10-Q 1 shyf20220331b_10q.htm FORM 10-Q shyf20220331b_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, 2022.

 

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

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 April 22, 2022

Common Stock

35,038,437 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, 2022 and December 31, 2021 (Unaudited)

4  
   

 

   
   

Condensed Consolidated Statements of Operations – Three Months Ended March 31, 2022 and 2021 (Unaudited)

5  
   

 

   
   

Condensed Consolidated Statements of Cash Flows – Three Months Ended March 31, 2022 and 2021 (Unaudited)

6  
         
   

Condensed Consolidated Statement of Shareholders’ Equity – Three Months Ended March 31, 2022 and 2021 (Unaudited)

7  
   

 

   
   

Notes to Condensed Consolidated Financial Statements

8  
   

 

   
 

Item 2.

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

17  
 

 

 

   
 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

25  
 

 

 

   
 

Item 4.

Controls and Procedures

25  
 

 

 

   

PART II.  OTHER INFORMATION

   
         
  Item 1. Legal Proceedings 27  
         
 

Item 1A.

Risk Factors

27  
         
 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

27  
         

 

Item 6.

Exhibits

28  

 

 

 

   

SIGNATURES

29  

 

 

 

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, 2021, as filed with the Securities and Exchange Commission on February 24, 2022, 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

 

Item 1.

Financial Statements

 

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

(In thousands) 

 

  March 31,  

December 31,

 
  2022  

2021

 

ASSETS

        

Current assets:

        

Cash and cash equivalents

 $3,691  $37,158 

Accounts receivable, less allowance of $133 and $187

  80,769   87,262 

Contract assets

  32,989   21,483 

Inventories

  91,256   67,184 

Other receivables – chassis pool agreements

  9,198   9,926 

Other current assets

  12,041   10,813 

Total current assets

  229,944   233,826 

Property, plant and equipment, net

  64,359   61,057 

Right of use assets operating leases

  56,239   43,316 

Goodwill

  48,880   48,880 

Intangible assets, net

  52,129   52,981 

Net deferred tax assets

  4,880   4,880 

Other assets

  2,709   2,927 

TOTAL ASSETS

 $459,140  $447,867 
         

LIABILITIES AND SHAREHOLDERS' EQUITY

        

Current liabilities:

        

Accounts payable

 $89,968  $82,442 

Accrued warranty

  5,649   5,975 

Accrued compensation and related taxes

  12,947   19,064 

Contract liabilities

  5,193   988 

Operating lease liability

  9,411   7,934 

Other current liabilities and accrued expenses

  7,710   9,256 

Short-term debt – chassis pool agreements

  9,198   9,926 

Current portion of long-term debt

  248   252 

Total current liabilities

  140,324   135,837 

Other non-current liabilities

  7,923   8,108 

Long-term operating lease liability

  47,952   36,329 

Long-term debt, less current portion

  35,245   738 

Total liabilities

  231,444   181,012 

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; 35,027 and 35,416 outstanding

  87,053   95,375 

Retained earnings

  140,542   171,379 

Total Shyft Group, Inc. shareholders equity

  227,595   266,754 

Non-controlling interest

  101   101 

Total shareholders' equity

  227,696   266,855 

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

 $459,140  $447,867 

 

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,

 
  2022  

2021

 
         

Sales

 $206,883  $197,888 

Cost of products sold

  180,952   157,902 

Gross profit

  25,931   39,986 
         

Operating expenses:

        

Research and development

  4,927   782 

Selling, general and administrative

  26,552   24,537 

Total operating expenses

  31,479   25,319 
         

Operating income (loss)

  (5,548)  14,667 
         

Other income (expense)

        

Interest income (expense)

  (154)  170

 

Other income (expense)

  (35)  183

 

Total other income (expense)

  (189)  353

 

         

Income (loss) from continuing operations before income taxes

  (5,737)  15,020 

Income tax expense (benefit)

  (1,885)  3,490 

Income (loss) from continuing operations

  (3,852)  11,530 

Income from discontinued operations, net of income taxes

  -   81

 

Net income (loss)

  (3,852)  11,611 

Less: net income attributable to non-controlling interest

  -   35 
         

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

 $($3,852) $11,576 
         

Basic earnings (loss) per share

        

Continuing operations

 $(0.11) $0.33 

Discontinued operations

  -   -

 

Basic earnings per share

 $(0.11) $0.33 
         

Diluted earnings (loss) per share

        

Continuing operations

 $(0.11) $0.32 

Discontinued operations

  -   -

 

Diluted earnings per share

 $(0.11) $0.32 
         

Basic weighted average common shares outstanding

  35,108   35,312 

Diluted weighted average common shares outstanding

  35,108   36,191 

 

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,

 
  2022  

2021

 

Cash flows from operating activities:

        

Net income (loss)

 $(3,852) $11,611 

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

        

Depreciation and amortization

  2,969   2,571 

Non-cash stock based compensation expense

  1,648   1,642 

Deferred income taxes

  -   134 

(Gain) on disposal of assets

  (10)  (142

)

Changes in accounts receivable and contract assets

  (5,012)  (30,149

)

Changes in inventories

  (24,072)  (12,115

)

Changes in accounts payable

  7,594   27,472 

Changes in accrued compensation and related taxes

  (7,966)  (4,736

)

Changes in accrued warranty

  (326)  686 

Change in other assets and liabilities

  1,243   1,723 

Net cash used in operating activities

  (27,784)  (1,303

)

         

Cash flows from investing activities:

        

Purchases of property, plant and equipment

  (5,514)  (5,914

)

Proceeds from sale of property, plant and equipment  29   - 

Acquisition of business, net of cash acquired

  -   404 

Net cash used in investing activities

  (5,485)  (5,510

)

         

Cash flows from financing activities:

        

Proceeds from long-term debt

  45,000   - 

Payments on long-term debt

  (10,000)  - 

Payment of dividends

  

(1,886

)  (889

)

Purchase and retirement of common stock

  (26,789)  (3,348

)

Issuance and vesting of stock incentive awards

  (6,523)  104 

Net cash used in financing activities

  (198)  (4,133

)

         

Net (decrease) in cash and cash equivalents

  (33,467)  (10,946

)

Cash and cash equivalents at beginning of period

  37,158   20,995 

Cash and cash equivalents at end of period

 $3,691  $10,049 

 

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

  

Retained

Earnings

  

Non-

Controlling

Interest

  

Total

Shareholders

Equity

 

Balance at December 31, 2021

  35,416  $95,375  $171,379  $101  $266,855 

Issuance of common stock and tax impact of stock incentive plan

  3   (8,372

)

  -   -   (8,372

)

Dividends declared ($0.05 per share)

  -   -   (1,794)  -   (1,794

)

Purchase and retirement of common stock

  (607

)

  (1,598

)

  (25,191

)

  -   (26,789

)

Issuance of restricted stock, net of cancellation

  215   -   -   -   - 

Non-cash stock based compensation expense

  -   1,648   -   -   1,648 

Net loss

  -   -   (3,852)  -   (3,852)

Balance at March 31, 2022

  35,027  $87,053  $140,542  $101  $227,696 

 

  

Number of

Shares

  

Common

Stock

  

Retained

Earnings

  

Non-

Controlling

Interest

  

Total

Shareholders

Equity

 

Balance at December 31, 2020

  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 

 

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 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 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, 2022, and our results of operations and cash flows for the three months ended March 31, 2022. 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, 2021 filed with the Securities and Exchange Commission on February 24, 2022. The results of operations for the three months ended March 31, 2022, 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, 2021, 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, 2022 and March 31, 2021, included $1,443 and $2,899 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 4 – Debt" for further information about the chassis pool agreements.

 

Potential Effect of Antidilution on Earnings Per Share

 

The potential effect of 670 thousand restricted stock units and performance stock units are excluded from the diluted earnings per share calculation for the three months ended March 31, 2022, as inclusion would be antidilutive.

 

 

NOTE 2 – DISCONTINUED OPERATIONS

 

On February 1, 2020, we completed the sale of our emergency 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 results of the ERV business have been reclassified to Income from discontinued operations, net of tax in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2021.

 

8

 

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

 

The Income from discontinued operations presented in the Condensed Consolidated Statement of Operations are summarized below:

 

  

Three Months Ended

March 31,

 
  2022  

2021

 

Other income

 $-  $109 

Income from discontinued operations before taxes

  -   109 

Income tax (expense)

  -   (28

)

Income from discontinued operations, net of income taxes

 $-  $81 

 

There were no depreciation and amortization expenses or capital expenditures for the discontinued operations for the three months ended March 31, 2022 and 2021.

 

 

NOTE 3 – INVENTORIES

 

Inventories are summarized as follows:

 

  

March 31,

2022

  

December 31,
2021

 

Finished goods

 $4,230  $2,990 

Work in process

  3,349   2,471 

Raw materials and purchased components

  83,677   61,723 

Total inventories

 $91,256  $67,184 

 

 

NOTE 4  DEBT

 

Short-term debt consists of the following:

 

  

March 31,
2022

  

December 31,
2021

 

Chassis pool agreements

 $9,198  $9,926 

Total short-term debt

 $9,198  $9,926 

 

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 with receipt at our facilities dependent on manufacturer’s production schedules. 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).

 

9

 

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. 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,
2022

  

December 31,
2021

 

Line of credit revolver

 $35,000  $- 

Finance lease obligation

  493   450 

Other

  -   540 

Total debt

  35,493   990 

Less current portion of long-term debt

  (248)  (252

)

Total long-term debt

 $35,245  $738 

 

Line of Credit Revolver

 

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. ("Wells Fargo"), as administrative agent, and the lenders party thereto consisting of Wells Fargo, JPMorgan Chase Bank, N.A., PNC Bank, 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.

 

Under the Credit Agreement, we may borrow up to $400,000 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 credit facility is also available for the issuance of letters of credit of up to $20,000 and swing line loans of up to $10,000, subject to certain limitations and restrictions. 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 the margin was 1.45% (or one-month LIBOR plus 1.00%) at March 31, 2022. 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 March 31, 2022 and December 31, 2021, we had outstanding letters of credit totaling $1,110 and $760, respectively, related to our workers’ compensation insurance.

 

Under the terms of our Credit Agreement, available borrowings (exclusive of outstanding borrowings) totaled $271,954 and $376,776 at March 31, 2022 and December 31, 2021, 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, 2022 and December 31, 2021, we were in compliance with all covenants in our Credit Agreement.

 

10

 

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

 

 

NOTE 5 – REVENUE

 

Changes in our contract assets and liabilities for the three months ended March 31, 2022 and 2021 are summarized below:

 

  

March 31,

2022

  

March 31,

2021

 

Contract Assets

        

Contract assets, beginning of period

 $21,483  $9,414 

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

  (18,635)  (8,977)

Contract assets recognized, net of reclassification to receivables

  30,141   20,211 

Contract assets, end of period

 $32,989  $20,648 
         

Contract Liabilities

        

Contract liabilities, beginning of period

 $988  $756 

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

  (988)  (567)

Cash received in advance and not recognized as revenue

  5,193   274 

Contract liabilities, end of period

 $5,193  $463 

 

As of October 1, 2021, the composition of both reportable segments changed due to an internal reorganization as certain businesses previously managed and reported within Fleet Vehicles and Services (“FVS”) are now a part of Specialty Vehicles (“SV”). Corresponding items of segment information for earlier periods have been recast.

 

The aggregate amount of the transaction price allocated to remaining performance obligations in existing contracts that are yet to be completed in the FVS and SV segments are $1,148,700 and $123,999, 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 with the reportable segments.

 

  

Three Months Ended

March 31, 2022

  

FVS

  

SV

  

Total

 

Primary geographical markets

            

United States

 $111,336  $94,183  $205,519 

Other

  1,361   3   1,364 

Total sales

 $112,697  $94,186  $206,883 
             

Timing of revenue recognition

            

Products transferred at a point in time

 $9,555  $52,851  $62,406 

Products and services transferred over time

  103,142   41,335   144,477 

Total sales

 $112,697  $94,186  $206,883 

 

11

 

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, 2021

  

FVS

  

SV

  

Total

 

Primary geographical markets

            

United States

 $121,230  $74,045  $195,275 

Other

  2,594   19   2,613 

Total sales

 $123,824  $74,064  $197,888 
             

Timing of revenue recognition

            

Products transferred at a point in time

 $6,801  $42,293  $49,094 

Products and services transferred over time

  117,023   31,771   148,794 

Total sales

 $123,824  $74,064  $197,888 

 

 

NOTE 6 – PROPERTY, PLANT AND EQUIPMENT

 

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

 

  

March 31,

2022

  

December 31,

2021

 

Land and improvements

 $9,810  $9,810 

Buildings and improvements

  46,150   45,724 

Plant machinery and equipment

  49,637   49,305 

Furniture and fixtures

  21,099   20,421 

Vehicles

  2,685   2,607 

Construction in process

  16,449   12,700 

Subtotal

  145,830   140,567 

Less accumulated depreciation

  (81,471)  (79,510

)

Total property, plant and equipment, net

 $64,359  $61,057 

 

We recorded depreciation expense of $2,125 and $1,741 during the three months ended March 31, 2022 and 2021, respectively.

 

 

NOTE 7 – LEASES

 

We have operating and finance leases for land, buildings and certain equipment. Our leases have remaining lease terms of one year to 18 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 4 – 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,

 
  

2022

  

2021

 

Operating leases

 $2,238  $1,954 

Short-term leases(1)

  38   38 

Total lease expense

 $2,276  $1,992 

 

(1Includes 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.

 

12

 

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:

 

  

Three Months Ended

March 31,

 
  

2022

  

2021

 

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

  8.5   9.3 

Weighted average discount rate of operating leases

  2.7%  3.1

%

 

Supplemental cash flow information related to leases was as follows:

 

  

Three Months Ended

March 31,

 
  

2022

  

2021

 

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

        

Operating cash flow for operating leases

 $2,061  $1,914 
         

Right of use assets obtained in exchange for lease obligations:

        

Operating leases

 $14,955  $60 
Finance leases $121  $- 

 

Maturities of operating lease liabilities as of March 31, 2022 are as follows:

 

Years ending December 31:

    

2022(1)

 $9,565 

2023

  9,587 

2024

  9,085 

2025

  8,236 

2026

  6,598 

Thereafter

  26,046 

Total lease payments

  69,117 

Less: imputed interest

  (11,754)

Total lease liabilities

 $57,363 

 

(1Excluding the three months ended March 31, 2022.

 

 

NOTE 8 – COMMITMENTS AND CONTINGENT LIABILITIES

 

At March 31, 2022, 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.

 

13

 

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,

 
  

2022

  

2021

 

Balance of accrued warranty at January 1

 $5,975  $5,633 

Provisions for current period sales

  793   824 
Changes in liability for pre-existing warranties  (174)  677 

Cash settlements

  (945)  (814)

Balance of accrued warranty at March 31

 $5,649  $6,320 

 

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 will continue discussions with the EPA regarding the allegations. At this time, it is not possible to estimate the potential fines or penalties that the Company may incur (if any) for this matter.

 

 

NOTE 9 – TAXES ON INCOME

 

Our effective income tax rate was a tax benefit of (32.9%) and a tax expense of 23.2% for the three months ended March 31, 2022 and 2021, respectively.

 

The effective tax rate of a benefit of (32.9%) for the three months ended March 31, 2022 is higher than the U.S. statutory tax rate of 21% due to a discrete tax benefit related to the difference in stock compensation expense recognized for financial reporting purposes and tax purposes upon vesting.

 

The effective tax rate of an expense of 23.2% for the three months ended March 31, 2021 is higher than the U.S. statutory tax rate of 21% primarily because of state income taxes at their statutory rates partially offset by a discrete tax benefit related to the difference in stock compensation expense recognized for financial reporting purposes and tax purposes upon vesting.

 
 
16

 

 

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 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 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.

 

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 is 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 growing opportunities that we have capitalized on in last mile delivery as a result of the rapidly changing e-commerce market is an excellent example of our ability to generate growth and profitability by quickly fulfilling customer needs.

 

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 $206.9 million for the first quarter of 2022, an increase of 4.5% compared to $197.9 million for the first quarter of 2021.

 

Gross Margin of 12.5% for the first quarter of 2022, compared to 20.2% for the first quarter of 2021.

 

Operating expense of $31.5 million, or 15.2% of sales for the first quarter of 2022, compared to $25.3 million, or 12.8% of sales for the first quarter of 2021.

 

Operating loss of $5.5 million for the first quarter of 2022, compared to income of $14.7 million for the first quarter of 2021.

 

Income tax benefit of $1.9 million for the first quarter of 2022, compared to expense of $3.5 million for the first quarter of 2021.

 

Loss from continuing operations of $3.9 million for the first quarter of 2022, compared to income of $11.5 million for the first quarter of 2021.

 

Diluted loss per share from continuing operations of $0.11 for the first quarter of 2022, compared to earnings per share of $0.32 for the first quarter of 2021.

 

Order backlog of $1,272.7 million at March 31, 2022, an increase of $606.2 million or 91.0% from our backlog of $666.5 million at March 31, 2021.

 

 

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™ EV Solutions, a new go-to-market brand alongside a trio of initial product offerings—an industry-first commercial grade purpose-built EV chassis; a fully reimagined from the ground up all-electric Class 3 delivery walk-in van; and a fully portable, remote-controlled charging station, the Power Cube™.

 

    The proprietary battery-powered chassis features customizable length and wheelbase, making it well-suited to serve a wide range of medium-duty trucks and end uses. The chassis’ modular design will accommodate multiple weight ratings and classifications, based on build-out and usage. The lithium-ion battery packs provide an approximate range of 150 to 175 miles with the opportunity to enhance range through expanded battery options.

 

   

The Blue Arc delivery van is a 100% battery-powered Class 3 electric commercial delivery vehicle, designed for high-frequency, last-mile delivery fleets. A spacious cargo area features 635-800 cubic feet of storage and offers a choice of vocational packages specifically designed for functionality.

 

    The Blue Arc ecosystem also includes the Power Cube, a fully portable remote-controlled charging station with onboard energy storage to serve a variety of commercial vehicle needs. Understanding that lack of EV infrastructure is one of the roadblocks to adoption, the Power Cube offers a unique solution, providing a mobile, customizable, commercial grade EV charger that does not need to be connected to the grid. 

 

 

The introduction of the Velocity F2™, a Class 2 walk-in van built on a Ford Transit chassis. The Velocity F2 combines nimbleness, comfort, and fuel efficiency with the cargo space, access, and load capacity similar to a traditional walk-in delivery van. The Velocity F2 gives parcel delivery fleets the added flexibility to manage their driver pool and optimize routing, consistent with increased demand.

 

 

The introduction of the Velocity M3™ walk-in van which is built on a Mercedes-Benz Sprinter cab and chassis, blends the fuel efficiency, driver ergonomics, and safety provisions of a cargo van cab and chassis with the expansive cargo space of a traditional walk-in van. The Velocity M3 builds upon advancements from the Utilimaster Reach®, with a lighter body design, improved payload, better fuel efficiency, and maximized cargo space.

 

 

Royal Truck Body’s new 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 Poly eurea 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.

 

 

The introduction of the K4 605 motorhome chassis. The K4 605 is equipped with Spartan Connected Coach™, a technology bundle featuring the new digital dash display and keyless push-button start. It also features the Spartan Advanced Protection System®, a collection of safety systems that includes collision mitigation with adaptive cruise control, electronic stability control, automatic traction control, Spartan Safe Haul™, factory chassis-integrated air supply for tow vehicle braking systems, tire pressure monitoring system with integrated controls with Spartan Connected Coach’s™ digital dash display, Premier Steer steering assist system, woodgrain and leather SMART steering wheel with integrated radio controls and a Passive Steer Tag Axle, and Cummins Connected Diagnostics.

 

 

The strength of our balance sheet and access to working capital through our revolving line of credit.

 


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 February 24, 2022.

 

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,

 
   

2022

   

2021

 

Sales

    100.0       100.0  

Cost of products sold

    87.5       79.8  

Gross profit

    12.5       20.2  

Operating expenses:

               

Research and development

    2.4       0.4  

Selling, general and administrative

    12.8       12.4  

Operating income (loss)

    (2.7 )     7.4  

Other income (expense), net

    (0.1 )     0.2  

Income (loss) from continuing operations before income taxes

    (2.8 )     7.6  

Income tax expense (benefit)

    (0.9 )     1.8  

Income (loss) from continuing operations

    (1.9 )     5.8  

Income from discontinued operations, net of income taxes

    -       0.0  

Non-controlling interest

    -       0.0  

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

    (1.9 )     5.8  

 

Quarter Ended March 31, 2022 Compared to the Quarter Ended March 31, 2021

 

Sales

 

For the quarter ended March 31, 2022, we reported consolidated sales of $206.9 million, compared to $197.9 million for the first quarter of 2021, an increase of $9.0 million or 4.5%. This increase reflects favorable pricing implemented to offset material and labor inflation, and strong demand in our Specialty Vehicles (“SV”) segment, partially offset by lower sales volumes in our Fleet Vehicles and Services (“FVS”) segment due to supply chain constraints.

 

Cost of Products Sold

 

Cost of products sold was $181.0 million in the first quarter of 2022, compared to $157.9 million for the first quarter of 2021, an increase of $23.1 million or 14.6%. Cost of products sold increased $15.6 million due to higher material and labor costs, $6.2 million due to lower productivity in locations impacted by supply chain constraints, and $6.0 million in mix and other costs, partially offset by lower volumes of $4.7 million.

 

Gross Profit

 

Gross profit was $25.9 million for the first quarter of 2022, compared to $40.0 million for the first quarter of 2021, a decrease of $14.1 million or (35.2%). Gross profit decreased $15.6 million due to higher material and labor costs, $6.2 million due to lower productivity in locations impacted by supply chain constraints and $3.2 million in volume and other costs, partially offset by price and mix increases of $10.9 million.

 

 

Operating Expenses

 

Operating expenses were $31.5 million for the first quarter of 2022, compared to $25.3 million for the first quarter of 2021, an increase of $6.2 million or 24.3%. Research and development expense for the first quarter of 2022 was $4.9 million, compared to $0.8 million in the first quarter of 2021, an increase of $4.1 million primarily related to the electric vehicle development initiatives. Selling, general and administrative expense was $26.6 million in the first quarter of 2022, compared to $24.5 million for the first quarter of 2021, an increase of $2.1 million, primarily driven by an increase in compensation expense related to growth and expenses related to electric vehicle development initiatives.

 

Other Income (Expense)

 

Interest expense was $0.2 million for the first quarter of 2022, compared to income of $0.2 million for the first quarter of 2021, driven by higher borrowing and finance lease costs. Other expense was insignificant for the first quarter of 2022, compared to income of $0.2 million for the first quarter of 2021. 

 

Income Tax Expense (Benefit)

 

Our effective income tax rate was a tax benefit of (32.9%) in the first quarter of 2022, compared to a tax expense of 23.2% in the first quarter of 2021. The effective tax rate for 2022 reflects the impact of current statutory income tax rates on our Loss from continuing operations before income taxes combined with a discrete tax benefit related to the difference in stock compensation expense recognized for financial reporting purposes and tax purposes upon vesting.

 

The effective tax rate for the three months ended March 31, 2022 compares unfavorably to the comparable period in 2021 as both quarters experienced a discrete tax benefit related to stock compensation expense. In 2022 this discrete tax benefit was recorded together with a tax benefit incurred from the Loss from continuing operations before income taxes and increased the effective tax rate, whereas in 2021 the benefit reduced the tax expense recorded from Income from continuing operations before income taxes, reducing the effective tax rate.

 

Income (Loss) from Continuing Operations

 

Income (loss) from continuing operations for the first quarter of 2022 decreased by $15.4 million to a loss of ($3.9) million compared to income of $11.5 million for the first quarter of 2021. On a diluted per share basis, Income from continuing operations decreased $0.43 to a loss per share of ($0.11) for the first quarter of 2022 compared to earnings of $0.32 per share for the first quarter of 2021. Driving this increase were the factors noted above.

 

Income from Discontinued Operations

 

Income from discontinued operations, net of income taxes for the first quarter of 2022 decreased by $0.1 million to none compared to $0.1 million for the first quarter of 2021, primarily attributable to 2021 winddown activities subsequent to the ERV divestiture not repeated in 2022.

 

Adjusted EBITDA

 

Our consolidated Adjusted EBITDA for the first quarter of 2022 was ($0.6) million, compared to $19.2 million for the first quarter of 2021, a decrease of $19.8 million or (103.4%).

 

The table below describes the changes in Adjusted EBITDA for the three months ended March 31, 2022 compared to the same period for 2021 (in millions):

 

Adjusted EBITDA three months ended March 31, 2021

  $ 19.2  

Product pricing and mix

    10.9  

Material and labor costs net of productivity

    (21.8 )
EV development costs     (4.4 )
Sales volume and other     (3.2 )

General and administrative costs and other

    (1.3 )

Adjusted EBITDA three months ended March 31, 2022

  $ (0.6 )

 

 

Order Backlog

 

As of October 1, 2021, the composition of both reportable segments changed due to an internal reorganization as certain businesses previously managed and reported within FVS are now a part of SV. Corresponding items of segment information for earlier periods have been recast.

 

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

 

   

March 31,

2022

   

March 31,

2021

 

Fleet Vehicles and Services

  $ 1,148,700     $ $     585,019  

Specialty Vehicles

    123,999        81,481  

Total consolidated

  $ 1,272,699     $ 666,500  

 

The consolidated backlog at March 31, 2022, totaled $1,272.7 million, up 91.0%, compared to $666.5 million at March 31, 2021, which reflects strong demand for vehicles across the Company’s product portfolio.

 

Our Fleet Vehicles and Services backlog increased by $563.7 million, or 96.4%, which reflects strong demand for vehicles across the segment’s walk in van, Velocity and Truck Body products. Our Specialty Vehicles segment backlog increased by $42.5 million, or 52.2%, due to increased motor home chassis and service truck body 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 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.

 

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 Income from continuing operations to Adjusted EBITDA for the periods indicated.

 

Financial Summary (Non-GAAP)

Consolidated

(In thousands, Unaudited)

 

   

Three Months Ended

 
   

March 31,

 
   

2022

   

2021

 

Income from continuing operations

  $ (3,852 )   $ 11,530  

Net (income) attributable to non-controlling interest

    -       (35 )

Add (subtract):

               

Interest expense (income)

    154       (170 )

Depreciation and amortization expense

    2,969       2,571  

Income tax expense (benefit)

    (1,885 )     3,490  

Restructuring and other related charges

    107       -  

Acquisition related expenses and adjustments

    216       143  

Non-cash stock based compensation expense

    1,648       1,642  

Adjusted EBITDA

  $ (643 )   $ 19,171  

 

Our Segments

 

As of October 1, 2021, the composition of both reportable segments changed due to an internal reorganization as certain businesses previously managed and reported within FVS are now a part of SV. Corresponding items of segment information for earlier periods have been recast.

 

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 10 – 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,

 
   

2022

   

2021

 
   

Amount

   

Percentage

   

Amount

   

Percentage

 
                                 

Sales

  $ 112,697       100.0 %   $  123,824       100.0

%

Adjusted EBITDA

    (871 )     (0.8 %)     17,866       14.4

%

 

Sales in our FVS segment were $112.7 million for the first quarter of 2022, compared to $123.8 million for the first quarter of 2021, a decrease of $11.1 million or (9.0%). This decrease was primarily attributable to a sales volume decrease due to supply chain constraints, partially offset by pricing actions.

 

Adjusted EBITDA in our FVS segment for the first quarter of 2022 was ($0.9) million compared to $17.9 million for the first quarter of 2021, a decrease of $18.7 million or (104.9%). This decrease was primarily attributable to $8.1 million in material and labor inflation, $6.6 million lower productivity due to supply chain constraints, $6.5 million in manufacturing and other costs. These costs were partially offset by pricing and mix of $2.5 million.

 

 

Specialty Vehicles

 

   

Financial Data

 
   

(Dollars in Thousands)

 
   

Three Months Ended

March 31,

 
   

2022

   

2021

 
   

Amount

   

Percentage

   

Amount

   

Percentage

 
                                 

Sales

  $ 94,186       100.0 %   $ 74,064       100.0

%

Adjusted EBITDA

    10,099       10.7 %     7,360       9.9

%

 

Sales in our SV segment were $94.2 million in the first quarter of 2022, compared to $74.1 million for the first quarter of 2021, an increase of $20.1 million or 27.2%. This increase was due to strong sales volume growth coupled with pricing actions to offset material and labor inflation.

 

Adjusted EBITDA for our SV segment for the first quarter of 2022 was $10.1 million, compared to $7.4 million for the first quarter of 2021, an increase of $2.7 million or 37.2%. This increase was primarily attributable to favorable pricing and mix of $8.8 million, volume and productivity of $2.6 million, offset by material and labor costs of $7.6 million and increased operating expenses of $1.1 million.

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash Flows

 

Cash and cash equivalents decreased by $33.5 million from December 31, 2022, to a balance of $3.7 million as of March 31, 2022. These funds, in addition to cash generated from future operations and availability under our existing credit facilities, are expected to be sufficient to finance our foreseeable liquidity and capital needs, including potential future acquisitions.

 

Cash Flow from Operating Activities

 

We used $27.8 million of cash from operating activities during the quarter ended March 31, 2022, an increase in cash used of $26.5 million from $1.3 million of cash used by operating activities during the quarter ended March 31, 2021. Cash flow from operating activities decreased due to a $15.1 million decrease in net income (loss) adjusted for non-cash charges to operations and a $11.4 million decrease in the change in net working capital. The change in net working capital is primarily attributable to a $12.0 million decrease in the change in inventories, a $19.9 decrease in the change in payables, $4.7 million decrease in other assets and liabilities, partially offset by a $25.2 million increase in the change in receivables and contract assets.

 

As of March 31, 2022, receivables decreased by $6.5 million compared to the prior year end, primarily due to improved timing of cash receipts. Inventories increased by $24.1 million primarily due to increased raw material inventories relative to finished goods due to industry wide supply chain interruptions. Payables increased by $7.5 million primarily due to increased sales partially offset by the Company’s continued focus on extending payment terms with suppliers. Contract assets increased $11.5 million primarily due to increased production and industry wide supply chain constraints.

 

Cash Flow from Investing Activities

 

We used $5.5 million in investing activities during the quarter ended March 31, 2022, an insignificant decrease compared to the $5.5 million used during the quarter ended March 31, 2021. The decrease in cash used in investing activities is primarily due to a $0.4 million inflow related to business acquisition in the first quarter of 2021 not repeated in the first quarter of 2022 offset by a $0.4 million decrease in the purchases of property, plant and equipment.

 

Cash Flow from Financing Activities

 

We used $0.2 million of cash through financing activities during the quarter March 31, 2022, compared to $4.1 million used during the quarter ended March 31, 2021. The $3.9 million decrease in cash used in financing activities is primarily attributable to $10.0 million increased payments on long-term debt, $1.0 million increase in the payment of dividends, $23.4 million increase in the purchase and retirement of common stock, $6.6 million increase in the issuance and vesting of stock incentive awards, partially offset by $45.0 million of increased proceeds from long-term debt.

 

 

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. ("Wells Fargo"), as administrative agent, and the lenders party thereto consisting of Wells Fargo, JPMorgan Chase Bank, N.A., PNC Bank, 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.

 

Under the Credit Agreement, we may borrow up to $400.0 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 credit facility is also available for the issuance of letters of credit of up to $20.0million and swing line loans of up to $10.0 million, subject to certain limitations and restrictions. 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 the margin was 1.45% (or one-month LIBOR plus 1.00%) at March 31, 2022. 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 March 31, 2022 and December 31, 2021, we had outstanding letters of credit totaling $1.1 million and $0.8 million, respectively, related to our workers’ compensation insurance.

 

Under the terms of our Credit Agreement, available borrowings (exclusive of outstanding borrowings) totaled $272.0 million and $376.8 million at March 31, 2022 and December 31, 2021, 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, 2022 and December 31, 2021, we were in compliance with all 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. In the first quarter of 2022, we repurchased 607,306 shares for $26.8 million. 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 2022 and 2021 as shown in the table below.

 

Date dividend declared

 

Record date

 

Payment date

 

Dividend per share ($)

 
Feb. 16, 2022   Feb. 17, 2022   Mar. 17, 2022   $ 0.050  
Nov. 5, 2021   Nov. 6, 2021   Dec. 16, 2021   $ 0.025  
Aug. 6, 2021   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  

  

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. 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, 2022, we had $35.0 million debt outstanding under our revolving line of credit agreement. An increase of 100 basis points in interest rates would result in $0.4 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.

 

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 4 – Debt" of this Form 10-Q. On July 27, 2017, the Financial Conduct Authority in the U.K. announced that it would phase out LIBOR by the end of 2021. On November 30, 2020, the ICE Benchmark Administration Limited (ICE) announced plans to delay the phase out of LIBOR to June 30, 2023. The U.S. Federal Reserve is considering replacing U.S. dollar LIBOR with a newly created index called the Secured Overnight Funding Rate (SOFR), a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities. Our credit facility provides for the transition to a replacement for LIBOR, and it also provides for an alternative to LIBOR. When LIBOR ceases to exist, our interest expense is not expected to increase materially. 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. 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, 2022.

 

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, 2022, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

 

Changes in Internal Control over Financial Reporting

 

Despite the fact that many of our employees are working remotely due to the COVID-19 pandemic, these remote work arrangements have not resulted in changes in our internal controls over financial reporting (as defined in Rule 13(a)-15(f) or Rule 15d-15(f) of the Exchange Act); however, we are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.

 

 

There have been no changes during the quarter ended March 31, 2022, 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 8 – 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, 2021, 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, 2021 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. In the first quarter of 2022, we repurchased 607,306 shares for $26.8 million. We believe that we have sufficient resources to fund any potential stock buyback in which we may engage.

 

Period

 

Total
Number of
Shares
Purchased

   

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(1)

(In millions)

 

January 1 to January 31

    408,994     $ 46.14       408,994     $ -  

February 1 to February 28

    183,006       40.98       21,108       249.2  

March 1 to March 31

    225,215       39.54       177,204       242.1  

Total

    817,215               607,306          

 

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

 

During the quarter ended March 31, 2022, 209,909 shares were delivered by associates in satisfaction of tax withholding obligations that occurred upon the vesting of restricted shares.

 

 

Item 6.

Exhibits.

 

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

 

Exhibit No.

 

Document

     
10.8.1   Form of Performance Share Unit Agreement (2022 LTI)*
     
10.9.1   Form of Restricted Stock Unit Agreement (2022 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 28, 2022

THE SHYFT GROUP, INC.

 

 

 

 

 

 

 

By

/s/ Jonathan C. Douyard

 

 

Jonathan C. Douyard
Chief Financial Officer

 

29