The Shyft (SHYF) - 2021 Q3 - Quarterly Report

FORWARD-LOOKING STATEMENTS This section cautions that forward-looking statements involve risks and uncertainties, and actual results may differ materially - This report contains forward-looking statements that involve risks, uncertainties, and assumptions, which may cause actual results to differ materially from those expressed or forecasted. Investors should not place undue reliance on these statements, and the Company does not undertake to update or revise them[12][13] PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents unaudited condensed consolidated financial statements and detailed notes for the specified reporting periods Condensed Consolidated Balance Sheets This section provides a snapshot of the Company's assets, liabilities, and shareholders' equity at specific dates Condensed Consolidated Balance Sheets (Unaudited, In thousands) | Item | September 30, 2021 | December 31, 2020 | | :----------------------------------- | :------------------- | :------------------- | | ASSETS | | | | Total current assets | $219,080 | $156,207 | | Property, plant and equipment, net | $57,374 | $45,734 | | Goodwill | $48,881 | $49,481 | | Intangible assets, net | $53,832 | $56,386 | | TOTAL ASSETS | $430,275 | $359,049 | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | Total current liabilities | $139,838 | $93,363 | | Total liabilities | $183,159 | $158,890 | | Total shareholders' equity | $247,116 | $200,159 | | TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $430,275 | $359,049 | - Total assets increased by $71.2 million (19.8%) from December 31, 2020, to September 30, 2021, primarily driven by increases in current assets, particularly contract assets and inventories[15] - Total liabilities increased by $24.3 million (15.3%) over the same period, with current liabilities seeing a significant rise[15] - Shareholders' equity grew by $46.9 million (23.5%), indicating improved financial health[15] Condensed Consolidated Statements of Operations This section details the Company's revenues, costs, and net income over specific reporting periods Condensed Consolidated Statements of Operations (Unaudited, In thousands, except per share data) | Item | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :------------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Sales | $272,622 | $203,473 | $714,492 | $504,391 | | Cost of products sold | $216,564 | $152,723 | $566,542 | $393,335 | | Gross profit | $56,058 | $50,750 | $147,950 | $111,056 | | Operating income | $28,108 | $26,401 | $65,001 | $38,026 | | Income from continuing operations | $20,999 | $19,375 | $49,482 | $29,983 | | Net income attributable to The Shyft Group Inc. | $20,922 | $18,408 | $48,461 | $24,858 | | Basic earnings per share | $0.59 | $0.52 | $1.37 | $0.70 | | Diluted earnings per share | $0.58 | $0.51 | $1.34 | $0.69 | - Sales for the three months ended September 30, 2021, increased by 34.0% year-over-year, and for the nine months, sales increased by 41.7% year-over-year, reflecting strong demand[17] - Net income attributable to The Shyft Group Inc. increased by 13.7% for the three-month period and 95.0% for the nine-month period year-over-year[17] Condensed Consolidated Statements of Cash Flows This section outlines the Company's cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (Unaudited, In thousands) | Item | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :----------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $42,323 | $20,993 | | Net cash provided by (used in) investing activities | $(17,318) | $46,827 | | Net cash used in financing activities | $(31,451) | $(43,768) | | Net increase (decrease) in cash and cash equivalents | $(6,446) | $24,052 | | Cash and cash equivalents at end of period | $14,549 | $43,401 | - Net cash provided by operating activities more than doubled to $42.3 million for the nine months ended September 30, 2021, compared to the prior year[20] - Investing activities shifted from a net cash inflow of $46.8 million in 2020 (due to business sale) to a net cash outflow of $17.3 million in 2021, primarily due to increased capital expenditures[20] - Net cash used in financing activities decreased by $12.3 million, driven by lower debt payments[20] Condensed Consolidated Statement of Shareholders' Equity This section presents changes in the Company's shareholders' equity over the reporting period Condensed Consolidated Statement of Shareholders' Equity (Unaudited, In thousands) | Item | Balance at January 1, 2021 | Balance at September 30, 2021 | | :----------------------------------- | :------------------------- | :---------------------------- | | Total Shareholders' Equity | $200,159 | $247,116 | Key Changes (Nine Months Ended September 30, 2021): | Item | Amount (in thousands) | | :----------------------------------- | :-------------------- | | Net income | $49,563 | | Non-cash stock based compensation expense | $6,571 | | Purchase and retirement of common stock | $(3,348) | | Dividends declared | $(2,786) | | Issuance of common stock and tax impact of stock incentive plan | $(3,043) | - Total shareholders' equity increased by $46.9 million from January 1, 2021, to September 30, 2021, primarily due to net income and non-cash stock-based compensation, partially offset by common stock repurchases and dividends[24][25] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION This note describes the Company's business, recent acquisitions, and the basis for financial statement presentation - The Shyft Group, Inc. is a niche market leader in specialty vehicle manufacturing and assembly for commercial and recreational vehicle industries[27] - The Company's operations include walk-in vans, truck bodies, upfit equipment, luxury Class A diesel motor home chassis, and contract manufacturing/assembly services, along with replacement parts and repair services[27] - The COVID-19 pandemic's full impact on financial condition, liquidity, and future operations remains uncertain, though all facilities were at full or modified production levels since Q3 2020[29][30] - On October 1, 2020, the Company acquired F3 MFG Inc. (DuraMag), a leading aluminum truck body and accessory manufacturer, enhancing its position as a national service body manufacturer within the Specialty Vehicle segment[31] - An immaterial revision was made to previously issued condensed consolidated financial statements for the period ended September 30, 2020, related to errors in accounting for the ERV business divestiture[35][36] NOTE 2 – DISCONTINUED OPERATIONS This note details the financial impact of the Company's emergency response vehicle (ERV) business divestiture - The Company completed the sale of its emergency response vehicle (ERV) business on February 1, 2020, for $55.0 million cash[39] Income (loss) from discontinued operations (Unaudited, In thousands) | Item | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :------------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income (loss) from discontinued operations | $0 | $(926) | $81 | $(4,947) | - The Company recognized a loss on sale of $763 thousand and $2,901 thousand in the three and nine months ended September 30, 2020, respectively, as part of discontinued operations[39] NOTE 3 – ACQUISITION ACTIVITIES This note provides details on the acquisition of DuraMag, including purchase price and asset allocation - On October 1, 2020, the Company acquired DuraMag for a final purchase price of $17.299 million, after adjustments for net working capital and indemnity claims[41][44] - The acquisition resulted in $5.401 million in goodwill, expected to be tax-deductible, and $5.590 million in identifiable intangible assets including customer relationships, trade names, unpatented technology, and non-competition agreements[42][45] DuraMag Acquisition: Final Purchase Price Allocation (As of Sep 30, 2021, In thousands) | Item | Amount | | :----------------------------------- | :------- | | Total assets acquired | $28,398 | | Total liabilities assumed | $(11,099) | | Total purchase price | $17,299 | DuraMag Acquisition: Intangible Assets Assigned (In thousands) | Intangible Asset | Amount | Useful Life | | :----------------------- | :------- | :---------- | | Customer relationships | $2,200 | 15 Years | | Trade names and trademarks | $2,420 | Indefinite | | Unpatented technology | $540 | 9 Years | | Non-competition agreements | $430 | 6 Years | | Total | $5,590 | | NOTE 4 – INVENTORIES This note details the composition and changes in the Company's inventory balances Inventories, Net (In thousands) | Item | September 30, 2021 | December 31, 2020 | | :----------------------------------- | :------------------- | :------------------- | | Finished goods | $5,119 | $4,200 | | Work in process | $7,078 | $1,908 | | Raw materials and purchased components | $72,176 | $46,576 | | Reserve | $(2,472) | $(6,256) | | Total inventories, net | $81,901 | $46,428 | - Total inventories, net, increased by $35.473 million (76.4%) from December 31, 2020, to September 30, 2021, primarily driven by a significant increase in raw materials and purchased components[48] NOTE 5 – DEBT This note outlines the Company's short-term and long-term debt obligations and credit facility status Short-term Debt (In thousands) | Item | September 30, 2021 | December 31, 2020 | | :----------------------------------- | :------------------- | :------------------- | | Chassis pool agreements | $3,995 | $6,503 | | Total short-term debt | $3,995 | $6,503 | - Chassis pool agreements, a non-cash arrangement, decreased by $2.508 million (38.6%) from December 31, 2020, to September 30, 2021[49][51] Long-term Debt (In thousands) | Item | September 30, 2021 | December 31, 2020 | | :----------------------------------- | :------------------- | :------------------- | | Line of credit revolver | $0 | $22,400 | | Finance lease obligation | $355 | $473 | | Other | $577 | $766 | | Total debt | $932 | $23,639 | | Less current portion of long-term debt | $(238) | $(221) | | Total long-term debt | $694 | $23,418 | - The Company had no outstanding debt under its $175 million secured revolving credit facility as of September 30, 2021, a significant reduction from $22.4 million at December 31, 2020[52][55] - Available borrowings under the credit agreement increased to $169.2 million at September 30, 2021, from $125.8 million at December 31, 2020[56] - The Company was in compliance with all covenants in its Credit Agreement as of September 30, 2021, and December 31, 2020[56] NOTE 6 – REVENUE This note provides details on contract assets and liabilities, and disaggregated revenue by geography and timing Contract Assets and Liabilities (Unaudited, In thousands) | Item | September 30, 2021 | September 30, 2020 | | :----------------------------------- | :------------------- | :------------------- | | Contract Assets, end of period | $42,459 | $9,667 | | Contract Liabilities, end of period | $2,148 | $650 | - Contract assets significantly increased to $42.459 million at September 30, 2021, from $9.667 million at September 30, 2020, reflecting increased production and supply chain constraints[57] Disaggregated Revenue by Primary Geographical Market (Three Months Ended Sep 30, 2021, In thousands) | Geographical Market | FVS | SV | Total Reportable Segments | Other | Total Sales | | :------------------------ | :------ | :----- | :------------------------ | :---- | :---------- | | United States | $194,067 | $74,077 | $268,144 | $0 | $268,144 | | Other | $4,473 | $5 | $4,478 | $0 | $4,478 | | Total sales | $198,540 | $74,082 | $272,622 | $0 | $272,622 | Disaggregated Revenue by Timing of Recognition (Three Months Ended Sep 30, 2021, In thousands) | Timing of Revenue Recognition | FVS | SV | Total Reportable Segments | Other | Total Sales | | :-------------------------------- | :------ | :----- | :------------------------ | :---- | :---------- | | Products transferred at a point in time | $11,773 | $47,462 | $59,235 | $0 | $59,235 | | Products and services transferred over time | $186,767 | $26,620 | $213,387 | $0 | $213,387 | | Total sales | $198,540 | $74,082 | $272,622 | $0 | $272,622 | - The aggregate amount of transaction price allocated to remaining performance obligations is $758.518 million for FVS and $94.042 million for SV, with most revenue expected within one year[57] NOTE 7 – PROPERTY, PLANT AND EQUIPMENT This note details the Company's property, plant, and equipment, including changes and depreciation expense Property, Plant and Equipment, Net (In thousands) | Item | September 30, 2021 | December 31, 2020 | | :----------------------------------- | :------------------- | :------------------- | | Land and improvements | $8,721 | $8,721 | | Buildings and improvements | $44,810 | $40,077 | | Plant machinery and equipment | $49,076 | $41,054 | | Furniture and fixtures | $18,588 | $16,259 | | Vehicles | $2,590 | $2,404 | | Construction in process | $10,986 | $8,724 | | Subtotal | $134,771 | $117,239 | | Less accumulated depreciation | $(77,397) | $(71,505) | | Total property, plant and equipment, net | $57,374 | $45,734 | - Net property, plant and equipment increased by $11.640 million (25.4%) from December 31, 2020, to September 30, 2021, driven by increases in buildings, machinery, and construction in process[61] - Depreciation expense for the nine months ended September 30, 2021, was $5.778 million, down from $8.440 million in the prior year, partly due to accelerated depreciation and write-off of an ERP system in 2020[62] NOTE 8 – LEASES This note provides information on the Company's lease expenses, terms, and liabilities Total Lease Expense (Unaudited, In thousands) | Item | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :----------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Operating leases | $2,048 | $1,551 | $5,984 | $4,657 | | Short-term leases | $135 | $75 | $301 | $159 | | Total lease expense | $2,183 | $1,626 | $6,285 | $4,816 | - Total lease expense increased by $0.557 million (34.3%) for the three months and $1.469 million (30.5%) for the nine months ended September 30, 2021, compared to the prior year[64] Weighted Average Lease Terms and Discount Rates (Nine Months Ended Sep 30) | Item | 2021 | 2020 | | :----------------------------------- | :--- | :--- | | Weighted average remaining lease term of operating leases (in years) | 9.2 | 7.7 | | Weighted average discount rate of operating leases | 3.0% | 3.4% | Maturities of Operating Lease Liabilities (As of Sep 30, 2021, In thousands) | Years ending December 31: | Amount | | :------------------------ | :------- | | 2021 (excluding 9 months) | $2,022 | | 2022 | $7,607 | | 2023 | $7,342 | | 2024 | $7,014 | | 2025 | $6,247 | | Thereafter | $21,636 | | Total lease payments | $51,868 | | Less: imputed interest | $(6,704) | | Total lease liabilities | $45,164 | NOTE 9 – COMMITMENTS AND CONTINGENT LIABILITIES This note discusses legal proceedings, warranty accruals, and other contingent obligations - The Company is involved in various lawsuits and claims in the normal course of business, but management believes the financial impact will not be material[67] Changes in Accrued Warranty (Unaudited, In thousands) | Item | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :----------------------------------- | :----------------------------- | :----------------------------- | | Balance of accrued warranty at January 1 | $5,633 | $5,694 | | Provisions for current period sales | $2,720 | $2,687 | | Cash settlements | $(3,052) | $(2,411) | | Changes in liability for pre-existing warranties | $1,958 | $(406) | | Acquired | $289 | $0 | | Balance of accrued warranty at September 30 | $7,548 | $5,564 | - Accrued warranty increased to $7.548 million at September 30, 2021, from $5.633 million at January 1, 2021, reflecting provisions for current sales and changes in pre-existing warranties[70] - The liquidation of the Spartan-Gimaex joint venture is substantially complete, with no expected material impact on future operating results[71] - The Company responded to an EPA information request regarding potential failure to affix emissions labels on vehicles; an estimate of possible penalties or loss cannot be made at this time[72] NOTE 10 – TAXES ON INCOME This note provides information on the Company's effective income tax rates and contributing factors Effective Income Tax Rate | Period | 2021 | 2020 | | :----------------------------------- | :--- | :--- | | Three Months Ended September 30 | 24.8% | 27.2% | | Nine Months Ended September 30 | 24.4% | 19.1% | - The effective tax rate for the nine months ended September 30, 2021 (24.4%) was higher than the prior year (19.1%) due to a favorable adjustment in 2020 from the CARES Act, which allowed the carryback of tax net operating losses (NOLs) to years with a 35% federal corporate income tax rate[75] - The 2021 effective tax rates are higher than the U.S. statutory rate of 21% primarily due to state income taxes[73] NOTE 11 – BUSINESS SEGMENTS This note presents financial information for the Company's two reportable segments: FVS and SV - The Company operates in two reportable segments: Fleet Vehicles and Services (FVS) and Specialty Vehicles (SV)[76] - Segment performance is evaluated based on Adjusted EBITDA, which excludes infrequent or non-indicative items and certain non-cash expenses[77] Segment Sales (Unaudited, In thousands) | Segment | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :----------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | FVS Total sales | $198,540 | $145,190 | $498,486 | $378,116 | | SV Total sales | $74,082 | $58,283 | $216,006 | $126,275 | | Consolidated Total sales | $272,622 | $203,473 | $714,492 | $504,391 | Segment Adjusted EBITDA (Unaudited, In thousands) | Segment | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :----------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | FVS Adjusted EBITDA | $36,813 | $33,237 | $83,310 | $68,625 | | SV Adjusted EBITDA | $5,827 | $7,183 | $21,480 | $12,123 | | Consolidated Adjusted EBITDA | $33,740 | $32,593 | $81,481 | $60,319 | Reconciliation of Income from Continuing Operations to Adjusted EBITDA (Unaudited, In thousands) | Item | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :----------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Income from continuing operations | $20,999 | $19,375 | $49,482 | $29,983 | | Interest expense | $253 | $11 | $310 | $1,202 | | Depreciation and amortization expense | $2,982 | $2,978 | $8,312 | $10,838 | | Income tax expense | $6,910 | $7,253 | $15,952 | $7,084 | | Restructuring and other related charges | $0 | $303 | $505 | $1,857 | | Acquisition related expenses and adjustments | $594 | $650 | $808 | $922 | | Non-cash stock based compensation expense | $2,079 | $2,064 | $6,571 | $6,181 | | Loss from liquidation of JV | $0 | $0 | $643 | $0 | | Loss from write-off of construction in process | $0 | $0 | $0 | $2,430 | | Adjusted EBITDA | $33,740 | $32,593 | $81,481 | $60,319 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section discusses financial condition, operational results, key performance indicators, and strategic developments Company Overview and Strategy This section provides an overview of the Company's business and its strategic focus - The Shyft Group, Inc. is a Michigan-based specialty vehicle manufacturer for commercial and recreational vehicle industries, offering products like walk-in vans, truck bodies, motor home chassis, and related services[85] - The Company's strategy focuses on product innovation, building lasting customer relationships, and maintaining an agile business structure to respond to market needs and capitalize on strategic opportunities, such as expansion into last-mile delivery and equipment upfit services[86] Recent Developments This section highlights recent events, including the impact of the COVID-19 pandemic and strategic acquisitions - The COVID-19 pandemic continues to impact macroeconomic conditions, but the Company's plants have been at full or modified production levels since Q3 2020, with ongoing measures to ensure associate safety[87][88] - The acquisition of DuraMag on October 1, 2020, significantly expanded the Company's aluminum truck body offerings, elevating its position as a national service body manufacturer within the Specialty Vehicle segment[89] Executive Overview This section summarizes key financial highlights and product innovations for the reporting period Key Financial Highlights (Three Months Ended Sep 30, 2021, In millions, except per share data) | Metric | 2021 | 2020 | Change (%) | | :----------------------------------- | :----- | :----- | :--------- | | Revenue | $272.6 | $203.5 | 34.0% | | Gross Margin | 20.6% | 24.9% | (4.3) pts | | Operating expense | $28.0 | $24.3 | 14.8% | | Operating income | $28.1 | $26.4 | 6.4% | | Income from continuing operations | $21.0 | $19.4 | 8.2% | | Diluted EPS from continuing operations | $0.58 | $0.54 | 7.4% | | Order backlog (as of Sep 30) | $852.6 | $280.6 | 203.8% | - The Company introduced Shyft Innovations™ for EV chassis development, the Velocity F2™ (Class 2 walk-in van on Ford Transit), and the Velocity M3™ (walk-in van on Mercedes-Benz Sprinter with automatic access system)[91] - Expansion into the equipment upfit market and introduction of Royal Truck Body's new Severe Duty body and the K4 605 motorhome chassis with Spartan Connected Coach™ technology are key product innovations[91] Results of Operations This section analyzes the Company's financial performance, including sales, gross profit, and operating expenses Quarter Ended September 30, 2021 Compared to the Quarter Ended September 30, 2020 This section compares the Company's consolidated financial performance for the three months ended September 30, 2021, and 2020 Consolidated Financial Performance (Three Months Ended Sep 30, In millions, except per share data) | Metric | 2021 | 2020 | Change ($) | Change (%) | | :----------------------------------- | :----- | :----- | :--------- | :--------- | | Sales | $272.6 | $203.5 | $69.1 | 34.0% | | Cost of products sold | $216.6 | $152.7 | $63.9 | 41.8% | | Gross profit | $56.1 | $50.8 | $5.3 | 10.5% | | Operating expenses | $28.0 | $24.3 | $3.7 | 14.8% | | Operating income | $28.1 | $26.4 | $1.7 | 6.4% | | Income from continuing operations | $21.0 | $19.4 | $1.6 | 8.2% | | Diluted EPS from continuing operations | $0.58 | $0.54 | $0.04 | 7.4% | | Adjusted EBITDA | $33.7 | $32.6 | $1.1 | 3.5% | - Sales growth was driven by strong demand, acquired business, and favorable pricing, offsetting lower sales in the prior COVID-19 impacted period[94] - Gross profit increase was primarily due to higher sales volume and productivity, partially offset by higher material, labor, and unfavorable product mix[96] - Operating expenses increased due to higher R&D for EV development and increased compensation and professional services, partially offset by cost reduction actions in the prior year[98] - Income from discontinued operations improved by $0.9 million, moving from a loss to zero, due to the completion of the ERV business sale[102] Order Backlog This section provides an overview of the Company's order backlog by reportable segment Order Backlog by Reportable Segment (As of Sep 30, In thousands) | Segment | 2021 | 2020 | Change ($) | Change (%) | | :----------------------------------- | :------- | :------- | :--------- | :--------- | | Fleet Vehicles and Services | $758,518 | $228,870 | $529,648 | 231.4% | | Specialty Vehicles | $94,042 | $51,756 | $42,286 | 81.7% | | Total consolidated | $852,560 | $280,626 | $571,934 | 203.8% | - Consolidated order backlog more than tripled, increasing by 203.8% to $852.6 million at September 30, 2021, reflecting strong demand across the product portfolio[105] - FVS segment backlog saw a substantial increase of 231.4%, while SV segment backlog grew by 81.7% due to increased motor home chassis and service truck body orders[106] Nine Months Ended September 30, 2021 Compared to the Nine Months Ended September 30, 2020 This section compares the Company's consolidated financial performance for the nine months ended September 30, 2021, and 2020 Consolidated Financial Performance (Nine Months Ended Sep 30, In millions, except per share data) | Metric | 2021 | 2020 | Change ($) | Change (%) | | :----------------------------------- | :----- | :----- | :--------- | :--------- | | Sales | $714.5 | $504.4 | $210.1 | 41.7% | | Cost of products sold | $566.5 | $393.3 | $173.2 | 44.0% | | Gross profit | $148.0 | $111.1 | $36.9 | 33.2% | | Operating expenses | $82.9 | $73.0 | $9.9 | 13.6% | | Operating income | $65.0 | $38.0 | $27.0 | 71.1% | | Income from continuing operations | $49.5 | $30.0 | $19.5 | 65.0% | | Diluted EPS from continuing operations | $1.34 | $0.83 | $0.51 | 61.4% | | Adjusted EBITDA | $81.5 | $60.3 | $21.2 | 35.1% | - Sales increased significantly due to strong demand and acquired business, contrasting with lower sales in the prior COVID-19 impacted period[108] - Gross profit growth was driven by higher sales volume and productivity, partially offset by increased material/labor costs, pre-production costs, and unfavorable product mix/pricing[110] - Operating expenses rose due to increased R&D for EV initiatives and higher compensation/professional services, partially offset by the non-recurrence of accelerated ERP depreciation from 2020[111] - Income from discontinued operations improved by $5.0 million, moving from a loss to a slight income, following the ERV business sale[116] Reconciliation of Non-GAAP Financial Measures This section reconciles non-GAAP financial measures, such as Adjusted EBITDA, to their most directly comparable GAAP measures - Adjusted EBITDA is presented as a non-GAAP measure to provide a supplemental understanding of performance by excluding infrequent or non-indicative items and certain non-cash expenses[118][119] - Management uses Adjusted EBITDA to evaluate segment performance, allocate resources, and determine annual and long-term incentive compensation[120] Reconciliation of Income from Continuing Operations to Adjusted EBITDA (Unaudited, In thousands) | Item | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :----------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Income from continuing operations | $20,999 | $19,375 | $49,482 | $29,983 | | Net (income) attributable to non-controlling interest | $(77) | $(41) | $(1,102) | $(178) | | Interest expense | $253 | $11 | $310 | $1,202 | | Depreciation and amortization expense | $2,982 | $2,978 | $8,312 | $10,838 | | Income tax expense | $6,910 | $7,253 | $15,952 | $7,084 | | Restructuring and other related charges | $0 | $303 | $505 | $1,857 | | Acquisition related expenses and adjustments | $594 | $650 | $808 | $922 | | Non-cash stock based compensation expense | $2,079 | $2,064 | $6,571 | $6,181 | | Loss from liquidation of JV | $0 | $0 | $643 | $0 | | Loss from write-off of construction in process | $0 | $0 | $0 | $2,430 | | Adjusted EBITDA | $33,740 | $32,593 | $81,481 | $60,319 | Our Segments This section provides a detailed analysis of the financial performance of the Company's Fleet Vehicles and Services (FVS) and Specialty Vehicles (SV) segments Fleet Vehicles and Services This section details the financial performance of the Fleet Vehicles and Services (FVS) segment FVS Segment Performance (Unaudited, In thousands) | Metric | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :----------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Sales | $198,540 | $145,190 | $498,486 | $378,116 | | Adjusted EBITDA | $36,813 | $33,237 | $83,310 | $68,625 | | Adjusted EBITDA Margin | 18.5% | 22.9% | 16.7% | 18.1% | - FVS sales increased by 36.7% for the three months and 31.8% for the nine months ended September 30, 2021, driven by sales volume and favorable pricing[126][128] - FVS Adjusted EBITDA increased by 10.8% for the three months and 21.4% for the nine months, primarily due to higher sales volumes and productivity, partially offset by increased material/labor costs and unfavorable pricing/mix[127][129] Specialty Vehicles This section details the financial performance of the Specialty Vehicles (SV) segment SV Segment Performance (Unaudited, In thousands) | Metric | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :----------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Sales | $74,082 | $58,283 | $216,006 | $126,275 | | Adjusted EBITDA | $5,827 | $7,183 | $21,480 | $12,123 | | Adjusted EBITDA Margin | 7.9% | 12.3% | 9.9% | 9.6% | - SV sales increased by 27.1% for the three months and 71.1% for the nine months ended September 30, 2021, driven by sales volume (including acquired business) and favorable pricing[130][132] - SV Adjusted EBITDA decreased by 18.9% for the three months due to higher material/labor costs and operating expenses, despite higher sales. For the nine months, it increased by 77.2% due to higher sales volume and favorable pricing, partially offset by increased costs[131][133] Liquidity and Capital Resources This section discusses the Company's cash flows, debt, equity, dividends, and the impact of inflation on its financial position Cash Flows This section analyzes the Company's cash flow activities for the reporting period - Cash and cash equivalents decreased by $6.5 million to $14.5 million at September 30, 2021, from $21.0 million at December 31, 2020[134] - Net cash provided by operating activities increased by $21.3 million to $42.3 million for the nine months ended September 30, 2021, driven by increased sales and changes in net working capital[135][136] - Net cash used in investing activities was $17.3 million for the nine months ended September 30, 2021, a $64.1 million decrease in cash provided compared to the prior year, primarily due to increased capital expenditures and the non-recurrence of proceeds from the ERV business sale[137] - Net cash used in financing activities decreased by $12.3 million to $31.5 million for the nine months ended September 30, 2021, mainly due to a net decrease in long-term debt payments[138] Debt This section provides information on the Company's outstanding debt and credit facility status - As of September 30, 2021, the Company had no outstanding debt under its $175.0 million secured revolving credit facility, which matures on August 8, 2023[140] - Available borrowings under the credit facility totaled $169.2 million at September 30, 2021, up from $125.8 million at December 31, 2020[141] - The Company was in compliance with all financial covenants of its Credit Agreement[141] Equity Securities This section details the Company's share repurchase authorization status - As of September 30, 2021, 0.4 million shares remained under the April 28, 2016, repurchase authorization, representing approximately $16.9 million based on the October 29, 2021 closing price[142] Dividends This section outlines the Company's dividend policy and declared dividends - The Board of Directors approved a change from semi-annual to quarterly dividend payments in August 2020[143] Dividends Declared (2020-2021) | Date dividend declared | Dividend per share ($) | | :--------------------- | :--------------------- | | Aug. 6, 2020 | $0.025 | | May 7, 2021 | $0.025 | | Feb. 15, 2021 | $0.025 | | Nov. 6, 2020 | $0.025 | | Aug. 6, 2020 | $0.025 | | May 8, 2020 | $0.050 | Effect of Inflation This section discusses how inflation impacts the Company's costs and pricing strategies - Inflation impacts the Company through variable interest rates on its credit agreement and increased costs for labor, parts, and supplies[145] - The Company attempts to cover increased costs by adjusting product prices but has limited ability to pass on short-term cost increases due to competitive markets and long order lead times[145] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section outlines the Company's exposure to market risks, specifically interest rate fluctuations and commodity price changes, and the strategies employed to mitigate these risks Interest Rate Risk This section describes the Company's exposure to interest rate fluctuations on its debt - The Company is exposed to interest rate risk on its variable rate debt, but had no outstanding variable rate debt at September 30, 2021[147] - An increase of 100 basis points in interest rates would not result in additional interest expense, and the Company does not use market-risk-sensitive instruments for trading[147] - The credit facility's interest rate is based on LIBOR, with provisions for transition to a replacement rate, and the phase-out of LIBOR could potentially increase interest expense or disrupt the financial market[148] Commodities Risk This section details the Company's exposure to price changes in raw materials and its mitigation strategies - The Company is exposed to price changes in raw materials, primarily steel and aluminum, and related components[149] - Risk mitigation strategies include pre-buys of components to align costs with customer orders and active management of material supply sourcing[149] - No material changes in primary market risk exposures are anticipated in the short-term[150] Item 4. Controls and Procedures This section addresses the effectiveness of the Company's disclosure controls and procedures and internal control over financial reporting, including identified material weaknesses and ongoing remediation efforts Effectiveness of Disclosure Controls and Procedures This section assesses the effectiveness of the Company's disclosure controls and procedures - As of September 30, 2021, the Company's disclosure controls and procedures were not effective due to a material weakness in internal control over financial reporting, as previously disclosed in the 2020 Form 10-K[152] - Despite the material weakness, management concluded that the condensed consolidated financial statements in this Form 10-Q fairly present the Company's financial condition, results of operations, and cash flows[153] Remediation This section outlines the Company's plan to address the identified material weakness in internal control - The Company is executing a remediation plan for the material weakness and expects to remediate it prior to the end of fiscal year 2021[154] Changes in Internal Control over Financial Reporting This section reports on any material changes in internal control over financial reporting during the period - No material changes in internal control over financial reporting occurred during the first nine months of fiscal 2021, other than the ongoing remediation efforts[155] - The Company is monitoring and assessing the impact of the COVID-19 pandemic on its internal controls[155] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section refers to Note 9 of the financial statements for details on legal proceedings, commitments, and contingent obligations - Information on legal proceedings is detailed in Note 9 – Commitments and Contingent Obligations[156] Item 1A. Risk Factors This section indicates that there have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2020 - No material changes have occurred to the risk factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2020[157] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the Company's share repurchase activities and shares delivered by associates for tax withholding obligations during the quarter ended September 30, 2021 - No shares were repurchased under the Board of Directors' authorization during the quarter ended September 30, 2021[158] Issuer Purchases of Equity Securities (Quarter Ended Sep 30, 2021) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Number of Shares that May Yet Be Purchased Under the Plans or Programs | | :-------------------- | :----------------------------- | :--------------------------- | :------------------------------------------------------------------- | | July 1 to July 31 | 257 | $38.26 | 408,994 | | August 1 to August 31 | 0 | $0.00 | 408,994 | | September 1 to September 30 | 1,765 | $42.87 | 408,994 | | Total | 2,022 | | 408,994 | - 2,022 shares were delivered by associates to satisfy tax withholding obligations upon the vesting of restricted shares during the quarter[160] Item 6. Exhibits This section lists the exhibits filed as part of this Form 10-Q, including certifications and Inline XBRL documents - Exhibits include certifications from the CEO and CFO (Sections 302 and 1350 of Sarbanes-Oxley Act) and various Inline XBRL documents[162] SIGNATURES This section confirms the official signing of the report by the Company's Chief Financial Officer - The report was signed on November 4, 2021, by Jonathan C. Douyard, Chief Financial Officer, on behalf of The Shyft Group, Inc[164]