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0000743238 SHYFT GROUP, INC. false --12-31 Q3 2020 198 228 0 0 2,000 2,000 0 0 0.01 0.01 80,000 80,000 35,550 35,343 0.05 0.025 0.05 89,217 26,830 1 10,777 2,370 871 1 1 1 525 2 Excluding the nine months ended September 30, 2020. 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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 


 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020.

 

OR

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

 

Commission File Number 001-33582

 

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

 

Michigan
(State or Other Jurisdiction of 
Incorporation or Organization)

 

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

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

 


48375
(Zip Code)

 

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

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $.01 par value

SHYF

NASDAQ Global Select Market

 

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

 

Yes

 

No

 

 

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

 

Yes

 

No

 

 

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller Reporting Company

Emerging Growth Company

   

 

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

 

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

 

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

 

Class

Outstanding at October 29, 2020

Common stock, $.01 par value

35,550,457 shares

 

THE SHYFT GROUP, INC.

 

INDEX
 


 

 

Page

 

   

FORWARD-LOOKING STATEMENTS

3

 

 

   

PART I.  FINANCIAL INFORMATION

   
 

 

 

   
 

Item 1.

Financial Statements:

   
         
   

Condensed Consolidated Balance Sheets – September 30, 2020 and December 31, 2019 (Unaudited)

4

 
   

 

   
   

Condensed Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2020 and 2019 (Unaudited)

5

 
   

 

   
   

Condensed Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2020 and 2019 (Unaudited)

6

 
         
   

Condensed Consolidated Statement of Shareholders’ Equity – Three and Nine Months Ended September 30, 2020 and 2019 (Unaudited)

7

 
   

 

   
   

Notes to Condensed Consolidated Financial Statements

8

 
   

 

   
 

Item 2.

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

23

 
 

 

 

   
 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

36

 
 

 

 

   
 

Item 4.

Controls and Procedures

36

 
 

 

 

   

PART II.  OTHER INFORMATION

   
         
 

Item 1A.

Risk Factors

37

 
         
 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

38

 
         

 

Item 6.

Exhibits

39

 

 

 

 

   

SIGNATURES

40

 

 

 

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 and Section 21E of the Securities Exchange Act of 1934. These statements involve important known and unknown risks, uncertainties and other factors and can be identified by phrases using “estimate,” “anticipate,” “believe,” “project,” “expect,” “intend,” “predict,” “potential,” “future,” “may,” “will”, “should” and 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 Part I, Item 1A – Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission on March 16, 2020, subject to any changes and updates disclosed in Part II, Item 1A – Risk Factors below. Those risk factors include all known risks our management believes could materially affect the potential results described by forward-looking statements contained in this Form 10-Q. However, those risks may not be the only ones 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. We do not undertake any 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.

 

3

 

Item 1.

Financial Statements

 

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

(In thousands, except par value) 

 

  

September 30,

2020

  

December 31,

2019

 

ASSETS

        

Current assets:

        

Cash and cash equivalents

 $43,055  $19,349 

Accounts receivable, less allowance of $198 and $228

  99,461   58,874 

Contract assets

  9,667   10,898 

Inventories, net

  43,076   59,456 

Other receivables – chassis pool agreements

  12,741   8,162 

Other current assets

  9,490   5,344 

Current assets held for sale

  -   90,725 

Total current assets

  217,490   252,808 

Property, plant and equipment, net

  37,360   40,074 

Right of use assets operating leases

  35,529   32,147 

Goodwill

  43,480   43,632 

Intangible assets, net

  51,662   54,061 

Other assets

  1,938   2,295 

Net deferred tax asset

  7,660   25,520 

TOTAL ASSETS

 $395,119  $450,537 
         

LIABILITIES AND SHAREHOLDERS’ EQUITY

        

Current liabilities:

        

Accounts payable

 $63,433  $54,713 

Accrued warranty

  5,564   5,694 

Accrued compensation and related taxes

  15,421   15,841 

Deposits from customers

  650   2,640 

Operating lease liability

  6,273   5,162 

Other current liabilities and accrued expenses

  6,731   15,967 

Short-term debt – chassis pool agreements

  12,741   8,162 

Current portion of long-term debt

  220   177 

Current liabilities held for sale

  -   49,601 

Total current liabilities

  111,033   157,957 

Other non-current liabilities

  6,063   4,922 

Long-term operating lease liability

  29,836   27,241 

Long-term debt, less current portion

  48,522   88,670 

Total liabilities

  195,454   278,790 

Commitments and contingent liabilities

          

Shareholders’ equity:

        

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

  -   - 

Common stock, $0.01 par value; 80,000 shares authorized; 35,550 and 35,343 outstanding

  355   353 

Additional paid in capital

  90,362   85,148 

Retained earnings

  109,288   86,764 

Total The Shyft Group, Inc. shareholders’ equity

  200,005   172,265 

Non-controlling interest

  (340)  (518)

Total shareholders’ equity

  199,665   171,747 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 $395,119  $450,537 

 

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

September 30,

  

Nine Months Ended

September 30,

 
  2020  2019  

2020

  

2019

 
                 

Sales

 $203,473  $224,703  $504,391  $576,582 

Cost of products sold

  152,723   186,674   393,335   496,974 

Gross profit

  50,750   38,029   111,056   79,608 
                 

Operating expenses:

                

Research and development

  824   1,103   3,496   3,475 

Selling, general and administrative

  23,525   19,812   69,534   46,815 

Total operating expenses

  24,349   20,915   73,030   50,290 
                 

Operating income

  26,401   17,114   38,026   29,318 
                 

Other income (expense):

                

Interest expense

  (11)  (144)  (1,202)  (831)

Interest and other income

  238   473   243   947 

Total other income (expense)

  227   329   (959)  116 
                 

Income from continuing operations before income taxes

  26,628   17,443   37,067   29,434 

Income tax expense

  7,253   4,317   7,084   6,929 

Income from continuing operations

  19,375   13,126   29,983   22,505 

Loss from discontinued operations, net of income taxes

  (598)  (2,711)  (4,619)  (7,264)

Net income

  18,777   10,415   25,364   15,241 

Less: net income (loss) attributable to non-controlling interest

  41   61   178   (14)
                 

Net income attributable to The Shyft Group, Inc.

 $18,736  $10,354  $25,186  $15,255 
                 

Basic earnings (loss) per share

                

Continuing operations

 $0.55  $0.37  $0.84  $0.64 

Discontinued operations

  (0.02)  (0.08)  (0.13)  (0.21)

Basic earnings per share

 $0.53  $0.29  $0.71  $0.43 
                 

Diluted earnings (loss) per share

                

Continuing operations

 $0.54  $0.37  $0.83  $0.64 

Discontinued operations

  (0.02)  (0.08)  (0.13)  (0.21)

Diluted earnings per share

 $0.52  $0.29  $0.70  $0.43 
                 

Basic weighted average common shares outstanding

  35,559   35,317   35,491   35,311 

Diluted weighted average common shares outstanding

  35,989   35,463   35,794   35,355 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

5

 

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

(In thousands)

 

  

Nine Months Ended September 30,

 
  

2020

  

2019

 

Cash flows from operating activities:

        

Net income

 $25,364  $15,241 

Adjustments to reconcile net income to net cash used in operating activities:

        

Depreciation and amortization

  11,122   7,731 
Deferred income taxes  17,859   (594)
Non-cash stock based compensation expense  6,322   3,767 
Loss on sale of business  2,901   - 
Loss from write-off of construction in process  2,430   - 
Changes in accounts receivable and contract assets  (40,027)  (11,527)
Changes in inventories  12,527   (10,934)
Changes in accounts payable  (1,265)  4,393 
Changes in accrued compensation and related taxes  (423)  6,211 
Changes in accrued warranty  (130)  1,896 
Change in other assets and liabilities  (16,033)  (9,950)

Total adjustments

  (4,717)  (9,007)

Net cash provided by operating activities

  20,647   6,234 
         

Cash flows from investing activities:

        

Purchases of property, plant and equipment

  (8,325)  (7,500)
Acquisition of business, net of cash acquired  152   (89,650)

Proceeds from sale of business

  55,000   - 

Net cash provided by (used in) investing activities

  46,827   (97,150)
         

Cash flows from financing activities:

        

Proceeds from long-term debt

  16,000   92,000 

Payments on long-term debt

  (56,000)  (10,102)
Payment of dividends  (2,662)  (1,777)

Purchase and retirement of common stock

  -   (793)

Cash used in the exercise and vesting of stock incentive awards

  (1,106)  (832)

Net cash provided by (used) in financing activities

  (43,768)  78,496 
         

Net increase (decrease) in cash and cash equivalents

  23,706   (12,420)

Cash and cash equivalents at beginning of period

  19,349   27,439 

Cash and cash equivalents at end of period

 $43,055  $15,019 

 

Note: Consolidated Statements of Cash Flows include continuing operations and discontinued operations for all periods presented.

 

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

  

Additional

Paid In

Capital

  

Retained

Earnings

  

Non-

Controlling

Interest

  

Total

Shareholders

Equity

 

Balance at December 31, 2019

  35,344  $353  $85,148  $86,764  $(518) $171,747 

Issuance of common stock and tax impact of stock incentive plan

  4   -   55   -   -   55 

Issuance of restricted stock, net of cancellation

  127   1   -   -   -   1 

Non-cash stock based compensation expense

  -   -   2,132   -   -   2,132 

Net income

  -   -   -   7,811   67   7,878 

Balance at March 31, 2020

  35,475   354   87,335   94,575   (451)  181,813 
Issuance of common stock and tax impact of stock incentive plan  4   -   (1,209)  -   -   (1,209)
Issuance of restricted stock, net of cancellation  80   1   (2)  -   -   (1)
Dividends declared ($0.05 per share)  -   -   -   (1,775)  -   (1,775)
Non-cash stock based compensation expense  -   -   2,126   -   -   2,126 
Net income (loss)  -   -   -   (1,361)  70   (1,291)
Balance at June 30, 2020  35,559   355   88,250   91,439   (381)  179,663 
Issuance of common stock and tax impact of stock incentive plan  3   -   48   -   -   48 
Issuance of restricted stock, net of cancellation  (12)  -   -   -   -   - 
Dividends declared ($0.025 per share)  -   -   -   (887)  -   (887)
Non-cash stock based compensation expense  -   -   2,064   -   -   2,064 
Net income  -   -   -   18,736   41   18,777 
Balance at September 30, 2020  35,550  $355  $90,362  $109,288  $(340) $199,665 

 

 

  

Number of

Shares

  

Common

Stock

  

Additional

Paid In

Capital

  

Retained

Earnings

  

Non-

Controlling

Interest

  

Total

Shareholders

Equity

 

Balance at December 31, 2018

  35,321  $353  $82,816  $103,571  $(658) $186,082 

Transition adjustment for adoption of new lease standard

  -   -   -   (113)  -   (113)

Balance at December 31, 2018, adjusted

  35,321   353   82,816   103,458   (658)  185,969 

Issuance of common stock and tax impact of stock incentive plan

  9   -   (922)  -   -   (922)

Issuance of restricted stock, net of cancellation

  121   1   (1)  -   -   - 

Purchase and retirement of common stock

  (101)  (1)  (236)  (556)  -   (793)

Non-cash stock based compensation expense

  -   -   860   -   -   860 

Net income

  -   -   -   1,397   140   1,537 

Balance at March 31, 2019

  35,350   353   82,517   104,299   (518)  186,651 
Issuance of common stock and tax impact of stock incentive plan  8   -   28   -   -   28 
Issuance of restricted stock, net of cancellation  (42)  -   -   -   -   - 
Issuance of common stock related to investment in subsidiary  (247)  (2)  (1,946)  -   -   (1,948)
Dividends declared ($0.05 per share)  -   -   -   (1,777)  -   (1,777)
Non-cash stock based compensation expense  247   2   1,341   -   -   1,343 
Net income (loss)  -   -   -   3,504   (215)  3,289 
Balance at June 30, 2019  35,316   353   81,940   106,026   (733)  187,586 
Issuance of common stock and tax impact of stock incentive plan  6   -   62   -   -   62 
Issuance of restricted stock, net of cancellation  11   -   -   -   -   - 
Non-cash stock based compensation expense  -   -   1,563   -   -   1,563 
Net income  -   -   -   10,354   61   10,415 
Balance at September 30, 2019  35,333  $353  $83,565  $116,380  $(672) $199,626 

 

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

 

Effective June 1, 2020, our corporate name has changed to The Shyft Group, Inc. (f/k/a Spartan Motors, Inc.). The new corporate name reflects the next phase of our business transformation with an increased focus on higher growth commercial, retail, and service specialty vehicle markets.

 

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, 2019, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2020.

 

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, luxury Class A diesel motor home chassis, military vehicles, and contract manufacturing and assembly services. We also supply replacement parts and offer repair, maintenance, field service and refurbishment services for the vehicles that we manufacture. Our operating activities are conducted through our wholly-owned operating subsidiary, The Shyft Group USA, Inc., with locations in Charlotte, Michigan; Pompano Beach and West Palm Beach, Florida; Ephrata, Pennsylvania; Bristol, Indiana; North Charleston, South Carolina; Kansas City, Missouri; Montebello, Carson and Sacramento, California; Mesa, Arizona; Dallas and Weatherford, Texas; and Saltillo, Mexico.

 

Our Bristol, Indiana location manufactures vehicles used in the parcel delivery, mobile retail and trades and construction industries, and supplies related aftermarket parts and services under the Utilimaster brand name. Our Kansas City, Missouri; Pompano Beach and West Palm Beach, Florida; Ephrata, Pennsylvania; North Charleston, South Carolina; Montebello, California; and Saltillo, Mexico locations sell and install equipment used in commercial and fleet vehicles. Our Charlotte, Michigan location manufactures heavy-duty chassis and vehicles, and supplies aftermarket parts and accessories under the Spartan Chassis brand name. Our Carson and Sacramento, California; Mesa, Arizona; and Dallas and Weatherford, Texas locations manufacture service truck bodies and accessories under the Royal Truck Body brand name.

 

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 September 30, 2020, and our results of operations and cash flows for the three and nine months ended September 30, 2020. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2019. The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results expected for the full year.

 

Recent Developments

 

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus (“COVID-19”). On March 11, 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The pandemic has had a significant impact on macroeconomic conditions. To limit the spread of COVID-19, governments have taken various actions including the issuance of stay-at-home orders and social distancing guidelines. While the Company’s plants continued to operate as essential businesses, starting March 23, 2020 certain of our manufacturing facilities were temporarily suspended or cut back on operating levels and shifts as a result of government orders. As of  June 30, 2020, approximately 90% of our facilities were at full or modified production levels and as of September 30, 2020, all of our facilities were at full or modified production levels. However, additional suspensions and cutbacks may occur as the impacts from COVID-19 and related responses continue to develop within our global supply chain and customer base. The Company is taking a variety of measures to maintain operations with as minimal impact as possible to promote the safety and security of our employees, including increased frequency of cleaning and disinfecting of facilities, social distancing, remote working when possible, travel restrictions and limitations on visitor access to facilities. We took actions to align operations and spending across our business in response to uncertainty caused by the COVID-19 outbreak during 2020. This included actions that primarily impacted the second quarter of 2020, such as temporary salary reductions for executive management and the Board of Directors, furloughs of a portion of our workforce, freezing employee requisitions and minimizing capital expenditures to critical investments.

 

 

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

 

The full impact of the COVID-19 outbreak continues to evolve as of the date of this filing. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the impact of the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2020. 

 

In 2019, we performed a quantitative assessment and concluded each of our reporting units and indefinite life intangible assets had excess fair value over their carrying value. However, during the nine months ended September 30, 2020, we observed negative macroeconomic indicators resulting from the COVID-19 pandemic, which could have a direct impact on our business. We determined this constituted a triggering event that required an assessment to determine if an impairment loss may have occurred. Therefore, we qualitatively assessed whether it was more likely than not that goodwill and indefinite life intangible assets were impaired as of September 30, 2020. We reviewed our previous forecasts and assumptions based on our current projections, which are subject to various risks and uncertainties, including projected revenue, projected operational profit, terminal growth rates, and the cost of capital. Based on our interim impairment assessment as of September 30, 2020, we have determined that our goodwill and indefinite life intangible assets are not impaired. The Company’s assumptions about future conditions important to its assessment of potential impairment of its goodwill and indefinite life intangible assets, including the impacts of the COVID-19 pandemic, are subject to uncertainty, and the Company will continue to monitor these conditions in future periods as new information becomes available, and will update its analyses accordingly.

 

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. As a result, the Company recorded an income tax benefit of $2,610 in the first quarter of 2020 (see "Note 10 – Taxes on Income") and has also made provision to defer the employer side social security payments for the remaining portion of 2020, to be paid in two equal installment payments in 2021 and 2022. We will continue to examine the potential impacts of the CARES Act and other future legislation on our business, results of operations, financial condition and liquidity.

 

On October 1, 2020, the Company completed its acquisition of F3 MFG Inc. (“F3”). F3 is a leading aluminum truck body and accessory manufacturer and its operations include aluminum manufacturing, finishing, assembly, and installation of DuraMag contractor, service, and van bodies, as well as Magnum branded truck accessories including headache racks (also known as cab protection racks or rear racks). F3 operates out of Waterville, Maine and that location is expected to continue to serve as the business’ primary manufacturing and assembly facility for both product lines. The addition of DuraMag aluminum bodies to the Company's product offerings follows the Company’s recent acquisition of Royal Truck Body ("Royal"), a West Coast and Southwestern US steel truck body maker. Combined, these acquisitions elevate the Company to a leading position as a national service body manufacturer. F3 will be part of our Specialty Vehicle segment (f/k/a Specialty Chassis and Vehicles).

 

On February 1, 2020, the Company completed its sale of the Emergency Response and Vehicle (“ERV”) business for $55,000 cash subject to certain post-closing adjustments. In September 2020, the Company finalized the post-close net working capital adjustment and subsequently paid $7,500 on October 1, 2020. The ERV business consisted of the emergency response cab-chassis and apparatus operations in Charlotte, Michigan, and the Spartan apparatus operations in Brandon, South Dakota; Snyder and Neligh, Nebraska; and Ephrata, Pennsylvania. See "Note 2 – Discontinued Operations" for further discussion regarding this transaction.

 

On September 9, 2019, the Company completed its acquisition of Fortress Resources, LLC d/b/a Royal Truck Body. Royal is a leading California-based designer, manufacturer and installer of service truck bodies and accessories. Royal manufactures and assembles truck body options for various trades, service truck bodies, stake body trucks, contractor trucks, and dump bed trucks. Royal is the largest service body company in the western United States with its principal facility in Carson, California. Royal has additional manufacturing, assembly, and service space in branch locations in Sacramento, California; Mesa, Arizona; and Dallas and Weatherford, Texas. This acquisition allowed us to quickly expand our footprint in the western United States supporting our strategy of coast-to-coast manufacturing and distribution. Royal is part of our Specialty Vehicles segment.

 

 

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

 

Recently Adopted Accounting Standards

 

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 is intended to introduce a revised approach to the recognition and measurement of credit losses, emphasizing an updated model based on expected losses rather than incurred losses. The provisions of this standard are effective for reporting periods beginning after December 15, 2019. The Company adopted ASU 2016-13 in the first quarter of 2020, and it had no material impact on our consolidated financial position, results of operations or cash flows.

 

Accounting Standards Not Yet Adopted

 

In December 2019, the FASB issued Accounting Standards Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 is intended to simplify the accounting for income taxes by removing certain exceptions to the general principles of Topic 740 and improving consistent application of Generally Accepted Accounting Principles ("GAAP") for other areas of Topic 740 by clarifying and amending existing guidance. The provisions of this standard are effective for reporting periods beginning after December 15, 2020 and early adoption is permitted. The adoption of the provisions of ASU 2019-12 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

 

 

NOTE 2 – DISCONTINUED OPERATIONS

 

On February 1, 2020, we completed the sale of our ERV business for $55,000 cash subject to certain post-closing adjustments. In September 2020, the Company finalized the post-close net working capital adjustment and subsequently paid $7,500 on October 1, 2020. The Company recognized a loss on sale of $763 and $2,901 in the three and nine months ended September 30, 2020, respectively, which are portions of the Loss from discontinued operations, net of tax in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020. The ERV business included the emergency response chassis operations in Charlotte, Michigan, and the Spartan apparatus operations in Brandon, South Dakota; Snyder and Neligh, Nebraska; and Ephrata, Pennsylvania. The ERV business met the accounting criteria for held for sale classification as of December 31, 2019. The results of the ERV business have been reclassified to Loss from discontinued operations, net of tax in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019.

 

The loss from discontinued operations presented in the Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2020 and 2019 is as follows:

 

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
  

2020

  

2019

  2020  2019 
                 

Sales

 $-  $64,248  $19,167  $194,268 

Cost of products sold

  -   60,101   18,678   180,302 

Gross profit

  -   4,147   489   13,966 

Operating expenses

  -   7,758   4,404   24,674 

Operating loss

  -   (3,611)  (3,915)  (10,708)

Other income (expense)

  (763)  7   (2,901)  1,015 

Loss from discontinued operations before taxes

  (763)  (3,604)  (6,816)  (9,693)

Income tax benefit

  165   893   2,197   2,429 

Net loss from discontinued operations

 $(598) $(2,711) $(4,619) $(7,264)

 

 

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

 

In the annual goodwill and intangible assets impairment test as of October 1, 2019, we determined that the fair value of our ERV business and Smeal trade name were less than their carrying values due to under-performance in 2019 which was expected to continue in future periods. As a result, we recorded impairment expense of $13,856 to write off the goodwill and indefinite lived intangible assets. In conjunction with the classification of the ERV business as held for sale as of December 31, 2019, we recorded a loss of $39,275 to write down the carrying values of the associated assets and liabilities to their fair values less estimated costs to sell of $3,604. The assets and liabilities of the discontinued operations are presented separately under the captions Current assets held for sale and Current liabilities held for sale in the Condensed Consolidated Balance Sheets as of December 31, 2019. As of September 30, 2020, due to the sale of the ERV business, there were no assets or liabilities related to discontinued operations on the Condensed Consolidated Balance Sheets.

 

Assets and Liabilities held for sale in the Condensed Consolidated Balance Sheet were as follows:

 

  

December 31,

 
  

2019

 

Assets:

    

Accounts receivable, net

 $30,760 

Contract assets

  36,740 

Inventories, net

  32,329 

Other current assets

  1,142 

Property, plant and equipment

  21,967 

Right of use assets – operating leases

  5,960 

Intangible assets

  1,050 

Other noncurrent assets

  52 

Impairment of carrying value

  (39,275)

Total current assets held for sale

 $90,725 
     

Liabilities:

    
Accounts payable $4,213 
Accrued warranty  11,347 
Accrued compensation and related taxes  3,047 
Deposits from customers  21,409 
Operating lease liability  727 

Other current liabilities

  3,495 
Long-term operating lease liability  5,363 
Total current liabilities held for sale $49,601 

 

Total depreciation and amortization and capital expenditures for the discontinued operations for the three and nine months ended September 30, 2020 and 2019 were as follows:

 

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
  2020  2019  

2020

  

2019

 
                 

Depreciation and amortization

 $-  $1,238  $284  $3,686 

Capital expenditures

 $-  $674  $84  $2,218 

 

 

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

 

NOTE 3 – ACQUISITION ACTIVITIES

 

On October 1, 2020, the Company completed its acquisition of F3 MFG Inc. F3 is a leading, aluminum truck body and accessory manufacturer, and F3 operations include aluminum manufacturing, finishing, assembly, and installation of DuraMag contractor, service, and van bodies, as well as Magnum branded headache racks (also known as cab protection racks or rear racks). The Company paid $18,250 in cash, which was partially financed by borrowing from our existing line of credit, as described in "Note 5 – Debt"F3 will be part of our Specialty Vehicle segment.

 

On September 9, 2019, the Company completed the acquisition of Fortress Resources, LLC d/b/a Royal Truck Body pursuant to which the Company acquired all the outstanding equity interests of Royal. The Company paid $89,217 in cash, which was financed by borrowing from our existing line of credit, as described in "Note 5 – Debt".

 

Purchase Price Allocation

 

The Royal acquisition was accounted for using the acquisition method of accounting with the purchase price allocated to the assets purchased and liabilities assumed based upon their estimated fair values at the date of acquisition. Identifiable intangible assets include customer relationships, trade names and trademarks, patented technology and non-competition agreements. The excess of the purchase price over the estimated fair values of the net tangible and intangible assets acquired of $27,476 was recorded as goodwill, which is expected to be deductible for tax purposes.

 

The fair value of the net assets acquired were based on a preliminary valuation and the estimates and assumptions were subject to change within the measurement period. In the second quarter of 2020, the Company agreed to a working capital adjustment with the seller and made certain adjustments which resulted in a decrease to goodwill of $152. The valuation and the estimates and assumptions were finalized during the quarter ended September 30, 2020, as the measurement period has concluded.

 

As of September 30, 2020, the final allocation of purchase price to assets acquired and liabilities assumed is as follows:

 

Cash and cash equivalents

 $431 

Accounts receivable, less allowance

  5,019 

Contract assets

  1,499 

Inventory

  6,453 

Other receivables – chassis pool agreements

  10,424 

Property, plant and equipment, net

  4,980 

Right of use assets-operating leases

  12,767 

Intangible assets, net

  47,150 

Goodwill

  27,324 

Total assets acquired

  116,047 
     

Accounts payable

  (1,658)

Customer prepayments

  (255)

Accrued warranty

  (98)

Operating lease liabilities

  (1,693)

Accrued compensation and related taxes

  (569)

Other current liabilities and accrued expenses

  (30)

Short-term debt – chassis pool agreements

  (10,424)

Long-term operating lease liability

  (11,074)

Long-term debt, less current portion

  (1,029)

Total liabilities assumed

  (26,830) 
     

Total purchase price

 $89,217 

 

 

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

 

Goodwill Assigned

 

Intangible assets totaling $47,150 have been assigned to customer relationships, trade names and trademarks, patented technology and non-competition agreements as a result of the acquisition and consist of the following (in thousands):

 

  

Amount

 

Useful Life

Customer relationships

 $30,000 

15 Years

Trade names and trademarks

  13,000 

Indefinite

Patented technology

  2,200 

8 Years

Non-competition agreements

  1,950 

5 Years

  $47,150  

 

The Company amortizes the customer relationships utilizing an accelerated approach and amortizes patented technology and non-competition agreement assets utilizing a straight-line approach. Amortization expense, including the intangible assets recorded from the Royal acquisition, is $666 and $1,999 for the three and nine months ended September 30, 2020.

 

Goodwill consists of operational synergies that are expected to be realized in both the short and long-term and the opportunity to enter into new markets which will enable us to increase value to our customers and shareholders. Key areas of expected cost savings include an expanded dealer network, complementary product portfolios and manufacturing and supply chain work process improvements.

 

 

NOTE 4 – INVENTORIES

 

Inventories are summarized as follows:

 

  

September 30,

2020

  

December 31,
2019

 

Finished goods

 $3,441  $4,764 

Work in process

  1,594   1,773 

Raw materials and purchased components

  44,982   57,679 

Reserve

  (6,941)  (4,760

)

Total inventories, net

 $43,076  $59,456 

 

 

NOTE 5 DEBT

 

Short-term debt consists of the following:

 

  

September 30,
2020

  

December 31,
2019

 

Chassis pool agreements

 $12,741  $8,162 

Total short-term debt

 $12,741  $8,162 

 

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, and in some cases, for unallocated orders. The agreements generally state that the manufacturer will provide a supply of chassis to be maintained at the Company’s facilities with the condition that we will store such chassis and will not move, sell, or otherwise dispose of such chassis except under the terms of the agreement. In addition, the manufacturer typically retains the sole authority to authorize commencement of work on the chassis and to make certain other decisions with respect to the chassis including the terms and pricing of sales of the chassis to the manufacturer’s dealers. The manufacturer also does not transfer the certificate of origin to the Company nor permit the Company to sell or transfer the chassis to anyone other than the manufacturer (for ultimate resale to a dealer).

 

 

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


Although the Company is party to related finance agreements with manufacturers, the Company has not historically settled any related obligations in cash, nor does it expect to do so in the future. Instead, the obligation is settled by the manufacturer upon reassignment of the chassis to an accepted dealer, and the dealer is invoiced for the chassis by the manufacturer. Accordingly, as of September 30, 2020 and December 31, 2019, the Company’s outstanding chassis converter pool with manufacturers totaled $12,741 and $8,162, respectively. The Company has included this financing agreement on the Company’s Condensed Consolidated Balance Sheets within Other receivables – chassis pool agreements and Short-term debt – chassis pool agreements. Typically, chassis are converted and delivered to customers within 90 days of the receipt of the chassis by the Company. The chassis converter pool is a non-cash arrangement and is offsetting between Current assets and Current liabilities on the Company’s Condensed Consolidated Balance Sheets.

 

Long-term debt consists of the following:

 

  

September 30,
2020

  

December 31,
2019

 

Line of credit revolver

 $47,400  $87,400 

Finance lease obligation

  519   496 

Other

  823   951 

Total debt

  48,742   88,847 

Less current portion of long-term debt

  (220)  (177

)

Total long-term debt

 $48,522  $

88,670

 

Line of Credit Revolver

 

On August 8, 2018, we entered into a Credit Agreement (the "Credit Agreement") by and among us and certain of our subsidiaries as borrowers, Wells Fargo Bank, National Association ("Wells Fargo"), as administrative agent, and the lenders party thereto consisting of Wells Fargo, JPMorgan Chase Bank, N.A. and PNC Bank National Association (the "Lenders"). Subsequently, the Credit Agreement was amended on May 14, 2019, September 9, 2019 and September 25, 2019 and certain of our other subsidiaries executed guaranties guarantying the borrowers’ obligations under the Credit Agreement. Concurrent with the close of the sale of the ERV business and effective January 31, 2020, the Credit Agreement was further amended by a fourth amendment, which released certain of our subsidiaries that were sold as part of the ERV business. The substantive business terms of the Credit Agreement remain in place and were not changed by the fourth amendment.

 

As a result, at September 30, 2020, under the Credit Agreement, as amended, we may borrow up to $175,000 from the Lenders under a secured revolving credit facility which matures August 8, 2023. We may also request an increase in the facility of up to $50,000 in the aggregate, subject to customary conditions. The credit facility is also available for the issuance of letters of credit of up to $20,000 and swing line loans of up to $30,000, subject to certain limitations and restrictions. This revolving credit facility carries an interest rate of either (i) the highest of prime rate, the federal funds effective rate from time to time plus 0.5%, or the one month adjusted LIBOR plus 1.0%; or (ii) adjusted LIBOR, in each case plus a margin based upon our ratio of debt to earnings from time to time. The applicable borrowing rate including margin was 1.44% (or one-month LIBOR plus 1.25%) at September 30, 2020. The credit facility is secured by security interests in, and liens on, all assets of the borrowers and guarantors, other than real property and certain other excluded assets. At September 30, 2020 and December 31, 2019, we had outstanding letters of credit totaling $525 related to our workers’ compensation insurance.

 

Under the terms of our Credit Agreement, available borrowings (exclusive of outstanding borrowings) totaled $100,681 and $60,499 at September 30, 2020 and December 31, 2019, 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 September 30, 2020 and December 31, 2019, we were in compliance with all covenants in our Credit Agreement.

 

In the three months ended September 30, 2020 the Company paid down $10,000 of long-term debt. In the nine months ended September 30, 2020 the Company paid down $40,000 of long-term debt, net of borrowings.

 

 

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

 

NOTE 6 – REVENUE

 

The tables below disclose changes in contract assets and liabilities for the nine months ended September 30, 2020 and 2019.

 

  

September 30,

2020

  

September 30,

2019

 

Contract Assets

        

Contract assets, beginning of period

 $10,898  $9,229 

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

  (10,777)  (9,229)

Contract assets recognized, net of reclassification to receivables

  9,546   12,432 

Contract assets, end of period

 $9,667  $12,432 
         

Contract Liabilities

        

Contract liabilities, beginning of period

 $2,640  $871 

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

  (2,370)  (871)

Cash received in advance and not recognized as revenue

  380   1,737 
Contract liabilities, end of period $650  $1,737 

 

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 $228,870 and $51,756 respectively, with substantially all revenue expected to be recognized within one year as of September 30, 2020.

 

In the following tables, revenue is disaggregated by primary geographical market and timing of revenue recognition for the three and nine months ended September 30, 2020 and 2019. The tables also include a reconciliation of the disaggregated revenue with the reportable segments.

 

  

Three Months Ended

September 30, 2020

 
  

FVS

  

SV

  

Total

Reportable

Segments

  

Other

  

Total

 

Primary geographical markets

                    

United States

 $144,420  $58,263  $202,683  $-  $202,683 

Other

  770   20   790   -   790 

Total sales

 $145,190  $58,283  $203,473  $-  $203,473 
                     

Timing of revenue recognition

                    

Products transferred at a point in time

 $11,075  $40,962  $52,037  $-  $52,037 

Products and services transferred over time

  134,115   17,321   151,436   -   151,436 

Total sales

 $145,190  $58,283  $203,473  $-  $203,473 

 

 

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, 2019

 
  

FVS

  

SV

  

Total

Reportable

Segments

  

Other

  

Total

 

Primary geographical markets

                    

United States

 $176,689  $45,072  $221,761  $-  $221,761 

Other

  2,905   37   2,942   -   2,942 

Total sales

 $179,594  $45,109  $224,703  $-  $224,703 
                     

Timing of revenue recognition

                    

Products transferred at a point in time

 $41,830  $35,824  $77,654  $-  $77,654 

Products and services transferred over time

  137,764   9,285   147,049   -   147,049 

Total sales

 $179,594  $45,109  $224,703  $-  $