as of March 31, 2024 are as follows:

 

Years ending December 31:

    

2024(1)

 $8,610 

2025

  10,569 

2026

  8,434 

2027

  5,735 

2028

  4,148 
2029  3,650 

Thereafter

  10,715 

Total lease payments

  51,861 

Imputed interest

  (5,035)

Total lease liabilities

 $46,826 

 

(1) Excluding the three months ended March 31, 2024.

 

NOTE 7 – COMMITMENTS AND CONTINGENT LIABILITIES

 

At March 31, 2024, 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.

 

12

 

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 are summarized below:

 

  

Three Months Ended

March 31,

 
  

2024

  

2023

 

Balance of accrued warranty at January 1

 $7,231  $7,161 

Accruals for warranties issued

  2,257   1,035 
Changes in liability for pre-existing warranties  273   (769)

Cash settlements

  (1,549)  (1,244)

Balance of accrued warranty at March 31

 $8,212  $6,183 

 

Legal Proceedings Relating to Environmental Matters

 

As previously disclosed, in May 2020, the Company received an information request from the United States Environmental Protection Agency (“EPA”) requesting certain information regarding emissions labels on chassis, vocational vehicles, and vehicles that the Company manufactured or imported into the U.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.

 

On April 6, 2022, the Company received a Notice of Violation from the EPA alleging a failure to secure certain certifications on manufactured chassis and a failure to comply with recordkeeping and reporting requirements related to supplier-provided chassis. The Company continues to investigate this matter, including potential defenses, and is continuing to discuss the allegations with the EPA. We have recorded an accrual of $1,850 at March 31, 2024 for this matter and do not believe the outcome will be materially different from the amount accrued.

 

NOTE 8 – TAXES ON INCOME

 

Our income tax expense was $783 and $430 for the three months ended March 31, 2024 and 2023, respectively. The tax expense represented a (20.1%) effective tax rate and 20.4% effective tax rate for the three months ended March 31, 2024 and 2023, respectively.

 

The effective tax rate for the three months ended March 31, 2024 and 2023 differs from the U.S. statutory rate of 21% primarily due to the tax benefit of research credits offset by state tax expense and non-deductible officer compensation and a discrete tax expense in 2024 related to the difference in stock compensation expense recognized for financial reporting purposes and tax purposes upon vesting.

 

NOTE 9 – 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 two reportable segments: Fleet Vehicles and Services and 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 underlying operating performance, as well as certain non-cash expenses. We define Adjusted EBITDA as income 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.

 

Our FVS segment focuses on designing and manufacturing walk-in vans for parcel delivery, mobile retail, and trades and construction industries, the production of commercial truck bodies, and the distribution of related aftermarket parts and accessories.

 

13

 

THE SHYFT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

 

Our SV segment consists of service bodies operations, operations that engineer and manufacture motorhome chassis, other specialty chassis and distributes related aftermarket parts and assemblies. We also provide vocation-specific equipment upfit services, which are marketed and sold under the Strobes-R-Us brand.

 

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.” 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.” Adjusted EBITDA in the “Eliminations and Other” column contains corporate related expenses not allocable to the operating segments. Interest expense and Income tax expense are not included in the information utilized by the chief operating decision maker to assess segment performance and allocate resources, and accordingly, are excluded from the segment results presented below.

 

  

Three Months Ended

March 31, 2024

 
  Segment 
  

FVS

  

SV

  

Eliminations

and Other

  

Consolidated

 
                 

Fleet vehicle sales

 $95,478  $-  $-  $95,478 

Motorhome chassis sales

  -   30,771   -   30,771 

Other specialty vehicle sales

  -   53,405   -   53,405 

Aftermarket parts and accessories sales

  12,281   5,954   -   18,235 

Total sales

 $107,759  $90,130  $-  $197,889 
                 

Depreciation and amortization expense

 $1,753  $1,542  $1,140  $4,435 

Adjusted EBITDA

  935   16,973   (11,820)  6,088 

Segment assets

  217,779   212,288   77,614   507,681 

Capital expenditures  

  785   413   943   2,141 

  

  

Three Months Ended

March 31, 2023

 
  Segment 
  

FVS

  

SV

  

Eliminations

and Other

  

Consolidated

 
                 

Fleet vehicle sales

 $147,279  $-  $-  $147,279 

Motorhome chassis sales

  -   27,960   -   27,960 

Other specialty vehicle sales

  -   54,697   (3,181)  51,516 

Aftermarket parts and accessories sales

  12,154   4,530   -   16,684 

Total sales

 $159,433  $87,187  $(3,181) $243,439 
                 

Depreciation and amortization expense

 $1,338  $1,679  $847  $3,864 

Adjusted EBITDA

  12,473   13,852   (15,537)  10,788 

Segment assets

  300,578   235,844   20,590   557,012 

Capital expenditures  

  1,865   741   2,298   4,904 

  

14

  
 

Item 2.

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

 

The Shyft Group, Inc. was organized as a Michigan corporation and is headquartered in Novi, Michigan. 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) and recreational vehicle industries. Our products include walk-in vans, truck bodies, and cargo van and pick-up truck upfits used in e-commerce/parcel delivery, upfit equipment used in the mobile retail and utility trades, as well as luxury Class A diesel motorhome custom chassis 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 vehicles, parts and services are sold to commercial users, original equipment manufacturers (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 agility 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.

 

We believe we can best carry out our long-term business plan and obtain optimal financial flexibility by using a combination of borrowings under our credit facilities, as well as internally or externally generated equity capital, as sources of expansion capital.

 

Executive Overview

 

 

Sales of $197.9 million for the first quarter of 2024, a decrease of 18.7% compared to $243.4 million for the first quarter of 2023.

 

Gross margin of 17.2% for the first quarter of 2024, compared to 17.6% for the first quarter of 2023.

 

Operating expense of $34.1 million, or 18.2% of sales for the first quarter of 2024, compared to $39.2 million, or 16.1% of sales for the first quarter of 2023.

 

Operating loss of $1.9 million for the first quarter of 2024, compared to operating income of $3.7 million for the first quarter of 2023.

 

Income tax expense of $0.8 million for the first quarter of 2024, compared to $0.4 million for the first quarter of 2023.

 

Net loss of $4.7 million for the first quarter of 2024, compared to net income of $1.7 million for the first quarter of 2023.

 

Diluted loss per share of $0.14 for the first quarter of 2024, compared to diluted earnings per share of $0.05 for the first quarter of 2023.

 

Order backlog of $439.4 million at March 31, 2024, a decrease of $228.0 million or 34.2% from our backlog of $667.4 million at March 31, 2023.

 

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 March 2022, we announced Blue Arc™ Electric Vehicle (“EV”) Solutions, a new go-to-market brand. Leveraging a scalable, commercial grade, purpose built design, the full Blue Arc EV offering will include Class 3, 4 and 5 walk-in van configurations with body length options from 12 to 22 feet. Designed for last-mile delivery fleets, these vehicles will be powered by lithium-ion battery packs that can deliver over 150 mile range at 50% payload. We expect Shyft customers can maximize productivity and minimize cost of ownership, including fuel and maintenance costs with our Blue Arc EV product offering.

 

 

The Velocity lineup of last-mile delivery vehicles span Gross Vehicle Weight Rating class sizes 2 and 3 and are available on Ford Transit, Mercedes Sprinter, and RAM Promaster chassis. The Velocity combines fuel efficiency, comfort, and maneuverability with the cargo space, access, and load capacity similar to a traditional walk-in van.

 

 

Royal Truck Body’s Severe Duty body, built to fit General Motors’ medium duty truck class and Ford's Super Duty truck class, includes more standard features than any other service body on the market. With its fortress five-point lock system, 10-gauge steel box tops treated with a protective Polyeurea coating and 3/8″ tread plate steel floors, this work truck is built to last and is ideal for contractors and business owners that need heavy-duty work trucks.

 

 

Feature motorhome chassis are equipped with the Spartan® RV Chassis Connected Coach®, featuring 15-inch anti-glare digital dash that is custom designed for the RV customer to meet their specific display or operational needs. Integrated with the digital dash is the Tri-Pod Steering Wheel, which places driving features and instrumentation right at the driver's fingertips, enabling a more effortless engagement with driving features and controls.

 

 

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 2023 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 22, 2024.

 

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

 
   

March 31,

 
   

2024

   

2023

 

Sales

    100.0       100.0  

Cost of products sold

    82.8       82.4  

Gross profit

    17.2       17.6  

Operating expenses:

               

Research and development

    1.9       2.9  

Selling, general and administrative

    16.3       13.3  

Operating income (loss)

    (1.0 )     1.5  

Other expense

    (1.0 )     (0.6 )

Income (loss) before income taxes

    (2.0 )     0.9  

Income tax expense

    0.4       0.2  

Net income (loss)

    (2.4 )     0.7  

Non-controlling interest

    -       0.0  

Net income (loss) attributable to The Shyft Group, Inc.

    (2.4 )     0.7  

 

Three Months Ended March 31, 2024 Compared to the Three Months Ended March 31, 2023

 

Sales

 

For the three months ended March 31, 2024, we reported consolidated sales of $197.9 million, compared to $243.4 million for the first quarter of 2023, a decrease of $45.5 million or 18.7%. This decrease is driven by lower sales volumes in our Fleet Vehicles and Services (“FVS”) segment attributed to lower sales volumes of walk-in vans and lower USPS pass-through chassis sales, partially offset by higher truck body and upfit sales, and higher sales in the Specialty Vehicles (“SV”) segment.

 

Cost of Products Sold

 

Cost of products sold was $163.8 million in the first quarter of 2024, compared to $200.5 million for the first quarter of 2023, a decrease of $36.7 million or 18.3%. The decrease was due to $38.2 million in lower volume and mix and $2.2 million in lower pass-through chassis costs, partially offset by $3.7 million higher manufacturing and other costs.

 

Gross Profit

 

Gross profit was $34.1 million for the first quarter of 2024, compared to $42.9 million for the first quarter of 2023, a decrease of $8.8 million or 20.6%. The decrease was due to $5.1 million in lower volume and mix, net of favorable pricing, and $3.7 million in higher manufacturing and other costs.

 

Operating Expenses

 

Operating expenses were $36.0 million for the first quarter of 2024, compared to $39.2 million for the first quarter of 2023, a decrease of $3.2 million or 8.3%. Research and development expense for the first quarter of 2024 was $3.7 million, compared to $6.9 million in the first quarter of 2023, a decrease of $3.2 million, of which $2.9 million was related to electric vehicle development initiatives as the program moves closer to production. Selling, general and administrative expense was $32.3 million for the first quarter of 2024, compared to $32.3 million for the first quarter of 2023.

 

 

Other Income (Expense)

 

Other expense was $2.0 million for the first quarter of 2024, compared to $1.6 million for the first quarter of 2023, driven by higher borrowing costs.

 

Income Tax Expense

 

Our income tax expense was $0.8 million for the first quarter of 2024, compared to an expense of $0.4 million for the first quarter 2023. The tax expense represented a (20.1%) effective tax rate and 20.4% effective tax rate for the three months ended March 31, 2024 and 2023, respectively, which reflects the impact of current statutory income tax rates on our income before income taxes combined with the tax expense of non-deductible officer compensation offset by the benefit of research credits combined with a discrete tax expense in 2024 related to the difference in stock compensation expense recognized for financial reporting purposes and tax purposes upon vesting.

 

Net Income (Loss)

 

Net loss was $4.7 million for the first quarter of 2024 compared to net income of $1.7 million for the first quarter of 2023, a decrease of $6.4 million. Diluted loss per share was $0.14 for the first quarter of 2024 compared to diluted earnings per share of $0.05 for the first quarter of 2023. Driving this decrease were the factors noted above.

 

Adjusted EBITDA

 

Our consolidated Adjusted EBITDA for the first quarter of 2024 was $6.1 million, compared to $10.8 million for the first quarter of 2023, a decrease of $4.7 million.

 

The table below describes the changes in Adjusted EBITDA for the three months ended March 31, 2024 compared to the same period for 2023 (in millions):

 

Adjusted EBITDA three months ended March 31, 2023

  $ 10.8  
Sales volume and other     (12.3 )
Product pricing and mix     3.4  
EV development/program costs     3.0  

General and administrative costs and other

    1.2  

Adjusted EBITDA three months ended March 31, 2024

  $ 6.1  

 

Order Backlog

 

Our order backlog by reportable segment is summarized in the following table (in thousands):

 

   

March 31,

2024

   

March 31,

2023

 

Fleet Vehicles and Services

  $ 356,089     $ 584,933  

Specialty Vehicles

    83,334       82,478  

Total consolidated

  $ 439,423     $ 667,411  

 

The consolidated backlog at March 31, 2024 totaled $439.4 million, a decrease of $228.0 million, or 34.2%, compared to $667.4 million at March 31, 2023.

 

Our FVS backlog decreased by $228.8 million, or 39.1%, primarily due to vehicle sales and softer demand in delivery vans. Our SV segment backlog increased by $0.9 million, or 1.0%, as higher service body orders more than offset lower motorhome orders.

 

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.

  

 

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 underlying operating performance, as well as certain non-cash expenses. We define Adjusted EBITDA as income 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.

 

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.

 

We 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 Net Income to Adjusted EBITDA for the periods indicated.

 

Financial Summary (Non-GAAP)

Consolidated

(In thousands, Unaudited)

 

   

Three Months Ended

 
   

March 31,

 
   

2024

   

2023

 

Net Income (loss)

  $ (4,669 )   $ 1,678  

Net loss attributable to non-controlling interest

    -       32  

Add (subtract):

               

Interest expense

     2,053       1,648  

Depreciation and amortization expense

     4,435       3,864  

Income tax expense

    783       430  

Restructuring and other related charges

     52       62  

Acquisition related expenses and adjustments

    -       291  

Non-cash stock based compensation expense

     1,474       1,827  

Legacy legal matters

    1,850       956  
CEO transition      110       -  

Adjusted EBITDA

  $ 6,088     $ 10,788  

 

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: FVS and SV.

 

For certain financial information related to each segment, see "Note 9 – Business 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

March 31,

 
   

2024

   

2023

 
   

Amount

   

Percentage

   

Amount

   

Percentage

 
                                 

Sales

  $ 107,759       100.0 %   $ 159,433       100.0 %

Adjusted EBITDA

    935       0.9 %     12,473       7.8 %

 

Sales in our FVS segment were $107.8 million for the first quarter of 2024, compared to $159.4 million for the first quarter of 2023, a decrease of $51.6 million or 32.4%. This decrease was primarily attributable to softer delivery van markets and lower pass-through chassis sales, partially offset by increased truck body sales and higher upfit volume.

 

Adjusted EBITDA in our FVS segment for the first quarter of 2024 was $0.9 million compared to $12.5 million for the first quarter of 2023, a decrease of $11.6 million. This decrease was attributable to $6.7 million in lower volume and $1.7 million of unfavorable mix net of pricing and $3.2 million of lower productivity net of material, labor costs, and other costs.

 

Specialty Vehicles

  

   

Financial Data

 
   

(Dollars in Thousands)

 
   

Three Months Ended

March 31,

 
   

2024

   

2023

 
   

Amount

   

Percentage

   

Amount

   

Percentage

 
                                 

Sales

  $ 90,130       100.0 %   $ 87,187       100.0

%

Adjusted EBITDA

    16,973       18.8 %     13,852       15.9

%

 

Sales in our SV segment were $90.1 million in the first quarter of 2024, compared to $87.2 million for the first quarter of 2023, an increase of $2.9 million or 3.4%. This increase was primarily attributable to higher motorhome chassis market demand and higher service body sales partially offset by a decline in other specialty vehicle sales.

 

Adjusted EBITDA for our SV segment for the first quarter of 2024 was $17.0 million, compared to $13.9 million for the first quarter of 2023, an increase of $3.1 million or 22.5%. This increase was primarily attributable to $2.8 million of favorable pricing and mix, $0.8 million lower manufacturing costs, and $0.4 million of favorable volume, partially offset by $0.9 million other costs.

 

19

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash Flows

 

Cash and cash equivalents increased by $3.3 million from December 31, 2023, to a balance of $13.3 million as of March 31, 2024. These funds, in addition to cash generated from future operations and availability under our existing credit facility, are expected to be sufficient to finance our foreseeable liquidity and capital needs, including potential future acquisitions.

 

Cash Flow from Operating Activities

 

We used $4.0 million of cash from operating activities during the three months ended March 31, 2024, a decrease in cash provided of $9.9 million from $5.9 million of cash provided by operating activities during the three months ended March 31, 2023. The $4.0 million of cash used in the first three months of 2024 was driven by a $1.3 million net inflow related to income adjusted for non-cash charges to operations and by a $5.3 million net outflow related to the change in net working capital. The change in working capital in the first three months of 2024 was driven by a $10.1 million net outflow related to decreased payables primarily attributable to timing of payments within the period and a $1.9 million net outflow related to changes in accrued compensation and related taxes, partially offset by a $7.2 million net inflow related to decreased inventories.

 

Cash Flow from Investing Activities

 

We used $5.6 million in investing activities during the three months ended March 31, 2024, an increase in cash used of $0.7 million from $4.9 million used during the three months ended March 31, 2023. The increase in cash used in investing activities is primarily due to a $1.2 million increase in the purchases of property, plant and equipment, partially offset by a $0.5 million decrease related to the acquisition of a business in prior year.

 

Cash Flow from Financing Activities

 

We generated $12.9 million of cash through financing activities during the three months ended March 31, 2024, an increase in cash generated of $18.0 million from $5.1 million used during the three months ended March 31, 2023. The increase in cash generated by financing activities is primarily attributable to $6.0 million of decreased payments on long-term debt, a $8.8 million decrease in the purchase and retirement of common stock, a $3.1 million decrease in exercise and vesting of stock awards and a $0.1 million decrease in payment of dividends.

 

Debt

 

On November 30, 2021, we entered into an Amended and Restated Credit Agreement (the "Credit Agreement") by and among us and certain of our subsidiaries as borrowers, Wells Fargo Bank, N.A., as administrative agent, and the lenders party thereto consisting of Wells Fargo, N.A., JPMorgan Chase Bank, N.A., PNC Bank, N.A., National Association and Bank of America, N.A. (the "Lenders"). Certain of our other subsidiaries have executed guaranties guarantying the borrowers' obligations under the Credit Agreement.

 

On May 31, 2023, the Company amended the Credit Agreement to effectuate the transition of the underlying variable interest rate from LIBOR to the Secured Overnight Financing Rate ("SOFR"). Our interest expense is not expected to increase materially with this transition. 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.

 

On March 27, 2024, we entered into the Second Amendment to Amended and Restated Credit Agreement (the “Credit Agreement Amendment”), which amended the Credit Agreement. The Credit Agreement Amendment, among other things, (i) reduced the revolving credit commitments from $400.0 million to $300.0 million, (ii) increased the applicable margin for term SOFR loans and base rate loans, (iii) adjusted the calculation of debt for purposes of determining the leverage ratio and (iv) temporarily increased the maximum leverage ratio.

 

Under the Credit Agreement, we may borrow up to $300.0 million from the Lenders under a secured revolving credit facility which matures November 30, 2026. We may also request an increase in the facility of up to $200.0 million in the aggregate, subject to customary conditions. The revolving 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 $15.0 million, subject to certain limitations and restrictions. The 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 SOFR including a credit spread adjustment plus 2.00%; or (ii) adjusted SOFR, in each case plus a margin based upon our ratio of debt to earnings from time to time. The applicable borrowing rate including the margin was 7.42% (or one-month SOFR including a credit spread adjustment plus 2.00%) at March 31, 2024.

 

 

The revolving 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 March 31, 2024 and December 31, 2023, we had outstanding letters of credit totaling $1.6 million, related to our workers’ compensation insurance.

 

Under the terms of our Credit Agreement, available borrowings (exclusive of outstanding borrowings) totaled $48.2 million and $83.2 million at March 31, 2024 and December 31, 2023, 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 March 31, 2024 and December 31, 2023, we were in compliance with all financial covenants in our Credit Agreement.

 

Equity Securities

 

On February 17, 2022, our Board of Directors authorized the repurchase of up to $250.0 million of our common stock in open market transactions. 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. We declared dividends on our outstanding common shares in 2024 and 2023 as shown in the table below.

 

Date dividend declared

 

Record date

 

Payment date

 

Dividend per share ($)

 
Feb. 1, 2024   Feb. 16, 2024   Mar. 18, 2024   $ 0.05  
Oct. 31, 2023   Nov. 16, 2023   Dec. 15, 2023   $ 0.05  
Aug. 2, 2023   Aug. 17, 2023   Sep. 18, 2023   $ 0.05  
May 2, 2023   May 17, 2023   Jun. 20, 2023   $ 0.05  
Jan. 31, 2023   Feb. 17, 2023   Mar. 17, 2023   $ 0.05  

   

Effect of Inflation

 

Inflation affects us in two principal ways. First, our revolving credit facility is generally tied to the prime and SOFR 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. 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.

 

 

Item 3.

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 March 31, 2024, we had $65.0 million debt outstanding under our revolving credit facility. An increase of 100 basis points in interest rates would result in $0.7 million of incremental interest expense on an annualized 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.

 

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. 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 months ended March 31, 2024.

 

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 near term. In this discussion, “near term” means a period of one year following the date of the most recent balance sheet contained in this report.

 

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.

 

 

Item 4.

Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended), as of the end of the period covered by this Quarterly Report. Based on the evaluation of our disclosure controls and procedures as of March 31, 2024, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

 

Changes in Internal Control over Financial Reporting           

 

There have been no changes during the quarter ended March 31, 2024, in our internal control over financial reporting that have materially affected, or are likely to materially affect, our internal control over financial reporting.

 

Inherent Limitations on Effectiveness of Controls

 

An effective internal control system, no matter how well designed, has inherent limitations, including the possibility of human error or overriding of controls, and therefore can provide only reasonable assurance with respect to reliable financial reporting. Because of its inherent limitations, our internal control over financial reporting may not prevent or detect all misstatements, including the possibility of human error, the circumvention or overriding of controls, or fraud. Effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements.

 

 

PART II.  OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

See “Note 7 – 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, 2023, 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, 2023 with respect to the Risk Factors. Investors should consider the Risk Factors prior to making an investment decision with respect to our stock.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

Issuer Purchases of Equity Securities

 

On February 17, 2022, our Board of Directors authorized the repurchase of up to $250.0 million of our common stock in open market transactions. We believe that we have sufficient resources to fund any potential stock buyback in which we may engage.

 

Period

 

Total
Number of
Shares
Purchased(1)

   

Average
Price Paid
per Share

   

Total Number

of
Shares

Purchased
as Part of

Publicly
Announced

Plans or
Programs

   

Approximate Dollar Value of Shares That
May Yet be Purchased Under Announced Plans or

Programs(2)

(In millions)

 

January 1 to January 31

    -     $ -       -     $ 223.0  

February 1 to February 29

    -       -       -       223.0  

March 1 to March 31

    43,177       11.84       -       223.0  

Total

    -               -          

 

(1) During the quarter ended March 31, 2024, 43,177 shares were delivered by employees in satisfaction of tax withholding obligations that occurred upon the vesting of restricted shares.

(2) This column reflects the number of shares that may yet be purchased pursuant to the February 17, 2022 Board of Directors authorization described above. 

 

 

Item 5.

Other Information

 

During the quarter ended March 31, 2024, no director or officer (as defined in Rule 16a-1(f) under the Exchange Act) of the Company adopted, modified or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement” (as each term is defined in Item 408 of Regulation S-K).

 

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Item 6.

Exhibits.

 

      (a)      Exhibits.  The following exhibits are filed as a part of this report on Form 10-Q:

 

Exhibit No.

 

Document

     
10.2.1   Second Amendment, dated as of March 27, 2024, to the Amended and Restated Credit Agreement dated as of November 30, 2021, as amended, among the Company and its affiliates, Wells Fargo Bank, National Association, as administrative agent, and the lender parties thereto (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on March 29, 2024).
     
10.8.3   Form of Performance Share Unit Agreement (2024 LTI)*
     
10.9.3   Form of Restricted Stock Unit Agreement (2024 LTI)*
     

31.1

 

Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.

 

 

 

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)

 

*Management contract or compensatory plan or arrangement

 

 

SIGNATURES

 

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

 

Date: April 25, 2024

THE SHYFT GROUP, INC.

 

 

 

 

 

 

 

By

/s/ Jonathan C. Douyard

 

 

Jonathan C. Douyard
Chief Financial Officer

 

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