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,September 30, 2023.

 

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: (517) 543-6400

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

SHYF

The NASDAQ Stock Market LLC

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes

 

No

 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Yes

 

No

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller Reporting Company

Emerging Growth Company

   

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Exchange Act).             Yes ☐       No ☒     

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

Outstanding at April 21,October 20, 2023

Common Stock

34,915,23134,289,839 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,September 30, 2023 and December 31, 2022 (Unaudited)

4 
  

 

  
  

Condensed Consolidated Statements of Operations – Three and Nine Months Ended March 31,September 30, 2023 and 2022 (Unaudited)

5 
  

 

  
  

Condensed Consolidated Statements of Cash Flows – ThreeNine Months Ended March 31,September 30, 2023 and 2022 (Unaudited)

6 
     
  

Condensed Consolidated Statement of Shareholders’ Equity – Three and Nine Months Ended March 31,September 30, 2023 and 2022 (Unaudited)

7 
  

 

  
  

Notes to Condensed Consolidated Financial Statements

8 
  

 

  
 

Item 2.

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

1517 
 

 

 

  
 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

2226 
 

 

 

  
 

Item 4.

Controls and Procedures

2327 
 

 

 

  

PART II.  OTHER INFORMATION

  
     
 Item 1.Legal Proceedings2428 
     
 

Item 1A.

Risk Factors

2428 
     
 

Item 2.

Unregistered Sales of Equity Securities, and Use of Proceeds, and Issuer Purchases of Equity Securities

2428
Item 5.Other Information28 
     

 

Item 6.

Exhibits

2529 

 

 

 

  

SIGNATURES

2630 

 

2

 

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, 2022, as filed with the Securities and Exchange Commission on February 23, 2023, subject to any changes and updates disclosed in Part II, Item 1A – Risk Factors below, “Risk Factors”, as well as risk factors that we have discussed in previous public reports and other documents filed with the Securities and Exchange Commission. Those risk factors include the primary risks our management believes could materially affect the potential results described by forward-looking statements contained in this Form 10-Q. However, these risks may not be the only risks we face. Our business, operations, and financial performance could also be affected by additional factors that are not presently known to us or that we currently consider to be immaterial to our operations. In addition, new Risk Factors may emerge from time to time that may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, although we believe that the forward-looking statements contained in this Form 10-Q are reasonable, we cannot provide you with any guarantee that the results described in those forward-looking statements will be achieved. All forward-looking statements in this Form 10-Q are expressly qualified in their entirety by the cautionary statements contained in this section, and investors should not place undue reliance on forward-looking statements as a prediction of actual results. The Company undertakes no obligation to update or revise any forward-looking statements to reflect developments or information obtained after the date this Form 10-Q is filed with the Securities and Exchange Commission.

 

Trademarks and Service Marks

 

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

 

3

 

PART I.  FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

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

(In thousands) 

 

 

March 31,

  

December 31,

  

September 30,

  

December 31,

 
 2023  

2022

  2023  

2022

 

ASSETS

        

Current assets:

        

Cash and cash equivalents

 $7,378  $11,548  $ 9,876  $11,548 

Accounts receivable, less allowance of $255 and $246

 120,141  115,742 

Accounts receivable, less allowance of $290 and $246

 91,536  115,742 

Contract assets

 60,094  86,993  48,469  86,993 

Inventories

 109,308  100,161  115,200  100,161 

Other receivables – chassis pool agreements

 16,112  19,544  29,285  19,544 

Other current assets

  4,908   11,779   5,350   11,779 

Total current assets

 317,941  345,767  299,716  345,767 

Property, plant and equipment, net

 73,939  70,753  79,437  70,753 

Right of use assets operating leases

 54,931  53,386  47,669  53,386 

Goodwill

 48,880  48,880  48,880  48,880 

Intangible assets, net

 48,126  49,078  46,221  49,078 

Net deferred tax assets

 10,390  10,390  11,004  10,390 

Other assets

  2,805   2,227   2,534   2,227 

TOTAL ASSETS

 $557,012  $580,481  $535,461  $580,481 
  

LIABILITIES AND SHAREHOLDERS' EQUITY

                

Current liabilities:

                

Accounts payable

 $107,807  $124,309  $99,299  $124,309 

Accrued warranty

 6,183  7,161  6,317  7,161 

Accrued compensation and related taxes

 16,038  14,434  16,127  14,434 

Contract liabilities

 7,719  5,255  6,233  5,255 

Operating lease liability

 11,576  10,888  10,884  10,888 

Other current liabilities and accrued expenses

 14,404  19,452  7,597  19,452 

Short-term debt – chassis pool agreements

 16,112  19,544  29,285  19,544 

Current portion of long-term debt

  183   189   203   189 

Total current liabilities

 180,022  201,232  175,945  201,232 

Other non-current liabilities

 9,557  10,033  10,105  10,033 

Long-term operating lease liability

 45,251  44,256  38,491  44,256 

Long-term debt, less current portion

  65,224   56,266   55,181   56,266 

Total liabilities

 300,054  311,787  279,722  311,787 

Commitments and contingent liabilities

                    

Shareholders' equity:

                

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

 -  -  -  - 

Common stock, no par value: 80,000 shares authorized; 34,915 and 35,066 outstanding

 89,260  92,982 

Common stock, no par value: 80,000 shares authorized; 34,289 and 35,066 outstanding

 91,046  92,982 

Retained earnings

  167,629   175,611   164,624   175,611 

Total Shyft Group, Inc. shareholders equity

 256,889  268,593  255,670  268,593 

Non-controlling interest

  69   101   69   101 

Total shareholders' equity

  256,958   268,694   255,739   268,694 

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

 $557,012  $580,481  $535,461  $580,481 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

4

 

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

(In thousands, except per share data)

 

 

Three Months Ended

March 31,

  

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

 
 2023  

2022

  

2023

  

2022

  

2023

  

2022

 
  

Sales

 $243,439  $206,883  $201,325  $286,075  $669,865  $725,153 

Cost of products sold

  200,515   180,952   164,557   231,979   547,419   603,008 

Gross profit

  42,924   25,931   36,768   54,096   122,446   122,145 
  

Operating expenses:

    

Research and development

 6,949  4,927  5,225  7,051  18,064  19,541 

Selling, general and administrative

  32,289   26,552   27,419   25,033   89,978   78,445 

Total operating expenses

  39,238   31,479   32,644   32,084   108,042   97,986 
  

Operating income (loss)

  3,686   (5,548)

Operating income

  4,124   22,012   14,404   24,159 
  

Other income (expense)

  

Interest expense

 (1,648) (154) (1,572) (1,137) (4,697) (1,754)

Other income (expense)

  70   (35)  15   181   209   (342)

Total other income (expense)

 (1,578) (189)

Total other expense

 (1,557) (956) (4,488) (2,096)
  

Income (loss) before income taxes

 2,108  (5,737)

Income before income taxes

 2,567  21,056  9,916  22,063 

Income tax expense (benefit)

  430   (1,885)  (1,951)  3,770   (965)  3,346 

Net income (loss)

 1,678  (3,852)

Net income

 4,518  17,286  10,881  18,717 

Less: net loss attributable to non-controlling interest

  32   -   -   -   32   - 
  

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

 $1,710  $(3,852)

Net income attributable to The Shyft Group Inc.

 $4,518  $17,286  $10,913  $18,717 
  

Basic earnings (loss) per share

  $0.05  $(0.11)

Diluted earnings (loss) per share

  $0.05  $(0.11)

Basic earnings per share

 $0.13  $0.49  $0.31  $0.53 

Diluted earnings per share

 $0.13  $0.49  $0.31  $0.53 
  

Basic weighted average common shares outstanding

  35,058   35,108   34,604   35,056   34,863   35,071 

Diluted weighted average common shares outstanding

  35,340   35,108   34,637   35,365   34,985   35,481 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

5

 

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

(In thousands)

 

 

Three Months Ended March 31,

  

Nine Months Ended September 30,

 
 2023  

2022

  2023  

2022

 

Cash flows from operating activities:

        

Net income (loss)

 $1,678  $(3,852)

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

 

Net income

 $10,881  $18,717 

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

 

Depreciation and amortization

 3,864  2,969  12,360  10,055 

Non-cash stock based compensation expense

 1,827  1,648  5,187  4,922 

(Gain) on disposal of assets

 -  (10)
Deferred income taxes (614) 64 

Loss on disposal of assets

 132  481 

Changes in accounts receivable and contract assets

 22,500  (5,012) 62,730  (66,026)

Changes in inventories

 (9,147) (24,072) (15,039) (44,029)

Changes in accounts payable

 (16,920) 7,594  (25,194) 24,708 

Changes in accrued compensation and related taxes

 419  (7,966) 1,693  (3,505)

Changes in accrued warranty

 (978) (326) (844) 457 

Change in other assets and liabilities

  2,644   1,243   (6,474)  9,663 

Net cash provided by (used in) operating activities

  5,887   (27,784)  44,818   (44,493)
  

Cash flows from investing activities:

          

Purchases of property, plant and equipment

 (4,469) (5,514) (16,143) (14,228)
Proceeds from sale of property, plant and equipment 25  29  100  148 

Acquisition of business, net of cash acquired

  (500)  -   

(500

)  - 

Net cash used in investing activities

  (4,944)  (5,485)  (16,543)  (14,080)
  

Cash flows from financing activities:

          

Proceeds from long-term debt

 40,000  45,000  100,000  120,000 

Payments on long-term debt

 (31,000) (10,000) (101,000) (55,000)

Payment of dividends

 (1,878) (1,886) (5,392) (5,395)

Purchase and retirement of common stock

 (8,765) (26,789) (19,083) (26,789)

Exercise and vesting of stock incentive awards

  (3,470)  (6,523)  (4,472)  (8,539)

Net cash used in financing activities

  (5,113)  (198)

Net cash provided by (used in) financing activities

  (29,947)  24,277 
  

Net decrease in cash and cash equivalents

 (4,170) (33,467) (1,672) (34,296)

Cash and cash equivalents at beginning of period

  11,548   37,158   11,548   37,158 

Cash and cash equivalents at end of period

 $7,378  $3,691  $9,876  $2,862 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

6

 

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

  

Number of

Shares

  

Common

Stock

  

Retained

Earnings

  

Non-

Controlling

Interest

  

Total

Shareholders

Equity

 

Balance at December 31, 2022

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

Issuance of common stock and tax impact of stock incentive plan

 5  (4,656) -  -  (4,656) 5  (4,656) -  -  (4,656)

Dividends declared ($0.05 per share)

 -  -  (1,820) -  (1,820) -  -  (1,820) -  (1,820)

Purchase and retirement of common stock

 (349) (893) (7,872) -  (8,765) (349) (893) (7,872) -  (8,765)

Issuance of restricted stock, net of cancellation

 193  -  -  -  -  193  -  -  -  - 

Non-cash stock based compensation expense

 -  1,827  -  -  1,827  -  1,827  -  -  1,827 

Net income (loss)

  -   -   1,710   (32)  1,678   -   -   1,710   (32)  1,678 

Balance at March 31, 2023

  34,915  $89,260  $167,629  $69  $256,958   34,915  $89,260  $167,629  $69  $256,958 
Issuance of common stock and tax impact of stock incentive plan 5  83  -  -  83 
Dividends declared ($0.05 per share) -  -  (1,770) -  (1,770)
Issuance of restricted stock, net of cancellation 36  -  (21) -  (21)
Non-cash stock based compensation expense -  1,263  -  -  1,263 
Net income  -   -   4,685   -   4,685 
Balance at June 30, 2023  34,956  $90,606  $170,523  $69  $261,198 
Issuance of common stock and tax impact of stock incentive plan 4 101 - - 101 
Dividends declared ($0.05 per share) - - (1,765) - (1,765)
Purchase and retirement of common stock (674) (1,758) (8,652) - (10,410)
Issuance of restricted stock, net of cancellation 3 - - - - 
Non-cash stock based compensation expense - 2,097 - - 2,097 
Net income  -  -  4,518  -  4,518 
Balance at September 30, 2023  34,289 $91,046 $164,624 $69 $255,739 

 

 

Number of

Shares

  

Common

Stock

  

Retained

Earnings

  

Non-

Controlling

Interest

  

Total

Shareholders

Equity

  

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  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) 3  (8,372) -  -  (8,372)

Dividends declared ($0.05 per share)

 -  -  (1,794) -  (1,794) -  -  (1,794) -  (1,794)

Purchase and retirement of common stock

 (607) (1,598) (25,191) -  (26,789) (607) (1,598) (25,191) -  (26,789)

Issuance of restricted stock, net of cancellation

 215  -  -  -  -  215  -  -  -  - 

Non-cash stock based compensation expense

 -  1,648  -  -  1,648  -  1,648  -  -  1,648 

Net loss

  -   -   (3,852)  -   (3,852)  -   -   (3,852)  -   (3,852)

Balance at March 31, 2022

  35,027  $87,053  $140,542  $101  $227,696   35,027  $87,053  $140,542  $101  $227,696 
Issuance of common stock and tax impact of stock incentive plan 3  (219) -  -  (219)
Dividends declared ($0.05 per share) -  -  (1,784) -  (1,784)
Issuance of restricted stock, net of cancellation 33  -  -  -  - 
Non-cash stock based compensation expense -  2,060  -  -  2,060 
Net income  -   -   5,283   -   5,283 
Balance at June 30, 2022  35,063  $88,894  $144,041  $101  $233,036 
Issuance of common stock and tax impact of stock incentive plan 6 52 - - 52 
Dividends declared ($0.05 per share) - - (1,790) - (1,790)
Issuance of restricted stock, net of cancellation (6) - - - - 
Non-cash stock based compensation expense - 1,214 - - 1,214 
Net income  -  -  17,286  -  17,286 
Balance at September 30, 2022  35,063 $90,160 $159,537 $101 $249,798 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

7

 

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 motorhome chassis and contract manufacturing and assembly services. We also supply replacement parts and offer repair, maintenance, field service and refurbishment services for the vehicles that we manufacture as well as truck accessories.

 

The accompanying unaudited interim condensed consolidated financial statements reflect all normal and recurring adjustments that are necessary for the fair presentation of our financial position as of March 31,September 30, 2023,and our results of operations for the three and nine months ended September 30, 2023 and our cash flows for the threenine months ended March 31,September 30, 2023. 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-K10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission on February 23, 2023. The results of operations for the three and nine months ended March 31,September 30, 2023, 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, 2022, included in our Annual Report on Form 10-K.10-K.

 

Supplemental Disclosures of Cash Flow Information

 

Non-cash investing in the threenine months ended March 31,September 30, 2023 and March 31,September 30, 2022 included $2,494$2,258 and $1,443$982 of capital expenditures, respectively. The Company has chassis pool agreements, where it participates in chassis converter pools that are non-cash arrangements and they are offsetting between current assets and current liabilities on the Company’s Consolidated Balance Sheets. See "Note 3 – Debt" for further information about the chassis pool agreements.

 

NOTE 2 – INVENTORIES

 

Inventories are summarized as follows:

 

 

March 31,

2023

  

December 31,
2022

  

September 30,

2023

  

December 31,
2022

 

Finished goods

 $11,696  $13,361  $20,706  $13,361 

Work in process

 3,796  5,200  8,878  5,200 

Raw materials and purchased components

  93,816   81,600   85,616   81,600 

Total inventories

 $109,308  $100,161  $115,200  $100,161 
 

NOTE 3 – DEBT

 

Short-term debt consists of the following:

 

 

March 31,
2023

  

December 31,
2022

  

September 30,
2023

  

December 31,
2022

 

Chassis pool agreements

 $16,112  $19,544  $29,285  $19,544 

Total short-term debt

 $16,112  $19,544  $29,285  $19,544 

 

8

 

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

 

Chassis Pool Agreements

 

The Company obtains certain vehicle chassis for its walk-in vans, 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).

 

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, theexcept as required under our credit agreement. The obligation is usually settled by the manufacturer upon reassignment of the chassis to an accepted dealer, and the dealer is invoiced for the chassis by the manufacturer. The Company has included this financing agreement on the Company’s Condensed Consolidated Balance Sheets within Other receivables – chassis pool agreementsand 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,
2023

  

December 31,
2022

  

September 30,
2023

  

December 31,
2022

 

Line of credit revolver

 $65,000  $56,000  $55,000  $56,000 

Finance lease obligation

  407   455   384   455 

Total debt

 65,407  56,455  55,384  56,455 

Less current portion of long-term debt

  (183)  (189)  (203)  (189)

Total long-term debt

 $65,224  $56,266  $55,181  $56,266 

 

Revolving Credit Facility

 

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

 

On May 31, 2023, the Company amended the Credit Agreement to effectuate the transition of the underlying variable interest rate from LIBOR to the Secured Overnight Financing Rate ("SOFR"). Our interest expense is not expected to increase materially with this transition. Increased interest expense and/or disruption in the financial market could have a material adverse effect on our business, financial condition, or results of operations.

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 revolving credit facility is also available for the issuance of letters of credit of up to $20,000 and swing line loans of up to $10,000, subject to certain limitations and restrictions. The revolving credit facility carries an interest rate of either (i) the highest of prime rate, the federal funds effective rate from time to time plus 0.5%, or the one month adjusted LIBORSOFR plus 1.0%; or (ii) adjusted LIBOR,SOFR, in each case plus a margin based upon our ratio of debt to earnings from time to time. The applicable borrowing rate including the margin was 5.66%6.43% (or one-month LIBORone-month SOFR plus 1.00%) at March 31,September 30, 2023. The revolving credit facility is secured by security interests in, and liens on, all assets of the borrowers and guarantors, other than real property and certain other excluded assets. At March 31,September 30, 2023 and December 31, 2022, we had outstanding letters of credit totaling $1,550 and $1,200, respectively, related to our workers’ compensation insurance.

 

9

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

Under the terms of our Credit Agreement, available borrowings (exclusive of outstanding borrowings) totaled $218,336$177,546 and $187,162 at March 31,September 30, 2023 and December 31, 2022, 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,September 30, 2023 and December 31, 2022, we were in compliance with all covenants in our Credit Agreement.

9

 

NOTE 4 – REVENUE

 

Changes in our contract assets and liabilities for the threenine months ended March 31,September 30, 2023 and 2022 are summarized below:

 

 

March 31,

2023

  

March 31,

2022

  

September 30,

2023

  

September 30,

2022

 

Contract Assets

  

Contract assets, beginning of period

 $86,993  $21,483  $86,993  $21,483 

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

  (66,340) (18,635) (86,061) (21,482)

Contract assets recognized, net of reclassification to receivables

  39,441   30,141   47,537   87,098 

Contract assets, end of period

 $60,094  $32,989  $48,469  $87,099 
  

Contract Liabilities

  

Contract liabilities, beginning of period

 $5,255  $988  $5,255  $988 

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

 (4,421) (988) (5,182) (988)

Cash received in advance and not recognized as revenue

  6,885   5,193   6,160   10,601 

Contract liabilities, end of period

 $7,719  $5,193  $6,233  $10,601 

 

The aggregate amount of the transaction price allocated to remaining performance obligations in existing contracts that are yet to be completed in the Fleet Vehicles and Services ("FVS") and Specialty Vehicles ("SV") segments are $584,933$383,448 and $82,478,$80,983, respectively.

 

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

 

  

Three Months Ended

March 31, 2023

 
  

FVS

  

SV

  

Eliminations and

Other

  

Total

 

Primary geographical markets

                

United States

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

Other

  5,405   3   -   5,408 

Total sales

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

Timing of revenue recognition

                

Products transferred at a point in time

 $12,154  $37,562  $-  $49,716 

Products and services transferred over time

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

Total sales

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

 

Three Months Ended

March 31, 2022

  

Three Months Ended

September 30, 2023

 
 

FVS

  

SV

  

Eliminations and

Other

  

Total

  

FVS

  

SV

  

Eliminations and

Other

  

Total

 

Primary geographical markets

                  

United States

 $111,336  $94,183  $-  $205,519  $122,626  $76,603  $444  $199,673 

Other

  1,361   3   -   1,364   1,633   19   -   1,652 

Total sales

 $112,697  $94,186  $-  $206,883  $124,259  $76,622  $444  $201,325 
                  

Timing of revenue recognition

                  

Products transferred at a point in time

 $9,555  $52,851  $-  $62,406  $15,768  $34,297  $467  $50,532 

Products and services transferred over time

  103,142   41,335   -   144,477   108,491   42,325   (23)  150,793 

Total sales

 $112,697  $94,186  $-  $206,883  $124,259  $76,622  $444  $201,325 

  

10

 

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

(Dollar amounts in thousands, except per share data)

  

Three Months Ended

September 30, 2022

 
  

FVS

  

SV

  

Eliminations and

Other

  

Total

 

Primary geographical markets

                

United States

 $183,409  $103,869  $(2,335) $284,943 

Other

  1,085   47   -   1,132 

Total sales

 $184,494  $103,916  $(2,335) $286,075 
                 

Timing of revenue recognition

                

Products transferred at a point in time

 $10,821  $58,729  $-  $69,550 

Products and services transferred over time

  173,673   45,187   (2,335)  216,525 

Total sales

 $184,494  $103,916  $(2,335) $286,075 

  

Nine Months Ended

 
  

September 30, 2023

 
  

FVS

  

SV

  

Eliminations and Other

  

Total

 

Primary geographical markets

                

United States

 $401,117  $251,306  $ (4,180) $648,243 

Other

  21,558   64   -   21,622 

Total sales

 $422,675  $251,370  $ (4,180) $669,865 
                 

Timing of revenue recognition

                

Products transferred at a point in time

 $41,614  $109,977  $467  $152,058 

Products and services transferred over time

  381,061   141,393    (4,647)  517,807 

Total sales

 $422,675  $251,370  $ (4,180) $669,865 

  

Nine Months Ended

 
  

September 30, 2022

 
  

FVS

  

SV

  

Eliminations and Other

  

Total

 

Primary geographical markets

                

United States

 $428,606  $293,325  $(2,335) $719,596 

Other

  5,482   75   -   5,557 

Total sales

 $434,088  $293,400  $(2,335) $725,153 
                 

Timing of revenue recognition

                

Products transferred at a point in time

 $31,092  $163,068  $-  $194,160 

Products and services transferred over time

  402,996   130,332   (2,335)  530,993 

Total sales

 $434,088  $293,400  $(2,335) $725,153 

11

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

(Dollar amounts in thousands, except per share data)

 

NOTE 5 – PROPERTY, PLANT AND EQUIPMENT

 

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

 

 

March 31,

2023

  

December 31,

2022

  

September 30,

2023

  

December 31,

2022

 

Land and improvements

 $12,314  $12,314  $12,178  $12,314 

Buildings and improvements

 42,857  42,827  49,051  42,827 

Plant machinery and equipment

 58,517  55,969  58,427  55,969 

Furniture and fixtures

 18,700  18,334  19,777  18,334 

Vehicles

 2,116  2,083  2,019  2,083 

Construction in process

  12,990   9,946   11,167   9,946 

Subtotal

 147,494  141,473  152,619  141,473 

Less accumulated depreciation

  (73,555)  (70,720)

Accumulated depreciation

  (73,182)  (70,720)

Total property, plant and equipment, net

 $73,939  $70,753  $79,437  $70,753 

 

We recorded depreciation expense of $2,912$3,358 and $2,125$2,404 during the three months ended March 31,September 30, 2023 and 2022, respectively, and $9,503 and $7,155 during the nine months ended September 30, 2023 and 2022, respectively.

 

NOTE 6 – LEASES

 

We have operating and finance leases for land, buildings and certain equipment. Our leases have remaining lease terms of one year to 17 years, some of which include options to extend the leases for up to 15 years. Our leases do not contain residual value guarantees. Assets recorded under finance leases were immaterial (See "Note 3 – Debt").

 

Operating lease expenses are classified as Cost of products sold and Operating expenses on the Condensed Consolidated Statements of Operations. The components of lease expense were as follows:

 

 

Three Months Ended

 

Nine Months Ended

 
 

Three Months Ended

March 31,

  

September 30,

  

September 30,

 
 

2023

  

2022

  

2023

  

2022

  

2023

  

2022

 

Operating leases

 $2,964  $2,238  $2,808  $2,683  $8,755  $7,492 

Short-term leases(1)

  252   38 

Short-term leases(1)

  373   87   995   144 

Total lease expense

 $3,216  $2,276  $3,181  $2,770  $9,750  $7,636 

 

(1)(1) Includes expenses for month-to-month equipment leases, which are classified as short-term as the Company is not reasonably certain to renew the lease term beyond one month.

 

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

 

 

March 31,

  

September 30,

 
 

2023

  

2022

  

2023

  

2022

 

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

 7.9  8.5  7.3  8.2 

Weighted average discount rate of operating leases

 2.8% 2.7

%

 2.9% 2.7

%

 

1112

 

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


Supplemental cash flow information related to leases was as follows:

 

 

Three Months Ended

March 31,

  

Nine Months Ended

September 30,

 
 

2023

  

2022

  

2023

  

2022

 

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

  

Operating cash flow for operating leases

 $2,793  $2,061  $8,312  $6,874 
  

Right of use assets obtained in exchange for lease obligations:

  

Operating leases

 $3,975  $14,955  $10,208  $16,367 
Finance leases $65  $121  $89  $202 

 

Maturities of operating lease liabilities as of March 31,September 30, 2023 are as follows:

 

Years ending December 31:

  

2023(1)

 $8,800  $2,693 

2024

 11,017  10,292 

2025

 9,742  9,782 

2026

 7,737  7,605 

2027

 5,499  5,268 

Thereafter

  20,500   18,505 

Total lease payments

 63,295  54,145 

Less: imputed interest

   (6,468)

Imputed interest

  (4,770)

Total lease liabilities

 $56,827  $49,375 

 

(1)(1) Excluding the threenine months ended March 31,September 30, 2023.

 

NOTE 7 – COMMITMENTS AND CONTINGENT LIABILITIES

 

At March 31,September 30, 2023, 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.

 

1213

 

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,

  

Nine Months Ended

September 30,

 
 

2023

  

2022

  

2023

  

2022

 

Balance of accrued warranty at January 1

 $7,161  $5,975  $7,161  $5,975 

Provisions for current period sales

 1,035  793  3,023  3,597 
Changes in liability for pre-existing warranties (769) (174) (1,044) 430 

Cash settlements

  (1,244)  (945)  (2,823)  (3,570)

Balance of accrued warranty at March 31

 $6,183  $5,649 

Balance of accrued warranty at September 30

 $6,317  $6,432 

 

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 8 – TAXES ON INCOME

 

Our effective income tax rate was a taxbenefit of 76.0% and an expense of 20.4% and a tax benefit of 32.9%17.9% for the three months ended March 31,September 30, 2023 and 2022, respectively.

The effective tax rate for the three months ended March 31, 2023 differs These rates differ from the U.S. statutory tax rate of 21.0% primarily due to non-deductible executive compensation offset by the tax benefit of research credits offset by stateand a discrete tax expense and non-deductible officer compensation.benefit in 2023 related to the 2022 tax return-to-provision adjustment for the research credit.

 

TheOur effective income tax rate ofwas a benefit of 32.9%9.7% and an expense of 15.2% for the threenine months ended March 31,September 30, 2023 and 2022, is higher thanrespectively. These rates differ from the U.S. statutory tax rate of 21.0% primarily due to non-deductible executive compensation offset by the benefit of research credits and a discrete tax benefit in 2023 related to the difference in stock compensation expense recognized2022 tax return-to-provision adjustment for financial reporting purposes and tax purposes upon vesting.the research credit.

 

NOTE 9 – BUSINESS SEGMENTS

 

1415

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

  

Nine Months Ended

 
  

September 30, 2023

 
  

Segment

 
  

FVS

  

SV

  

Eliminations

and Other

  

Consolidated

 
                 

Fleet vehicle sales

 $381,061  $-  $-  $381,061 

Motorhome chassis sales

  -   78,578   -   78,578 

Other specialty vehicle sales

  -   156,906   (4,180)  152,726 

Aftermarket parts and accessories sales

  41,614   15,886   -   57,500 

Total sales

 $422,675  $251,370  $(4,180) $669,865 
                 

Depreciation and amortization expense

 $4,679  $5,038  $2,643  $12,360 

Adjusted EBITDA

  32,918   47,207   (42,482)  37,643 

Segment assets

  254,729   219,204   61,528   535,461 

Capital expenditures

  4,317   2,185   11,132   17,634 

  

Nine Months Ended

 
  

September 30, 2022

 
  

Segment

 
  

FVS

  

SV

  

Eliminations

and Other

  

Consolidated

 
                 

Fleet vehicle sales

 $402,996  $-  $-  $402,996 

Motorhome chassis sales

  -   138,000   -   138,000 

Other specialty vehicle sales

  -   140,320   (2,335)  137,985 

Aftermarket parts and accessories sales

  31,092   15,080   -   46,172 

Total sales

 $434,088  $293,400  $(2,335) $725,153 
                 
Depreciation and amortization expense $3,074  $5,306  $1,675  $10,055 
Adjusted EBITDA  38,015   38,508   (36,415)  40,108 
Segment assets  281,510   231,185   39,004   551,699 
Capital expenditures  10,590   906   2,202   13,698 

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 motorhome chassis and contract manufacturing and assembly services. We also supply replacement parts and offer repair, maintenance, field service and refurbishment services for the vehicles that we manufacture as well as truck accessories.

 

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 $243.4$201.3 million for the firstthird quarter of 2023, an increasea decrease of 17.7%29.6% compared to $206.9$286.1 million for the firstthird quarter of 2022.

 

Gross Marginmargin of 17.6%18.3% for the firstthird quarter of 2023, compared to 12.5%18.9% for the firstthird quarter of 2022.

 

Operating expense of $39.2$32.6 million, or 16.1%16.2% of sales for the firstthird quarter of 2023, compared to $31.5$32.1 million, or 15.2%11.2% of sales for the firstthird quarter of 2022.

 

Operating income of $3.7$4.1 million for the firstthird quarter of 2023, compared to a loss of $5.5$22.0 million for the firstthird quarter of 2022.

 

Income tax expensebenefit of $0.4$2.0 million for the firstthird quarter of 2023, compared to benefit$3.8 million of $1.9 millionexpense for the firstthird quarter of 2022.

 

Net income of $1.7$4.5 million for the firstthird quarter of 2023, compared to loss of $3.9$17.3 million for the firstthird quarter of 2022.

 

Diluted earnings per share of $0.05$0.13 for the firstthird quarter of 2023, compared to loss of $0.11$0.49 for the firstthird quarter of 2022.

 

Order backlog of $667.4$464.4 million at March 31,September 30, 2023, a decrease of $605.3$579.5 million or 47.6%55.5% from our backlog of $1,272.7$1,043.9 million at March 31,September 30, 2022.

 

We believe we are well positioned to take advantage of long-term opportunities and continue our efforts to bring product innovations to each of the markets that we serve. Some of our recent innovations, strategic developments and strengths include:

 

 

In March 2022, we announced Blue Arc™ Electric Vehicle ("EV") Solutions, a new go-to-market brand 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 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.

 

  

Leveraging a scalable design, the full Blue Arc EV portfolio is available incovers Class 3, 4 and 5 walk-in van configurations with body length options from 12 to 22 feet. Designed for high-frequency, last-mile delivery fleets, these vehicles are powered by lithium-ion battery packs with optional extended range packs available. With these options, Shyft customers can maximize productivity and minimize cost of ownership, including fuel and maintenance costs.

15

 

  

In March 2023, we completed testing and received certification from the United States Environmental Protection Agency (EPA) for the Company’s Blue Arc™Arc EV Solutions Class 3, 4 and 5 electric delivery vehicles. In April 2023, we completed testing and received an executive order of compliance from the California Air Resources Board (CARB) for the Company’s Blue Arc™Arc EV Solutions Class 3, 4 and 5 electric delivery vehicles. Testing for CARB demonstrated Class 3 delivery vehicle performance at a 225-mile city driving range.

17

In October 2023, we announced an agreement with Rush Enterprises, which operates the largest network of commercial vehicle dealerships in North America, to sell and service Blue Arc Class 3, 4 and 5 all-electric delivery vehicles.

 

 

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

 

 

Royal Truck Body’s 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 Polyurea 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.

 

 

In March 2023, we debuted the all-new steel Royal XP Service Body, precision engineered to eliminate water, salt and chemical traps and featuring a proprietary high-endurance coating for a glossy, high-edge finish to seal out weather and wear. The body is third party tested to live up to its promise on the punishing proving grounds of a leading commercial testing facility and is performance-rated for 250,000 miles.

 

 

The K3 and K4 motorhome chassis are equipped with the Spartan® RV Chassis Connected Coach®, featuring the new 15-inch anti-glare digital dash that is custom designed for the RV customer to meet their specific display or operational needs. Integrating with the digital dash is the new Tri-Pod Steering Wheel, which places driving features and instrumentation right at the driver's fingertips, enabling a more effortless engagement with driving features and controls.

 

 

The 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 2022 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 23, 2023.

 

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

 

Nine Months Ended

 
 

Three Months Ended

March 31,

  

September 30,

  

September 30,

 
 

2023

  

2022

  

2023

  

2022

  

2023

  

2022

 

Sales

 100.0  100.0  100.0  100.0  100.0  100.0 

Cost of products sold

  82.4   87.5   81.7   81.1   81.7   83.2 

Gross profit

 17.6  12.5  18.3  18.9  18.3  16.8 

Operating expenses:

  

Research and development

 2.9  2.4  2.6  2.5  2.7  2.7 

Selling, general and administrative

  13.3   12.8   13.6   8.8   13.4   10.8 

Operating income (loss)

 1.5  (2.7)

Other income (expense)

  (0.6)  (0.1)

Income (loss) before income taxes

 0.9  (2.8)

Operating income

 2.0  7.7  2.2  3.3 

Other expense

  (0.8)  (0.3)  (0.7)  (0.3)

Income before income taxes

 1.3  7.4  1.5  3.0 

Income tax expense (benefit)

  0.2   (0.9)  (1.0)  1.3   (0.1)  0.5 

Income (loss)

 0.7  (1.9)

Net income

 2.2  6.0  1.6  2.6 

Non-controlling interest

  0.0   -   -   -   -   - 

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

  0.7   (1.9)

Net income attributable to The Shyft Group, Inc.

  2.2   6.0   1.6   2.6 

 

1618

 

Three Months March 31,Ended September 30, 2023 Compared to the Three Months Ended March 31,September 30, 2022

 

Sales

 

For the quarterthree months ended March 31,September 30, 2023, we reported consolidated sales of $243.4$201.3 million, compared to $206.9$286.1 million for the firstthird quarter of 2022, an increasea decrease of $36.5$84.8 million or 17.7%29.6%. This increase reflects strong demand in our Fleet Vehicles and Services (“FVS”) segment and favorable pricing implemented to offset material and labor inflation, partially offsetdecrease is driven by lower sales volumes in our Specialty Vehicles (“SV”) segment primarily attributableattributed to lower motorhome chassis market demand, and lower sales in the Fleet Vehicles and Services (“FVS”) segment attributed to lower sales volumes of walk-in vans partially offset by higher truck body sales, including $6.0 million in pass-through chassis sales.

 

Cost of Products Sold

 

Cost of products sold was $200.5$164.6 million in the firstthird quarter of 2023, compared to $181.0$232.0 million for the firstthird quarter of 2022, an increasea decrease of $19.5$67.4 million or 10.8%29.1%. The increasedecrease was due to $28.9$74.5 million higherin lower volume and mix and $2.0$1.5 million due to higher productivity, partially offset by $6.0 million in pass-through chassis costs and $2.6 million higher material and labor costs, partially offset by $11.3 million due to higher productivity.inflation, and other costs.

 

Gross Profit

 

Gross profit was $42.9$36.8 million for the firstthird quarter of 2023, compared to $25.9$54.1 million for the firstthird quarter of 2022, an increasea decrease of $17.0$17.3 million or 65.5%32.0%. The increasedecrease was due to $7.7$16.2 million more favorablein lower volume and mix net of costfavorable pricing, and $11.3$2.6 million in higher productivitymaterial, labor and other items,costs, partially offset by $2.0$1.5 million due toin higher material and labor costs.productivity.

 

Operating Expenses

 

Operating expenses were $39.2$32.6 million for the firstthird quarter of 2023, compared to $31.5$32.1 million for the firstthird quarter of 2022, an increase of $7.7$0.5 million or 24.6%1.7%. Research and development expense for the firstthird quarter of 2023 was $6.9$5.2 million, compared to $4.9$7.1 million in the firstthird quarter of 2022, an increasea decrease of $2.0$1.9 million, of which $2.4$1.5 million was related to electric vehicle development initiatives partially offset by a $0.4 million decrease relatedas the program moves closer to other products.production. Selling, general and administrative expense was $32.3$27.4 million for the firstthird quarter of 2023, compared to $26.6$25.0 million for the firstthird quarter of 2022, an increase of $5.7$2.4 million, primarily driven by increased employee and administrative costs, of which $1.7 million was related to electric vehicle development.costs.


Other Income (Expense)

 

InterestOther expense was $1.6 million for the firstthird quarter of 2023, compared to $0.2$1.0 million for the firstthird quarter of 2022, driven by higher borrowing costs. Other income was $0.1 million for the first quarter of 2023, compared to de minimis expense for the first quarter of 2022.

 

Income Tax Expense (Benefit)

 

Our effective income tax rate was a tax expensebenefit of 20.4%76.0% for the firstthird quarter of 2023, compared to a tax benefitan expense of 32.9%17.9% for the firstthird quarter 2022. The effective tax rate for 20232022, which reflects the impact of current statutory income tax rates on our income before income taxes combined with the tax expense of non-deductible officer compensation offset by the benefit of research credits.

The effective tax rate for the first quarter of 2023 compares unfavorably to the first quarter of 2022 primarily due to thecredits combined with a discrete tax benefit in 2023 related to the difference in stock compensation expense recognized2022 tax return-to-provision adjustment for financial reporting purposes and tax purposes upon vesting realized in the first quarter of 2022.research credit.

 

Net Income (Loss)

 

Net income (loss) for the firstthird quarter of 2023 increaseddecreased by $5.6$12.8 million to $1.7$4.5 million compared to a loss of $3.9$17.3 million for the firstthird quarter of 2022. On a diluted per share basis, earnings increased $0.16decreased $0.36 to $0.05$0.13 for the firstthird quarter of 2023 compared to a loss of $0.11$0.49 per share for the firstthird quarter of 2022. Driving this increasedecrease were the factors noted above.

Adjusted EBITDA

 

Our consolidated Adjusted EBITDA for the firstthird quarter of 2023 was $10.8$11.0 million, compared to a loss of $0.6$27.1 million for the firstthird quarter of 2022, an increasea decrease of $11.4$16.1 million.

 

1719

 

The table below describes the changes in Adjusted EBITDA for the three months ended March 31,September 30, 2023 compared to the same period for 2022 (in millions):

 

Adjusted EBITDA three months ended March 31, 2022

 $(0.6)

Adjusted EBITDA three months ended September 30, 2022

 $27.1 
Sales volume and other 7.7  (15.9)

Product pricing and mix

 8.1  1.3 

Material and labor costs

 (2.0) (1.3)
EV development costs  (4.1)
EV development/program costs  0.2 

General and administrative costs and other

  1.7   (0.4)

Adjusted EBITDA three months ended March 31, 2023

 $10.8 

Adjusted EBITDA three months ended September 30, 2023

 $11.0 

Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022

Sales

For the nine months ended September 30, 2023, we reported consolidated sales of $669.9 million, compared to $725.2 million for the first nine months of 2022, a decrease of $55.3 million or 7.6%. This decrease was driven by lower sales volumes in our SV segment primarily attributable to lower motorhome chassis market demand, lower sales volumes in our FVS segment primarily attributable to lower walk-in van sales partially offset by higher truck body sales including $19.2 million in pass-through chassis sales, and favorable pricing implemented to offset material and labor inflation.

Cost of Products Sold

Cost of products sold was $547.4 million for the first nine months of 2023, compared to $603.0 million for the first nine months of 2022, a decrease of $55.6 million or 9.2%. The decrease was due to $62.3 million in lower volume and mix and $18.6 million due to higher productivity, partially offset by $19.2 million in pass-through chassis costs, and $6.1 million in higher material and labor inflation and other costs.

Gross Profit

Gross profit was $122.5 million for the first nine months of 2023, compared to $122.1 million for the first nine months of 2022, an increase of $0.4 million or 0.3%. The increase was due to $18.6 million higher productivity, partially offset by $12.1 million in lower volume and mix net of favorable pricing and $6.1 million due to higher material, labor and other costs.

Operating Expenses

Operating expenses were $108.0 million for the first nine months of 2023, compared to $98.0 million for the first nine months of 2022, an increase of $10.0 million or 10.3%. Research and development expense for the first nine months of 2023 was $18.1 million, compared to $19.5 million in the first nine months of 2022, a decrease of $1.4 million, of which $0.6 million was related to electric vehicle development initiatives as the program moves closer to production and $0.8 million related to other products. Selling, general and administrative expense was $90.0 million for the first nine months of 2023, compared to $78.4 million for the first nine months of 2022, an increase of $11.6 million, primarily driven by $8.8 million of increased employee and administrative costs. These costs include $2.5 million of CEO transition costs, $0.9 million of severance related cost reduction initiatives, $2.6 million of electric vehicle administrative costs and $2.8 million of other employee and administrative costs.

Other Income (Expense)

Other expense was $4.5 million for the first nine months of 2023, compared to $2.0 million for the first nine of months of 2022, driven by higher borrowing costs.

Income Tax Expense (Benefit)

Our effective income tax rate was a benefit of 9.7% for the first nine months of 2023, compared to an expense of 15.2% for the first nine months of 2022, which reflects the impact of current statutory income tax rates on our income before income taxes combined with a discrete tax benefit in 2023 related to the 2022 tax return-to-provision adjustment for the research credit.

20

Net Income

Net income for the first nine months of 2023 decreased by $7.8 million to $10.9 million compared to $18.7 million for the first nine months of 2022. On a diluted per share basis, earnings decreased $0.22 to $0.31 for the first nine months of 2023 compared to $0.53 per share for the first nine months of 2022. Driving this increase were the factors noted above.

Adjusted EBITDA

Our consolidated Adjusted EBITDA for the first nine months of 2023 was $37.6 million, compared to $40.1 million for the first nine months of 2022, a decrease of $2.5 million.

The table below describes the changes in Adjusted EBITDA for the nine months ended September 30, 2023 compared to the same period for 2022 (in millions):

Adjusted EBITDA nine months ended September 30, 2022

 $40.1 
Sales volume and other  (6.1)

Product pricing and mix

  9.4 

Material and labor costs

  (4.2)
EV development/program costs  (3.4)

General and administrative costs and other

  1.8 

Adjusted EBITDA nine months ended September 30, 2023

 $37.6 

 

Order Backlog

 

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

 

 

March 31,

2023

  

March 31,

2022

  

September 30,

2023

  

September 30,

2022

 

Fleet Vehicles and Services

 $584,933  $1,148,700  $383,448  $915,135 

Specialty Vehicles

  82,478   123,999    80,983   128,769 

Total consolidated

 $667,411  $1,272,699  $464,431  $1,043,904 

 

The consolidated backlog at March 31,September 30, 2023 totaled $667.4$464.4 million, a decrease of $605.3$579.5 million, or 47.6%55.5%, compared to $1,272.7$1,043.9 million at March 31,September 30, 2022.

 

Our Fleet Vehicles and ServicesFVS backlog decreased by $563.8$531.7 million, or 49.1%58.1%dueprimarily to increased vehicle sales volume driven by easing of supply chain constraints and softening demand returning to normalized levels.in delivery vans. Our Specialty VehiclesSV segment backlog decreased by $41.5$47.8 million, or 33.5%37.1%, due to lower motorhome orders.

 

Orders in the backlog are subject to modification, cancellation or rescheduling by customers. Although the backlog of unfilled orders is one of many indicators of market demand, several factors, such as changes in production rates, available capacity, new product introductions, supply of chassis, and competitive pricing actions, may affect actual sales. Accordingly, a comparison of backlog from period-to-period is not necessarily indicative of eventual actual shipments.

 

Reconciliation of Non-GAAP Financial Measures

 

This report presents Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization), which is a non-GAAP financial measure. This non-GAAP measure is calculated by excluding items that we believe to be infrequent or not indicative of our underlying operating performance, as well as certain non-cash expenses. We define Adjusted EBITDA as income 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.

21

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.

18

 

The following table reconciles Net Income from continuing operations to Adjusted EBITDA for the periods indicated.

 

Financial Summary (Non-GAAP)

Consolidated

(In thousands, Unaudited)

 

 

Three Months Ended

  

Three Months Ended

 

Nine Months Ended

 
 

March 31,

  

September 30,

  

September 30,

 
 

2023

  

2022

  

2023

  

2022

  

2023

  

2022

 

Net Income (loss)

 $1,678  $(3,852)

Net Income

 $4,518  $17,286  $10,881  $18,717 

Net loss attributable to non-controlling interest

  32  -  -  -  32  - 

Add (subtract):

            

Interest expense

  1,648  154   1,572  1,137   4,697  1,754 

Depreciation and amortization expense

  3,864  2,969   4,310  3,359   12,360  10,055 

Income tax expense (benefit)

 430  (1,885)  (1,951) 3,770   (965) 3,346 

Restructuring and other related charges

  62  107   58  53   1,373  514 

Acquisition related expenses and adjustments

  291  216   149  243   440  800 

Non-cash stock based compensation expense

  1,827  1,648  2,097  1,214   5,187  4,922 
Legacy legal matters  956   -  -  -   956  - 
Non-recurring professional fees  -  -   160  - 
CEO transition   235   -    2,522   - 

Adjusted EBITDA

 $10,788  $(643) $10,988  $27,062  $37,643  $40,108 

 

Our Segments

 

We identify our reportable segments based on our management structure and the financial data utilized by our chief operating decision maker to assess segment performance and allocate resources among our operating units. We have two reportable segments: FVS and SV.

 

For certain financial information related to each segment, see "Note 9 – Business Segments," of the Notes to Condensed Consolidated Financial Statements appearing in Item 1 of this Form 10-Q.

 

Fleet Vehicles and Services

  

 

Financial Data

  

Financial Data

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 
 

Three Months Ended

March 31,

  

Three Months Ended

September 30,

 
 

2023

  

2022

  

2023

  

2022

 
 

Amount

  

Percentage

  

Amount

  

Percentage

  

Amount

  

Percentage

  

Amount

  

Percentage

 
          

Sales

 $159,433  100.0% $112,697  100.0%  $ 124,259  100.0% $184,494  100.0%

Adjusted EBITDA

 12,473 7.8% (871) (0.8%) 7,977  6.4% 24,361  13.2%

 

Sales in our FVS segment were $159.4$124.3 million for the firstthird quarter of 2023, compared to $112.7$184.5 million for the third quarter of 2022, a decrease of $60.2 million or 32.6%. This decrease was primarily attributable to a softening in the delivery van markets, partially offset by increased truck body sales, including $6.0 million in pass-through chassis sales.

22

Adjusted EBITDA in our FVS segment for the third quarter of 2023 was $8.0 million compared to $24.4 million for the third quarter of 2022, a decrease of $16.4 million. This decrease was attributable to $11.2 million in lower volume and $6.3 million of unfavorable mix net of pricing, partially offset by $1.3 million of favorable productivity net of material, labor costs, and other costs.

  

Financial Data

 
  

(Dollars in Thousands)

 
  

Nine Months Ended

 
  

September 30,

 
  

2023

  

2022

 
  

Amount

  

Percentage

  

Amount

  

Percentage

 
                 

Sales

 $ 422,675   100.0

%

 $434,089   100.0%

Adjusted EBITDA

  32,918   7.8

%

  38,015   8.8

%

Sales in our FVS segment were $422.7 million for the first quarternine months of 2023, compared to $434.1 million for the first nine months of 2022, an increasea decrease of $46.7$11.4 million or 41.5%2.6%. This increasedecrease was primarily attributable to a softening in the delivery van markets, partially offset by increasedsales volume driven by truck body sales as well as easing of industry wide supply chain constraints.volume, including $19.2 million pass through-chassis sales.

 

Adjusted EBITDA in our FVS segment for the first quarternine months of 2023 was $12.5$32.9 million compared to a loss of $0.9$38.0 million for the first quarternine months of 2022, an increasea decrease of $13.4$5.1 million. This increasedecrease was primarily attributable to $2.4$9.9 million favorablein lower volume and $3.4$9.7 million favorableof unfavorable mix net of pricing, and mix, $5.8partially offset by $9.9 million of favorable productivity and $1.8$4.6 million of favorable material, labor costs, and other costs.

19

 

Specialty Vehicles

  

 

Financial Data

  

Financial Data

 
 

(Dollars in Thousands)

  

(Dollars in Thousands)

 
 

Three Months Ended

March 31,

  

Three Months Ended

September 30,

 
 

2023

  

2022

  

2023

  

2022

 
 

Amount

  

Percentage

  

Amount

  

Percentage

  

Amount

  

Percentage

  

Amount

  

Percentage

 
          

Sales

 $87,187  100.0% $94,186  100.0

%

 $ 76,622  100.0% $103,916  100.0

%

Adjusted EBITDA

 13,852 15.9% 10,099  10.7

%

 15,988 20.9% 15,550  15.0

%

 

Sales in our SV segment were $87.2$76.6 million in the firstthird quarter of 2023, compared to $94.2$103.9 million for the firstthird quarter of 2022, a decrease of $7.0$27.3 million or 7.4%26.3%. This decrease was primarily attributable to lower motorhome sales volumes,chassis market demand, partially offset by higher service body sales.

 

Adjusted EBITDA for our SV segment for the firstthird quarter of 2023 was $13.9$16.0 million, compared to $10.1$15.6 million for the firstthird quarter of 2022, an increase of $3.8$0.4 million or 37.2%2.8%. This increase was primarily attributable to $7.6 million of favorable pricing and mix and $0.5$0.7 million of favorable productivity, partially offset by $2.3$6.6 million due to lower volume and $2.0$1.3 million due to material, labor, and other costs.

  

Financial Data

 
  

(Dollars in Thousands)

 
  

Nine Months Ended

 
  

September 30,

 
  

2023

  

2022

 
  

Amount

  

Percentage

  

Amount

  

Percentage

 
                 

Sales

 $ 251,370   100.0

%

 $293,400   100.0

%

Adjusted EBITDA

  47,208   18.8

%

  38,508   13.1

%

Sales in our SV segment were $251.4 million in the first nine months of 2023, compared to $293.4 million for the first nine months of 2022, a decrease of $42.0 million or 14.3%. This decrease was primarily attributable to lower motorhome chassis market demand, partially offset by higher service body sales.

23

Adjusted EBITDA for our SV segment for the first nine months of 2023 was $47.2 million, compared to $38.5 million for the first nine months of 2022, an increase of $8.7 million or 22.6%. This increase was primarily attributable to $21.8 million of favorable pricing and mix and $3.7 million of favorable productivity, partially offset by $11.2 million due to lower volume and $5.6 million due to material, labor, and other costs.

LIQUIDITY AND CAPITAL RESOURCES

 

Cash Flows

 

Cash and cash equivalents decreased by $4.2$1.7 million from December 31, 2022, to a balance of $7.4$9.9 million as of March 31,September 30, 2023. 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 generated $5.9$44.8 million of cash from operating activities during the threenine months ended March 31,September 30, 2023, an increase in cash provided of $33.7$89.3 million from $27.8$44.5 million of cash used in operating activities during the threenine months ended March 31,September 30, 2022. The $5.9$44.8 million of cash generated in the first quarternine months of 2023 was driven by a $7.4$27.9 million net inflow related to income adjusted for non-cash charges to operations partially offsetand by a $1.5$16.9 million net outflowinflow related to the change in net working capital. The change in working capital in the first quarternine months of 2023 was driven by a $22.5$62.7 million net inflow related to decreased receivables and contract assets primarily attributable to increased sales volumes driven by easingthe completion of industry wide supply chain constraintsin process vehicles and a $3.0$1.7 million net inflow related to changes in accrued compensation and related taxes, and other assets and liabilities,partially offset by a $16.9$25.2 million net outflow related to decreased payables primarily attributable to timely processingtiming of payments within the period, a $9.1$15.0 million net outflow related to increased inventories, primarily attributable to increased raw material inventories and a $1.0$7.3 million net outflow related to changes in accrued warranty.other assets and liabilities.

 

Cash Flow from Investing Activities

 

We used $4.9$16.5 million in investing activities during the threenine months ended March 31,September 30, 2023, a decreasean increase in cash used of $0.6$2.4 million from $5.5$14.1 million used during the threenine months ended March 31,September 30, 2022. The decreaseincrease in cash used in investing activities is primarily due to a $1.0$1.9 million decreaseincrease in the purchases of property, plant and equipment partially offset byand a $0.5 million increase related to the acquisition of a business.

 

Cash Flow from Financing Activities

 

We used $5.1$30.0 million of cash through financing activities during the threenine months ended March 31,September 30, 2023, an increase in cash used of $4.9$54.3 million from $0.2$24.3 million usedgenerated during the threenine months ended March 31,September 30, 2022. The increase in cash used by financing activities is primarily attributable to $21.0$46.0 million of increased payments on long-term debt and $5.0$20.0 million of decreased proceeds from long-term debt, partially offset by an $18.0a $7.7 million decrease in the purchase and retirement of common stock and a $3.1$4.1 million decrease in exercise and vesting of stock awards.

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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, N.A., JPMorgan Chase Bank, N.A., PNC Bank, N.A., National Association and Bank of America, N.A. (the "Lenders"). Certain of our other subsidiaries have executed guaranties guarantying the borrowers' obligations under the Credit Agreement.

On May 31, 2023, the Company amended the Credit Agreement to effectuate the transition of the underlying variable interest rate from LIBOR to the Secured Overnight Financing Rate ("SOFR"). Our interest expense is not expected to increase materially with this transition. Increased interest expense and/or disruption in the financial market could have a material adverse effect on our business, financial condition, or results of operations.

 

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 revolving credit facility is also available for the issuance of letters of credit of up to $20.0 million and swing line loans of up to $10.0 million, subject to certain limitations and restrictions. The revolving credit facility carries an interest rate of either (i) the highest of prime rate, the federal funds effective rate from time to time plus 0.5%, or the one month adjusted LIBORSOFR plus 1.0%; or (ii) adjusted LIBOR,SOFR, in each case plus a margin based upon our ratio of debt to earnings from time to time. The applicable borrowing rate including the margin was 5.66%6.43% (or one-month LIBORSOFR plus 1.00%) at March 31,September 30, 2023.

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The revolving credit facility is secured by security interests in, and liens on, all assets of the borrowers and guarantors, other than real property and certain other excluded assets. At March 31,September 30, 2023 and December 31, 2022, we had outstanding letters of credit totaling $1.6 million and $1.2 million, respectively, related to our workers’ compensation insurance.

 

Under the terms of our Credit Agreement, available borrowings (exclusive of outstanding borrowings) totaled $218.3$177.6 million and $187.2 million at March 31,September 30, 2023 and December 31, 2022, 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,September 30, 2023 and December 31, 2022, 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 2023, we repurchased 348,705 shares for $8.8 million. In the third quarter of 2023, we repurchased 673,744 shares for $10.3 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 2023 and 2022 as shown in the table below.

 

Date dividend declared

 

Record date

 

Payment date

 

Dividend per share ($)

  

Record date

 

Payment date

 

Dividend per share ($)

 
Aug. 2, 2023 Aug. 17, 2023 Sep. 18, 2023 $0.05 
May 2, 2023 May 17, 2023 Jun. 20, 2023 $0.05 
Jan. 31, 2023 Feb. 17, 2023 Mar. 17, 2023 $0.050  Feb. 17, 2023 Mar. 17, 2023 $0.05 
Nov. 1, 2022 Aug. 17, 2022 Sep. 16, 2022 $0.050  Aug. 17, 2022 Sep. 16, 2022 $0.05 
Aug. 5, 2022 Aug. 17, 2022 Sep. 16, 2022 $0.050  Aug. 17, 2022 Sep. 16, 2022 $0.05 
May 2, 2022 May 17, 2022 June 17, 2022 $0.050  May 17, 2022 June 17, 2022 $0.05 
Feb. 16, 2022 Feb. 17, 2022 Mar. 17, 2022 $0.050  Feb. 17, 2022 Mar. 17, 2022 $0.05 

   

Effect of Inflation

 

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

 

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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,September 30, 2023, we had $65.0$55.0 million debt outstanding under our revolving credit facility. An increase of 100 basis points in interest rates would result in $0.7$0.6 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.

 

On May 31, 2023, the Company amended the Credit Agreement to effectuate the transition of the underlying variable interest rate from LIBOR to SOFR. The interest rate charged on our outstanding borrowings pursuant to our revolving credit facility is currently based on LIBOR,SOFR, as described in Part 1, Item 1, "Note 43 – 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 revolving 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 LIBORmaterially with SOFR or any other reference rate.this transition. Increased interest expense and/or disruption in the financial market could have a material adverse effect on our business, financial condition, or results of operations.

 

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,September 30, 2023.

 

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.

 

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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,September 30, 2023, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

 

Changes in Internal Control over Financial Reporting           

 

In February 2023, Shyft implemented a new enterprise resource planning system at the Charlotte, Michigan, Specialty Vehicles location. In connection with this implementation, Shyft replaced multiple internal controls with new or modified controls.

Except as described above, there wereThere have been no changes during the quarter ended September 30, 2023, in our internal control over financial reporting during the quarter ended March 31, 2023, 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.

 

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PART II.  OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

See “Note 7 – Commitments and Contingent Obligations,” included in Part I, Item 1, “Notes to Unaudited Consolidated Financial Statements,” within this quarterly report on Form 10-Q. 

 

Item 1A.

Risk Factors

 

We have included in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022, 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, 2022 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, and Issuer Purchases of Equity Securities

 

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 2023, we repurchased 348,705 shares for $8.8 million. In the third quarter of 2023, we repurchased 673,744 shares for $10.3 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(1)

  

Average
Price Paid
per Share

  

Total Number

of
Shares

Purchased
as Part of

Publicly
Announced

Plans or
Programs

  

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

Programs(2)

(In millions)

 

January 1 to January 31

  -  $-   -  $242.1 

February 1 to February 28

  152,062   30.66   -   242.1 

March 1 to March 31

  363,320   24.65   348,705   233.3 

Total

  515,382       348,705     

Period

 

Total
Number of
Shares
Purchased(1)

  

Average
Price Paid
per Share

  

Total Number

of
Shares

Purchased
as Part of

Publicly
Announced

Plans or
Programs

  

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

Programs(2)

(In millions)

 

July 1 to July 31

  -  $-   -  $233.3 

August 1 to August 31

  674,811   15.32   673,744   223.0 

September 1 to September 30

  -   -   -   223.0 

Total

  674,811       -     

 

(1) During the quarter ended March 31,September 30, 2023, 166,6771,067 shares were delivered by employees in satisfaction of tax withholding obligations that occurred upon the vesting of restricted shares.

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

 

Item 5.

Other Information

During the quarter ended September 30, 2023, no director or officer (as defined in Rule 16a-1(f) under the Exchange Act) of the Company adopted, modified or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement” (as each term is defined in Item 408 of Regulation S-K).

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Item 6.

Exhibits.

 

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

 

Exhibit No.

 

Document

   
10.8.210.1 Form of Performance Share Unit Agreement (2023 LTI)*
10.9.2Form of Restricted Stock Unit Agreement (2023 LTI)dated as of September 1, 2023 (under The Shyft Group, Inc. Stock Incentive Plan (as amended and restated effective May 17, 2023)), between the Company and Paul Mascarenas.*
   

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

 

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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 27,October 26, 2023

THE SHYFT GROUP, INC.

 

 

 

 

 

 

 

By

/s/ Jonathan C. Douyard

 

 

Jonathan C. Douyard
Chief Financial Officer

 

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