THE SHYFT GROUP, INC. EffectiveJune 1, 2020 , our corporate name has changed to TheShyft Group, Inc. (f/k/aSpartan 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.
The
The Company is a niche market leader in specialty vehicle manufacturing and assembly for the commercial vehicle (including last-mile delivery, specialty service and vocation-specific upfit segments) and recreational vehicle industries. Our products include walk-in vans and truck bodies used in e-commerce/parcel delivery, upfit equipment used in the mobile retail and utility trades, service and vocational truck bodies, luxury Class A diesel motor home chassis, 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 inCharlotte, Michigan ;Pompano Beach andWest Palm Beach, Florida ;Ephrata, Pennsylvania ;Bristol, Indiana ;North Charleston, South Carolina ;Kansas City, Missouri ;Montebello ,Carson andSacramento, California ;Mesa, Arizona ;Dallas andWeatherford, Texas ; andSaltillo, Mexico . 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 provides the agility 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 expansion of equipment upfit services in our Fleet Vehicles and Services segment, and the growing opportunities that we have capitalized on in last mile delivery as a result of the rapidly changing e-commerce market, are excellent examples of our ability to generate growth and profitability by quickly fulfilling customer needs. Recent Developments OnJanuary 30, 2020 , theWorld Health Organization ("WHO") announced a global health emergency because of a new strain of coronavirus ("COVID-19"). OnMarch 11, 2020 , theWHO 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, startingMarch 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 ofJune 30, 2020 , approximately 90% of our facilities were at full or modified production levels and as ofSeptember 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 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. 23
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OnMarch 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$2.6 million 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 on our business, results of operations, financial condition and liquidity. OnOctober 1, 2020 , the Company completed its acquisition ofF3 MFG Inc. ("F3"). 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 truck accessories including headache racks (also known as cab protection racks or rear racks). F3 operates out ofWaterville, 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 ofRoyal Truck Body ("Royal"), aWest 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). OnFebruary 1, 2020 , the Company completed its sale of the Emergency Response and Vehicle ("ERV") business for$55.0 million in cash, subject to certain post-closing adjustments. InSeptember 2020 , the Company finalized the post-close net working capital adjustment and subsequently paid$7.5 million onOctober 1, 2020 . The ERV business consisted of the emergency response cab-chassis and apparatus operations inCharlotte, Michigan , and the Spartan apparatus operations inBrandon, South Dakota ;Snyder andNeligh, Nebraska ; andEphrata, Pennsylvania . The divestiture will allow us to further focus on accelerating growth and profitability in our commercial, fleet, delivery and specialty vehicles markets. As a result of this divestiture, the ERV business is accounted for as a discontinued operation for all periods presented. See "Note 2 - Discontinued Operations" of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for further discussion of this transaction. OnSeptember 9, 2019 , the Company completed the acquisition ofFortress Resources, LLC d/b/aRoyal Truck Body for$89.2 million in cash, subject to certain post-closing adjustments. Royal is a leadingCalifornia -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 westernUnited States with its principal facility inCarson, California . Royal has additional manufacturing, assembly, and service space in branch locations inSacramento, California ;Mesa, Arizona ; andDallas andWeatherford, Texas . This acquisition allowed us to quickly expand our footprint in the westernUnited States supporting our strategy of coast-to-coast manufacturing and distribution. Royal is part of our Specialty Vehicle segment. See "Note 3 - Acquisition Activities" of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for further discussion of this transaction. Executive Overview ? Revenue of$203.5 million in the third quarter of 2020, a decrease of 9.4% compared to$224.7 million in the third quarter of 2019.
? Gross Margin of 24.9% in the third quarter of 2020, compared to 16.9% in the
third quarter of 2019.
? Operating expense of
2020, compared to
2019.
? Operating income of
? Income tax expense of
? Income from continuing operations of
2020, compared to $13.1 million in the third quarter of 2019.
? Diluted earnings per share from continuing operations of $0.54 in the
third quarter of 2020, compared to $0.37 in the third quarter of 2019.
? Order backlog of $280.6 million at September 30, 2020 , an increase of
2019.
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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:
? The introduction of the Velocity F2, Class 2 walk-in van built on a Ford
Transit chassis. The Velocity F2 combines nimbleness, comfort, and fuel
efficiency with the cargo space, access, and load capacity similar to a
traditional walk-in delivery van. The Velocity F2 gives parcel delivery fleets
the flexibility they need to activate a large driver pool, service more
customers, and maintain longer routes, consistent with increased demand.
? Our relationship with
chassis for walk-in vans, box trucks, work trucks, buses and other specialty
vehicles that provides us with access to Motiv's EPIC™ all-electric chassis in
manufacturing Class 4 - Class 6 walk-in vans. This alliance demonstrates our
ability to innovate and advance the markets we serve, and places us ahead of
the curve in the electric vehicle (EV) fleet market.
? Our continued expansion into the equipment upfit market for vehicles used in
the parcel delivery, trades and construction industries. This rapidly
expanding market offers an opportunity to add value to current and new
customers for our fleet vehicles and vehicles produced by other original
equipment manufacturers.
? The introduction of Velocity M3 walk-in cargo van which is built on aergonomics, and safety provisions of a cargo van cab and chassis with the
expansive cargo space of a traditional walk-in van. The Velocity M3 builds
upon advancements from the Utilimaster Reach®, with a lighter body design,
improved payload, better fuel efficiency, and maximized cargo space,
punctuated with a game-changing automatic access system that opens, closes,
and locks interior and exterior doors-without keys or manual effort-for
unequaled ease and stop-by-stop efficiency gains.
? The introduction of our refrigeration technology, which demonstrates our
ability to apply the latest technical advancements with our unique
understanding of last-mile delivery optimization. Utilimaster's Work-Driven
Design™ process provides best-in-class conversion solutions in walk-in vans,
truck bodies, and cargo van vehicles. The refrigerated van is upfitted to
optimally preserve cold cargo quality while offering customizations such as
removable bulkheads and optional thermal curtains. The multi-temperature
solution requires no additional fuel source, so it can serve a wide variety of
categories from food and grocery to time and temperature sensitive healthcare
deliveries.
? The introduction of the K3 605 chassis. The K3 605 is equipped with Spartan
Connected Coach, a technology bundle featuring the new digital dash display
and keyless push-button start. It also features Spartan's Advanced Protection
System, a collection of safety systems that includes collision mitigation with
adaptive cruise control, electronic stability control, automatic traction
control, Spartan Safe Haul, and factory chassis-integrated air supply for tow
vehicle braking systems.
? Spartan Connected Coach, a technology bundle for our motor home chassis that
includes a 15-inch digital dash displaying gauge functions, tire pressure
monitoring, blind spot indicators, navigation, and other information. Spartan
Connected Coach also offers passive keyless start and adjustable Adaptive
Cruise Control and brings proven automotive technology to the RV market.
? The strength of our balance sheet and access to credit through our revolving
line of credit.
The following section provides a narrative discussion about our financial
condition and results of operations. Certain amounts in the narrative may not
sum due to rounding. The comments should be read in conjunction with our
Condensed Consolidated Financial Statements and related Notes thereto included
in Item 1 of this Form 10-Q and in conjunction with our Annual Report on Form
10-K filed with the Securities and Exchange Commission on March 16, 2020 .
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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
September 30, September 30,
2020 2019 2020 2019
Sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 75.1% 83.1% 78.0% 86.2%
Gross profit 24.9% 16.9% 22.0% 13.8%
Operating expenses:
Research and development 0.4% 0.5% 0.7% 0.6%
Selling, general and administrative 11.6% 8.8% 13.8% 8.1%
Operating income 13.0% 7.6% 7.5% 5.1%
Other income (expense), net 0.1% 0.2% (0.2% ) 0.0%
Income from continuing operations before
income taxes 13.1% 7.8% 7.3% 5.1%
Income tax expense 3.6% 1.9% 1.4% 1.2%
Income from continuing operations 9.5% 5.8% 5.9% 3.9%
Loss from discontinued operations, net
of income taxes (0.3% ) (1.2% ) (0.9% ) (1.3% )
Non-controlling interest 0.0% 0.0% 0.0% 0.0%
Net income attributable to The Shyft
Group, Inc. 9.2% 4.6% 5.0% 2.6%
Quarter Ended
Sales
For the quarter ended
Cost of Products Sold Cost of products sold was$152.7 million in the third quarter of 2020, compared to$186.7 million in the third quarter of 2019, a decrease of$34.0 million or 18.2%. Cost of products sold decreased$23.0 million due to lower pass through Chassis material,$0.2 million due to the lower unit sales volumes,$6.6 million due to favorable product mix,$1.9 million due to cost reductions and productivity improvements,$2.3 million due to lower supplier and other costs. As a percentage of sales, cost of products sold decreased to 75.1% in the third quarter of 2020, compared to 83.1% in the third quarter of 2019. Gross Profit Gross profit was$50.7 million for the third quarter of 2020, compared to$38.0 million for the third quarter of 2019, an increase of$12.7 million , or 33.5%. Favorable product mix of$6.6 million , impact from higher sales volumes of$1.9 million , productivity improvements of$1.9 million , lower supplier and other costs of$2.3 million drove the gross profit improvements. Gross margin increased to 24.9% from 16.9% over the same period in 2019. Operating Expenses Operating expense was$24.3 million for the third quarter of 2020, compared to$20.9 million for the third quarter of 2019, an increase of$3.4 million or 16.4%. Research and development expense in the third quarter of 2020 was$0.8 million , compared to$1.1 million in the third quarter of 2019. Selling, general and administrative expense was$23.5 million in the third quarter of 2020, compared to$19.8 million for the third quarter of 2019, an increase of$3.7 million or 18.7%. This increase was primarily due to$1.7 million in additional salaried employees and incentive compensation in the third quarter of 2020. The remaining increase of$1.6 million is related to manufacturing facilities acquired in 2019. 26
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Table of Contents Other Income (Expense) Interest expense was insignificant for the third quarter of 2020, compared to$0.1 million for the third quarter of 2019, driven by lower borrowings. Other income was$0.2 million in the third quarter of 2020 compared to$0.5 million for the third quarter of 2019. Income Tax Expense Our effective income tax rate was 27.2% in the third quarter of 2020, compared to 24.7% in the third quarter of 2019. The effective tax rate of 27.2% for the three months endedSeptember 30, 2020 compares unfavorably to the comparable period in 2019 primarily because of certain non-deductible compensation expense in 2020. The effective tax rate for the three months endedSeptember 30, 2019 reflects the impact of current statutory income tax rates on our Income before taxes.
Income from Continuing Operations
Income from continuing operations for the quarter endedSeptember 30, 2020 increased by$6.3 million , or 47.6%, to$19.4 million compared to$13.1 million for the quarter endedSeptember 30, 2019 . On a diluted per share basis, income from continuing operations increased$0.17 to$0.54 in the third quarter of 2020 compared to$0.37 per share in the third quarter of 2019. Driving this increase were the factors noted above.
Loss from Discontinued Operations
Loss from discontinued operations, net of income taxes for the quarter endedSeptember 30, 2020 decreased by$2.1 million , or 77.9%, to$0.6 million compared to$2.7 million for the quarter endedSeptember 30, 2019 due to the completion of the sale of the ERV business inFebruary 2020 . Adjusted EBITDA
Our consolidated Adjusted EBITDA in the third quarter of 2020 was
The table below describes the changes in Adjusted EBITDA for the three months
ended
Adjusted EBITDA three months ended
1.9
Sales pricing/mix 6.6
Supplier, other cost decreases, and favorable productivity 6.3 General and administrative costs and other
(4.5 )
Adjusted EBITDA three months ended
Order Backlog
Our order backlog by reportable segment as of
September 30, September 30,
2020 2019
Fleet Vehicles and Services $ 228,870 $ 223,753
Specialty Vehicles 51,756 39,947
Total consolidated $ 280,626 $ 263,700 Our Fleet Vehicles and Services backlog increased by
The segment backlog at
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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.
Nine Months Ended
Sales For the nine months endedSeptember 30, 2020 , we reported consolidated sales of$504.4 million , compared to$576.6 million for the nine months endedSeptember 30, 2019 , a decrease of$72.2 million or 12.5%. This decrease reflects a sales volume decrease of$12.2 million in our Specialty Vehicles segment and a$91.4 million decrease in pass through Chassis revenue. These decreases were partially offset by a$26.2 million sales volume increases in our Fleet Vehicles and Services segment and lower intersegment revenues. Revenue was negatively impacted during the second quarter of 2020 by COVID-19 related production shut-downs due to chassis and component shortages. Please refer to our segment discussion below for further information about segment sales. Cost of Products Sold Cost of products sold was$393.3 million in the nine months endedSeptember 30, 2020 , compared to$497.0 million in the nine months endedSeptember 30, 2019 , a decrease of$103.6 million or 20.9%. Cost of products sold decreased by$91.4 million due to lower pass through Chassis material,$21.4 million due to product mix and$4.4 million due to reductions in supplier and other costs. These decreases were partially offset by$12.9 million due to higher unit sales volumes and new business. As a percentage of sales, cost of products sold decreased to 78.0% in the nine months endedSeptember 30, 2020 , compared to 86.2% in the nine months endedSeptember 30, 2019 . Gross Profit Gross profit was$111.1 million for the nine months endedSeptember 30, 2020 , compared to$79.6 million for the nine months ended,September 30, 2019 , an increase of$31.5 million , or 39.5%. The increase was due to increased volume of$5.5 million and$21.4 million driven primarily by favorable product mix, and$4.4 million due to reductions in supplier and other costs. Gross margin increased to 22.0% from 13.8% over the same period. Operating Expenses Operating expense was$73.0 million for the nine months endedSeptember 30, 2020 , compared to$50.3 million for the nine months endedSeptember 30, 2019 , an increase of$22.7 million or 45.2%. Research and development expense was$3.5 million in the nine months endedSeptember 30, 2020 , flat to the nine months endedSeptember 30, 2019 . Selling, general and administrative expense was$69.5 million in the nine months endedSeptember 30, 2020 , compared to$46.8 million for the nine months endedSeptember 30, 2019 , an increase of$22.7 million or 48.5%. This increase was primarily due to$11.2 million in additional salaried employees, incentive compensation, increased severance costs in 2020 related to the realignment of the Company after the sale of the ERV business and$5.2 million for the write-down of an ERP system. The remaining increase of$6.3 million is related to manufacturing facilities acquired in 2019. Other Income (Expense) Interest expense was$1.2 million for the nine months endedSeptember 30, 2020 , compared to$0.8 million for the nine months endedSeptember 30, 2019 , driven by higher borrowing primarily related to the Royal acquisition and incremental liquidity borrowing in response to the market uncertainty caused by the coronavirus outbreak. Interest and other income was$0.2 million for the nine months endedSeptember 30, 2020 compared to interest and other income of$0.9 million for the nine months endedSeptember 30, 2019 . 28
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Table of Contents Income Tax Expense Our effective income tax rate was 19.1% in the nine months endedSeptember 30, 2020 , compared to 23.5% in the nine months endedSeptember 30, 2019 . Our effective income tax rate in 2020 compares favorably to 2019 due to an adjustment recorded in 2020 as a result of provisions of the CARES Act allowing the carryback of tax net operating losses ("NOL") incurred in the years 2018 through 2020 for five years. The sale of our ERV business in 2020 placed the Company into a tax NOL position because of the reversal of certain deferred tax assets recorded in 2019. As a result, we will carry this NOL back to offset taxable income in years when the federal corporate income tax rate was 35%, as opposed to the 21% rate in effect at the time the deferred tax assets were recorded. The resultant favorable tax rate differential allowed us to record a$2.6 million current year tax benefit as a discrete item. Our effective income tax rate in 2019 was favorably impacted by a discrete tax benefit related to additional state tax credits from prior years becoming available for utilization in future tax returns, with a net reduction in income tax expense of$0.3 million .
Income from Continuing Operations
Income from continuing operations for the nine months endedSeptember 30, 2020 increased by$7.5 million , or 33.2%, to$30.0 million compared to$22.5 million for the nine months endedSeptember 30, 2019 . On a diluted per share basis, income from continuing operations increased$0.19 to$0.83 in the nine months endedSeptember 30, 2020 compared to$0.64 per share in the nine months endedSeptember 30, 2019 . Driving this increase were the factors noted above.
Loss from Discontinued Operations
Loss from discontinued operations, net of income taxes for the nine months endedSeptember 30, 2020 decreased by$2.7 million , or 36.4%, to$4.6 million compared to$7.3 million for the nine months endedSeptember 30, 2019 due to the completion of the sale of the ERV business inFebruary 2020 . Adjusted EBITDA Our consolidated Adjusted EBITDA in the nine months endedSeptember 30, 2020 was$60.3 million , compared to$40.5 million for the nine months endedSeptember 30, 2019 , an increase of$19.8 million or 49.1%.
The table below describes the changes in Adjusted EBITDA for the nine months
ended
Adjusted EBITDA nine months ended
5.5
Sales pricing/mix 21.4
Supplier, other cost decreases, and favorable productivity 4.4 General and administrative costs and other
(11.5 )
Adjusted EBITDA nine months ended
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 continuing operating performance. 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. Adjusted EBITDA for all prior periods presented has been
recast to conform to the current presentation.
We present the non-GAAP measure Adjusted EBITDA because we consider it to be an
important supplemental measure of our performance. The presentation of Adjusted
EBITDA enables investors to better understand our operations by removing items
that we believe are not representative of our continuing operations and may
distort our longer-term operating trends. We believe this measure to be useful
to improve the comparability of our results from period to period and with our
competitors, as well as to show ongoing results from operations distinct from
items that are infrequent or not indicative of our continuing operating
performance. We believe that presenting this non-GAAP measure is useful to
investors because it permits investors to view performance using the same tools
that management uses to budget, make operating and strategic decisions, and
evaluate our historical performance. We believe that the presentation of this
non-GAAP measure, when considered together with the corresponding GAAP financial
measures and the reconciliations to that measure, provides investors with
additional understanding of the factors and trends affecting our business than
could be obtained in the absence of this disclosure.
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Our management uses Adjusted EBITDA to evaluate the performance of and allocate resources to our segments. Adjusted EBITDA is also used, along with other financial and non-financial measures, for purposes of determining annual incentive compensation for our management team and long-term incentive compensation for certain members of our management team.
The following table reconciles Income from continuing operations to Adjusted EBITDA for the periods indicated.
Financial Summary (Non-GAAP)
Consolidated
(In thousands, Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Income from continuing operations
22,505
Net (income) loss attributable to
non-controlling interest (41 ) (61 ) (178 ) 14
Add (subtract):
Interest expense 11 144 1,202 831
Income tax expense 7,253 4,317 7,084 6,929
Depreciation and amortization expense 2,978 1,453 10,838 4,045
Restructuring and other related charges 303 243 1,857 270
Acquisition related expenses and
adjustments 650 1,522 922 1,987
Non-cash stock based compensation
expense 2,064 1,581 6,181 3,878
Loss from write-off of construction in
process - - 2,430 -
Adjusted EBITDA $ 32,593 $ 22,325 $ 60,319 $ 40,459
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: Fleet Vehicles and Services ("FVS") and Specialty Vehicles
("SV").
For certain financial information related to each segment, see "Note 11 - Business Segments", of the Notes to Condensed Consolidated Financial Statements appearing in Item 1 of this Form 10-Q.
Fleet Vehicles and Services
Financial Data
(Dollars in Thousands)
Three Months Ended
September 30,
2020 2019
Amount Percentage Amount Percentage
Sales $ 145,190 100.0 % $ 179,594 100.0 %
Adjusted EBITDA 33,237 22.9 % 24,689 13.7 %
Comparison of the Three-Month Periods Ended
Sales in our FVS segment were$145.2 million for the third quarter of 2020, compared to$179.6 million for the third quarter of 2019, a decrease of$34.4 million or 19.2%, driven by decreased vehicle sales volume of$11.4 million and a decrease of$23.0 million in pass through chassis revenue. Adjusted EBITDA in our FVS segment for the third quarter of 2020 was$33.2 million compared to$24.7 million in the third quarter of 2019, an increase of$8.5 million . Favorable product mix of$6.8 million , lower supplier costs and insourcing of$1.8 million , productivity improvements and other cost reductions of$0.8 million and lower healthcare costs of$1.4 million more than offset a$2.5 million unfavorable impact of decreased volume. 30
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Financial Data
(Dollars in Thousands)
Nine Months Ended
September 30,
2020 2019
Amount Percentage Amount Percentage
Sales $ 378,116 100.0 % $ 443,345 100.0 %
Adjusted EBITDA 68,625 18.1 % 39,584 8.9 %
Comparison of the Nine-Month Periods Ended
Sales in our FVS segment were$378.1 million for the nine months endedSeptember 30, 2020 , compared to$443.3 million for the nine months endedSeptember 30, 2019 , a decrease of$65.2 million or 14.7%, driven by a decrease of$91.4 million in pass through Chassis revenue partially offset by increased vehicle sales of$26.2 million . Adjusted EBITDA in our FVS segment for the nine months endedSeptember 30, 2020 was$68.6 million compared to$39.6 million in the nine months endedSeptember 30, 2019 , an increase of$29.0 million . Higher unit sales volume drove a$3.2 million increase, favorable product mix added$23.2 million , a reduction in supplier costs added$3.2 million and productivity improvements contributed$1.3 million to the increased profitability. These increases were partially offset by a$1.9 million increase in selling and administrative costs related to our growth and initiatives. Specialty Vehicles Financial Data (Dollars in Thousands) Three Months Ended September 30, 2020 2019 Amount Percentage Amount Percentage Sales$ 58,283 100.0 %$ 45,109 100.0 % Adjusted EBITDA 7,183 12.3 % 4,079 9.0 %
Comparison of the Three-Month Periods Ended
Sales in our SV segment were$58.3 million in the third quarter of 2020, compared to$45.1 million in the third quarter ended 2019, an increase of$13.2 million or 29.2%. This increase was driven by unit sales volume increases of$13.2 million in motor home chassis and from new business.
Adjusted EBITDA for our SV segment for the third quarter of 2020 was
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Financial Data
(Dollars in Thousands)
Nine Months Ended
September 30,
2020 2019
Amount Percentage Amount Percentage
Sales $ 126,275 100.0 % $ 138,517 100.0 %
Adjusted EBITDA 12,123 9.6 % 14,110 10.2 %
Comparison of the Nine-Month Periods Ended
Sales in our SV segment were
Adjusted EBITDA for our SV segment for the nine months endedSeptember 30, 2020 was$12.1 million , compared to$14.1 million in the nine months endedSeptember 30, 2019 , a decrease of$2.0 million , or 14.1%. This decrease was driven by unit sales volume decreases of$1.4 million in motor home chassis, other specialty vehicles, and from new business and$1.8 million of unfavorable mix partially offset by other of$1.2 million . 32
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LIQUIDITY AND CAPITAL RESOURCES
Cash Flows Cash and cash equivalents increased by$23.7 million to$43.1 million atSeptember 30, 2020 , compared to$19.4 million atDecember 31, 2019 . These funds, in addition to cash generated from future operations and available credit facilities, are expected to be sufficient to finance the Company's foreseeable liquidity and capital needs.
Cash Flow from Operating Activities
We generated$20.6 million of cash for operating activities during the nine months endedSeptember 30, 2020 , an increase of$14.4 million from$6.2 million of cash provided by operations during the nine months endedSeptember 30, 2019 . Cash flow from operating activities increased due to a$39.8 million increase in higher net income adjusted for non-cash charges to operations partially offset by a$25.4 million decrease in the change in net working capital (primarily driven by the net change in receivables and contract assets, inventories, payables, accrued compensation, accrued warranty, and other assets and liabilities). See the Financial Condition section contained in Item 2 of this Form 10-Q for further information regarding balance sheet line items that impacted cash flows for the nine-month period endedSeptember 30, 2020 . Also see the Condensed Consolidated Statements of Cash Flows contained in Item 1 of this Form 10-Q for the other various factors that represented the remaining fluctuation of cash from operations between the periods.
Cash Flow from Investing Activities
We generated$46.8 million of cash from investing activities during the nine months endedSeptember 30, 2020 , primarily attributable to the sale of the ERV business. This is a$144.0 million increase compared to the$97.2 million used during the nine months endedSeptember 30, 2019 .
Cash Flow from Financing Activities
We used$43.8 million of cash for financing activities during the nine months endedSeptember 30, 2020 , compared to$78.5 million generated during the nine months endedSeptember 30, 2019 . This increase in cash used is mainly due to a net reduction in borrowing on the line of credit revolver. Contingent Obligations
Spartan-
InFebruary 2015 , the Company andGimaex Holding, Inc. mutually agreed to begin discussions regarding the dissolution of the Spartan-Gimaex joint venture. InJune 2015 , the Company andGimaex Holding, Inc. entered into court proceedings to determine the terms of the dissolution. InFebruary 2017 , by agreement of the parties, the court proceeding was dismissed with prejudice and the judge entered an order to this effect as the parties agreed to seek a dissolution plan on their own. In late 2019, the Company initiated additional court proceedings to dissolve and liquidate the joint venture. In April of 2020, as a result of a default judgment, the Company was appointed as liquidating trustee of theGimaex joint venture, but no dissolution terms have been determined as of the date of this Form 10-Q. Costs associated with the wind-down will be impacted by the final dissolution terms. In accordance with accounting guidance, the costs we have accrued so far represent the low end of the range of the estimated total charges that we believe we may incur related to the wind-down. While we are unable to determine the final cost of the wind-down with certainty at this time, we may incur additional charges, depending on the final terms of the dissolution. Such charges are not expected to be material to our future operating results. EPA Information Request InMay 2020 , the Company received a letter from theUnited States Environmental Protection Agency ("EPA") requesting certain information as part of an EPA investigation regarding a potential failure to affix emissions labels on vehicles to determine the Company's compliance with applicable laws and regulations. This information request pertains to chassis, vocational vehicles, and vehicles that the Company manufactured or imported into the US betweenJanuary 1, 2017 to the date the Company received the request inMay 2020 . The Company responded to theEPA's request and furnished the requested materials in the third quarter of 2020. An estimate of possible penalties or loss, if any, cannot be made at this time. 33
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Table of Contents Debt OnAugust 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 . andPNC Bank National Association (the "Lenders"). Subsequently, the Credit Agreement was amended onMay 14, 2019 ,September 9, 2019 andSeptember 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 effectiveJanuary 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, atSeptember 30, 2020 , under the Credit Agreement, as amended, we may borrow up to$175.0 million from the Lenders under a secured revolving credit facility which maturesAugust 8, 2023 . We may also request an increase in the facility of up to$50.0 million in the aggregate, subject to customary conditions. The credit facility is also available for the issuance of letters of credit of up to$20.0 million and swing line loans of up to$30.0 million subject to certain limitations and restrictions. This revolving credit facility carries an interest rate of either (i) the highest of prime rate, the federal funds effective rate from time to time plus 0.5%, or the one month adjusted LIBOR plus 1.0%; or (ii) adjusted LIBOR, in each case plus a margin based upon our ratio of debt to earnings from time to time. The applicable borrowing rate including margin was 1.44% (or one-month LIBOR plus 1.25%) atSeptember 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. AtSeptember 30, 2020 andDecember 31, 2019 , we had outstanding letters of credit totaling$0.5 million related to our workers' compensation insurance. Under the terms of our Credit Agreement, available borrowings (exclusive of outstanding borrowings) totaled$100.7 million and$60.5 million atSeptember 30, 2020 andDecember 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. AtSeptember 30, 2020 andDecember 31, 2019 , we were in compliance with all covenants in our Credit Agreement.
In the three months ended
Equity Securities OnApril 28, 2016 , our Board of Directors authorized the repurchase of up to 1.0 million shares of our common stock in open market transactions. AtSeptember 30, 2020 there were 0.8 million shares remaining under this repurchase authorization. If we were to repurchase the remaining 0.8 million shares of stock under the repurchase program, it would cost us approximately$16.1 million based on the closing price of our stock onOctober 29, 2020 . We believe that we have sufficient resources to fund any potential stock buyback in which we may engage. Dividends The amounts or timing of any dividends are subject to earnings, financial condition, liquidity, capital requirements and such other factors as our Board of Directors deems relevant. InAugust 2020 , the Board of Directors approved the change of the frequency of dividend payments from semi-annual to quarterly. We declared dividends on our outstanding common shares in 2019 and 2020 as shown in the table below. Date dividend declared Record date Payment date Dividend per share ($) May 6, 2019 May 17, 2019 Jun. 17, 2019 $ 0.050 Nov. 4, 2019 Nov. 14, 2019 Dec. 16, 2019 $ 0.050 May 8, 2020 May 18, 2020 Jun. 18, 2020 $ 0.050 Aug. 6, 2020 Aug. 18, 2020 Sep. 18, 2020 $ 0.025 34
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EFFECT OF INFLATION
Inflation affects us in two principal ways. First, our revolving credit
agreement is generally, tied to the prime and LIBOR interest rates so that
increases in those interest rates would be translated into additional interest
expense. Second, general inflation impacts prices paid for labor, parts and
supplies. Whenever possible, we attempt to cover increased costs of production
and capital by adjusting the prices of our products. However, we generally do
not attempt to negotiate inflation-based price adjustment provisions into our
contracts. Since order lead times can be as much as nine months, 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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