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 March 31, 2018

 

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 May 8, 2018 was 22,700,991.

 

 


 

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 March 31, 2018 and December 31, 2017  

3

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2018 and 2017 

4

Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017 

5

Notes to Unaudited Condensed Consolidated Financial Statements 

6

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

29

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

40

Item 4. Controls and Procedures 

41

PART II. OTHER INFORMATION 

42

Item 1. Legal Proceedings 

42

Item 1A. Risk Factors 

42

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

42

Item 3. Defaults Upon Senior Securities 

42

Item 4. Mine Safety Disclosures 

42

Item 5. Other Information 

42

Item 6. Exhibits 

43

Signatures 

44

 

 

 

 

 

 


 

Table of Contents 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Douglas Dynamics, Inc.

Condensed Consolidated Balance Sheets

(In thousands except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

2018

 

2017

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

Assets

  

 

 

  

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

12,937

 

$

36,875

Accounts receivable, net

 

 

41,130

 

 

79,120

Inventories

 

 

94,924

 

 

71,524

Inventories - truck chassis floor plan

 

 

4,555

 

 

7,711

Refundable income taxes paid

 

 

 2

 

 

 -

Prepaid and other current assets

 

 

3,164

 

 

2,883

Total current assets

 

 

156,712

 

 

198,113

Property, plant, and equipment, net

 

 

52,914

 

 

53,962

Goodwill

 

 

241,006

 

 

241,006

Other intangible assets, net

 

 

183,279

 

 

186,150

Other long-term assets

 

 

6,728

 

 

5,945

Total assets

 

$

640,639

 

$

685,176

Liabilities and stockholders’ equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

15,590

 

$

16,323

Accrued expenses and other current liabilities

 

 

18,050

 

 

21,004

Floor plan obligations

 

 

4,555

 

 

7,711

Income taxes payable

 

 

 -

 

 

2,996

Current portion of long-term debt

 

 

2,749

 

 

32,749

Total current liabilities

 

 

40,944

 

 

80,783

Retiree health benefit obligation

 

 

6,913

 

 

6,809

Pension obligation

 

 

9,823

 

 

9,761

Deferred income taxes

 

 

41,018

 

 

39,269

Long-term debt, less current portion

 

 

274,391

 

 

274,872

Other long-term liabilities

 

 

16,248

 

 

17,004

Stockholders’ equity:

 

 

 

 

 

 

Common Stock, par value $0.01, 200,000,000 shares authorized, 22,700,991 and 22,590,897 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively

 

 

227

 

 

226

Additional paid-in capital

 

 

148,683

 

 

147,287

Retained earnings

 

 

108,140

 

 

115,737

Accumulated other comprehensive loss, net of tax

 

 

(5,748)

 

 

(6,572)

Total stockholders’ equity

 

 

251,302

 

 

256,678

Total liabilities and stockholders’ equity

 

$

640,639

 

$

685,176

 

 

See the accompanying notes to condensed consolidated financial statements.

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Table of Contents 

 

Douglas Dynamics, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2018

 

2017

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

Net sales

  

$

83,964

  

$

72,248

 

Cost of sales

 

 

63,937

 

 

55,061

 

Gross profit

 

 

20,027

 

 

17,187

 

Selling, general, and administrative expense

 

 

16,146

 

 

14,877

 

Intangibles amortization

 

 

2,871

 

 

2,749

 

Income (loss) from operations

 

 

1,010

 

 

(439)

 

Interest expense, net

 

 

(3,945)

 

 

(5,296)

 

Other expense, net

 

 

(203)

 

 

(236)

 

Loss before taxes

 

 

(3,138)

 

 

(5,971)

 

Income tax benefit

 

 

(1,262)

 

 

(2,694)

 

Net loss

 

$

(1,876)

 

$

(3,277)

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

Basic

 

 

22,623,518

 

 

22,532,027

 

Diluted

 

 

22,623,518

 

 

22,532,027

 

Loss per common share:

 

 

 

 

 

 

 

Basic

 

$

(0.08)

 

$

(0.14)

 

Diluted

 

$

(0.08)

 

$

(0.14)

 

Cash dividends declared and paid per share

 

$

0.27

 

$

0.24

 

Comprehensive loss

 

$

(1,052)

 

$

(3,311)

 

 

 

See the accompanying notes to condensed consolidated financial statements.

 

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Douglas Dynamics, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

March 31,

 

 

2018

 

2017

 

 

(unaudited)

 

 

 

 

 

 

 

Operating activities

 

 

 

 

 

 

Net loss

  

$

(1,876)

  

$

(3,277)

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

 

 

 

 

 

 

Depreciation and amortization

 

 

4,701

 

 

4,485

Amortization of deferred financing costs and debt discount

 

 

304

 

 

303

Stock-based compensation

 

 

1,420

 

 

1,350

Provision for losses on accounts receivable

 

 

182

 

 

128

Deferred income taxes

 

 

1,749

 

 

773

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

40,193

 

 

36,596

Inventories

 

 

(25,275)

 

 

(27,489)

Prepaid  and refundable income taxes and other assets

 

 

(1,199)

 

 

(5,114)

Accounts payable

 

 

(208)

 

 

(2,168)

Accrued expenses and other current liabilities

 

 

(5,950)

 

 

(1,596)

Benefit obligations and other long-term liabilities

 

 

234

 

 

282

Net cash provided by operating activities

 

 

14,275

 

 

4,273

Investing activities

 

 

 

 

 

 

Capital expenditures

 

 

(1,307)

 

 

(1,306)

Net cash used in investing activities

 

 

(1,307)

 

 

(1,306)

Financing activities

 

 

 

 

 

 

Shares withheld on restricted stock vesting paid for employees’ taxes

 

 

(23)

 

 

(923)

Payments of financing costs

 

 

 -

 

 

(932)

Earnout payment

 

 

 -

 

 

(5,487)

Dividends paid

 

 

(6,098)

 

 

(5,495)

Repayment of long-term debt

 

 

(30,785)

 

 

(789)

Net cash used in financing activities

 

 

(36,906)

 

 

(13,626)

Change in cash and cash equivalents

 

 

(23,938)

 

 

(10,659)

Cash and cash equivalents at beginning of period

 

 

36,875

 

 

18,609

Cash and cash equivalents at end of period

 

$

12,937

 

$

7,950

 

 

 

 

 

 

 

Non-cash operating and financing activities

 

 

 

 

 

 

Truck chassis inventory acquired through floorplan obligations

 

$

7,301

 

$

12,247

 

 

 

 

 

 

 

 

 

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 2017 Form 10-K (Commission File No. 001-34728) filed with the Securities and Exchange Commission on March 1, 2018.

 

The Company currently conducts business in two segments: Work Truck Attachments and Work Truck Solutions. Financial information regarding these segments is reported in Note 15 to the Unaudited Condensed Consolidated Financial Statements.

 

Interim Condensed Consolidated Financial Information

 

The accompanying condensed consolidated balance sheet as of March 31, 2018 and the condensed consolidated statements of operations and comprehensive income for the three months ended March 31, 2018 and 2017 and condensed cash flows for the three months ended March 31, 2018 and 2017 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. In addition, due to the factors noted above, Work Truck Attachments working capital needs are highest in the second and third quarters as its accounts receivable rise from pre-season sales. These working capital needs decline in the fourth quarter as the Company receives payments for its pre-season shipments.

 

Recently Adopted Accounting Pronouncements

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” amending revenue recognition guidance and requiring more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amended guidance, herein referred to as Topic 606, is effective for annual and interim reporting periods beginning after December 15, 2017. The Company adopted Topic 606, effective January 1, 2018, using the modified retrospective transition method. The Company recognized the cumulative effect of applying the new revenue standard as an adjustment to the opening balance of retained earnings at the beginning of 2018. The comparative information has not been restated and continues to be reported under the accounting standards in effect for the period presented. See Note 2 for additional information.

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In March 2017, the FASB issued ASU No. 2017-07, “Compensation-Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”. The standard requires that an employer report the service cost component in the same line items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside of operating profit. The standard is effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those annual periods.  Prior periods are required to be recast. The Company adopted this standard on January 1, 2018. The impact of this standard was a reclassification of $179 of other components of net periodic benefit cost to Other expense, net on the Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2017.  The Company utilized a practical expedient included in the ASU which allowed the Company to use amounts previously disclosed in its pension and other postretirement benefits not for the prior period as the estimation basis for applying the required retrospective presentation requirements.

 

In March 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-09, Stock-based Compensation: Improvements to Employee Share-based Payment Accounting, which simplifies several aspects of the accounting for share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, and statement of cash flow classification. The amended guidance became effective for the Company commencing in the first quarter of 2017. The Company has implemented ASU 2016-09 as follows:

 

o

ASU 2016-09 eliminates the requirement to estimate and apply a forfeiture rate to reduce stock compensation expense during the vesting period, and instead, provides an alternative option to account for forfeitures as they occur, which is the option the Company has adopted. ASU 2016-09 requires that this change be adopted using the modified retrospective approach. The adoption of this section had no material impact on the financial statements.

 

o

ASU 2016-09 addresses the presentation of excess tax benefits and employee taxes paid on the statement of cash flows. The standard requires presentation of excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. The Company adopted this change prospectively during the first quarter of 2017. ASU 2016-09 also requires the presentation of amounts withheld for applicable income taxes on employee share-based awards as a financing activity on the statement of cash flows, which the Company also adopted in the first quarter of 2017.  

 

o

ASU No 2016-09 also eliminates additional paid in capital ("APIC") pools and requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. This requirement was adopted prospectively by the Company. The impact of this section of the standard was a benefit of $616 to income tax expense for the three month period ended March 31, 2017. In addition, the ASU requires that the excess tax benefit be removed from the overall calculation of diluted shares. The impact on diluted earnings per share of this adoption was not material.

 

 

 

2.Revenue Recognition

 

On January 1, 2018, the Company adopted Topic 606 applying the modified retrospective method to all contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. The Company recorded a net increase to opening retained earnings of $378 as of January 1, 2018 due to the cumulative impact of adopting Topic 606. The implementation of the guidance had no material impact on the measurement or recognition of revenue of prior periods; however, additional disclosures have been added in accordance with the ASU.

 

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The adoption of Topic 606 did not have a significant impact on the Work Truck Attachments segment. In the Work Truck Solutions segment, the standard changed the timing of revenue for truck upfits of customer-owned chassis from a point in time to over time. This change in timing of revenue recognition increased revenue by $294 in the three months ended March 31, 2018.

 

Revenue Streams

 

The following is a description of principal activities from which the Company generates revenue. Revenues are recognized when control of the promised goods or services are transferred to the customer, in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. The Company generates all of its revenue from contracts with customers. Additionally, contract amounts represent the full amount of the transaction price as agreed upon with the customer at the time of order, resulting in a single performance obligation in all cases.

 

Work Truck Attachments

 

The Company recognizes revenue upon shipment of equipment to the customer. Additionally, the Company performs upfitting services within the Work Truck Attachments segment. For upfit sales, customers are billed separately for the truck chassis by the chassis manufacturer.  The Company only records sales for the amount of the up-fit, excluding the truck chassis. The Company acts as a garage keeper and never takes ownership or title to the truck chassis and does not pay interest associated with the truck chassis while on its premises within the Work Truck Attachments segment.

 

Within the Work Truck Attachments segment, the Company offers a variety of discounts and sales incentives to its distributors. The estimated liability for sales discounts and allowances is calculated using the expected value method and recorded at the time of sale as a reduction of net sales. The liability is estimated based on the costs of the program, the planned duration of the program and historical experience.

 

The Work Truck Attachments segment has three revenue streams, as identified below.

 

Independent Dealer Sales – Revenues from sales to independent dealers are recognized when the customer obtains control of the Company’s product, which occurs at a point in time, typically upon shipment. In these instances, each product is considered a separate performance obligation, and revenue is recognized upon shipment of the goods. Any shipping and handling activities performed by the Company after the transfer of control to the customer (e.g., when control transfers upon shipment) are considered fulfillment activities, and accordingly, the costs are accrued for when the related revenue is recognized.

 

State and Local Bids – The Company records revenue of separately sold snow and ice equipment upon shipment and fully upfit vehicles upon delivery.  The state and local bid process does not obligate the entity to buy any products from the Company, but merely allows the entity to purchase products in the future typically for a fixed period of time. The entity commits to actually purchasing products from the Company when it issues purchase orders off of a previously awarded bid, which lists out actual quantities of equipment being ordered and the delivery terms. On upfit transactions, the Company is providing a significant service by assembling and integrating the individual products onto the customer’s truck. Each individual product and installation activity is highly interdependent and highly interrelated, and therefore the Company considers the manufacture and upfit of a truck a single performance obligation. Any shipping and handling activities performed by the Company after the transfer of control to the Customer (e.g., when control transfers upon shipment) are considered fulfillment activities, and accordingly, the costs are accrued for when the related revenue is recognized.

 

Parts & Accessory Sales – The Company’s equipment is used in harsh conditions and parts frequently wear out. These parts drive recurring revenues through parts and accessory sales. The process for recording parts and accessory sales is consistent with the independent dealer sales noted above.

 

 

 

 

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Work Truck Solutions

 

The Work Truck Solutions segment primarily participates in the truck and vehicle upfitting industry in the United States. Customers are billed separately for the truck chassis by the chassis manufacturer.  The Company only records sales for the amount of the upfit, excluding the truck chassis.   The Company obtains the truck chassis from the truck chassis manufacturer through either its floor plan agreement with a financial institution or bailment pool agreement with the truck chassis manufacturer. Additionally, in some instances the Company upfits chassis which are owned by the end customer.  For truck chassis acquired through the floor plan agreement, the Company holds title to the vehicle from the time the chassis is received by the Company until the completion of the up-fit.  Under the bailment pool agreement, the Company does not take title to the truck chassis, but rather only holds the truck chassis on consignment.   The Company pays interest on both of these arrangements as discussed below in Note 8.  The Company records revenue in the same manner net of the value of the truck chassis in both the Company’s floor plan and bailment pool agreements. The Company does not set the price for the truck chassis, is not responsible for the billing of the chassis and does not have inventory risk in either the bailment pool or floor plan agreements.

Revenues from the sales of the Work Truck Solutions products are generally recognized net of the truck chassis with the selling price to the customer recorded as sales and the manufacturing and up-fit cost of the product recorded as cost of sales. In these cases, the Company acts as an agent as it does not have inventory or pricing control over the truck chassis.  Within the Work Truck Solutions segment, the Company also sells certain third-party products for which it acts as an agent.  These sales do not meet the criteria for gross sales recognition, and thus are recognized on a net basis at the time of sale. Under net sales recognition, the cost paid to the third-party service provider is recorded as a reduction to sales, resulting in net sales being equal to the gross profit on the transaction.

The Work Truck Solutions segment has three revenue streams, as identified below.

 

Fleet Upfit Sales – The Company enters contracts with certain fleet customers. Fleet agreements create enforceable rights without the issuance of a purchase order. Typically these agreements outline the terms of sale, payment terms, standard pricing, and the rights of the customer and seller. Fleet sales are performed on both customer owned vehicles as well as non-customer owned vehicles.  For non-customer owned vehicles, revenue is recognized at a point in time upon delivery of the truck to the customer. For customer-owned vehicles, per Topic 606, revenue is recognized over time based on a cost input method. The Company accumulates costs incurred on partially completed customer-owned upfits based on estimated margin and completion. This change to over time recognition for customer owned vehicles increased revenue by $294 for the three months ended March 31, 2018.

 

Dealer Upfit Sales – The Company upfits work trucks for independent dealer customers. Dealer upfit revenue is recorded upon delivery. The customer does not own the vehicles during the upfit process, and as such revenue is recorded at a point in time upon delivery to the customer.

 

Over the Counter / Parts & Accessory Sales – Work Truck Solutions part and accessory sales are recorded as revenue upon shipment. Additionally, customers can purchase parts at any of the Company’s showrooms.  In these instances, each product is considered a separate performance obligation, and revenue is recognized upon shipment of the goods or customer pick up.

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Disaggregation of Revenue

 

The following table provides information about disaggregated revenue by customer type and timing of revenue recognition, and includes a reconciliation of the disaggregated revenue with reportable segments.

 

Revenue by customer type was as follows:

 

 

 

 

 

 

Three Months Ended March 31, 2018

Work Truck Attachments

Work Truck Solutions

Corporate and Eliminations

Total Revenue

Independent dealer

$ 33,638

$ 19,891

$ -

$ 53,529

Government

13,821

 -

 -

13,821

Fleet

 -

14,352

 -

14,352

Other

 -

4,470

(2,208)

2,262

Total revenue

$ 47,459

$ 38,713

$ (2,208)

$ 83,964

 

 

 

 

 

 

Revenue by timing of revenue recognition was as follows:

 

 

 

 

 

 

Three Months Ended March 31, 2018

Work Truck Attachments

Work Truck Solutions

Corporate and Eliminations

Total Revenue

Point in time

$ 47,459

$ 15,376

$ (2,208)

$ 60,627

Over time

 -

23,337

 -

23,337

Total revenue

$ 47,459

$ 38,713

$ (2,208)

$ 83,964

 

 

 

 

 

 

Contract Balances

 

The following table shows the changes in the Company’s contract liabilities during the three months ended March 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

Balance at Beginning of Period

 

Additions

 

Deductions

 

Balance at End of Period

Contract liabilities

$

2,048

$

1,819

$

(1,648)

$

2,219

 

 

 

 

 

 

 

 

 

 

The Company receives payments from customers based upon contractual billing schedules. Contract assets include amounts related to our contractual right to consideration for completed performance objectives not yet invoiced. There were no contract assets as of March 31, 2018. Contract liabilities include payments received in advance of performance under the contract, variable freight allowances which are refunded to the customer, and rebates paid to distributors under our municipal rebate program, and are realized with the associated revenue recognized under the contract. The change in the contract liabilities balance is driven by an increase in customer payments received in advance of performance.

 

The Company recognized revenue of $279 during the three months ended March 31, 2018, which amount was included in contract liabilities at the beginning of the period.

 

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Transaction Price Allocated to the Remaining Performance Obligations

 

Topic 606 requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of March 31, 2018. The guidance provides certain optional exemptions that limit this requirement. The Company has various contracts that meet the following optional exemptions provided by ASC 606:

 

1.

The performance obligation is part of a contract that has an original expected duration of one year or less.

 

2.

Revenue is recognized from the satisfaction of the performance obligations in the amount billable to the customer in accordance with ASC 606-10-55-18.

 

3.

The variable consideration is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation in accordance with ASC 606-10-25-14(b), for which the criteria in ASC 606-10-32-40 have been met.

 

After considering the above optional exemptions, the estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period is immaterial. Specifically, all obligations are expected to be less than one year, revenue is recognized from the satisfaction of the performance obligations and variable consideration is allocated entirely to wholly unsatisfied performance obligations.

 

Practical Expedients and Exemptions

 

As allowed under Topic 606, the Company adopted the following practical expedients and exemptions:

 

·

The Company generally expenses sales commissions when incurred because the amortization period would have been less than one year. The Company records these costs within selling, general and administrative expenses.

 

·

The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

 

·

The Company does not assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer.

 

·

The Company excludes from the transaction price all sales taxes that are assessed by a governmental authority.

 

·

The Company does not adjust the promised amount of consideration for the effects of a significant financing component, as it expects at contract inception that the period between the transfer to a promised good or service to a customer and the customer’s payment for the good or service will be one year or less.

 

·

The Company accounts for shipping and handling activities that occur after control of the related good transfers as fulfillment activities instead of assessing such activities as performance obligations.

 

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Impact of New Revenue Guidance on Financial Statement Line Items

 

In accordance with Topic 606, the disclosure of the impact of adoption to the condensed consolidated statements of operations was as follows:

 

 

 

 

 

 

Three Months Ended March 31, 2018

 

As Reported

Balances without adoption of Topic 606

Effect of Change Higher/(Lower)

Net sales

$ 83,964

$ 83,670

$ 294

Cost of sales

63,937

63,748

189

Gross profit

20,027

19,922

105

Selling, general, and administrative expense

16,146

16,146

 -

Intangibles amortization

2,871

2,871

 -

Income from operations

1,010

905

105

Interest expense, net

(3,945)

(3,945)

 -

Other expense, net

(203)

(203)

 -

Loss before taxes

(3,138)

(3,243)

105

Income tax benefit

(1,262)

(1,290)

28

Net loss

$ (1,876)

$ (1,953)

$ 77

Loss per common share:

 

 

 

Basic

$ (0.08)

$ (0.09)

$ 0.01

Diluted

$ (0.08)

$ (0.09)

$ 0.01

 

 

 

 

 

 

In accordance with Topic 606, the disclosure of the impact of adoption to the condensed consolidated balance sheet was as follows:

 

 

 

 

 

 

As of March 31, 2018

 

As Reported

Balances without adoption of Topic 606

Effect of Change Higher/(Lower)

Assets:

 

 

 

Accounts Receivable

$ 41,130

$ 39,039

$ 2,091

Inventory

94,924

96,610

(1,686)

Liabilities:

 

 

 

Deferred tax liability

41,018

40,913

105

Shareholder's Equity:

 

 

 

Retained Earnings

108,140

107,762

378

 

 

 

 

 

 

 

 

 

3.Acquisition

 

On May 1, 2017, the Company purchased substantially all of the assets of Arrowhead Equipment, Inc. (“Arrowhead”). Total consideration was $7,385. The acquisition includes Arrowhead’s assets acquired at two up-fit locations in Albany and Queensbury, New York that are both being leased by the Company. 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 $38 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 ended March 31, 2017.

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The following table summarizes the 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

 

$

852

 

Inventories

 

 

1,547

 

Prepaids and other current assets

 

 

6

 

Property and equipment

 

 

624

 

Goodwill

 

 

2,720

 

Intangible assets

 

 

2,700

 

Accounts payable and other current liabilities

 

 

(957)

 

Unfavorable lease

 

 

(107)

 

Total

 

$

7,385

 

 

 

 

 

 

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 will be able to deduct amortization of goodwill for income tax purposes over a fifteen-year period.  The acquisition was accounted for under the acquisition method of accounting, and accordingly, the results of operations are included in the Company’s financial statements from the date of acquisition. For the three months ended March 31, 2018, the Arrowhead assets contributed $3,138 of revenues and $313 of pre-tax operating income to the Company.

 

 

 

 

 

4.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

 

 

March 31,

 

December 31,

 

 

2018

 

2017

Assets:

 

 

 

 

 

 

Other long-term assets (a)

  

$

5,397

  

$

4,840

 

 

 

 

 

 

 

Total Assets

 

$

5,397

 

$

4,840

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Interest rate swaps (b)

 

$

1,191

 

$

2,178

Long term debt (c)

 

 

281,544

 

 

312,384

Earnout - Henderson (d)

 

 

475

 

 

529

Earnout - Dejana (e)

 

 

3,100

 

 

3,100

Total Liabilities

 

$

286,310

 

$

318,191

 

 

 


(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 $506 and $685 at March 31, 2018 are included in Accrued expenses and other current liabilities and Other long-term liabilities, respectivelyInterest rate swaps of $597 and $1,581 at December 31, 2017 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 $33 and $442, respectively, at March 31, 2018 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 $165 and $442, respectively, at March 31, 2017 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

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2018

 

2017

 

 

 

 

 

 

 

 

 

Beginning Balance

  

$

529

 

$

636

 

Additions

 

 

 

 

 

Adjustments to fair value

 

 

 

 

 

Payment to former owners

 

 

(54)

 

 

(29)

 

Ending balance

 

$

475

 

$

607

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(e) Included in Other long term liabilities in the amount of $3,100 at March 31, 2018 is the fair value of an obligation for a portion of the potential earnout incurred in conjunction with the acquisition of substantially all of the assets of Dejana Truck & Utility Equipment Company, Inc. and certain entities directly or indirectly owned by the Peter Paul Dejana Family Trust dated 12/31/98 (“Dejana”). Included in Other long term liabilities in the amount of $4,886 at March 31, 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

 

 

Three Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

Beginning Balance

  

$

3,100

 

 

$

10,373

 

Additions

 

 

 

 

 

 

Adjustments to fair value

 

 

 

 

 

 

Payment to former owners

 

 

 

 

 

(5,487)

 

Ending balance

 

$

3,100

 

 

$

4,886

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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5.Inventories

 

 

Inventories consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

2018

 

2017

 

 

 

 

 

 

 

Finished goods

  

$

59,961

  

$

35,547

Work-in-process

 

 

6,622

 

 

7,774

Raw material and supplies

 

 

28,341

 

 

28,203

 

 

$

94,924

 

$

71,524

 

 

 

 

 

 

 

 

 

 

 

 

The inventories in the table above do not include truck chassis inventory financed through a floor plan financing agreement as discussed in Note 8.  The Company takes title to truck chassis upon receipt of the inventory through its 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 the dealer customer upon delivery.  At March 31, 2018 and December 31, 2017, the Company had $4,555 and $7,711 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.

 

 

 

   

 

 

 

 

6.Property, plant and equipment

 

Property, plant and equipment are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

2018

 

2017

 

 

 

 

 

 

 

Land

 

$

2,378

 

$

2,378

Land improvements

 

 

4,357

 

 

4,357

Leasehold Improvements

 

 

4,288

 

 

4,183

Buildings

 

 

26,920

 

 

26,846

Machinery and equipment

 

 

44,892

 

 

44,618

Furniture and fixtures

 

 

14,011

 

 

13,681

Mobile equipment and other

 

 

4,640

 

 

4,576

Construction-in-process

 

 

4,229

 

 

4,320

Total property, plant and equipment

 

 

105,715

 

 

104,959

Less accumulated depreciation

 

 

(52,801)

 

 

(50,997)

Net property, plant and equipment

 

$

52,914

 

$

53,962

 

 

 

 

 

 

 

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7. Other Intangible Assets

 

The following is a summary of the Company’s other intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Less

 

Net

 

 

 

Carrying

 

Accumulated

 

Carrying

 

 

 

Amount

 

Amortization

 

Amount

March 31, 2018

 

 

 

 

 

 

 

 

 

Indefinite-lived intangibles:

 

 

 

 

 

 

 

 

 

Trademark and tradenames

 

$

77,600

 

$

 -

 

$

77,600

Amortizable intangibles:

 

 

 

 

 

 

 

 

 

Dealer network

 

 

80,000

 

 

56,000

 

 

24,000

Customer relationships

 

 

80,920

 

 

12,631

 

 

68,289

Patents

 

 

21,136

 

 

11,036

 

 

10,100

Noncompete agreements

 

 

8,640

 

 

7,260

 

 

1,380

Trademarks

 

 

5,459

 

 

3,549

 

 

1,910

Backlog

 

 

1,900

 

 

1,900

 

 

 -

License

 

 

20

 

 

20

 

 

 -

Amortizable intangibles, net

 

 

198,075

 

 

92,396

 

 

105,679

Total

 

$

275,675

 

$

92,396

 

$

183,279

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Less

 

Net

 

 

 

Carrying

 

Accumulated

 

Carrying

 

 

 

Amount

 

Amortization

 

Amount

December 31, 2017

 

 

 

 

 

 

 

 

 

Indefinite-lived intangibles:

 

 

 

 

 

 

 

 

 

Trademark and tradenames

 

$

77,600

 

$

 -

 

$

77,600

Amortizable intangibles:

 

 

 

 

 

 

 

 

 

Dealer network

 

 

80,000

 

 

55,000

 

 

25,000

Customer relationships

 

 

80,920

 

 

11,304

 

 

69,616

Patents

 

 

21,136

 

 

10,721

 

 

10,415

Noncompete agreements

 

 

8,640

 

 

7,055

 

 

1,585

Trademarks

 

 

5,459

 

 

3,525

 

 

1,934

Backlog

 

 

1,900

 

 

1,900

 

 

 -

License

 

 

20

 

 

20

 

 

 -

Amortizable intangibles, net

 

 

198,075

 

 

89,525

 

 

108,550

Total

 

$

275,675

 

$

89,525

 

$

186,150

 

 

 

 

 

 

 

 

 

 

Amortization expense for intangible assets was $2,871 and $2,749 for the three months ended March 31, 2018 and 2017, respectively. Estimated amortization expense for the remainder of 2018 and each of the succeeding five years is as follows:

 

 

 

 

 

2018

       

$

8,607

2019

 

 

10,954

2020

 

 

10,932

2021

 

 

10,670

2022

 

 

10,520

2023

 

 

10,520

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6.

 

 

 

 

 

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8.Long-Term Debt

 

Long-term debt is summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

2018

 

2017

 

 

 

 

 

 

 

Term Loan, net of debt discount of $1,464 and $1,562 at March 31, 2018 and December 31, 2017, respectively

 

$

280,143

 

$

310,830

Less current maturities

 

 

2,749

 

 

32,749

Long term debt before deferred financing costs

 

 

277,394

 

 

278,081

Deferred financing costs, net

 

 

3,003

 

 

3,209

Long term debt, net

 

$

274,391

 

$

274,872

 

 

 

 

 

 

 

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 year ended December 31, 2017.

 

On August 17, 2017 the Company entered into an amendment to the Term Loan Credit Agreement to further decrease the interest rate margins that apply to the term loan facility from 2.50% to 2.00% for ABR Loans (as defined in the Term Loan Credit Agreement) and from 3.50% to 3.00% 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) 2.00% 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) 3.00% 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 $676 in costs with third parties directly related to the amendment that the Company expensed as incurred in the year ended December 31, 2017.

 

The Term Loan Credit Agreement 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 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.

 

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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 Credit Agreement 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. 

 

At March 31, 2018, the Company had outstanding borrowings under the Term Loan Credit Agreement of $280,143, no outstanding borrowings on the Revolving Credit Agreement and remaining borrowing availability of $54,491.  At December 31, 2017, the Company had outstanding borrowings under the Term Loan Credit Agreement of $310,830, no outstanding borrowings on the Revolving Credit Agreement and remaining borrowing availability of $99,463. 

 

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 March 31, 2018, 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 March 31, 2018, the Company was not required to make additional excess cash flow payments during fiscal 2018. The Company made a required excess cash flow payment of $11,279 and a voluntary payment of $18,721 on January 31, 2018. 

 

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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.  On February 5, 2018, the Company entered into additional interest rate swap agreements to reduce its exposure to interest rate volatility. The two interest rate swap agreements have notional amounts of $50,000 and $150,000 effective for the periods December 31, 2018 through June 30, 2021 and June 30, 2021 through December 10, 2021, respectively. The interest rates swaps are accounted for as cash flow hedges. 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 either received or made payments on a monthly basis based on the differential between 6.105% and LIBOR plus 3.00% (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 3.00% (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 3.00% (with a LIBOR floor of 1.0%). Under the interest rate swap agreement effective as of December 31, 2018, the Company will either receive or make payments on a monthly basis based on the differential between 2.613% and LIBOR. Under the interest rate swap agreement effective as of June 30, 2021, the Company will either receive or make payments on a monthly basis based on the differential between 2.793% and LIBOR. The interest rate swaps’ negative fair value at March 31, 2018 was $1,191, of which $506 and $685 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, 2017 was $2,178, of which $597 and $1,581 are included in Accrued expenses and other current liabilities and Other long-term liabilities on the Condensed Consolidated Balance Sheet, respectively. 

 

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 March 31, 2018 and December 31, 2017 were $15,805 and $17,447, 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 March 31, 2018, rates were based on prime plus a margin ranging from 0% to 8%.  During the three months ended March 31, 2018, the Company incurred $29 in interest on the bailment pool arrangement. During the three months ended March 31, 2017, the Company incurred $92 in interest on the bailment pool arrangement.

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 expires on 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 $4,555 and $7,711 at March 31, 2018 and December 31, 2017, respectively.  During the three months ended March 31, 2018, the Company incurred $52 in interest on the floor plan arrangements. During the three months ended March 31, 2017, the Company incurred $30 in interest on the floor plan arrangements.

 

 

 

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9.Accrued Expenses and Other Current Liabilities

 

Accrued expenses and other liabilities are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

2018

 

2017

 

 

 

 

 

 

 

Payroll and related costs

 

$

4,652

 

$

6,923

Employee benefits

 

 

5,520

 

 

4,701

Accrued warranty

 

 

2,747

 

 

3,262

Other

 

 

5,131

 

 

6,118

 

 

$

18,050

 

$

21,004

 

 

 

 

 

 

10.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 was $4,630 at March 31, 2018, of which $1,883 is included in Other long term liabilities and $2,747 is included in Accrued expenses and other current liabilities in the accompanying Condensed Consolidated Balance Sheet.  The warranty reserve was $5,677 at December 31, 2017, of which $2,415 is included in Other long term liabilities and $3,262 is included in Accrued expenses and other current liabilities in the accompanying Condensed Consolidated Balance Sheet. 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2018

 

2017

 

 

 

 

 

 

 

 

 

Balance at the beginning of the period

 

$

5,677

 

$

6,160

 

Warranty provision

 

 

662

 

 

626

 

Claims paid/settlements

 

 

(1,709)

 

 

(1,505)

 

Balance at the end of the period

 

$

4,630

 

$

5,281

 

 

 

 

 

 

 

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11.                 Employee Retirement Plans

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2018

 

2017

 

 

 

 

 

 

 

 

 

Component of net periodic pension cost:

 

 

 

 

 

 

 

Service cost

 

$

102

 

$

89

 

Interest cost

 

 

389

 

 

403

 

Expected return on plan assets

 

 

(475)

 

 

(448)

 

Amortization of net loss