The Shyft Group, Inc.was organized as a Michigancorporation 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 motor home 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. COVID-19 Pandemic On March 11, 2020, the World Health Organizationclassified the COVID-19 outbreak as a pandemic. 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. As a result, certain of our manufacturing facilities were temporarily suspended or cut back on operating levels and shifts as a result of government orders. Since June 30, 2020and throughout 2021, 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 evolve 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. The full impact of the COVID-19 outbreak continues to evolve as of the date of this filing, including the resurgence of COVID-19 and its variants in regions recovering from the impacts of the pandemic, the effectiveness of COVID-19 vaccines, and the speed at which populations are vaccinated around the globe, the impact of COVID-19 on economic activity, and regulatory actions taken to contain its impact on public health and the global economy. 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 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 future periods. Executive Overview ? Sales of $991.8 millionin 2021, compared to $676.0 millionin 2020 ? Gross margin of 20.1% in 2021, compared to 21.6% in 2020
? Operating expenses of
? Operating result of
? Income tax expense of
? Income from continuing operations of
million in 2020 ? Diluted earnings per share from continuing operations of
$1.91in 2021, compared to $1.05in 2020
? Operating cash flow of
2020 ? Order backlog of
$963.6 millionin 2021, compared to $478.7 millionat December 31, 202023
The following table shows our sales by market for the years ended
2021 2020 2019 Fleet vehicles sales 63.0 % 63.3 % 64.2 % Motor home chassis sales 17.0 % 16.0 % 16.8 % Other specialty vehicles sales 14.6 % 14.0 % 8.1 %
Sales of aftermarket parts and accessories 5.4% 6.7% 10.9% Total sales
100.0 % 100.0 % 100.0 % We continue to seek out opportunities to grow the business, both organically and by acquisition, by expanding relationships with existing customers, seeking out new business wins, and pursuing acquisitions in a strategic fashion. 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 we serve. Some of our recent innovations and strategic developments include:
enterprise mobility research and development team, initially focused on
introduction of a class 3 flat modular EV chassis specially designed for any specialty
vehicle bodybuilder. The electric vehicle powered chassis has a length and a
wheelbase, making it well suited for a variety of vehicle types. The chassis’
modular design will accommodate multiple gross vehicle weight ratings
classifications, based on construction and use. With this high degree of
configurability, the all-electric chassis is adaptable to last-mile delivery,
work truck, mass transit, recreational vehicle and other emerging electric vehicle markets.
? The introduction of the Velocity F2™, a Class 2 van built on a Ford
Transit frame. The Velocity F2 combines agility, comfort and fuel
efficiency with cargo space, access and carrying capacity similar to a
traditional walk-in delivery van. The Velocity F2 gives parcel delivery fleets
the added flexibility to manage their driver pool and optimize routing, consistent with increased demand. ? The introduction of the Velocity M3™ walk-in van which is built on a
the ergonomics and safety provisions of a utility van cab and chassis with the
ample cargo space of a traditional minivan. Velocity M3 builds
on the progress of the Utilimaster Reach®, with a lighter body design,
improved payload, better fuel efficiency, and maximized cargo space.
? Our continued expansion into the retrofitting market for vehicles used in
the package delivery, grocery, trades and construction industries. This
rapidly expanding market provides an opportunity to add value to current and new products
customers for our fleet vehicles and vehicles produced by other originals
? The introduction of
General Motors Medium Truck Class and Ford Super Duty Truck Class,
which includes more standard features than any other service organization on the
Marlet. With its Fortress five-point locking system, 10-gauge steel and Line-X’d
3/8″ tread plate steel box tops and floors, this work truck is built to last
and is ideal for contractors and business owners who need heavy duty work
? The introduction of the K4 605 motorhome chassis. The K4 605 is equipped with
Spartan Connected Coach™, a technology package including the new digital dashboard
display and keyless push-button start. It also includes the Spartan Advanced
Protection System®, a collection of safety systems that includes collision
attenuation with adaptive cruise control, electronic stability control,
automatic traction control, Spartan Safe Haul™, factory-integrated chassis air
power supply for braking systems of towing vehicles, tire pressure monitoring system with
integrated controls with Spartan Connected Coach’s™ dashboard digital display,
Premier Steer Steering Assist System, Intelligent Woodgrain and Leather Steering
wheel with integrated radio controls and passive steering axle, and Cummins
? 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 Consolidated Financial Statements and related Notes thereto appearing in Item 8 of this Form 10-K. 24
Results of Operations The discussion of our 2020 consolidated operating results compared to our 2019 consolidated operating results is included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") of our 2020 Annual Report on Form 10-K filed March 25, 2021 and is incorporated by reference into this MD&A. The following table sets forth, for the periods indicated, the components of our consolidated statements of operations, as a percentage of sales (percentages may not sum due to rounding): Year Ended December 31, 2021 2020 Sales 100.0 100.0 Cost of products sold 79.9 78.4 Gross profit 20.1 21.6 Operating expenses: Research and development 0.9 0.6 Selling, general and administrative 10.8 13.8 Operating income 8.5 7.2 Other expense, net - (0.1 ) Income from continuing operations before income taxes 8.5 7.1 Income tax expense 1.5 1.5 Income from continuing operations 7.1 5.7 Loss from discontinued operations, net of income taxes - (0.8 ) Non-controlling interest 0.1 0.1 Net income attributable to The Shyft Group, Inc. 6.9 4.9 Sales Consolidated sales for the year ended
December 31, 2021increased by $315.8 million, or 46.7% to $991.8 millionfrom $676.0 millionin 2020. This increase reflects favorable sales volume driven by strong demand, acquired business and favorable pricing versus lower sales in the COVID-19 impacted prior year. Sales in our FVS segment increased by $196.0 million, primarily due to an increase in vehicle sales driven by the introduction of the Velocity F2, class 2 walk-in van in 2021 and favorable pricing. Sales in our SV segment increased by $119.8 milliondriven by higher sales in other specialty chassis and vehicle sales and by sales attributable to business acquisitions. These changes in sales are discussed more fully in the discussion of our segments below.
Cost of goods sold
Cost of products sold increased by
$262.8 million, or 49.6%, to $792.5 millionfor the year ended December 31, 2021from $529.7 millionin 2020. Cost of products sold increased $251.5 milliondue to higher sales volumes and mix including acquired business, $2.3 millionof pre-production costs and $22.8 milliondue to higher material, labor, and other costs. These costs increases were partially offset by productivity and other cost reductions of $13.8 million. As a percentage of sales, cost of products sold increased to 79.9% in 2021, compared to 78.4% in 2020.
Gross profit increased by
$53.0 million, or 36.2%, to $199.3 millionin 2021 from $146.3 millionin 2020. The increase was due to favorable volume of $65.7 millionand productivity and cost reductions of $13.8 million. These increases were partially offset by higher material, labor, and other costs of $22.8 million, pre-production costs of $2.3 million, and unfavorable product mix and pricing of $1.5 million. Gross margin decreased to 20.1% in 2021 from 21.6% over the year ended in 2020 due to the items mentioned above.
Operating expenses for the year ended
December 31, 2021increased by $17.8 million, or 18.3%, to $115.2 millionfrom $97.4 millionin 2020. Research and development expense increased $4.2 millionin 2021 primarily related to the electric vehicle development initiatives. Selling, general and administrative expense increased by $13.6 million, or 14.6 %, to $106.7 millionin 2021 from $93.1 millionin 2020. This increase was primarily due to $14.6 millionin compensation expense related to growth and acquisition versus cost reduction actions taken in 2020 and higher professional services of $4.5 million. These increases were partially offset by the accelerated depreciation of the ERP system and write-off of related construction in process of $5.5 millionin the second quarter of 2020 that did not recur in 2021. 25 --------------------------------------------------------------------------------
Other Income and Expense Interest expense for the year ended
December 31, 2021decreased by $0.9 million, or 68.0%, to $0.4 millionfrom $1.3 millionin 2021 The decrease was due to the paydown of debt principal. Interest and other income was $0.8 millionfor the year ended December 31, 2021compared to interest and other income of $0.6 millionfor the year ended December 31, 2020.
income tax expense
Income tax expense from continuing operations for the year ended
The lower Income tax rate for the year ended
December 31, 2021as compared to the prior year primarily reflects the favorable impact of increased R&D credits from years 2015-2020. The Company recorded additional R&D credits of $3.8 millionfor the six-year period as a result of the conclusion of a study in the fourth quarter of 2021 and has filed the appropriate amended tax returns.
Revenue from continuing operations
Income from continuing operations for the year ended
December 31, 2021increased by $31.7 million, or 82.8%, to $70.0 millioncompared to $38.3 millionin 2020. On a diluted per share basis, income from continuing operations increased $0.86to $1.91in 2021 compared to $1.05per share in 2020. Driving this increase were the factors noted above.
Profit (loss) from discontinued operations, net of income taxes
Income from discontinued operations for the year ended
December 31, 2021increased to $0.2 millioncompared to $5.1 millionloss in 2020. The increase is primarily attributable to the divestiture of ERV on February 1, 2020compared to a full year of results in 2021 without the divested business. Our Segments
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. 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.
Our management uses Adjusted EBITDA to assess performance and allocate resources to our segments. Adjusted EBITDA is also used, along with other financial and non-financial measures, to determine the annual incentive compensation of our management team and the long-term incentive compensation of certain members of our management team.
The following table reconciles earnings from continuing operations to adjusted EBITDA for the periods indicated.
Year Ended Year Ended December 31, December 31, 2021 2020 Income from continuing operations
$ 69,974 $ 38,289Net (income) attributable to non-controlling interest (1,230 ) (347 ) Interest expense 414 1,293 Income tax expense 14,506 9,867 Depreciation and amortization expense 11,356
Restructuring and other related charges 505
Acquisition related expenses and adjustments 1,585
Non-cash stock-based compensation expense 8,745
Loss from write-off of construction in process -
Loss from liquidation of JV 643 - Non-recurring professional fees 1,568 - Adjusted EBITDA
$ 108,066 $ 76,346Our FVS segment consists of our operations at our Bristol, Indiana; Charlotte, Michigan; Kansas City, Missouri; Landisville, Pennsylvania; North Charleston, South Carolina; and Saltillo, Mexicolocations. This segment focuses on designing and manufacturing walk-in vans for the parcel delivery, mobile retail, and trades and construction industries; the production of commercial truck bodies, supply of related aftermarket parts and services under the Utilimaster brand name. Our SV segment consists of our Charlotte, Michiganoperations that engineer and manufacture motor home chassis, other specialty chassis and distribute related aftermarket parts and assemblies. We also provide vocation-specific equipment upfit services, which are marketed and sold under the Strobes-R-Us brand, through our manufacturing operations in Pompano and West Palm Beach, Florida. Our service truck bodies operations include locations in Carson, McClellan Park, and Montebello, California; Mesa, Arizona; Dallasand Weatherford, Texas; and Waterville, Maine. The accounting policies of the segments are the same as those described, or referred to, in "Note 1 - Nature of Operations and Basis of Presentation." Interest expense and Taxes on income are not included in the information utilized by the chief operating decision maker to assess segment performance and allocate resources, and accordingly, are excluded from the segment results presented below. Appropriate expense amounts are allocated to the two reportable segments and are included in their reported operating income or loss.
For certain financial information relating to each segment, see “Note 17 – Business segments” of the Notes to the consolidated financial statements appearing in item 8 of this Form 10-K.
Fleet vehicles and services
Segment Financial Data (Dollars in Thousands) Year Ended December 31, 2021 2020 2019 Amount Percentage Amount Percentage Amount Percentage Sales
$ 659,432100.0 % $ 463,455100.0 % $ 557,702100.0 % Adjusted EBITDA $ 108,62116.5 % $ 83,29218.0 % $ 59,22710.6 % Segment assets $ 174,799 $ 118,444 $ 137,446
Sales in our FVS segment increased by
$195.9 million, or 42.3%, to $659.4 millionin 2021 from $463.5 millionin 2020. This increase was primarily due to a $191.8 millionnet increase in sales volume and mix driven by strong demand for the Velocity F2, class 2 walk-in van, and a $4.2 millionincrease in favorable pricing. Adjusted EBITDA in our FVS segment was $108.6 millionfor the year ended December 31, 2021, an increase of $25.3 millioncompared to $83.3 millionfor the year ended December 31, 2020. This increase was due to $39.0 millionin higher sales volumes, other productivity and cost reductions of $12.7 million, and favorable pricing of $4.2 million, partially offset by higher material and labor costs of $13.7 million, unfavorable mix of $9.8 million, $2.3 millionof pre-production costs, and $4.8 millionof increased operating expense. 27 -------------------------------------------------------------------------------- Order backlog for our FVS segment increased by $437.9 million, or 103.9%, to $859.4 millionat December 31, 2021compared to $421.5 millionat December 31, 2020, driven by new orders for walk-in vans. Our backlog enables visibility into future sales which can normally range from two to twelve months depending on the product. This visibility allows us to more effectively plan and predict our sales and production activity.
Sales in our FVS segment decreased by
$94.2 million, or 16.9%, to $463.5 millionin 2020 from $557.7 millionin 2019. This decrease was driven by a $91.4 milliondecrease in pass-through chassis revenue and a decrease of $2.8 millionin vehicle sales mainly due to lower unit volumes. Adjusted EBITDA in our FVS segment was $83.3 millionfor the year ended December 31, 2020, an increase of $24.1 millioncompared to $59.2 millionfor the year ended December 31, 2019. Product mix contributed $22.0 millionand productivity improvements and cost reductions generated $5.6 million. These increases were partially offset by $3.5 millionof higher selling, general and administrative expenses. Order backlog for our FVS segment increased by $118.6 million, or 39.2%, to $421.5 millionat December 31, 2020compared to $302.9 millionat December 31, 2019, driven by new orders for walk-in vans offset by the build out of the USPScontract that originated in 2017 and was completed in 2019. Specialty Vehicles Segment Financial Data (Dollars in Thousands) Year Ended December 31, 2021 2020 2019 Amount Percentage Amount Percentage Amount Percentage Sales $ 332,360100.0 % $ 212,518100.0 % $ 204,118100.0 % Adjusted EBITDA $ 32,6689.8 % $ 20,9009.8 % $ 22,15210.9 % Segment assets $ 202,302 $ 190,306 $ 154,469
Sales in our SV segment increased by
$119.8 millionor 56.4%, to $332.4 millionin 2021 compared to $212.5 millionin 2020. This increase was due to a sales volume increases in motor chassis and service bodies including acquired business and favorable pricing. Adjusted EBITDA for our SV segment was $32.7 millionfor the year ended December 31, 2021, an increase of $11.8 millioncompared to $20.9 millionfor the year ended December 31, 2020. This increase was due to $17.7 millionin higher sales volumes including acquired business and favorable pricing and mix of $4.3 million. These increases were partially offset by higher material and labor costs of $9.1 millionand $1.1 millionof higher operating expenses due to acquisition. Order backlog for our SV segment increased by $47.0 million, or 82.3%, to $104.1 millionat December 31, 2021compared to $57.1 millionat December 31, 2020. This increase was due to an increase in the Class A diesel motor home market demand and service body orders. Our backlog enables visibility into future sales which can normally range from less than one month to twelve months depending on the product. This visibility allows us to more effectively plan and predict our sales and production activity.
Sales in our SV segment increased by
$8.4 millionor 4.1%, to $212.5 millionin 2020 compared to $204.1 millionin 2019. This increase was driven by sales attributable to business acquisitions of $43.5 millionand was partially offset by a decrease of $35.1 millionin other specialty vehicle sales due to lower unit volumes. Adjusted EBITDA for our SV segment was $20.9 millionfor the year ended December 31, 2020, a decrease of $1.3 millioncompared to $22.2 millionfor the year ended December 31, 2019. This decrease was driven by $6.7 millionattributable to volume in motor home chassis and $2.8 millionattributable to mix. This decrease was partially offset by $1.3 millionfrom overhead reductions and $6.9 millionfrom business acquisitions. Order backlog for our SV segment increased by $23.3 million, or 69.2%, to $57.1 millionat December 31, 2020compared to $33.8 millionat December 31, 2019. This increase was due to an increase in the Class A diesel motor home market demand and service body orders. 28 --------------------------------------------------------------------------------
Cash and capital resources
Cash Flows Our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statements of Cash Flows appearing in Item 8 of this Form 10-K, are summarized in the following table (in thousands): Year Ended December 31, 2021 2020 Cash provided by (used in): Operating activities
$ 74,009 $ 64,332Investing activities (22,076 ) 14,916 Financing activities (35,770 ) (77,602 )
Net increase in cash and cash equivalents
During 2021, cash and cash equivalents increased by
$16.2 millionto a balance of $37.2 millionas of December 31, 2021. These funds, in addition to cash generated from future operations and available credit facilities, are expected to be sufficient to finance our foreseeable liquidity and capital needs, including potential future acquisitions.
Cash flow from operating activities
$74.0 millionof cash from operating activities during the year ended December 31, 2021, an increase in cash provided of $9.7 millionfrom $64.3 millionof cash provided by operating activities during the year ended December 31, 2020. Cash flow from operating activities increased due to a $10.3 millionincrease in net income adjusted for non-cash charges to operations partially offset by a $0.6 milliondecrease in the change in net working capital. The change in net working capital is primarily attributable to a $33.6 milliondecrease in the change in inventories, $28.5 milliondecrease in the change in receivables and contract assets partially offset by a $45.6increase in payables, $14.8 millionincrease in other assets and liabilities. The change in net working capital was primarily due to increased sales of $315.8 million, or 46.7% in 2021, compared to the same period in 2020, primarily driven by strong demand in the current period and the comparatively lower sales resulting from the impact of the COVID-19 pandemic in the comparative period. Receivables and contract assets increased by $34.5 milliondue to increased sales with accounts receivables being partially offset by improved timing of cash receipts. Inventories increased by $20.8 millionand payables increased by $35.0 million, both due to increased sales with payables being partially offset by the Company's continued focus on extending payment terms with suppliers. As of December 31, 2021, contract assets increased $12.1 millionto $21.5 millioncompared to $9.4 millionin the prior year, primarily due to increased production and industry wide supply chain constraints.
Cash flow from investing activities
$22.1 millionin investing activities during the year ended December 31, 2021, a $37.0 millionincrease compared to the $14.9 milliongenerated during the year ended December 31, 2020. The increase in cash used in investing activities is primarily attributable to $47.5 millionof proceeds from the sale of the ERV business in 2020 not repeated in 2021, $8.5 millionof purchases of property, plant and equipment, partially offset by $19.0 millionof lower cost of business acquisition.
Cash flow from financing activities
$35.8 millionof cash through financing activities during the year ended December 31, 2021, compared to $77.6 millionused during the year ended December 31, 2020. This $41.8 millionof less cash used in financing activities is primarily attributable to $29.0 millionof increased proceeds from long-term debt and to $13.6 millionlower principal payments on long-term debt. 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. 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 7A of this Form 10-K for further information regarding commodity cost fluctuations. 29 --------------------------------------------------------------------------------
February 2015, the Company and Gimaex Holding, Inc.initiated discussions to dissolve the Spartan-Gimaex joint venture. Further to legal proceedings initiated by the Company to dissolve and liquidate the joint venture, the court appointed the Company as liquidating trustee of the joint venture. As of December 2021, the liquidation is substantially complete, and the Company does not expect any material impact to our future operating results. EPAInformation Request In May 2020, the Company received a letter from the United States Environmental Protection Agency(" EPA") requesting certain information as part of an EPAinvestigation 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 U.S.between January 1, 2017to 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. An estimate of possible penalties or loss, if any, cannot be made at this time. 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, JPMorgan Chase Bank, N.A., PNC Bank, National Associationand Bank of America, N.A. (the "Lenders"). Certain of our other subsidiaries have executed guaranties guarantying the borrowers' obligations under the Credit Agreement. Under the Credit Agreement, we may borrow up to $400.0 millionfrom 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 millionin the aggregate, subject to customary conditions. The credit facility is also available for the issuance of letters of credit of up to $20.0 millionand swing line loans of up to $10.0 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 the margin was 1.10% (or one-month LIBOR plus 1.00%) at December 31, 2021. 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 December 31, 2021and December 31, 2020, we had outstanding letters of credit totaling $0.8 millionand $0.5 million, respectively, related to our workers' compensation insurance. Under the terms of our Credit Agreement, available borrowings (exclusive of outstanding borrowings) totaled $376.8 millionand $125.8 millionat December 31, 2021and December 31, 2020, 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 December 31, 2021and December 31, 2020, we were in compliance with all covenants in our Credit Agreement.
In the year ended
Material cash needs
We are party to contractual obligations involving commitments to make payments to third parties, and such commitments require a material amount of cash. As part of our normal course of business, we enter into contracts with suppliers for purchases of certain raw materials, components, and services to facilitate adequate supply of these materials and services. These arrangements may contain fixed or minimum quantity purchase requirements. Our current cash position, available borrowing capacity on our credit facilities, and the cash flows we expect to generate from continuing operations are expected to be sufficient to finance our foreseeable operating and capital needs, including day to day operations, capital expenditures, research and development, investments in information technology systems, dividends and potential future acquisitions. Our future contractual obligations, as described above, are summarized below. Payments Due by Period (in thousands) Less than More than Total 1 Year 1-3 Years 4-5 Years 5 Years Debt (1)
$ 1,224241 185 38 760 Operating 50,658 8,072 14,703 10,804 17,079 lease obligations Purchase obligations 11,741 11,741 - - - Total contractual $ 63,623 $ 20,054 $ 14,888 $ 10,842 $ 17,839obligations
(1) Debt includes estimated interest payments on the line of credit and
payments on finance leases. Interest payments on the related variable
rate debt were calculated using the effective interest rate of 1.0% at
December 31, 2021. Equity SecuritiesOn April 28, 2016, our Board of Directors authorized the repurchase of up to 1.0 million additional shares of our common stock in open market transactions. We repurchased a total of 100,000, 300,000; and 101,006 shares of our common stock during the years ended December 31, 2021, 2020 and 2019, respectively. In January 2022, we repurchased the remaining 408,994 shares for $18.9 million. On February 17, 2022, our Board of Directors authorized the repurchase of up to $250.0 millionof our common stock in open market transactions. We believe that we have sufficient resources to fund any potential stock buyback in which we may engage. Dividends
We paid dividends on our outstanding common shares in 2021 and 2020, as shown in the table below.
Date dividend Dividend per
declared Date of registration Date of payment share ($)
0.025 Aug. 6, 2021 Aug. 18, 2021 Sep. 15, 2021 0.025 May 7, 2021 May 18, 2021 June 18, 2021 0.025 Feb. 15, 2021 Feb. 25, 2021 Mar. 25, 2021 0.025 Nov. 6, 2020 Nov. 18, 2020 Dec. 18, 2020 0.025 Aug. 6, 2020 Aug. 18, 2020 Sep. 18, 2020 0.025 May 8, 2020 May 18, 2020 Jun. 18, 2020 0.050 On
February 3, 2022, our Board of Directors authorized an increase in the Company's quarterly dividend from $0.025to $0.05per share payable on or before March 17, 2022, to shareholders of record at the close of business on February 17, 2022.
Significant Accounting Policies and Estimates
The following discussion of critical accounting policies and estimates is intended to supplement "Note 1 - Nature of Operations and Basis of Presentation" of the Notes to Consolidated Financial Statements appearing in Item 8 of this Form 10-K. These policies were selected because they are broadly applicable within our operating units and they involve additional management judgment due to the sensitivity of the methods, assumptions and estimates necessary in determining the related statement of income, asset and/or liability amounts. 31 --------------------------------------------------------------------------------
Revenue Recognition Essentially all of our revenue is generated through contracts with our customers. We may recognize revenue over time or at a point in time when or as obligations under the terms of a contract with our customer are satisfied, depending on the terms and features of the contract and the products supplied. Our contracts generally do not have any significant variable consideration. The collectability of consideration on the contract is reasonably assured before revenue is recognized. On certain vehicles, payment may be received in advance of us satisfying our performance obligations. Such payments are recorded in Deposits from customers on the Consolidated Balance Sheets. The corresponding performance obligations are generally satisfied within one year of the contract inception. We have elected to utilize the practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred because the amortization period for the prepaid costs that would have otherwise been deferred and amortized is one year or less. We use an observable price to allocate the stand-alone selling price to separate performance obligations within a contract or a cost-plus margin approach when an observable price is not available. The estimated costs to fulfill our base warranties are recognized as expense when the products are sold. Revenue for parts sales for both segments is recognized at the time that control and risk of ownership has passed to the customer, which is generally, when the ordered part is shipped to the customer. Historical return rates on parts sales have been immaterial. Revenue for upfit and field service contracts and walk-in vans and truck bodies built on a chassis owned and controlled by the customer is recognized over time, as equipment is installed in the customer's vehicle, repairs and enhancements are made to the customer's vehicles, or as the vehicles are built. For certain of our vehicles and chassis, we sell separately priced service contracts that provide roadside assistance or extend certain warranty coverage beyond our base warranty agreements. These separately priced contracts range from one to six years from the date of the shipment of the related vehicle or chassis. We receive payment with the shipment of the related vehicle or at the inception of the extended service contract, if later, and recognize revenue over the coverage term of the agreement, generally on a straight-line basis, which approximates the pattern of costs expected to be incurred in satisfying the obligations under the contract. Business Combinations When acquiring other businesses, we recognize identifiable assets acquired and liabilities assumed at their acquisition date estimated fair values, and separately from any goodwill that may be required to be recognized.
Goodwill, when recognizable, is measured as the excess amount of any consideration transferred, which is measured at fair value, over the acquisition date fair values of the identifiable assets acquired and liabilities assumed. Amounts recorded in a business combination may change during the measurement period, which is a period not to exceed one year from the date of acquisition, as additional information about conditions existing at the acquisition date becomes available. Accounting for such acquisitions requires us to make significant assumptions and estimates and are adjusted during the measurement period for a period of up to one year after the acquisition date. Costs incurred to effect an acquisition, such as legal, accounting, valuation or other third-party costs, as well as internal general and administrative costs incurred are charged to expense in the periods incurred.
In accordance with authoritative guidance on goodwill and other indefinite-lived intangible assets, such assets are tested for impairment at least annually, and written down when and to the extent impaired. We perform our annual impairment test for goodwill and indefinite-lived intangible assets as of
October 1of each year, or more frequently if an event occurs or conditions change that would more likely than not reduce the fair value of the asset below its carrying value. As of October 1, 2021the most recent annual goodwill impairment assessment date, two reporting units were determined for goodwill impairment testing: Fleet Vehicles and Services and Specialty Vehicles, which is a change from the prior year where three reporting units were determined for goodwill impairment testing: Fleet Vehicles and Services, Specialty Vehicles, and Service Truck Bodies. As we continued integrating the newly acquired DuraMag business with the Royal operations in 2021, further similarities between these two businesses and the other Specialty Vehicles business were identified that allowed us to run operations with shared manufacturing facilities, engineering resources and capital equipment. As a result, the entirety of goodwill at the former Service Truck Bodies reporting unit was combined into the Specialty Vehicles reporting unit. We qualitatively assessed goodwill assigned to the Fleet Vehicles and Services and Specialty Vehicles reporting units and found no indicators of impairment. We completed a quantitative assessment of the Service Truck Bodies reporting unit immediately before the reporting unit change and a qualitative assessment of the Special Vehicles reporting unit post reorganization and determined that no impairment existed. 32 -------------------------------------------------------------------------------- We first assess qualitative factors including, but not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for our products and current and forecasted financial performance to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we determine that it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, we are not required to calculate the fair value of a reporting unit. We have the option to bypass this qualitative assessment and proceed to a quantitative goodwill impairment assessment. If we elect to bypass the qualitative assessment, or if after completing the assessment it is determined to be more likely than not that the fair value of a reporting unit is less than its carrying value, we perform an impairment test by comparing the fair value of a reporting unit with its carrying amount, including goodwill. The fair value of the reporting unit is determined by estimating the future cash flows of the reporting unit to which the goodwill relates, and then discounting the future cash flows at a market-participant-derived weighted-average cost of capital ("WACC"). In determining the estimated future cash flows, we consider current and projected future levels of income based on our plans for that business; business trends, prospects and market and economic conditions; and market-participant considerations. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered to not be impaired. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to the excess, up to the value of the goodwill. We evaluate the recoverability of our indefinite lived intangible assets by comparing the estimated fair value of the trade names with their carrying values. We estimate the fair value of our trade names based on estimates of future royalty payments that are avoided through our ownership of the trade name, discounted to their present value. In determining the estimated fair value of the trade names, we consider current and projected future levels of revenue based on our plans for branded products, business trends, prospects and market and economic conditions. Significant judgments inherent in these analyses include assumptions about appropriate sales growth rates, WACC and the amount of expected future net cash flows. The judgments and assumptions used in the estimate of fair value are generally consistent with the projections and assumptions that are used in current operating plans. Such assumptions are subject to change as a result of changing economic and competitive conditions. The determination of fair value is highly sensitive to differences between estimated and actual cash flows and changes in the related discount rate used to evaluate the fair value of the reporting units and trade name.
See “Note 6 –
Warranties Our policy is to record a provision for the estimated cost of warranty-related claims at the time of the sale, and periodically adjust the warranty liability to reflect actual experience. The amount of warranty liability accrued reflects actual historical warranty cost, which is accumulated on specific identifiable units. From that point, there is a projection of the expected future cost of honoring our obligations under the warranty agreements. Historically, the cost of fulfilling our warranty obligations has principally involved replacement parts and labor for field retrofit campaigns and recalls, which increase the reserve. Our estimates are based on historical experience, the number of units involved, and the extent of features and components included in product models. See "Note 11 - Commitments and Contingent Liabilities" in the Notes to Consolidated Financial Statements appearing in Item 8 of this Form 10-K for further information regarding warranties.
Provision for income taxes
We account for income taxes under a method that requires deferred income tax assets and liabilities to be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. Authoritative guidance also requires deferred income tax assets, which include state tax credit carryforwards, operating loss carryforwards and deductible temporary differences, be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred income tax assets will not be realized. We evaluate the likelihood of realizing our deferred income tax assets by assessing our valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization include our forecast of future taxable income, the projected reversal of temporary differences and available tax planning strategies that could be implemented to realize the net deferred income tax assets. 33 -------------------------------------------------------------------------------- We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The determination is based on the technical merits of the position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. Although management believes the estimates are reasonable, no assurance can be given that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals.
Interest and penalties attributable to income taxes are accounted for as a component of income taxes.
New and pending accounting policies
See “Note 1 – Nature of Operations and Basis of Presentation” in the Notes to the Consolidated Financial Statements appearing in Item 8 of this Form 10-K.
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