The Shyft (SHYF) - 2023 Q4 - Annual Report

Part I Item 1. Business Shyft Group manufactures specialty vehicles, seeing sales growth but declining income and a reduced order backlog General and Performance Overview - The Shyft Group is a niche market leader in manufacturing and assembling specialty vehicles for commercial (last-mile delivery, specialty service) and recreational vehicle industries[16] Five-Year Performance Overview (Continuing Operations) | Metric | Change (in millions) | CAGR | | :--- | :--- | :--- | | Sales | +$115.7 | 3.6% | | Income from Continuing Operations | -$30.3 | (35.2)% | | Adjusted EBITDA | -$24.0 | (11.1)% | Our Segments - The company's two reportable segments are Fleet Vehicles and Services (FVS) and Specialty Vehicles (SV)[20] - The FVS segment, marketed under the Utilimaster brand, manufactures commercial vehicles for e-commerce, parcel delivery, and various trades. It employed approximately 1,500 employees and 300 contractors as of December 31, 2023[20] - The SV segment provides service bodies, RV chassis (Spartan RV Chassis), and contract manufacturing. It employed approximately 1,000 employees and less than 100 contractors as of December 31, 2023[32] Competition - The company competes based on custom design capability, product quality, customer service, and quick delivery. Competitors range from large diversified organizations to smaller manufacturers and new market entrants, including technology companies[41] Suppliers - The single largest commodity used in production is aluminum. The company is also dependent on suppliers for lumber, fiberglass, and steel. While most raw materials have several sources, the company relies on a few single-source vendors for specific component parts[43] - For certain vehicles, the company uses chassis supplied by third parties and typically does not hold them in inventory, instead installing its specialized bodies on chassis owned by dealers or end-users[44] Research and Development R&D Spending (in millions) | Year | Amount (in millions) | | :--- | :--- | | 2023 | $25.2 | | 2022 | $25.3 | | 2021 | $8.5 | - A key R&D initiative is Shyft's Blue Arc™ EV Solutions, which introduced an all-electric, purpose-built chassis platform for Class 3, 4, and 5 medium-duty trucks[46] Human Capital Management - As of December 31, 2023, the company employed approximately 3,000 employees and contractors. About 11% of the workforce consists of contractors[51] Customer Base - In 2023, sales to the top 10 customers accounted for 54.3% of total sales, with no single customer exceeding 10%[57] Customers Exceeding 10% of Consolidated Sales | Year | Customer | Sales (in millions) | % of Consolidated Sales | Segment | | :--- | :--- | :--- | :--- | :--- | | 2022 | Amazon | $153.6 | 15.0% | FVS | | 2022 | Newmar | $107.7 | 10.5% | SV | | 2021 | Amazon | $248.6 | 25.1% | FVS | Order Backlog Consolidated Order Backlog (in thousands) | Segment | Dec 31, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Decrease (in thousands) | | :--- | :--- | :--- | :--- | | FVS | $325,003 | $736,690 | $(411,687) | | SV | $84,269 | $96,023 | $(11,754) | | Total | $409,272 | $832,713 | $(423,441) | - The total order backlog decreased by $423.4 million, primarily driven by a 55.9% decrease in the FVS segment backlog[61] Non-GAAP Financial Measure Reconciliation of Income from Continuing Operations to Adjusted EBITDA (in thousands) | | 2023 (in thousands) | 2022 (in thousands) | 2021 (in thousands) | | :--- | :--- | :--- | :--- | | Income from continuing operations | $6,464 | $36,558 | $69,974 | | Adjustments | $33,504 | $34,235 | $38,092 | | Adjusted EBITDA | $39,968 | $70,793 | $108,066 | Item 1A. Risk Factors The company faces global economic, supply chain, customer, EV market, and operational risks - Global Risks: The company is exposed to risks from uncertain global macro-economic and political conditions, including inflation, supply chain disruptions, and military conflicts, which can increase costs and soften demand[71][72] - Customer Concentration: Failure to maintain relationships with major customers could adversely affect revenues. In 2023, the top 10 customers accounted for 54.3% of sales[74] - Competition and Market Changes: The company faces intense competition from established OEMs and new entrants, particularly in the electric vehicle (EV) market. Failure to remain competitive could adversely affect business[75] - EV Development Risks: The development of EVs involves complex software and hardware, reliance on third-party suppliers for emerging technologies like batteries, and risks associated with lithium-ion battery safety[89][91][93] - Supply Chain and Costs: The business is subject to risks from increased costs of raw materials (steel, aluminum), component parts, and labor, as well as disruptions in the supply chain and reliance on a small group of suppliers for some components[87][94][96] - Backlog Uncertainty: The order backlog is subject to modification, cancellation, or rescheduling by customers and is not a guaranteed indicator of future revenue[76] Item 1C. Cybersecurity Cybersecurity risk management is overseen by the Audit Committee and CIO, with no material incidents to date - The Board of Directors, through its Audit Committee, is responsible for overseeing the company's cybersecurity risk management strategy[128] - The cybersecurity program is overseen by the Chief Information Officer (CIO), who has over 20 years of experience and reports to the CEO. The Security Manager, with over 15 years of experience, reports to the CIO[129][130] - To date, no cybersecurity incidents have materially affected the company's business strategy, results of operations, or financial position[127] Item 2. Properties The company operates 18 facilities across the U.S. and Mexico, with corporate headquarters in Novi, Michigan - The company operates from 18 locations, including 17 in the U.S. and one in Saltillo, Mexico, as part of its strategy for coast-to-coast manufacturing and distribution[131][132] Item 3. Legal Proceedings The company is involved in various legal proceedings, but management expects no material financial impact - The company is party to a number of lawsuits and claims arising from normal business conduct, but management does not currently expect a material impact from their outcomes[136] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities SHYF stock trades on NASDAQ, paid dividends, and repurchased shares under a $250 million program - The company's common stock is traded on the NASDAQ Global Select Market under the symbol "SHYF"[140] 2023 Dividend Payments | Declaration Date | Payment Date | Dividend per Share | | :--- | :--- | :--- | | Oct. 31, 2023 | Dec. 15, 2023 | $0.05 | | Aug. 2, 2023 | Sep. 18, 2023 | $0.05 | | May 2, 2023 | Jun. 20, 2023 | $0.05 | | Jan. 31, 2023 | Mar. 17, 2023 | $0.05 | - In 2023, the company repurchased 1,022,449 shares for $19.1 million under its $250.0 million share repurchase authorization[147] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 2023 saw a 15.1% sales decrease, sharp drop in operating income, but improved operating cash flow Executive Overview 2023 Financial Highlights vs. 2022 | Metric | 2023 (in millions) | 2022 (in millions) | | :--- | :--- | :--- | | Sales | $872.2 | $1,027.2 | | Gross Margin | 17.2% | 17.6% | | Operating Income | $6.8 | $47.5 | | Income from Continuing Operations | $6.5 | $36.6 | | Diluted EPS from Continuing Ops | $0.19 | $1.03 | | Operating Cash Flow | $56.2 | $(18.8) | | Order Backlog (Year-End) | $409.3 | $832.7 | - Recent innovations include the Blue Arc™ EV Solutions brand with a purpose-built EV chassis and all-electric delivery van, the Velocity lineup of last-mile delivery vehicles, and Royal Truck Body's new Severe Duty body[159] Results of Operations (2023 vs 2022) 2023 consolidated sales decreased 15.1% due to lower volumes, leading to a sharp 82.3% drop in income - Consolidated sales decreased by $155.0 million (15.1%) in 2023, driven by lower sales volumes in both FVS (walk-in vans) and SV (motorhome chassis) segments[162] - Gross profit decreased by $30.0 million (16.7%), with gross margin declining to 17.2% from 17.6% in 2022, due to lower volume and higher costs, partially offset by productivity gains[164] - Operating expenses increased by $10.7 million (8.0%), primarily due to a $10.8 million rise in SG&A from CEO transition costs ($2.6M), severance ($1.0M), and EV program management costs ($3.2M)[165] - Income from continuing operations decreased by $30.1 million (82.3%) to $6.5 million, or $0.19 per diluted share, down from $1.03 per share in 2022[168] Segment Analysis FVS sales and EBITDA declined, while SV sales decreased but Adjusted EBITDA increased due to favorable pricing Fleet Vehicles and Services (FVS) Segment Performance (in thousands) | Metric | 2023 (in thousands) | 2022 (in thousands) | % Change | | :--- | :--- | :--- | :--- | | Sales | $541,638 | $647,003 | (16.3)% | | Adjusted EBITDA | $30,326 | $65,719 | (53.9)% | | Adj. EBITDA Margin | 5.6% | 10.2% | (4.6) pps | - The FVS order backlog decreased by 55.9% to $325.0 million at the end of 2023, primarily due to softer parcel delivery vehicle demand[181] Specialty Vehicles (SV) Segment Performance (in thousands) | Metric | 2023 (in thousands) | 2022 (in thousands) | % Change | | :--- | :--- | :--- | :--- | | Sales | $334,743 | $386,644 | (13.4)% | | Adjusted EBITDA | $66,186 | $54,413 | 21.7% | | Adj. EBITDA Margin | 19.8% | 14.1% | 5.7 pps | - The SV order backlog decreased by 12.2% to $84.3 million, reflecting lower motorhome orders partially offset by strong demand for service bodies[186] Liquidity and Capital Resources Cash decreased slightly, but operating cash flow improved significantly, with $83.2 million available credit Summary of Cash Flows (in thousands) | Activity | 2023 (in thousands) | 2022 (in thousands) | | :--- | :--- | :--- | | Cash from Operating Activities | $56,244 | $(18,843) | | Cash used in Investing Activities | $(21,114) | $(20,416) | | Cash (used in) from Financing Activities | $(36,721) | $13,649 | | Net Decrease in Cash | $(1,591) | $(25,610) | - The improvement in operating cash flow was primarily driven by a $72.9 million inflow from decreased receivables and contract assets[188] - As of December 31, 2023, the company had $83.2 million in available borrowings under its credit agreement and was in compliance with all covenants[198] Material Cash Requirements (in thousands) | Obligation | Total (in thousands) | Less than 1 Year (in thousands) | 1-3 Years (in thousands) | 4-5 Years (in thousands) | More than 5 Years (in thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | | Debt | $59,675 | $3,225 | $56,450 | - | - | | Operating lease obligations | $52,198 | $10,475 | $17,824 | $9,532 | $14,367 | | Purchase obligations | $2,300 | $2,300 | - | - | - | | Total | $114,173 | $16,000 | $74,274 | $9,532 | $14,367 | Critical Accounting Policies and Estimates Critical accounting policies involve significant judgment in revenue, goodwill, warranties, and income taxes - Revenue Recognition: Revenue is recognized over time for services like upfits and for vehicles built on customer-owned chassis, and at a point in time (generally shipment) for vehicles where the company owns the chassis[207][209] - Goodwill Impairment: Goodwill is tested for impairment annually as of October 1. For the 2023 assessment, the company performed a qualitative assessment for both its Fleet Vehicles and Services and Specialty Vehicles reporting units and found no indicators of impairment[213][214] - Warranties: The company records a provision for estimated warranty costs at the time of sale, based on historical experience and projections of future costs[219] - Income Taxes: The company recognizes deferred tax assets and liabilities and assesses the need for a valuation allowance based on forecasts of future taxable income. Uncertain tax positions are recognized only if it is more likely than not that they will be sustained[220][222] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company faces interest rate risk on variable debt and commodity price risk for raw materials - The company is exposed to interest rate risk on its variable rate debt. A hypothetical 100 basis point increase in interest rates would add approximately $0.5 million to annualized interest expense[227] - The company faces commodity risk from price changes in raw materials, particularly steel and aluminum. It does not generally use derivative instruments to manage this exposure[229] Item 8. Financial Statements and Supplementary Data This section presents audited financial statements and notes, with an unqualified opinion from Deloitte & Touche LLP Report of Independent Registered Public Accounting Firm - Deloitte & Touche LLP issued an unqualified opinion, stating that the financial statements present fairly, in all material respects, the financial position of the company and that the company maintained effective internal control over financial reporting as of December 31, 2023[235] - The critical audit matter identified was the qualitative assessment of goodwill impairment due to the significant judgments and assumptions involved, particularly regarding macroeconomic conditions and financial performance forecasts[242][244] Consolidated Financial Statements Consolidated Balance Sheet Highlights (in thousands) | | Dec 31, 2023 (in thousands) | Dec 31, 2022 (in thousands) | | :--- | :--- | :--- | | Total Current Assets | $286,928 | $345,767 | | Total Assets | $530,049 | $580,481 | | Total Current Liabilities | $182,831 | $201,232 | | Total Liabilities | $277,883 | $311,787 | | Total Shareholders' Equity | $252,166 | $268,694 | Consolidated Statement of Operations Highlights (in thousands) | | 2023 (in thousands) | 2022 (in thousands) | 2021 (in thousands) | | :--- | :--- | :--- | :--- | | Sales | $872,198 | $1,027,164 | $991,792 | | Gross Profit | $150,358 | $180,433 | $199,265 | | Operating Income | $6,753 | $47,509 | $84,052 | | Net Income Attributable to Shyft | $6,496 | $36,558 | $68,925 | | Diluted EPS | $0.19 | $1.03 | $1.91 | Notes to Consolidated Financial Statements - Note 2 (Revenue): The aggregate transaction price allocated to remaining performance obligations is $325.0 million for the FVS segment and $84.3 million for the SV segment as of December 31, 2023[312] - Note 4 (Goodwill): The annual goodwill impairment test as of October 1, 2023, was a qualitative assessment for both the FVS and SV reporting units, which found no indicators of impairment. The total goodwill balance remains $48.9 million[321][322] - Note 9 (Contingent Liabilities): The company received a Notice of Violation from the EPA in April 2022 regarding vehicle certifications. The company is investigating the matter, and a potential penalty cannot be estimated at this time[349] - Note 11 (Debt): The company has a $400 million revolving credit facility maturing in 2026. As of December 31, 2023, $50.0 million was outstanding, and the company was in compliance with all covenants[359][360] - Note 12 (Stock Based Compensation): The company grants restricted stock, performance stock units (PSUs), and restricted stock units (RSUs) to employees and directors. As of December 31, 2023, there was $10.6 million of total remaining unrecognized compensation cost related to these awards[366][376][380] Item 9A. Controls and Procedures Management and auditors concluded that disclosure controls and internal control over financial reporting were effective - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[403] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2023, a conclusion audited and affirmed by Deloitte & Touche LLP[405][406] Part III Item 10. Directors, Executive Officers, and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the proxy statement - Information required by this item is incorporated by reference from the definitive proxy statement for the 2024 Annual Meeting of Shareholders[416] Item 11. Executive Compensation Executive compensation information is incorporated by reference from the 2024 Annual Meeting of Shareholders proxy statement - Information required by this item is incorporated by reference from the definitive proxy statement for the 2024 Annual Meeting of Shareholders[417] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Equity compensation plan details and security ownership information are incorporated by reference from the proxy statement Equity Compensation Plan Information as of December 31, 2023 | Plan Category | Securities to be Issued (a) | Weighted Avg. Exercise Price | Securities Remaining for Future Issuance (c) | | :--- | :--- | :--- | :--- | | Approved by security holders | 828,179 | N/A | 1,592,067 | | Not approved by security holders | - | N/A | 51,318 | | Total | 828,179 | N/A | 1,643,385 | Part IV Item 15. Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K report - This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, including the consent of the independent registered public accounting firm and certifications by the CEO and CFO[427][429]