PLOW_Current Folio_10Q_Taxonomy2017

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 September 30, 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 every Interactive Data File required to be submitted 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 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:

 

 

 

 

Large accelerated filer ☒

 

Accelerated filer ☐

 

 

 

Non-accelerated filer ☐

 

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 November 6, 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 September 30, 2018 and December 31, 2017 

3

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2018 and 2017 

4

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 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 

26

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

39

Item 4. Controls and Procedures 

40

PART II. OTHER INFORMATION 

40

Item 1. Legal Proceedings 

40

Item 1A. Risk Factors 

41

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

41

Item 3. Defaults Upon Senior Securities 

41

Item 4. Mine Safety Disclosures 

41

Item 5. Other Information 

41

Item 6. Exhibits 

41

Signatures 

42

 

 

 

 

 

 


 

Table of Contents 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Douglas Dynamics, Inc.

Condensed Consolidated Balance Sheets

(In thousands except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

2018

 

2017

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

Assets

  

 

 

  

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

 -

 

$

36,875

Accounts receivable, net

 

 

128,164

 

 

79,120

Inventories

 

 

89,444

 

 

71,524

Inventories - truck chassis floor plan

 

 

9,495

 

 

7,711

Refundable income taxes paid

 

 

1,476

 

 

 -

Prepaid and other current assets

 

 

3,562

 

 

2,883

Total current assets

 

 

232,141

 

 

198,113

Property, plant, and equipment, net

 

 

54,298

 

 

53,962

Goodwill

 

 

241,006

 

 

241,006

Other intangible assets, net

 

 

177,545

 

 

186,150

Other long-term assets

 

 

7,750

 

 

5,945

Total assets

 

$

712,740

 

$

685,176

Liabilities and stockholders’ equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

15,280

 

$

16,323

Accrued expenses and other current liabilities

 

 

28,360

 

 

21,004

Floor plan obligations

 

 

9,495

 

 

7,711

Income taxes payable

 

 

 -

 

 

2,996

Short term borrowings

 

 

38,000

 

 

 -

Current portion of long-term debt

 

 

2,749

 

 

32,749

Total current liabilities

 

 

93,884

 

 

80,783

Retiree health benefit obligation

 

 

7,113

 

 

6,809

Pension obligation

 

 

2,803

 

 

9,761

Deferred income taxes

 

 

46,447

 

 

39,269

Long-term debt, less current portion

 

 

273,428

 

 

274,872

Other long-term liabilities

 

 

14,355

 

 

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 September 30, 2018 and December 31, 2017, respectively

 

 

227

 

 

226

Additional paid-in capital

 

 

151,443

 

 

147,287

Retained earnings

 

 

127,032

 

 

115,737

Accumulated other comprehensive loss, net of tax

 

 

(3,992)

 

 

(6,572)

Total stockholders’ equity

 

 

274,710

 

 

256,678

Total liabilities and stockholders’ equity

 

$

712,740

 

$

685,176

 

 

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

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

September 30,

 

September 30,

 

 

2018

 

2017

 

2018

 

2017

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

  

$

124,832

  

$

125,339

 

$

372,242

  

$

336,958

Cost of sales

 

 

89,912

 

 

89,284

 

 

261,446

 

 

238,683

Gross profit

 

 

34,920

 

 

36,055

 

 

110,796

 

 

98,275

Selling, general, and administrative expense

 

 

16,592

 

 

12,914

 

 

53,281

 

 

44,537

Intangibles amortization

 

 

2,868

 

 

2,997

 

 

8,605

 

 

8,532

Income from operations

 

 

15,460

 

 

20,144

 

 

48,910

 

 

45,206

Interest expense, net

 

 

(4,379)

 

 

(4,860)

 

 

(12,420)

 

 

(14,348)

Litigation proceeds

 

 

 -

 

 

 -

 

 

 -

 

 

1,275

Other expense, net

 

 

(12)

 

 

(203)

 

 

(479)

 

 

(669)

Income before taxes

 

 

11,069

 

 

15,081

 

 

36,011

 

 

31,464

Income tax expense

 

 

1,148

 

 

5,754

 

 

6,802

 

 

10,668

Net income

 

$

9,921

 

$

9,327

 

$

29,209

 

$

20,796

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

22,700,991

 

 

22,590,897

 

 

22,675,450

 

 

22,571,560

Diluted

 

 

22,726,517

 

 

22,604,921

 

 

22,697,259

 

 

22,582,502

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.43

 

$

0.41

 

$

1.27

 

$

0.91

Diluted

 

$

0.43

 

$

0.40

 

$

1.26

 

$

0.90

Cash dividends declared and paid per share

 

$

0.27

 

$

0.24

 

$

0.80

 

$

0.72

Comprehensive income

 

$

10,709

 

$

9,396

 

$

31,789

 

$

20,590

 

 

See the accompanying notes to condensed consolidated financial statements.

 

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Douglas Dynamics, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2018

 

2017

 

 

(unaudited)

 

 

 

 

 

 

 

Operating activities

 

 

 

 

 

 

Net income

  

$

29,209

  

$

20,796

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

14,215

 

 

13,815

Amortization of deferred financing costs and debt discount

 

 

911

 

 

911

Loss on disposal of fixed assets

 

 

185

 

 

 -

Stock-based compensation

 

 

4,180

 

 

2,750

Provision for losses on accounts receivable

 

 

446

 

 

1,424

Deferred income taxes

 

 

7,178

 

 

4,464

Earnout liability

 

 

 -

 

 

(1,186)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(47,105)

 

 

(39,519)

Inventories

 

 

(19,795)

 

 

(4,929)

Prepaid and refundable income taxes and other assets

 

 

(4,093)

 

 

(55)

Accounts payable

 

 

(872)

 

 

(2,556)

Accrued expenses and other current liabilities

 

 

4,360

 

 

3,069

Benefit obligations and other long-term liabilities

 

 

(6,723)

 

 

347

Net cash used in operating activities

 

 

(17,904)

 

 

(669)

Investing activities

 

 

 

 

 

 

Capital expenditures

 

 

(6,302)

 

 

(5,216)

Acquisition of business

 

 

 -

 

 

(7,385)

Net cash used in investing activities

 

 

(6,302)

 

 

(12,601)

Financing activities

 

 

 

 

 

 

Shares withheld on restricted stock vesting paid for employees’ taxes

 

 

(23)

 

 

(923)

Payments of financing costs

 

 

 -

 

 

(1,608)

Earnout payment

 

 

 -

 

 

(5,487)

Dividends paid

 

 

(18,291)

 

 

(16,476)

Net revolver borrowings

 

 

38,000

 

 

23,000

Repayment of long-term debt

 

 

(32,355)

 

 

(2,363)

Net cash used in financing activities

 

 

(12,669)

 

 

(3,857)

Change in cash and cash equivalents

 

 

(36,875)

 

 

(17,127)

Cash and cash equivalents at beginning of period

 

 

36,875

 

 

18,609

Cash and cash equivalents at end of period

 

$

 -

 

$

1,482

 

 

 

 

 

 

 

Non-cash operating and financing activities

 

 

 

 

 

 

Truck chassis inventory acquired through floorplan obligations

 

$

30,034

 

$

33,271

 

 

 

 

 

 

 

 

 

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 September 30, 2018 and the condensed consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2018 and 2017 and condensed cash flows for the nine months ended September 30, 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 and $537 of other components of net periodic benefit cost to Other expense, net on the Condensed Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2017, respectively.  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 note for the prior period as the estimation basis for applying the required retrospective presentation requirements.

 

 

 

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.

 

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 $16 and increased revenue by $273 in the three and nine months ended September 30, 2018, respectively.

 

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.

 

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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.

 

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.  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

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customer-owned upfits based on estimated margin and completion. This change to over time recognition for customer owned vehicles increased revenue by $16 and increased revenue by $273 for the three and nine months ended September 30, 2018, respectively.

 

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.

 

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 September 30, 2018

Work Truck Attachments

Work Truck Solutions

Corporate and Eliminations

Total Revenue

Independent dealer

$ 80,964

$ 18,732

$ -

$ 99,696

Government

12,568

 -

 -

12,568

Fleet

 -

13,955

 -

13,955

Other

 -

2,017

(3,404)

(1,387)

Total revenue

$ 93,532

$ 34,704

$ (3,404)

$ 124,832

 

 

 

 

 

Nine Months Ended September 30, 2018

Work Truck Attachments

Work Truck Solutions

Corporate and Eliminations

Total Revenue

Independent dealer

$ 232,934

$ 58,524

$ -

$ 291,458

Government

35,351

 -

 -

35,351

Fleet

 -

43,501

 -

43,501

Other

 -

8,538

(6,606)

1,932

Total revenue

$ 268,285

$ 110,563

$ (6,606)

$ 372,242

 

 

 

 

 

Revenue by timing of revenue recognition was as follows:

 

 

 

 

 

Three Months Ended September 30, 2018

Work Truck Attachments

Work Truck Solutions

Corporate and Eliminations

Total Revenue

Point in time

$ 93,532

$ 13,601

$ (3,404)

$ 103,729

Over time

 -

21,103

 -

21,103

Total revenue

$ 93,532

$ 34,704

$ (3,404)

$ 124,832

 

 

 

 

 

Nine Months Ended September 30, 2018

Work Truck Attachments

Work Truck Solutions

Corporate and Eliminations

Total Revenue

Point in time

$ 268,285

$ 42,501

$ (6,606)

$ 304,180

Over time

 -

68,062

 -

68,062

Total revenue

$ 268,285

$ 110,563

$ (6,606)

$ 372,242

 

 

 

 

 

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Contract Balances

 

The following table shows the changes in the Company’s contract liabilities during the three and nine months ended September 30, 2018:

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

Balance at Beginning of Period

 

Additions

 

Deductions

 

Balance at End of Period

Contract liabilities

$

3,316

$

2,434

$

(3,544)

$

2,206

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

Balance at Beginning of Period

 

Additions

 

Deductions

 

Balance at End of Period

Contract liabilities

$

2,048

$

8,605

$

(8,447)

$

2,206

 

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 September 30, 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 for the three and nine months ended September 30, 2018 is driven by an increase in customer payments received in advance of performance.

 

The Company recognized revenue of $980 and $2,365 during the three and nine months ended September 30, 2018, respectively, which amount was included in contract liabilities at the beginning of each period.

 

 

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 September 30, 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.

 

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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 the Company recognizes revenue at the amount to which it has 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.

 

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 September 30, 2018

 

Nine Months Ended September 30, 2018

 

As Reported

Balances without adoption of Topic 606

Effect of Change Higher/(Lower)

 

As Reported

Balances without adoption of Topic 606

Effect of Change Higher/(Lower)

Net sales

$ 124,832

$ 124,816

$ 16

 

$ 372,242

$ 371,969

$ 273

Cost of sales

89,912

89,910

 2

 

261,446

261,276

170

Gross profit

34,920

34,906

14

 

110,796

110,693

103

Income from operations

15,460

15,446

14

 

48,910

48,807

103

Income tax expense

1,148

1,144

 4

 

6,802

6,774

28

Net income

$ 9,921

$ 9,911

$ 10

 

$ 29,209

$ 29,134

$ 75

Earnings per common share:

 

 

 

 

 

 

 

Basic

$ 0.43

$ -

$ 0.43

 

$ 1.27

$ -

$ 1.27

Diluted

$ 0.43

$ -

$ 0.43

 

$ 1.26

$ -

$ 1.26

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

As of September 30, 2018

 

As Reported

Balances without adoption of Topic 606

Effect of Change Higher/(Lower)

Assets:

 

 

 

Accounts Receivable

$ 128,164

$ 126,052

$ 2,112

Inventory

89,444

91,148

(1,704)

Liabilities:

 

 

 

Deferred tax liability

46,447

46,341

106

Shareholder's Equity:

 

 

 

Retained Earnings

127,032

126,654

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 ($70) and $418 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 nine months ended September 30, 2017, respectively, which includes an accrual reversal for estimated transaction-related expenses.

 

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 and nine months ended September 30, 2018, the Arrowhead assets contributed $2,583 and $8,324 of revenues and $220 and $791 of pre-tax operating income to the Company, respectively.

 

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

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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).

 

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

 

 

September 30,

 

December 31,

 

 

2018

 

2017

Assets:

 

 

 

 

 

 

Other long-term assets (a)

  

$

5,762

  

$

4,840

Interest rate swaps (b)

 

 

935

 

 

 -

 

 

 

 

 

 

 

Total Assets

 

$

6,697

 

$

4,840

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Interest rate swaps (b)

 

$

 -

 

$

2,178

Long term debt (c)

 

 

280,860

 

 

312,384

Earnout - Henderson (d)

 

 

413

 

 

529

Earnout - Dejana (e)

 

 

3,100

 

 

3,100

Total Liabilities

 

$

284,373

 

$

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 $7 and $942 at September 30, 2018 are included in Accrued expenses and other current liabilities and Other long-term assets, 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.

 

(d) Included in Accrued expenses and other current liabilities and Other long term liabilities in the amounts of $213 and $200, respectively, at September 30, 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 $111 and $442, respectively, at September 30, 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: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Three Months Ended

 

Nine Months Ended

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

September 30,

 

September 30,

 

 

2018

 

2018

 

2017

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

  

$

444

 

$

529

 

$

580

 

$

636

Additions

 

 

 

 

 

 

 

 

Adjustments to fair value

 

 

 

 

 

 

 

 

Payment to former owners

 

 

(31)

 

 

(116)

 

 

(27)

 

 

(83)

Ending balance

 

$

413

 

$

413

 

$

553

 

$

553

 

 

 

 

(e) Included in Other long term liabilities in the amount of $3,100 at September 30, 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 $3,700 at September 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

 

Nine Months Ended

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

September 30,

 

September 30,

 

 

 

2018

 

2018

 

2017

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

  

$

3,100

 

$

3,100

 

$

4,886

 

$

10,373

 

Additions

 

 

 

 

 

 

 

 

 

Adjustments to fair value

 

 

 

 

 

 

(1,186)

 

 

(1,186)

 

Payment to former owners

 

 

 

 

 

 

 

 

(5,487)

 

Ending balance

 

$

3,100

 

$

3,100

 

$

3,700

 

$

3,700

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5.Inventories

 

Inventories consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

2018

 

2017

 

 

 

 

 

 

 

Finished goods

  

$

43,480

  

$

35,547

Work-in-process

 

 

8,704

 

 

7,774

Raw material and supplies

 

 

37,260

 

 

28,203

 

 

$

89,444

 

$

71,524

 

 

The inventories in the table above do not include truck chassis inventory financed through a floor plan financing agreement, which are recorded separately on the balance sheet. 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

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upon delivery.  At September 30, 2018 and December 31, 2017, the Company had $9,495 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.

 

 

 

 

 

6.Property, plant and equipment

 

Property, plant and equipment are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

2018

 

2017

 

 

 

 

 

 

 

Land

 

$

2,378

 

$

2,378

Land improvements

 

 

4,357

 

 

4,357

Leasehold improvements

 

 

4,080

 

 

4,183

Buildings

 

 

27,134

 

 

26,846

Machinery and equipment

 

 

48,847

 

 

44,618

Furniture and fixtures

 

 

14,470

 

 

13,681

Mobile equipment and other

 

 

4,750

 

 

4,576

Construction-in-process

 

 

4,598

 

 

4,320

Total property, plant and equipment

 

 

110,614

 

 

104,959

Less accumulated depreciation

 

 

(56,316)

 

 

(50,997)

Net property, plant and equipment

 

$

54,298

 

$

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

September 30, 2018

 

 

 

 

 

 

 

 

 

Indefinite-lived intangibles:

 

 

 

 

 

 

 

 

 

Trademark and tradenames

 

$

77,600

 

$

 -

 

$

77,600

Amortizable intangibles:

 

 

 

 

 

 

 

 

 

Dealer network

 

 

80,000

 

 

58,000

 

 

22,000

Customer relationships

 

 

80,920

 

 

15,281

 

 

65,639

Patents

 

 

21,136

 

 

11,662

 

 

9,474

Noncompete agreements

 

 

8,640

 

 

7,671

 

 

969

Trademarks

 

 

5,459

 

 

3,596

 

 

1,863

Backlog

 

 

1,900

 

 

1,900

 

 

 -

License

 

 

20

 

 

20

 

 

 -

Amortizable intangibles, net

 

 

198,075

 

 

98,130

 

 

99,945

Total

 

$

275,675

 

$

98,130

 

$

177,545

 

 

 

 

 

 

 

 

 

 

 

 

 

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 $2,868 and $2,997 for the three months ended September 30, 2018 and 2017, respectively. Amortization expense for intangible assets was $8,605 and $8,532 for the nine months ended September 30, 2018 and 2017, respectively. Estimated amortization expense for the remainder of 2018 and each of the succeeding five years is as follows:

 

 

 

 

 

2018

       

$

2,869

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: