UNITED STATES
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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, 2020

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

13-4275891

(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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $.01 per share

PLOW

New York Stock Exchange

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 May 5, 2020 was 22,857,457.

Table of Contents

DOUGLAS DYNAMICS, INC.

Table of Contents

PART I. FINANCIAL INFORMATION

3

Item 1. Financial Statements

3

Unaudited Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019

3

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2020 and 2019

4

Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019

5

Unaudited Condensed Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2020 and 2019

6

Notes to Unaudited Condensed Consolidated Financial Statements

7

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

27

Item 3. Quantitative and Qualitative Disclosures About Market Risk

38

Item 4. Controls and Procedures

39

PART II. OTHER INFORMATION

39

Item 1. Legal Proceedings

39

Item 1A. Risk Factors

40

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

42

Signatures

43

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,

2020

2019

(unaudited)

(unaudited)

Assets

  

  

Current assets:

Cash and cash equivalents

$

27,141

$

35,665

Accounts receivable, net

48,096

87,871

Inventories

112,370

77,942

Inventories - truck chassis floor plan

8,774

6,539

Refundable income taxes paid

974

-

Prepaid and other current assets

5,168

3,511

Total current assets

202,523

211,528

Property, plant, and equipment, net

58,542

58,444

Goodwill

241,006

241,006

Other intangible assets, net

160,984

163,722

Operating lease - right of use asset

21,555

22,557

Other long-term assets

7,926

8,438

Total assets

$

692,536

$

705,695

Liabilities and stockholders’ equity

Current liabilities:

Accounts payable

$

17,224

$

16,113

Accrued expenses and other current liabilities

22,135

26,496

Floor plan obligations

8,774

6,539

Operating lease liability - current

3,770

3,822

Income taxes payable

-

2,990

Short term borrowings

30,000

-

Current portion of long-term debt

1,938

22,143

Total current liabilities

83,841

78,103

Retiree health benefit obligation

6,451

6,338

Deferred income taxes

45,961

47,211

Long-term debt, less current portion

222,008

222,081

Operating lease liability - noncurrent

18,010

18,981

Other long-term liabilities

23,230

19,818

Stockholders’ equity:

Common Stock, par value $0.01, 200,000,000 shares authorized, 22,857,457 and 22,795,412 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively

229

228

Additional paid-in capital

156,296

155,001

Retained earnings

143,618

160,748

Accumulated other comprehensive loss, net of tax

(7,108)

(2,814)

Total stockholders’ equity

293,035

313,163

Total liabilities and stockholders’ equity

$

692,536

$

705,695

See the accompanying notes to condensed consolidated financial statements.

3

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,

2020

2019

(unaudited)

Net sales

  

$

68,190

  

$

93,187

Cost of sales

56,500

70,241

Gross profit

11,690

22,946

Selling, general, and administrative expense

17,149

16,644

Intangibles amortization

2,738

2,741

Income (loss) from operations

(8,197)

3,561

Interest expense, net

(5,040)

(4,150)

Other expense, net

(111)

(171)

Loss before taxes

(13,348)

(760)

Income tax benefit

(3,262)

(463)

Net loss

$

(10,086)

$

(297)

Weighted average number of common shares outstanding:

Basic

22,813,256

22,729,084

Diluted

22,813,256

22,729,084

Loss per common share:

Basic

$

(0.44)

$

(0.01)

Diluted

$

(0.44)

$

(0.01)

Cash dividends declared and paid per share

$

0.28

$

0.27

Comprehensive loss

$

(14,380)

$

(1,319)

See the accompanying notes to condensed consolidated financial statements.

4

Table of Contents

Douglas Dynamics, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

Three Months Ended

March 31,

March 31,

2020

2019

(unaudited)

Operating activities

Net loss

  

$

(10,086)

  

$

(297)

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

Depreciation and amortization

4,894

4,808

Amortization of deferred financing costs and debt discount

303

303

Stock-based compensation

1,368

1,054

Mark-to-market adjustments on derivatives not classified as hedges

1,413

-

Provision for losses on accounts receivable

204

107

Deferred income taxes

(1,250)

1,010

Earnout liability

(17)

(217)

Changes in operating assets and liabilities:

Accounts receivable

39,014

26,096

Inventories

(34,428)

(29,229)

Prepaid assets, refundable income taxes and other assets

(2,119)

(3,676)

Accounts payable

1,161

(2,179)

Accrued expenses and other current liabilities

(7,334)

(1,451)

Benefit obligations and other long-term liabilities

(2,203)

(1,906)

Net cash used in operating activities

(9,080)

(5,577)

Investing activities

Capital expenditures

(2,304)

(769)

Net cash used in investing activities

(2,304)

(769)

Financing activities

Shares withheld on restricted stock vesting paid for employees’ taxes

(72)

(50)

Dividends paid

(6,487)

(6,292)

Net revolver borrowings

30,000

16,000

Repayment of long-term debt

(20,581)

(30,784)

Net cash provided by (used in) financing activities

2,860

(21,126)

Change in cash and cash equivalents

(8,524)

(27,472)

Cash and cash equivalents at beginning of period

35,665

27,820

Cash and cash equivalents at end of period

$

27,141

$

348

Non-cash operating and financing activities

Truck chassis inventory acquired through floorplan obligations

$

6,215

$

10,299

See the accompanying notes to condensed consolidated financial statements.

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Douglas Dynamics, Inc.

Condensed Consolidated Statements of Shareholders’ Equity

(In thousands)

Accumulated

Additional

Other

Common Stock

Paid-in

Retained

Comprehensive

Shares

Dollars

Capital

Earnings

Loss

Total

Three Months Ended March 31, 2020

Balance at December 31, 2019

22,795,412

$

228

$

155,001

$

160,748

$

(2,814)

$

313,163

Net loss

(10,086)

(10,086)

Dividends paid

(6,487)

(6,487)

Impact due to adoption of ASC 2016-13 (credit losses), net of tax of $193

(557)

(557)

Adjustment for postretirement benefit liability, net of tax of $20

(57)

(57)

Adjustment for interest rate swap, net of tax of $1,489

(4,237)

(4,237)

Shares withheld on restricted stock vesting

(72)

(72)

Stock based compensation

62,045

1

1,367

1,368

Balance at March 31, 2020

22,857,457

$

229

$

156,296

$

143,618

$

(7,108)

$

293,035

Three Months Ended March 31, 2019

Balance at December 31, 2018

22,700,991

$

227

$

151,813

$

136,765

$

(6,049)

$

282,756

Net loss

(297)

(297)

Dividends paid

(6,292)

(6,292)

Adjustment for pension and postretirement benefit liability, net of tax of ($18)

53

53

Adjustment for interest rate swap, net of tax of $378

(1,075)

(1,075)

Shares withheld on restricted stock vesting

(50)

(50)

Stock based compensation

94,421

1

1,053

1,054

Balance at March 31, 2019

22,795,412

$

228

$

152,816

$

130,176

$

(7,071)

$

276,149

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 2019 Form 10-K (Commission File No. 001-34728) filed with the Securities and Exchange Commission on February 25, 2020.

The Company conducts business in two segments: Work Truck Attachments and Work Truck Solutions. Under this reporting structure, the Company’s two reportable business segments are as follows: 

Work Truck Attachments.  The Work Truck Attachments segment includes commercial snow and ice management attachments sold under the FISHER®, WESTERN® and SNOWEX® brands.  This segment consists of our operations that manufacture and sell snow and ice control products.

 

Work Truck Solutions.  The Work Truck Solutions segment includes manufactured municipal snow and ice control products under the HENDERSON® brand and the up-fit of market leading attachments and storage solutions under the HENDERSON® brand, and the DEJANA® brand and its related sub-brands.

See Note 16 to the Unaudited Condensed Consolidated Financial Statements for financial information regarding these segments.

Interim Condensed Consolidated Financial Information

The accompanying condensed consolidated balance sheet as of March 31, 2020, the condensed consolidated statements of operations and comprehensive loss and the condensed consolidated statements of shareholders’ equity for the three months ended March 31, 2020 and 2019, and the condensed cash flows for the three months ended March 31, 2020 and 2019 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.  

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As a result of the COVID-19 crisis, including the market volatility and other economic implications associated with the crisis and the economic and regulatory measures enacted to contain its spread, the Company’s results of operations have been impacted in the three months ended March 31, 2020, and may be significantly impacted in future quarters. In addition, the Company’s working capital and liquidity needs may become more unpredictable as a result of changes in order patterns among customers due to the crisis.  Based on the COVID-19 crisis, the results of operations of the Company for any quarter during the crisis 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 preventatively and voluntarily closed its facilities on March 18, 2020.  Since that time, the Company has started to slowly ramp up production at various facilities as appropriate. The Company has taken all of the necessary safety steps and precautions for employees who have returned to work. As of the date of this filing, the Company is not yet up to full production levels. The Company will continue to monitor the situation and provide updates as appropriate.

During the three months ended March 31, 2020, the Company benefited from credits related to the passage of the CARES Act on March 27, 2020 in response to the COVID-19 crisis. Under the CARES Act, the Company qualified for an Employee Retention Credit for wages paid to employees who were not working due to a plant shutdown related to the COVID-19 crisis. As a result of the CARES Act, the Company recorded a total benefit of $1,152 to Cost of sales and Selling, general and administrative expense on the Consolidated Condensed Consolidated Statements of Operations and Comprehensive Loss.

Recently Adopted Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses,” which modifies the measurement of expected credit losses for financial instruments held at the reporting date. The standard is effective for annual periods beginning after December 15, 2019. The Company adopted this standard in the first quarter of fiscal 2020. Upon adoption, the Company recognized the cumulative effect of adopting this guidance as an adjustment to the opening balance of retained earnings of $557, net of tax. The Company has identified and implemented changes to processes and controls to meet the standard’s updated reporting and disclosure requirements. See Note 3 for additional information.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform,” which provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The Company adopted this standard in the first quarter of fiscal 2020 specifically related to its interest rate swap, where the Company asserts the forecasted transaction using the existing reference rate associated with the swap remains probable.

2.Revenue Recognition

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. In regards to the COVID-19 crisis, the Company believes most customers within all revenue streams identified below provide essential services.

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Work Truck Attachments

The Company recognizes revenue upon shipment of equipment to the customer. 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 two 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.

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.   Generally, 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. The Work Truck Solutions segment also has manufacturing operations of municipal snow and ice control equipment, where revenue is recognized upon shipment of equipment to the customer.

Revenues from the sales of the Work Truck Solutions products are 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 four revenue streams, as identified below.

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

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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.

Fleet Upfit Sales – The Company enters into 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. The Company books an adjustment to account for revenue over time related to customer owned vehicles, which decreased revenue by $106 and increased revenue by $145 for the three months ended March 31, 2020 and 2019, 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 March 31, 2020

Work Truck Attachments

Work Truck Solutions

Total Revenue

Independent dealer

$ 19,120

$ 28,052

$ 47,172

Government

-

10,490

10,490

Fleet

-

9,229

9,229

Other

-

1,299

1,299

Total revenue

$ 19,120

$ 49,070

$ 68,190

Three Months Ended March 31, 2019

Work Truck Attachments

Work Truck Solutions

Total Revenue

Independent dealer

$ 25,817

$ 33,043

$ 58,860

Government

-

15,529

15,529

Fleet

-

14,952

14,952

Other

-

3,846

3,846

Total revenue

$ 25,817

$ 67,370

$ 93,187

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Revenue by timing of revenue recognition was as follows:

Three Months Ended March 31, 2020

Work Truck Attachments

Work Truck Solutions

Total Revenue

Point in time

$ 19,120

$ 29,714

$ 48,834

Over time

-

19,356

19,356

Total revenue

$ 19,120

$ 49,070

$ 68,190

Three Months Ended March 31, 2019

Work Truck Attachments

Work Truck Solutions

Total Revenue

Point in time

$ 25,817

$ 42,023

$ 67,840

Over time

-

25,347

25,347

Total revenue

$ 25,817

$ 67,370

$ 93,187

Contract Balances

The following table shows the changes in the Company’s contract liabilities during the three months ended March 31, 2020 and 2019, respectively:

Three Months Ended March 31, 2020

Balance at Beginning of Period

Additions

Deductions

Balance at End of Period

Contract liabilities

$

2,187

$

1,637

$

(1,789)

$

2,035

Three Months Ended March 31, 2019

Balance at Beginning of Period

Additions

Deductions

Balance at End of Period

Contract liabilities

$

2,006

$

2,335

$

(2,041)

$

2,300

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, 2020 or 2019. 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 Company recognized revenue of $467 and $372 during the three months ended March 31, 2020 and 2019, respectively, which was included in contract liabilities at the beginning of each period.

3.         Credit Losses

Effective January 1, 2020, the Company adopted new accounting guidance that significantly changes the impairment model for estimating credit losses on financial assets to a current expected credit losses (“CECL”) model that requires entities to estimate the lifetime expected credit losses on such assets, leading to earlier recognition of such losses. Under the new guidance, the Company is required to measure expected credit losses using forward-looking information to assess its allowance for credit losses. The guidance also requires the Company to consider of a broader range of reasonable and supportable information in estimating credit losses. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Effective January 1, 2020, the adoption of CECL accounting, through a modified-retrospective approach,

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caused an increase to the allowance for credit losses of approximately $400 and $350 for the Work Truck Attachments and Work Truck Solutions segments, respectively.

The majority of the Company’s accounts receivable are due from distributors of truck equipment and dealers of completed upfit trucks. Credit is extended based on an evaluation of a customer’s financial condition. A receivable is considered past due if payments have not been received within agreed upon invoice terms. Accounts receivable are written off after all collection efforts have been exhausted. The Company takes a security interest in the inventory as collateral for the receivable but often does not have a priority security interest. The Company has short-term accounts receivable at its Work Truck Attachments and Work Truck Solutions segments subject to evaluation for expected credit losses. Expected credit losses are estimated based on the loss-rate and probability of default methods. On a periodic basis, the Company evaluates its accounts receivable and establishes the allowance for credit losses based on specific customer circumstances, past events including collections and write-off history, current conditions, and reasonable forecasts about the future. Management evaluated the need for an additional allowance for credit losses related to economic conditions arising from the COVID-19 crisis. Management has not seen indications of customers going out of business and not being able to pay their bills (although the receivables may become more aged). Management believes customers of the Work Truck Attachments segment have long-standing relationships with the Company, and are mature dealers that are likely able to weather the crisis. Many Work Truck Solutions customers are governments and municipal entities who management believes are highly unlikely to default. In addition management believes Work Truck Solutions has long-standing relationships with its customers, and the customers are in general mature dealers that are unlikely to default as a result of the crisis. Therefore, as of March 31, 2020, no additional reserve related to the COVID-19 crisis was deemed necessary. As of March 31, 2020 the Company had an allowance for credit losses on its trade accounts receivable of $1,151 and $1,284 at its Work Truck Attachments and Work Truck Solutions segments, respectively.

The following table rolls forward the activity related to credit losses for trade accounts receivable at each segment, and on a consolidated basis for the three months ended March 31, 2020:

Balance at

Adoption of

Additions

Changes to

Balance at

December 31,

ASU 2016-13

charged to

Writeoffs

reserve, net

March 31,

2019

earnings

2020

Three Months Ended March 31, 2020

Work Truck Attachments

$

600

$

400

$

100

$

-

$

51

$

1,151

Work Truck Solutions

887

350

104

-

(57)

1,284

Total

$

1,487

$

750

$

204

$

-

$

(6)

$

2,435

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,

2020

2019

Assets:

Other long-term assets (a)

  

$

6,767

  

$

7,270

Total Assets

$

6,767

$

7,270

Liabilities:

Interest rate swaps (b)

$

13,876

$

6,736

Long-term debt (c)

218,543

247,630

Earnout - Dejana (d)

2,000

2,000

Total Liabilities

$

234,419

$

256,383

(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 $3,570 and $10,306 at March 31, 2020 are included in Accrued expenses and other current liabilities and Other long-term liabilities, respectively.  Interest rate swaps of $1,522 and $5,214 at December 31, 2019 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 Other long-term liabilities in the amount of $2,000 at March 31, 2020 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 $2,200 at March 31, 2019 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.  There were no adjustments to fair value or payments to former owners in either the three months ended March 31, 2020 or March 31, 2019.

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5.Inventories

Inventories consist of the following:

March 31,

December 31,

2020

2019

Finished goods

  

$

65,530

  

$

42,125

Work-in-process

11,187

6,906

Raw material and supplies

35,653

28,911

$

112,370

$

77,942

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 upon delivery.  At March 31, 2020 and December 31, 2019, the Company had $8,774 and $6,539 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:

March 31,

December 31,

2020

2019

Land

$

2,378

$

2,378

Land improvements

4,541

4,541

Leasehold improvements

4,087

4,087

Buildings

28,938

28,715

Machinery and equipment

55,743

55,238

Furniture and fixtures

18,193

17,918

Mobile equipment and other

5,323

5,285

Construction-in-process

7,706

6,555

Total property, plant and equipment

126,909

124,717

Less accumulated depreciation

(68,367)

(66,273)

Net property, plant and equipment

$

58,542

$

58,444

7.

Leases

The Company has operating leases for manufacturing and upfit facilities, land and parking lots, warehousing space and certain equipment. The leases have remaining lease terms of less than one year to 16 years, some of which include options to extend the leases for up to 10 years. Such renewal options were not included in the determination of the lease term unless deemed reasonably certain of exercise. The discount rate used in measuring the lease liabilities is based on the Company’s interest rate on its secured Term Loan Credit Agreement. Certain of the Company’s leases contain escalating rental payments based on an index. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

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Lease Expense

The components of lease expense, which are included in Cost of sales and Selling, general and administrative expenses on the Condensed Consolidated Statements of Operations and Comprehensive Loss, were as follows:

Three Months Ended

Three Months Ended

March 31, 2020

March 31, 2019

Operating lease expense

$ 1,311

$ 1,132

Short term lease cost

$ 39

$ 100

Total lease cost

$ 1,350

$ 1,232

Cash Flow

Supplemental cash flow information related to leases is as follows:

Three Months Ended

Three Months Ended

March 31, 2020

March 31, 2019

Cash paid for amounts included in the measurement of operating lease liabilities

$ 1,303

$ 765

Non-cash lease expense - right-of-use assets

$ 1,015

$ 785

Right-of-use assets obtained in exchange for operating lease obligations

$ 321

$ 56

Balance Sheet

Supplemental balance sheet information related to leases is as follows:  

March 31, 2020

December 31, 2019

Operating Leases

Operating lease right-of-use assets

$ 21,555

$ 22,557

Other current liabilities

3,770

3,822

Operating lease liabilities

18,010

18,981

Total operating lease liabilities

$ 21,780

$ 22,803

Weighted Average Remaining Lease Term

Operating leases

75

months

78

months

Weighted Average Discount Rate

Operating leases

5.31%

5.32%

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Lease Maturities

Maturities of leases were as follows:

Year ending December 31,

Operating Leases

2020 (excluding the three months ended March 31, 2020)

$ 3,704

2021

4,716

2022

4,307

2023

3,824

2024

3,194

Thereafter

6,146

Total Lease Payments

25,891

Less: imputed interest

(4,111)

Total

$ 21,780

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8. 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, 2020

Indefinite-lived intangibles:

Trademark and tradenames

$

77,600

$

-

$

77,600

Amortizable intangibles:

Dealer network

80,000

64,000

16,000

Customer relationships

80,920

23,239

57,681

Patents

21,136

13,543

7,593

Noncompete agreements

8,640

8,252

388

Trademarks

5,459

3,737

1,722

Backlog

1,900

1,900

-

License

20

20

-

Amortizable intangibles, net

198,075

114,691

83,384

Total

$

275,675

$

114,691

$

160,984

Gross

Less

Net

Carrying

Accumulated

Carrying

Amount

Amortization

Amount

December 31, 2019

Indefinite-lived intangibles:

Trademark and tradenames

$

77,600

$

-

$

77,600

Amortizable intangibles:

Dealer network

80,000

63,000

17,000

Customer relationships

80,920

21,914

59,006

Patents

21,136

13,229

7,907

Noncompete agreements

8,640

8,177

463

Trademarks

5,459

3,713

1,746

Backlog

1,900

1,900

-

License

20

20

-

Amortizable intangibles, net

198,075

111,953

86,122

Total

$

275,675

$

111,953

$

163,722

Amortization expense for intangible assets was $2,738 and $2,741 for the three months ended March 31, 2020 and 2019, respectively. Estimated amortization expense for the remainder of 2020 and each of the succeeding five years is as follows:

2020

    

$

8,199

2021

10,670

2022

10,520

2023

10,520

2024

7,520

2025

6,075