PLOW_Current Folio_10Q

Table of Contents 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

Form 10-Q

 


 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2017

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                  to                  .

 

Commission file number: 001-34728

 

DOUGLAS DYNAMICS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

134275891

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

7777 North 73rd Street

Milwaukee, Wisconsin 53223

(Address of principal executive offices) (Zip code)

 

(414) 354-2310

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

 

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

 

 

 

 

Large accelerated filer ☐

 

Accelerated filer ☒

 

 

 

Non-accelerated filer ☐

 

Smaller reporting company ☐

(Do not check if a smaller reporting company)

 

 

Emerging growth company ☐

 

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

 

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

 

Number of shares of registrant’s common shares outstanding as of August 8, 2017 was 22,590,897.

 

 


 

Table of Contents 

 

DOUGLAS DYNAMICS, INC.

 

Table of Contents

 

 

 

PART I. FINANCIAL INFORMATION 

3

Item 1. Financial Statements 

3

Unaudited Condensed Consolidated Balance Sheet as of June 30, 2017 and audited Consolidated Balance Sheet as of December 31, 2016 

3

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2017 and 2016 

4

Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016 

5

Notes to Unaudited Condensed Consolidated Financial Statements 

6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 

25

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

35

Item 4. Controls and Procedures 

36

PART II. OTHER INFORMATION 

36

Item 1. Legal Proceedings 

36

Item 1A. Risk Factors 

36

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

37

Item 3. Defaults Upon Senior Securities 

37

Item 4. Mine Safety Disclosures 

37

Item 5. Other Information 

37

Item 6. Exhibits 

38

Signatures 

39

 

 

 

 

 

 


 

Table of Contents 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Douglas Dynamics, Inc.

Condensed Consolidated Balance Sheets

(In thousands except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

2017

 

2016

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

Assets

  

 

 

  

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,290

 

$

18,609

Accounts receivable, net

 

 

80,076

 

 

78,589

Inventories

 

 

85,913

 

 

70,871

Inventories - truck chassis floor plan

 

 

8,721

 

 

3,939

Refundable income taxes paid

 

 

1,009

 

 

1,541

Prepaid and other current assets

 

 

2,829

 

 

2,886

Total current assets

 

 

182,838

 

 

176,435

Property, plant, and equipment, net

 

 

52,626

 

 

52,141

Goodwill

 

 

240,627

 

 

238,286

Other intangible assets, net

 

 

192,014

 

 

194,851

Other long-term assets

 

 

5,404

 

 

4,460

Total assets

 

$

673,509

 

$

666,173

Liabilities and stockholders’ equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

19,568

 

$

17,299

Accrued expenses and other current liabilities

 

 

23,332

 

 

27,325

Floor plan obligations

 

 

8,721

 

 

3,939

Short term borrowings

 

 

3,000

 

 

 -

Current portion of long-term debt

 

 

2,765

 

 

2,829

Total current liabilities

 

 

57,386

 

 

51,392

Retiree health benefit obligation

 

 

7,431

 

 

7,193

Pension obligation

 

 

9,745

 

 

10,184

Deferred income taxes

 

 

57,609

 

 

54,563

Long-term debt, less current portion

 

 

305,819

 

 

306,726

Other long-term liabilities

 

 

13,480

 

 

15,652

Stockholders’ equity:

 

 

 

 

 

 

Common Stock, par value $0.01,  200,000,000 shares authorized, 22,590,897 and 22,501,640 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively

 

 

226

 

 

225

Additional paid-in capital

 

 

145,894

 

 

144,523

Retained earnings

 

 

82,866

 

 

82,387

Accumulated other comprehensive loss, net of tax

 

 

(6,947)

 

 

(6,672)

Total stockholders’ equity

 

 

222,039

 

 

220,463

Total liabilities and stockholders’ equity

 

$

673,509

 

$

666,173

 

 

See the accompanying notes to condensed consolidated financial statements

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Douglas Dynamics, Inc.

 

Condensed Consolidated Statements of Operations and Comprehensive Income

 

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

June 30,

 

June 30,

 

 

2017

 

2016

 

2017

 

2016

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

  

$

139,371

  

$

113,763

 

$

211,619

  

$

162,552

Cost of sales

 

 

94,338

 

 

72,242

 

 

149,399

 

 

106,900

Gross profit

 

 

45,033

 

 

41,521

 

 

62,220

 

 

55,652

Selling, general, and administrative expense

 

 

16,925

 

 

11,312

 

 

31,981

 

 

22,225

Intangibles amortization

 

 

2,786

 

 

1,726

 

 

5,535

 

 

3,452

Income from operations

 

 

25,322

 

 

28,483

 

 

24,704

 

 

29,975

Interest expense, net

 

 

(4,192)

 

 

(2,863)

 

 

(9,488)

 

 

(5,735)

Litigation proceeds

 

 

1,275

 

 

 -

 

 

1,275

 

 

10,050

Other expense, net

 

 

(51)

 

 

(69)

 

 

(108)

 

 

(133)

Income before taxes

 

 

22,354

 

 

25,551

 

 

16,383

 

 

34,157

Income tax expense

 

 

7,608

 

 

9,223

 

 

4,914

 

 

12,551

Net income

 

$

14,746

 

$

16,328

 

$

11,469

 

$

21,606

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

22,590,897

 

 

22,501,640

 

 

22,561,785

 

 

22,459,488

Diluted

 

 

22,605,208

 

 

22,501,640

 

 

22,571,352

 

 

22,459,488

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.64

 

$

0.72

 

$

0.50

 

$

0.95

Diluted

 

$

0.64

 

$

0.71

 

$

0.50

 

$

0.94

Cash dividends declared and paid per share

 

$

0.24

 

$

0.24

 

$

0.48

 

$

0.47

Comprehensive income

 

$

14,505

 

$

15,875

 

$

11,194

 

$

20,079

 

 

See the accompanying notes to condensed consolidated financial statements.

 

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Douglas Dynamics, Inc.

 

Condensed Consolidated Statements of Cash Flows

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2017

 

2016

 

 

(unaudited)

 

 

 

 

 

 

 

Operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

  

$

11,469

  

$

21,606

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

9,012

 

 

6,205

Amortization of deferred financing costs and debt discount

 

 

607

 

 

363

Stock-based compensation

 

 

2,108

 

 

1,736

Provision (benefit) for losses on accounts receivable

 

 

1,077

 

 

151

Deferred income taxes

 

 

3,046

 

 

1,625

Earnout liability

 

 

 -

 

 

132

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(1,190)

 

 

939

Inventories

 

 

(13,426)

 

 

(8,712)

Prepaid  refundable income taxes and other assets

 

 

(355)

 

 

4,446

Accounts payable

 

 

1,393

 

 

(366)

Accrued expenses and other current liabilities

 

 

2,351

 

 

(1,065)

Benefit obligations and other long-term liabilities

 

 

(2,755)

 

 

1,230

Net cash provided by operating activities

 

 

13,337

 

 

28,290

Investing activities

 

 

 

 

 

 

Capital expenditures

 

 

(3,146)

 

 

(4,794)

Acquisition of business

 

 

(7,600)

 

 

 -

Net cash used in investing activities

 

 

(10,746)

 

 

(4,794)

Financing activities

 

 

 

 

 

 

Shares withheld on restricted stock vesting paid for employees’ taxes

 

 

(923)

 

 

 -

Payments of financing costs

 

 

(932)

 

 

 -

Earnout payment

 

 

(5,487)

 

 

 -

Dividends paid

 

 

(10,990)

 

 

(10,724)

Net revolver borrowings

 

 

3,000

 

 

 -

Repayment of long-term debt

 

 

(1,578)

 

 

(950)

Net cash used in financing activities

 

 

(16,910)

 

 

(11,674)

Change in cash and cash equivalents

 

 

(14,319)

 

 

11,822

Cash and cash equivalents at beginning of period

 

 

18,609

 

 

36,844

Cash and cash equivalents at end of period

 

$

4,290

 

$

48,666

 

 

 

 

 

 

 

Non-cash operating and financing activities

 

 

 

 

 

 

Truck chassis inventory acquired through floorplan obligations

 

$

26,661

 

$

 -

 

 

 

 

 

 

 

 

 

See the accompanying notes to condensed consolidated financial statements.

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Douglas Dynamics, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands except share and per share data)

 

1.Basis of presentation

 

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for fiscal year-end financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to the financial statements and related footnotes included in our 2016 Form 10-K (Commission File No. 001-34728) filed with the Securities and Exchange Commission on March 13, 2017.

 

The Company currently conducts business in two segments: Work Truck Attachments and Work Truck Solutions. Financial information regarding these segments is reported in Note 13 to the Unaudited Condensed Consolidated Financial Statements.

 

Certain reclassifications have been made to the prior period financial statements to conform to the 2017 presentation.  In November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) No. 2015-17, Balance Sheet Classification of Deferred Taxes, This ASU requires entities to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet.  The Company adopted ASU No. 2015-17 during the quarter ended March 31, 2017 and applied it retrospectively. The adoption resulted in the reclassification of Deferred income taxes as included in Current assets to Deferred income taxes as included in Liabilities and shareholders’ equity on the balance sheet of $5,726 for December 31, 2016.

 

Interim Condensed Consolidated Financial Information

 

The accompanying condensed consolidated balance sheet as of June 30, 2017 and the condensed consolidated statements of operations and comprehensive income for the three and six months ended June 30, 2017 and 2016 and condensed cash flows for the six months ended June 30, 2017 and 2016 have been prepared by the Company and have not been audited.

 

The Company’s Work Truck Attachments segment is seasonal and consequently its results of operations and financial condition vary from quarter-to-quarter.  Because of this seasonality, the results of operations of the Work Truck Attachments segment for any quarter may not be indicative of results of operations that may be achieved for a subsequent quarter or the full year, and may not be similar to results of operations experienced in prior years. The Company attempts to manage the seasonal impact of snowfall on its revenues in part through its pre-season sales program. This pre-season sales program encourages the Company’s distributors to re-stock their inventory of Work Truck Attachments products during the second and third quarters in anticipation of the peak fourth quarter retail sales period by offering favorable pre-season pricing and payment deferral until the fourth quarter. Thus, the Company’s Work Truck Attachments segment tends to generate its greatest volume of sales during the second and third quarters. By contrast, its revenue and operating results tend to be lowest during the first quarter, as management believes the end-users of Work Truck Attachments products prefer to wait until the beginning of a snow season to purchase new equipment and as the Company’s distributors sell off Work Truck Attachments inventory and wait for the pre-season sales incentive period to re-stock inventory. Fourth quarter sales vary from year-to-year as they are primarily driven by the level, timing and location of snowfall during the quarter. This is because most of the Company’s Work Truck Attachments fourth quarter sales and shipments consist of re-orders by distributors seeking to restock inventory to meet immediate customer needs caused by snowfall during the winter months.

 

The Company relies on a combination of patents, trade secrets and trademarks to protect certain of the proprietary aspects of its business and technology.  In the three and six months ended June  30, 2017, the Company received a settlement resulting from an ongoing lawsuit with one of its competitors. Previously under the same lawsuit the competitor was required to stop using the Company’s intellectual property.  Under the settlement

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agreement the Company received $1,275 as part of defending its intellectual property.   In the six months ended June 30, 2016, the Company received a settlement resulting from an ongoing lawsuit with one of its competitors. Previously under the same lawsuit the competitor was required to stop using the Company’s intellectual property.  Under the settlement agreement the Company received $10,050 as part of defending its intellectual property.   The proceeds of the lawsuits are included on the Consolidated Statements of Operations and Comprehensive Income as Litigation proceeds.

 

The proceeds of the lawsuit are included on the Condensed Consolidated Statements of Operations and Comprehensive Income as Litigation proceeds.    

 

 

2.  Acquisition

 

On May 1, 2017, the Company purchased substantially all of the assets of Arrowhead Equipment, Inc. (“Arrowhead”) for $7,600, including a preliminary estimated working capital adjustment of $319 that decreased the purchase price at the close of the transaction on May 1, 2017 which is owed to the Company.    The acquisition includes the Arrowhead’s assets acquired at two up-fit locations in Albany and Queensbury, New York that are both being leased by the Company.   The purchase price is subject to adjustment based upon the closing working capital of the Seller.  The assets were acquired with on hand cash and short term borrowings under the Company’s Revolving Credit Agreement.   The acquired assets are included in the Work Truck Solutions segment and were acquired to expand the geographical footprint of that segment.  The Company incurred $450 and $488 of transaction expenses related to this acquisition that are included in selling, general and administrative expense in the Condensed Consolidated Statements of Income in the three and six months ended June  30, 2017, respectively. 

 

The following table summarizes the preliminary allocation of the purchase price paid and the subsequent working capital adjustment to the fair value of the net assets acquired as of the acquisition date:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable - trade

 

$

850

 

Inventories

 

 

1,616

 

Prepaids and other current assets

 

 

524

 

Property and equipment

 

 

816

 

Goodwill

 

 

2,341

 

Intangible assets

 

 

2,700

 

Accounts payable and other current liabilities

 

 

(1,140)

 

Unfavorable lease

 

 

(107)

 

Total

 

$

7,600

 

 

 

 

 

 

 The goodwill for the acquisition is a result of acquiring and retaining the existing workforces and expected synergies from integrating the operations into the Company.   Due to the limited amount of time since the acquisition of substantially all of the assets of Arrowhead, the initial purchase price allocation is preliminary as of June 30, 2017 as the Company has not completed its analysis  of working capital, the fair value of inventories, property and equipment, intangible assets and income tax liabilities.  The Company expects to be able to deduct amortization of goodwill for income tax purposes over a fifteen-year period.  The acquisition was accounted for under the purchase method, and accordingly, the results of operations are included in the Company’s financial statements from the date of acquisition.  From the date of acquisition through June 30, 2017, the Arrowhead assets contributed $1,029 of revenues and $38 of pre-tax operating income to the Company.

 

 

On July 15, 2016, the Company acquired substantially all of the assets of Dejana Truck & Utility Equipment Company, Inc. and certain entities directly or indirectly owned by Peter Paul Dejana Family Trust Dated 12/31/98 (“Dejana”). Total consideration was $191,544 including a preliminary estimated working capital adjustment of $3,989 that reduced the purchase price at the close of the transaction on July 15, 2016 that was subsequently adjusted by $5,417 paid by the Company to the seller.   Thus, the net working capital adjustment

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paid to the former owners of Dejana was $1,428 in addition to contingent consideration with an estimated fair value of $10,200.  The acquisition was financed through exercising the accordion feature on the Company’s term loan for $130,000 less an original issue discount of $650 and $20,000 of short term revolver borrowings and through the use of $31,994 of on hand cash. The Company incurred $417 and $667 of transaction expenses related to this acquisition that are included in selling, general and administrative expense in the Condensed Consolidated Statements of Income in the three months and six months ended June  30, 2016,  respectively. 

 

The Dejana purchase agreement includes contingent consideration in the form of an earnout capped at $26,000. Under the earnout agreement, the former owners of Dejana are entitled to receive payments contingent upon the revenue growth and financial performance of the acquired business for the years 2016, 2017 and 2018.  There is no requirement for continued employment related to the contingent consideration, and thus the earnout is recorded as a component of purchase price.  The preliminary estimated fair value of the earnout consideration was $10,200 which was further adjusted at December 31, 2016 to $10,373 as a result of the 2016 performance exceeding the 2016 fair value established at the opening balance sheet by $173.  As a result of the year ending December 31, 2016 financial results, the new possible range of outcomes was reduced from $26,000 to a maximum earnout of $21,487.  The Company made a payment to the former owners of Dejana of $5,487 in the six months ended June  30, 2017.

 

 

The following table summarizes the preliminary allocation of the purchase price paid and the subsequent working capital adjustment to the fair value of the net assets acquired as of the acquisition date:

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

$

13,509

Inventories

 

 

20,017

Truck chassis floor plan inventory

 

 

13,479

Prepaids and other current assets

 

 

705

Property and equipment

 

 

5,821

Goodwill

 

 

77,354

Intangible assets

 

 

77,800

Other assets - long term

 

 

219

Accounts payable and other current liabilities

 

 

(3,881)

Floor plan obligations

 

 

(13,479)

Earnout

 

 

(10,200)

Total

 

$

181,344

 

 

 The goodwill for the acquisition is a result of acquiring and retaining the existing workforces and expected synergies from integrating the operations into the Company.  The Company expects to be able to deduct amortization of goodwill for income tax purposes over a fifteen-year period.    The acquisition was accounted for under the purchase method, and accordingly, the results of operations are included in the Company’s financial statements from the date of acquisition.  

 

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The following unaudited pro forma information presents the combined results of operations of the Company and Dejana for the three and six months ended June 30, 2016 as if the acquisition had occurred on January 1, 2015, with pro forma adjustments to give effect to amortization of intangible assets, depreciation of fixed assets, an increase in interest expense from the acquisition financing and certain other adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

 

June 30,

 

 

June 30,

 

 

 

 

2016

 

 

2016

 

 

Net sales

$

150,611

 

$

231,407

 

 

Net income

$

18,380

 

$

24,904

 

 

Earnings per common share assuming dilution attributable to common shareholders

$

0.80

 

$

1.09

 

 

 

 

 

 

 

 

 

 

 

The unaudited pro forma information above includes the historical financial results of the Company and Dejana, adjusted to record depreciation and intangible asset amortization related to valuation of the acquired tangible and intangible assets at fair value and the addition of incremental costs related to debt to finance the acquisition, and the tax benefits related to the increased costs. This information is presented for information purposes only and is not necessarily indicative of what the Company’s results of operations would have been had the acquisition been in effect for the periods presented or future results.

 

 

 

 

3.Fair Value

 

Fair value is the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor.  Fair value measurements are categorized into one of three levels based on the lowest level of significant input used: Level 1 (unadjusted quoted prices in active markets); Level 2 (observable market inputs available at the measurement date, other than quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data).

 

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The following table presents financial assets and liabilities measured at fair value on a recurring basis and discloses the fair value of long-term debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value at

 

Fair Value at

 

 

June 30,

 

December 31,

 

 

2017

 

2016

Assets:

 

 

 

 

 

 

Other long-term assets (a)

  

$

4,466

  

$

3,458

 

 

 

 

 

 

 

Total Assets

 

$

4,466

 

$

3,458

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Interest rate swaps (b)

 

$

2,736

 

$

1,985

Long term debt (c)

 

 

314,156

 

 

315,940

Earnout - Henderson (d)

 

 

580

 

 

636

Earnout - Dejana (e)

 

 

4,886

 

 

10,373

Total Liabilities

 

$

322,358

 

$

328,934

 

 

 


(a)  Included in other assets is the cash surrender value of insurance policies on various individuals that are associated with the Company. The carrying amount of these insurance policies approximates their fair value and is considered Level 2 inputs

 

(b) Valuation models are calibrated to initial trade price. Subsequent valuations are based on observable inputs to the valuation model (e.g. interest rates and credit spreads). Model inputs are changed only when corroborated by market data. A credit risk adjustment is made on each swap using observable market credit spreads. Thus, inputs used to determine fair value of the interest rate swap are Level 2 inputs.  Interest rate swaps of $442 and $2,294 at June 30, 2017 are included in Accrued expenses and other current liabilities and Other long-term liabilities, respectivelyInterest rate swaps of $335 and $1,650 at December 31, 2016 are included in Accrued expenses and other current liabilities and Other long-term liabilities, respectively.

 

(c)  The fair value of the Company’s long-term debt, including current maturities, is estimated using discounted cash flows based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements, which is a Level 2 input for all periods presented. Meanwhile, long-term debt is recorded at carrying amount, net of discount and deferred debt issuance costs, as disclosed on the face of the balance sheet.

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(d) Included in Accrued expenses and other current liabilities and Other long term liabilities in the amounts of $138 and $442, respectively, at June  30, 2017 is the fair value of an obligation for a portion of the potential earnout acquired in conjunction with the acquisition of Henderson Enterprise Group, Inc. (“Henderson”).   Included in accrued expenses and other current liabilities and Other long term liabilities in the amounts of $263 and $442, respectively, at June 30, 2016 is the fair value of an obligation for a portion of the potential earnout acquired in conjunction with the acquisition of Henderson. Fair value is based upon Level 3 discounted cash flow analysis using key inputs of forecasted future sales as well as a growth rate reduced by the market required rate of return. See reconciliation of liability included below: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

June 30,

 

June 30,

 

 

2017

 

2017

 

2016

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

  

$

607

 

$

636

 

$

709

 

$

761

Additions

 

 

 

 

 

 

 

 

Adjustments to fair value

 

 

 

 

 

 

 

 

Payment to former owners

 

 

(27)

 

 

(56)

 

 

(4)

 

 

(56)

Ending balance

 

$

580

 

$

580

 

$

705

 

$

705

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(e) Included in Accrued expenses and other current liabilities and Other long term liabilities in the amounts of $3,397 and $1,489, respectively, at June  30, 2017 is the fair value of an obligation for a portion of the potential earnout incurred in conjunction with the acquisition of Dejana.   Fair value is based upon Level 3 inputs of a real options approach where gross sales were simulated in a risk-neutral framework using Geometric Brownian Motion, a well-accepted model of stock price behavior that is used in option pricing models such as the Black-Scholes option pricing model, using key inputs of forecasted future sales and financial performance as well as a risk adjusted expected growth rate adjusted appropriately based on its correlation with the market.  See reconciliation of liability included below: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2017

 

2017

 

 

 

 

 

 

 

 

 

Beginning Balance

  

$

4,886

 

$

10,373

 

Additions

 

 

 

 

 

Adjustments to fair value

 

 

 

 

 

Payment to former owners

 

 

 

 

(5,487)

 

Ending balance

 

$

4,886

 

$

4,886

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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4.Inventories

 

 

Inventories consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

2017

 

2016

 

 

 

 

 

 

 

Finished goods and work-in-process

  

$

54,933

  

$

44,047

Raw material and supplies

 

 

30,980

 

 

26,824

 

 

$

85,913

 

$

70,871

 

 

 

 

 

 

 

 

 

 

 

 

The inventories in the table above do not include truck chassis inventory financed through a floor plan financing agreement as discussed in Note 6.  The Company takes title to truck chassis upon receipt of the inventory through their floor plan agreement and performs up-fitting service installations to the truck chassis inventory during the installation period.  The floor plan obligation is then assumed by their dealer customer upon delivery.  At June  30, 2017 and December 31, 2016, the Company had $8,721 and $3,939 of chassis inventory and related floor plan financing obligation, respectively.  The Company recognizes revenue associated with up-fitting and service installations net of the truck chassis.

 

Unlike the floor plan agreement, the Company does not record inventory related to the truck chassis acquired through the bailment pool agreement as these truck chassis are held on consignment.  Like the revenue recognized on floor plan arrangement, revenue recognized for up-fitting services on chassis acquired through the bailment agreement, are also recognized net of the truck chassis.

 

 

 

   

 

 

 

 

5.Property, plant and equipment

 

Property, plant and equipment are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

2017

 

2016

 

 

 

 

 

 

 

Land

 

$

2,378

 

$

2,378

Land improvements

 

 

4,357

 

 

4,357

Leasehold Improvements

 

 

3,959

 

 

2,569

Buildings

 

 

26,175

 

 

26,058

Machinery and equipment

 

 

42,723

 

 

40,878

Furniture and fixtures

 

 

13,042

 

 

12,561

Mobile equipment and other

 

 

4,373

 

 

3,873

Construction-in-process

 

 

3,351

 

 

3,850

Total property, plant and equipment

 

 

100,358

 

 

96,524

Less accumulated depreciation

 

 

(47,732)

 

 

(44,383)

Net property, plant and equipment

 

$

52,626

 

$

52,141

 

 

 

 

 

 

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6.Long-Term Debt

 

Long-term debt is summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

2017

 

2016

 

 

 

 

 

 

 

Term Loan, net of debt discount of $1,757 and $1,953 at June 30, 2017 and December 31, 2016, respectively

 

$

312,205

 

$

313,588

Less current maturities

 

 

2,765

 

 

2,829

Long term debt before deferred financing costs

 

 

309,440

 

 

310,759

Deferred financing costs, net

 

 

3,621

 

 

4,033

Long term debt, net

 

$

305,819

 

$

306,726

 

 

 

 

 

 

 

 

 

On February 8, 2017 the Company entered into an amendment to its senior secured term loan facility (the “Term Loan Credit Agreement”) to decrease the interest rate margins that apply to the term loan facility from 3.25% to 2.50% for ABR Loans (as defined in the Term Loan Credit Agreement) and from 4.25% to 3.50% for Eurodollar Rate Loans (as defined in the Term Loan Credit Agreement), such that the senior secured term loan facility generally bears interest at a rate of (at the Company’s election) either (i) 2.50% per annum plus the greatest of (a) the Prime Rate (as defined in the Term Loan Credit Agreement) in effect on such day, (b) the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers plus 0.50% and (c) 1.00% plus the greater of (1) the LIBOR for a one month interest period multiplied by the Statutory Reserve Rate (as defined in the Term Loan Credit Agreement) and (2) 2.00% or (ii) 3.50% per annum plus the greater of (a) the LIBOR for the applicable interest period multiplied by the Statutory Reserve Rate and (b) 1.00%.  Meanwhile the discount, principal and tenure of the Company’s Term Loan Credit Agreement has remained unchanged.   The amendment to the Term Loan Credit Agreement did not result in a significant debt modification under ASC 470-50.  Additionally, the Company incurred approximately $932 in costs with third parties directly related to the amendment that the Company expensed as incurred in the six months ended June 30, 2017.

 

The Company’s term loan amortizes in nominal amounts quarterly with the balance payable on December 31, 2021.   The Term Loan Credit Agreement also allows the Company to request the establishment of one or more additional term loan commitments in an aggregate amount not in excess of $80,000 subject to specified terms and conditions, which amount may be further increased so long as the First Lien Debt Ratio (as defined in the Term Loan Credit Agreement) is not greater than 3.25 to 1.00.   The Company’s term Loan Credit Agreement permits the Company to enter into floor plan financing arrangements in an aggregate amount not to exceed $20,000 under both the term loan and revolving credit facility.

 

The Company’s senior credit facilities also include a $100,000 revolving credit facility (the “Revolving Credit Agreement”) with a group of banks, of which $10,000 is available in the form of letters of credit and $5,000 is available for the issuance of short-term swing line loans. The Revolving Credit Agreement provides that the Company has the option to select whether borrowings will bear interest at either (i) a margin ranging from 1.50% to 2.00% per annum, depending on the utilization of the facility, plus the LIBOR for the applicable interest period multiplied by the Statutory Reserve Rate (as defined in the Revolving Credit Agreement) or (ii) a margin ranging from 0.50% to 1.00% per annum, depending on the utilization of the facility, plus the greatest of (a) the Prime Rate (as defined in the Revolving Credit Agreement) in effect on such day, (b) the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers plus 0.50% and (c) the LIBOR for a one month interest period multiplied by the Statutory Reserve Rate plus 1%. The maturity date for the Revolving Credit Agreement is June 30, 2021.

 

The term loan was originally issued at a $1,900 discount and the incremental term loan used to fund the Dejana acquisition on July 15, 2016 was issued at a $650 discount both of which are being amortized over the term of the term loan. 

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At June 30, 2017, the Company had outstanding borrowings under the Term Loan Credit Agreement of $312,205, and outstanding borrowings of $3,000 on the Revolving Credit Agreement and remaining borrowing availability of $77,930.  At December 31, 2016, the Company had outstanding borrowings under the Term Loan Credit Agreement of $313,588, no outstanding borrowings on the Revolving Credit Agreement at December 31, 2016 and remaining borrowing availability of $89,664. 

 

The Company’s senior credit facilities include certain negative and operating covenants, including restrictions on its ability to pay dividends, and other customary covenants, representations and warranties and events of default. The senior credit facilities entered into and recorded by the Company’s subsidiaries significantly restrict its subsidiaries from paying dividends and otherwise transferring assets to Douglas Dynamics, Inc. The terms of the Revolving Credit Agreement specifically restrict subsidiaries from paying dividends if a minimum availability under the Revolving Credit Agreement is not maintained, and both senior credit facilities restrict subsidiaries from paying dividends above certain levels or at all if an event of default has occurred. These restrictions would affect the Company indirectly since the Company relies principally on distributions from its subsidiaries to have funds available for the payment of dividends. In addition, the Revolving Credit Agreement includes a requirement that, subject to certain exceptions, capital expenditures may not exceed $12,500 in any calendar year (plus the unused portion of permitted capital expenditures from the preceding year subject to a $12,500 cap and a separate one-time $15,000  capital expenditures  to be used for the consolidation of facilities and costs associated with the acquiring and/or development and construction of one new manufacturing facility) and, if certain minimum availability under the Revolving Credit Agreement is not maintained, that the Company comply with a monthly minimum fixed charge coverage ratio test of 1.0:1.0. Compliance with the fixed charge coverage ratio test is subject to certain cure rights under the Revolving Credit Agreement. At June 30, 2017, the Company was in compliance with the respective covenants. The credit facilities are collateralized by substantially all assets of the Company.

 

In accordance with the senior credit facilities, the Company is required to make additional principal prepayments over the above scheduled payments under certain conditions. This includes, in the case of the term loan facility, 100% of the net cash proceeds of certain asset sales, certain insurance or condemnation events, certain debt issuances, and, within 150 days of the end of each fiscal year, 50% of consolidated excess cash flow including a deduction for certain distributions (which percentage is reduced to 0% upon the achievement of certain leverage ratio thresholds), for such fiscal year. Consolidated excess cash flow is defined in the senior credit facilities as consolidated adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) plus a consolidated working capital adjustment, less the sum of repayments of debt and capital expenditures (subject to certain adjustments), interest and taxes paid in cash, management fees and certain restricted payments (including certain dividends or distributions). Consolidated working capital adjustment is defined in the senior credit facilities as the change in working capital, defined as current assets, excluding cash and cash equivalents, less current liabilities, excluding the current portion of long term debt.  As of June 30, 2017, the Company was not required to make an excess cash flow payment.

 

The Company entered into interest rate swap agreements on February 20, 2015 to reduce its exposure to interest rate volatility.  The three interest rate swap agreements have notional amounts of $45,000,  $90,000 and $135,000 effective for the periods December 31, 2015 through March 29, 2018, March 29, 2018 through March 31, 2020 and March 31, 2020 through June 30, 2021, respectively.  The interest rate swaps’ negative fair value at June 30, 2017 was $2,736, of which $442 and $2,294 are included in Accrued expenses and other current liabilities and Other long-term liabilities on the Condensed Consolidated Balance Sheet, respectively.  Meanwhile, the interest rate swaps’ negative fair value at December 31, 2016 was $1,985, of which $335 and $1,650 are included in Accrued expenses and Other current liabilities and Other long-term liabilities on the Condensed Consolidated Balance Sheet, respectively. The Company may have counterparty credit risk resulting from the interest rate swap, which it monitors on an on-going basis. This risk lies with one global financial institution.  Under the interest rate swap agreement, effective as of December 31, 2015, the Company will either receive or make payments on a monthly basis based on the differential between 6.105% and LIBOR plus 4.25% (with a LIBOR floor of 1.0%).  Under the interest rate swap agreement, effective as of March 29, 2018, the Company will either receive or make payments on a monthly basis based on the differential between 6.916% and LIBOR plus 4.25% (with a LIBOR floor of 1.0%).  Under the interest rate swap agreement, effective as of March 31, 2020, the Company will either receive or make payments on a monthly basis based on the differential between 7.168% and LIBOR plus 4.25% (with a LIBOR floor of 1.0%).

 

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The Company receives on consignment, truck chassis on which it performs up-fitting service installations under “bailment pool” arrangements with major truck manufacturers.  The Company never receives title to the truck chassis.  The aggregate value of all bailment pool chassis on hand as of June 30, 2017 and December 31, 2016 were $15,228 and $22,420,  respectively. The Company is responsible to the manufacturer for interest on chassis held for up-fitting. Interest rates vary depending on the number of days in the bailment pool. As of June 30, 2017, rates were based on prime plus a margin ranging from 0% to 8%.  During the three months and six months ended June 30, 2017, the Company incurred $43 and $135 in interest on the bailment pool arrangement, respectively.

The Company has a floor plan line of credit for up to $20,000 with a financial institution.  The terms of the line of credit are contained in a credit agreement dated July 15, 2016 and expired on July 31, 2017, which the Company has renewed through December 31, 2018.  Under the floor plan agreement the Company receives truck chassis and title on up-fitting service installations.  Upon up-fit completion, the title transfers from the Company to the dealer customer.   The note bears interest at an adjusted LIBOR rate, plus an applicable rate of 1.75%.  The obligation under the floor plan agreement was $8,721 and $3,939 at June 30, 2017 and December 31, 2016, respectively.  During the three and six months ended June 30, 2017, the Company incurred $52 and $82 in interest on the floor plan arrangements, respectively.

 

 

7.Accrued Expenses and Other Current Liabilities

 

Accrued expenses and other liabilities are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

2017

 

2016

 

 

 

 

 

 

 

Payroll and related costs

 

$

5,606

 

$

8,731

Employee benefits

 

 

5,326

 

 

5,179

Accrued warranty

 

 

3,277

 

 

3,535

Earnout - Dejana

 

 

3,397

 

 

5,487

Other

 

 

5,726

 

 

4,393

 

 

$

23,332

 

$

27,325

 

 

 

 

 

 

8.Warranty Liability

 

The Company accrues for estimated warranty costs as sales are recognized and periodically assesses the adequacy of its recorded warranty liability and adjusts the amount as necessary.  The Company’s warranties generally provide, with respect to its snow and ice control equipment, that all material and workmanship will be free from defect for a period of two years after the date of purchase by the end-user, and with respect to its parts and accessories purchased separately, that such parts and accessories will be free from defect for a period of one year after the date of purchase by the end-user.  Certain snowplows only provide for a one year warranty.  The Company determines the amount of the estimated warranty costs (and its corresponding warranty reserve) based on the Company’s prior five years of warranty history utilizing a formula driven by historical warranty expense and applying management’s judgment.  The Company adjusts its historical warranty costs to take into account unique factors such as the introduction of new products into the marketplace that do not provide a historical warranty record to assess.  The warranty reserve is $5,575 at June  30, 2017 of which $2,298 is included in Other long term liabilities and $3,277 is included in Accrued expenses and other current liabilities in the accompanying Condensed Consolidated Balance Sheet.  The warranty reserve is $6,160 at December 31, 2016 of which $2,625 is included in Other long term liabilities and $3,535 is included in Accrued expenses and other current liabilities in the accompanying Condensed Consolidated Balance Sheet. 

 

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Table of Contents 

The following is a rollforward of the Company’s warranty liability:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

June 30,

 

June 30,

 

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at the beginning of the period

 

$

5,281

 

$

6,504

 

$

6,160

 

$

7,423

Establish warranty provision for Arrowhead

 

 

65

 

 

 -

 

 

65

 

 

 -

Warranty provision

 

 

937

 

 

719

 

 

1,563

 

 

1,190

Claims paid/settlements

 

 

(708)

 

 

(926)

 

 

(2,213)

 

 

(2,316)

Balance at the end of the period

 

$

5,575

 

$

6,297

 

$

5,575

 

$

6,297

 

 

 

 

 

 

9.Employee Retirement Plans

 

The components of net periodic pension cost consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

June 30,

 

June 30,

 

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Component of net periodic pension cost:

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

89

 

$

80

 

$

178

 

$

160

Interest cost

 

 

403

 

 

410

 

 

806

 

 

820

Expected return on plan assets

 

 

(448)

 

 

(456)

 

 

(896)

 

 

(912)

Amortization of net loss

 

 

181

 

 

181

 

 

362

 

 

362

Net periodic pension cost

 

$

225

 

$

215

 

$

450

 

$

430

 

 

The Company estimates its total required minimum contributions to its pension plans in 2017 will be $216.  Through June  30, 2017, the Company has made $655 of cash contributions to the pension plans versus $711 through the same period in 2016.

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Components of net periodic other postretirement benefit cost consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

June 30,

 

June 30,

 

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Component of periodic other postretirement benefit cost:

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

51

 

$

52

 

$

102

 

$

105

Interest cost

 

 

70

 

 

69

 

 

140

 

 

139

Amortization of net gain

 

 

(27)

 

 

(31)

 

 

(54)

 

 

(63)

Net periodic other postretirement benefit  cost

 

$

94

 

$

90

 

$

188

 

$

181

 

 

 

 

 

 

 

10.Earnings per Share

 

Basic earnings per share of common stock is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share of common stock is computed by dividing net income by the weighted average number of common shares, using the two-class method.  As the Company has granted restricted stock units (“RSUs”) that both participate in dividend equivalents and do not participate in dividend equivalents, the Company has calculated earnings per share pursuant to the two-class method, which is an earnings allocation formula that determines earnings per share for common stock and participating securities according to dividends declared and participation rights in undistributed earnings. Under this method, all earnings (distributed and undistributed) are allocated to common shares and participating securities based on their respective rights to receive dividends.  Diluted net income per share is calculated by dividing net income attributable to common stockholders as adjusted for the effect of dilutive non-participating securities, by the weighted average number of common stock and dilutive common stock outstanding during the period.   Potential common shares in the diluted net earnings per share computation are excluded to the extent that they would be anti-dilutive.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

June 30,

 

June 30,

 

 

2017

 

2016

 

2017

 

2016

Basic earnings per common share

 

 

 

 

 

 

 

 

 

 

 

 

Net income 

 

$

14,746

 

$

16,328

 

$

11,469

 

$

21,606

Less income allocated to participating securities

 

 

187

 

 

223

 

 

150

 

 

289

Net income allocated to common shareholders

 

$

14,559

 

$

16,105

 

$

11,319

 

$

21,317

Weighted average common shares outstanding

 

 

22,590,897

 

 

22,501,640

 

 

22,561,785

 

 

22,459,488

 

 

$

0.64

 

$

0.72

 

$

0.50

 

$

0.95

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share assuming dilution

 

 

 

 

 

 

 

 

 

 

 

 

Net income 

 

$

14,746

 

$

16,328

 

$

11,469

 

$

21,606

Less income allocated to participating securities

 

 

187

 

 

223

 

 

150

 

 

289

Net income allocated to common shareholders

 

$

14,559

 

$

16,105

 

$

11,319

 

$

21,317

Weighted average common shares outstanding

 

 

22,590,897

 

 

22,501,640

 

 

22,561,785

 

 

22,459,488

Incremental shares applicable to non-participating RSUs

 

 

14,311

 

 

 -

 

 

9,567

 

 

 -

Weighted average common shares assuming dilution

 

 

22,605,208

 

 

22,501,640