SHYFT GROUP, INC. Management report and analysis of the financial situation and operating results. (Form 10-K)


General



The Shyft Group, Inc. was organized as a Michigan corporation and is
headquartered in Novi, Michigan. We are a niche market leader in specialty
vehicle manufacturing and assembly for the commercial vehicle (including
last-mile delivery, specialty service and vocation-specific upfit segments) and
recreational vehicle industries. Our products include walk-in vans and truck
bodies used in e-commerce/parcel delivery, upfit equipment used in the mobile
retail and utility trades, service and vocational truck bodies, luxury Class A
diesel 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 Organization classified 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, 2020 and 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 million in 2021, compared to $676.0 million in 2020


  ? Gross margin of 20.1% in 2021, compared to 21.6% in 2020

? Operating expenses of $115.2 millioni.e. 11.6% of sales in 2021, compared to

$97.4 millioni.e. 14.4% of sales in 2020

? Operating result of $84.1 million in 2021, compared to $48.9 million in 2020

? Income tax expense of $14.5 million in 2021, compared to $9.9 million in 2020

? Income from continuing operations of $70.0 million in 2021, compared to $38.3

    million in 2020


  ? Diluted earnings per share from continuing operations of $1.91 in 2021,
    compared to $1.05 in 2020

? Operating cash flow of $74.0 million in 2021, compared to $64.3 million in

    2020


  ? Order backlog of $963.6 million in 2021, compared to $478.7 million at
    December 31, 2020




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The following table shows our sales by market for the years ended December 31, 20212020 and 2019 as a percentage of total sales:


                                           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:



? In June 2021we announced the creation of Shyft Innovations™, our

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

mercedes sprinter cab and chassis, combines energy efficiency, the driver

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

    equipment manufacturers.



? The introduction of Royal truck body new Severe Duty body, designed to fit

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

    trucks.



? 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

    Connected Diagnostics.



? 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.



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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, 2021 increased by $315.8
million, or 46.7% to $991.8 million from $676.0 million in 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
million driven 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 million
for the year ended December 31, 2021 from $529.7 million in 2020. Cost of
products sold increased $251.5 million due to higher sales volumes and mix
including acquired business, $2.3 million of pre-production costs and $22.8
million due 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

Gross profit increased by $53.0 million, or 36.2%, to $199.3 million in 2021
from $146.3 million in 2020. The increase was due to favorable volume of $65.7
million and 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.



Functionnary costs

Operating expenses for the year ended December 31, 2021 increased by
$17.8 million, or 18.3%, to $115.2 million from $97.4 million in 2020. Research
and development expense increased $4.2 million in 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 million in 2021 from
$93.1 million in 2020. This increase was primarily due to $14.6 million in
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 million in the
second quarter of 2020 that did not recur in 2021.



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Other Income and Expense

Interest expense for the year ended December 31, 2021 decreased by $0.9 million,
or 68.0%, to $0.4 million from $1.3 million in 2021 The decrease was due to the
paydown of debt principal. Interest and other income was $0.8 million for the
year ended December 31, 2021 compared to interest and other income of $0.6
million for the year ended December 31, 2020.



income tax expense

Income tax expense from continuing operations for the year ended December 31, 2021 has been $14.5 million compared to the previous year at $9.9 million. Our effective tax rate in 2021 was 17.2%, compared to 20.5% in 2020.



The lower Income tax rate for the year ended December 31, 2021 as 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
million for 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, 2021 increased
by $31.7 million, or 82.8%, to $70.0 million compared to $38.3 million in 2020.
On a diluted per share basis, income from continuing operations increased
$0.86 to $1.91 in 2021 compared to $1.05 per 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, 2021
increased to $0.2 million compared to $5.1 million loss in 2020. The increase is
primarily attributable to the divestiture of ERV on February 1, 2020 compared to
a full year of results in 2021 without the divested business.



Our Segments


From October 1, 2021, the composition of the two reportable segments has changed due to an internal reorganization, with certain businesses previously managed and reported within FVS now being part of SV. The corresponding elements of segment information for previous periods have been restated.



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.

                                       26
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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     $       38,289
Net (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      

13,903

Restructuring and other related charges                            505      

1,873

Acquisition related expenses and adjustments                     1,585      

1,332

Non-cash stock-based compensation expense                        8,745      

7,706

Loss from write-off of construction in process                       -      

2,430

Loss from liquidation of JV                                        643                  -
Non-recurring professional fees                                  1,568                  -
Adjusted EBITDA                                         $      108,066     $       76,346




Our FVS segment consists of our operations at our Bristol, Indiana; Charlotte,
Michigan; Kansas City, Missouri; Landisville, Pennsylvania; North Charleston,
South Carolina; and Saltillo, Mexico locations. 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, Michigan operations 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; Dallas and 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              $  659,432            100.0 %   $ 463,455              100.0 %   $  557,702               100.0 %
Adjusted EBITDA    $  108,621             16.5 %   $  83,292               18.0 %   $   59,227                10.6 %
Segment assets     $  174,799                      $ 118,444                        $  137,446



Year ended December 31, 2021 compared to the year ended December 31, 2020



Sales in our FVS segment increased by $195.9 million, or 42.3%, to $659.4
million in 2021 from $463.5 million in 2020. This increase was primarily due to
a $191.8 million net increase in sales volume and mix driven by strong demand
for the Velocity F2, class 2 walk-in van, and a $4.2 million increase
in favorable pricing.



Adjusted EBITDA in our FVS segment was $108.6 million for the year ended
December 31, 2021, an increase of $25.3 million compared to $83.3 million for
the year ended December 31, 2020. This increase was due to $39.0 million in
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 million of
pre-production costs, and $4.8 million of increased operating expense.

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Order backlog for our FVS segment increased by $437.9 million, or 103.9%, to
$859.4 million at December 31, 2021 compared to $421.5 million at 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.



Year ended December 31, 2020 compared to the year ended December 31, 2019



Sales in our FVS segment decreased by $94.2 million, or 16.9%, to $463.5 million
in 2020 from $557.7 million in 2019. This decrease was driven by a $91.4 million
decrease in pass-through chassis revenue and a decrease of $2.8 million in
vehicle sales mainly due to lower unit volumes.



Adjusted EBITDA in our FVS segment was $83.3 million for the year ended December
31, 2020, an increase of $24.1 million compared to $59.2 million for the year
ended December 31, 2019. Product mix contributed $22.0 million and productivity
improvements and cost reductions generated $5.6 million. These increases were
partially offset by $3.5 million of higher selling, general and administrative
expenses.


Order backlog for our FVS segment increased by $118.6 million, or 39.2%, to
$421.5 million at December 31, 2020 compared to $302.9 million at December 31,
2019, driven by new orders for walk-in vans offset by the build out of the USPS
contract 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              $  332,360            100.0 %   $ 212,518              100.0 %   $  204,118               100.0 %
Adjusted EBITDA    $   32,668              9.8 %   $  20,900                9.8 %   $   22,152                10.9 %
Segment assets     $  202,302                      $ 190,306                        $  154,469



Year ended December 31, 2021 compared to the year ended December 31, 2020



Sales in our SV segment increased by $119.8 million or 56.4%, to $332.4 million
in 2021 compared to $212.5 million in 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 million for the year ended December
31, 2021, an increase of $11.8 million compared to $20.9 million for the year
ended December 31, 2020. This increase was due to $17.7 million in 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 million and $1.1 million of higher operating expenses due to
acquisition.

Order backlog for our SV segment increased by $47.0 million, or 82.3%, to $104.1
million at December 31, 2021 compared to $57.1 million at 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.

Year ended December 31, 2020 compared to the year ended December 31, 2019



Sales in our SV segment increased by $8.4 million or 4.1%, to $212.5 million in
2020 compared to $204.1 million in 2019. This increase was driven by sales
attributable to business acquisitions of $43.5 million and was partially offset
by a decrease of $35.1 million in other specialty vehicle sales due to lower
unit volumes.



Adjusted EBITDA for our SV segment was $20.9 million for the year ended December
31, 2020, a decrease of $1.3 million compared to $22.2 million for the year
ended December 31, 2019. This decrease was driven by $6.7 million attributable
to volume in motor home chassis and $2.8 million attributable to mix. This
decrease was partially offset by $1.3 million from overhead reductions and $6.9
million from business acquisitions.



Order backlog for our SV segment increased by $23.3 million, or 69.2%, to $57.1
million at December 31, 2020 compared to $33.8 million at December 31, 2019.
This increase was due to an increase in the Class A diesel motor home market
demand and service body orders.



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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      $  64,332
Investing activities                              (22,076 )       14,916
Financing activities                              (35,770 )      (77,602 )

Net increase in cash and cash equivalents $16,163 $1,646




During 2021, cash and cash equivalents increased by $16.2 million to a balance
of $37.2 million as 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



We generated $74.0 million of cash from operating activities during the year
ended December 31, 2021, an increase in cash provided of $9.7 million from
$64.3 million of cash provided by operating activities during the year ended
December 31, 2020. Cash flow from operating activities increased due to a
$10.3 million increase in net income adjusted for non-cash charges to operations
partially offset by a $0.6 million decrease in the change in net working
capital. The change in net working capital is primarily attributable to a $33.6
million decrease in the change in inventories, $28.5 million decrease in the
change in receivables and contract assets partially offset by a $45.6 increase
in payables, $14.8 million increase 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 million due to increased
sales with accounts receivables being partially offset by improved timing of
cash receipts. Inventories increased by $20.8 million and 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 million to $21.5 million
compared to $9.4 million in the prior year, primarily due to increased
production and industry wide supply chain constraints.



Cash flow from investing activities



We used $22.1 million in investing activities during the year ended December 31,
2021, a $37.0 million increase compared to the $14.9 million generated during
the year ended December 31, 2020. The increase in cash used in investing
activities is primarily attributable to $47.5 million of proceeds from the sale
of the ERV business in 2020 not repeated in 2021, $8.5 million of purchases of
property, plant and equipment, partially offset by $19.0 million of lower cost
of business acquisition.


Cash flow from financing activities



We used $35.8 million of cash through financing activities during the year ended
December 31, 2021, compared to $77.6 million used during the year ended December
31, 2020. This $41.8 million of less cash used in financing activities is
primarily attributable to $29.0 million of increased proceeds from long-term
debt and to $13.6 million lower 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.



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Contingent Liabilities


Spartan-Gimaex joint venture



In 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.



EPA Information Request



In May 2020, the Company received a letter from the United 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 U.S. between
January 1, 2017 to the date the Company received the request in May 2020. The
Company responded to the EPA's request and furnished the requested materials in
the third quarter of 2020. 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 Association and Bank of America, N.A. (the "Lenders").
Certain of our other subsidiaries have executed guaranties guarantying the
borrowers' obligations under the Credit Agreement.



Under the Credit Agreement, we may borrow up to $400.0 million from the Lenders
under a secured revolving credit facility which matures November 30, 2026. We
may also request an increase in the facility of up to $200.0 million in the
aggregate, subject to customary conditions. The credit facility is also
available for the issuance of letters of credit of up to $20.0 million and swing
line loans of up to $10.0 million, subject to certain limitations and
restrictions. 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, 2021 and December 31, 2020, we had outstanding letters of credit
totaling $0.8 million and $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 million and $125.8 million at December
31, 2021 and 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, 2021 and December 31, 2020, we were in
compliance with all covenants in our Credit Agreement.



In the year ended December 31, 2021 the company reimbursed $22.4 million long-term debt, net of borrowings.

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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)                 $  1,224             241             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     $    17,839
obligations



(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 Securities



On 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 million of 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 ($)
November 5, 2021 November 6, 2021 December 16, 2021

           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 $0.025 to $0.05 per 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.

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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.


Good will and other indefinite life intangible assets



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 1 of 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, 2021 the 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.



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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 – Good will and Intangible Assets” in the Notes to the Consolidated Financial Statements in Item 8 of this Form 10-K for further details on our goodwill and indefinite life intangible assets.


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
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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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