UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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Emerging growth company |
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DOUGLAS DYNAMICS, INC.
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Douglas Dynamics, Inc.
Condensed Consolidated Balance Sheets
(In thousands except share data)
June 30, | December 31, | |||||
2020 | 2019 | |||||
(unaudited) | (unaudited) | |||||
Assets |
|
| ||||
Current assets: | ||||||
Cash and cash equivalents | $ | | $ | | ||
Accounts receivable, net | | | ||||
Inventories | | | ||||
Inventories - truck chassis floor plan | | | ||||
Refundable income taxes paid | | - | ||||
Prepaid and other current assets | | | ||||
Total current assets | | | ||||
Property, plant, and equipment, net | | | ||||
Goodwill | | | ||||
Other intangible assets, net | | | ||||
Operating lease - right of use asset | | | ||||
Other long-term assets | | | ||||
Total assets | $ | | $ | | ||
Liabilities and stockholders’ equity | ||||||
Current liabilities: | ||||||
Accounts payable | $ | | $ | | ||
Accrued expenses and other current liabilities | | | ||||
Floor plan obligations | | | ||||
Operating lease liability - current | | | ||||
Income taxes payable | - | | ||||
Current portion of long-term debt | | | ||||
Total current liabilities | | | ||||
Retiree health benefit obligation | | | ||||
Deferred income taxes | | | ||||
Long-term debt, less current portion | | | ||||
Operating lease liability - noncurrent | | | ||||
Other long-term liabilities | | | ||||
Stockholders’ equity: | ||||||
Common Stock, par value $ | | | ||||
Additional paid-in capital | | | ||||
Retained earnings | | | ||||
Accumulated other comprehensive loss, net of tax | ( | ( | ||||
Total stockholders’ equity | | | ||||
Total liabilities and stockholders’ equity | $ | | $ | |
See the accompanying notes to condensed consolidated financial statements.
3
Douglas Dynamics, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(In thousands, except share and per share data)
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||
2020 | 2019 | 2020 | 2019 | |||||||||
(unaudited) | (unaudited) | |||||||||||
Net sales |
| $ | |
| $ | | $ | |
| $ | | |
Cost of sales | | | | | ||||||||
Gross profit | | | | | ||||||||
Selling, general, and administrative expense | | | | | ||||||||
Impairment charges | | - | | - | ||||||||
Intangibles amortization | | | | | ||||||||
Income (loss) from operations | ( | | ( | | ||||||||
Interest expense, net | ( | ( | ( | ( | ||||||||
Debt modification expense | ( | - | ( | - | ||||||||
Other expense, net | ( | ( | ( | ( | ||||||||
Income (loss) before taxes | ( | | ( | | ||||||||
Income tax expense (benefit) | ( | | ( | | ||||||||
Net income (loss) | $ | ( | $ | | $ | ( | $ | | ||||
Weighted average number of common shares outstanding: | ||||||||||||
Basic | | | | | ||||||||
Diluted | | | | | ||||||||
Earnings (loss) per common share: | ||||||||||||
Basic | $ | ( | $ | | $ | ( | $ | | ||||
Diluted | $ | ( | $ | | $ | ( | $ | | ||||
Cash dividends declared and paid per share | $ | | $ | | $ | | $ | | ||||
Comprehensive income (loss) | $ | ( | $ | | $ | ( | $ | |
See the accompanying notes to condensed consolidated financial statements.
4
Douglas Dynamics, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
Six Months Ended | ||||||
June 30, | June 30, | |||||
2020 | 2019 | |||||
(unaudited) | ||||||
Operating activities | ||||||
Net income (loss) |
| $ | ( |
| $ | |
Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||
Depreciation and amortization | | | ||||
Amortization of deferred financing costs and debt discount | | | ||||
Debt modification expense | | - | ||||
Stock-based compensation | | | ||||
Adjustments on derivatives not classified as hedges | | - | ||||
Provision for losses on accounts receivable | | | ||||
Deferred income taxes | ( | | ||||
Impairment charges | | - | ||||
Earnout liability | ( | ( | ||||
Changes in operating assets and liabilities: | ||||||
Accounts receivable | | ( | ||||
Inventories | ( | ( | ||||
Prepaid assets, refundable income taxes and other assets | ( | ( | ||||
Accounts payable | | ( | ||||
Accrued expenses and other current liabilities | ( | | ||||
Benefit obligations and other long-term liabilities | ( | ( | ||||
Net cash used in operating activities | ( | ( | ||||
Investing activities | ||||||
Capital expenditures | ( | ( | ||||
Net cash used in investing activities | ( | ( | ||||
Financing activities | ||||||
Shares withheld on restricted stock vesting paid for employees’ taxes | ( | ( | ||||
Payments of financing costs | ( | - | ||||
Dividends paid | ( | ( | ||||
Net revolver borrowings | - | | ||||
Borrowings on long-term debt | | - | ||||
Repayment of long-term debt | ( | ( | ||||
Net cash provided by (used in) financing activities | | ( | ||||
Change in cash and cash equivalents | ( | ( | ||||
Cash and cash equivalents at beginning of period | | | ||||
Cash and cash equivalents at end of period | $ | | $ | | ||
Non-cash operating and financing activities | ||||||
Truck chassis inventory acquired through floorplan obligations | $ | | $ | | ||
See the accompanying notes to condensed consolidated financial statements.
5
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 June 30, 2020 | |||||||||||||||||||
Balance at March 31, 2020 | | $ | | $ | | $ | | $ | ( | $ | | ||||||||
Net income (loss) | — | — | — | ( | — | ( | |||||||||||||
Dividends paid | — | — | — | ( | — | ( | |||||||||||||
Adjustment for postretirement benefit liability, net of tax of $ | — | — | — | — | ( | ( | |||||||||||||
Adjustment for interest rate swap, net of tax of ($ | — | — | — | — | | | |||||||||||||
Stock based compensation | — | — | | — | — | | |||||||||||||
Balance at June 30, 2020 | | $ | | $ | | $ | | $ | ( | $ | | ||||||||
Six Months Ended June 30, 2020 | |||||||||||||||||||
Balance at December 31, 2019 | | $ | | $ | | $ | | $ | ( | $ | | ||||||||
Net income (loss) | — | — | — | ( | — | ( | |||||||||||||
Dividends paid | — | — | — | ( | — | ( | |||||||||||||
Impact due to adoption of ASC 2016-13 (credit losses), net of tax of $ | — | — | — | ( | — | ( | |||||||||||||
Adjustment for pension and postretirement benefit liability, net of tax of $ | — | — | — | — | ( | ( | |||||||||||||
Adjustment for interest rate swap, net of tax of $ | — | — | — | — | ( | ( | |||||||||||||
Shares withheld on restricted stock vesting | — | — | ( | — | — | ( | |||||||||||||
Stock based compensation | | | — | — | | ||||||||||||||
Balance at June 30, 2020 | | $ | | $ | | $ | | $ | ( | $ | | ||||||||
Three Months Ended June 30, 2019 | |||||||||||||||||||
Balance at March 31, 2019 | | $ | | $ | | $ | | $ | ( | $ | | ||||||||
Net income | — | — | — | | — | | |||||||||||||
Dividends paid | — | — | — | ( | — | ( | |||||||||||||
Adjustment for pension and postretirement benefit liability, net of tax of ($ | — | — | — | — | | | |||||||||||||
Adjustment for interest rate swap, net of tax of $ | — | — | — | — | ( | ( | |||||||||||||
Shares withheld on restricted stock vesting | — | — | — | — | — | - | |||||||||||||
Stock based compensation | — | — | | — | — | | |||||||||||||
Balance at June 30, 2019 | | $ | | $ | | $ | | $ | ( | $ | | ||||||||
Six Months Ended June 30, 2019 | |||||||||||||||||||
Balance at December 31, 2018 | | $ | | $ | | $ | | $ | ( | $ | | ||||||||
Net income | — | — | — | | — | | |||||||||||||
Dividends paid | — | — | — | ( | — | ( | |||||||||||||
Adjustment for pension and postretirement benefit liability, net of tax of ($ | — | — | — | — | | | |||||||||||||
Adjustment for interest rate swap, net of tax of $ | — | — | — | — | ( | ( | |||||||||||||
Shares withheld on restricted stock vesting | — | — | ( | — | — | ( | |||||||||||||
Stock based compensation | | | — | — | | ||||||||||||||
Balance at June 30, 2019 | | $ | | $ | | $ | | $ | ( | $ | | ||||||||
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
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 June 30, 2020, the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) and the Condensed Consolidated Statements of Shareholders’ Equity for the three and six months ended June 30, 2020 and 2019, and the Condensed Cash Flows for the six months ended June 30, 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.
7
As a result of the COVID-19 pandemic, 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 and six months ended June 30, 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 pandemic. Based on the COVID-19 pandemic, 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. The Company slowly ramped up production and returned to full production during the second quarter. The Company has taken what it believes to be the appropriate and necessary safety steps and precautions as employees have returned to work.
During the six months ended June 30, 2020, the Company benefited from credits related to the passage of the CARES Act on March 27, 2020 in response to the COVID-19 pandemic. 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 pandemic. As a result of the CARES Act, the Company recorded a total benefit of $
Goodwill
The Company performs an annual impairment test for goodwill and more frequently if an event or circumstances indicate that an impairment loss has been incurred. Conditions that would trigger an impairment assessment include, but are not limited to, a significant adverse change in legal factors or business climate that could affect the value of an asset. The amount of goodwill impairment is determined by the amount the carrying value of the reporting unit exceeds its fair value. The Company has determined it has three reporting units, and all significant decisions are made on a company-wide basis by the chief operating decision maker. The fair value of the reporting unit is estimated by using an income and market approach. The estimated fair value is compared with the aggregate carrying value. If the fair value is greater than the carrying amount, there is no impairment. If the carrying amount is greater than the fair value, an impairment loss is recognized equal to the difference. Annual impairment tests conducted by the Company on December 31, 2019 resulted in no adjustment to the carrying value of goodwill. During the quarter ended June 30, 2020, the Company identified a triggering event as there has been a significant decline in the business climate and in results of operations as a result of uncertainty related to the COVID-19 pandemic and chassis availability. Given these indicators, the Company determined that there was a higher degree of uncertainty in achieving its financial projections. Therefore, the Company performed an impairment test as of June 30, 2020 for each of its reporting units.
The Work Truck Attachments segment consists of
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 $
8
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.
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
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
9
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
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.
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 $
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.
10
Revenue by customer type was as follows:
Three Months Ended June 30, 2020 | Work Truck Attachments | Work Truck Solutions | Total Revenue |
Independent dealer | $ | $ | $ |
Government | - | | |
Fleet | - | | |
Other | - | | |
Total revenue | $ | $ | $ |
Three Months Ended June 30, 2019 | Work Truck Attachments | Work Truck Solutions | Total Revenue |
Independent dealer | $ | $ | $ |
Government | - | | |
Fleet | - | | |
Other | - | | |
Total revenue | $ | $ | $ |
Six Months Ended June 30, 2020 | Work Truck Attachments | Work Truck Solutions | Total Revenue |
Independent dealer | $ | $ | $ |
Government | - | | |
Fleet | - | | |
Other | - | | |
Total revenue | $ | $ | $ |
Six Months Ended June 30, 2019 | Work Truck Attachments | Work Truck Solutions | Total Revenue |
Independent dealer | $ | $ | $ |
Government | - | | |
Fleet | - | | |
Other | - | | |
Total revenue | $ | $ | $ |
11
Revenue by timing of revenue recognition was as follows:
Three Months Ended June 30, 2020 | Work Truck Attachments | Work Truck Solutions | Total Revenue |
Point in time | $ | $ | $ |
Over time | - | | |
Total revenue | $ | $ | $ |
Three Months Ended June 30, 2019 | Work Truck Attachments | Work Truck Solutions | Total Revenue |
Point in time | $ | $ | $ |
Over time | - | | |
Total revenue | $ | $ | $ |
Six Months Ended June 30, 2020 | Work Truck Attachments | Work Truck Solutions | Total Revenue |
Point in time | $ | $ | $ |
Over time | - | | |
Total revenue | $ | $ | $ |
Six Months Ended June 30, 2019 | Work Truck Attachments | Work Truck Solutions | Total Revenue |
Point in time | $ | $ | $ |
Over time | - | | |
Total revenue | $ | $ | $ |
Contract Balances
The following table shows the changes in the Company’s contract liabilities during the three and six months ended June 30, 2020 and 2019, respectively:
Three Months Ended June 30, 2020 | Balance at Beginning of Period | Additions | Deductions | Balance at End of Period | |||||||
Contract liabilities | $ | | $ | | $ | ( | $ | | |||
Three Months Ended June 30, 2019 | Balance at Beginning of Period | Additions | Deductions | Balance at End of Period | |||||||
Contract liabilities | $ | | $ | | $ | ( | $ | | |||
Six Months Ended June 30, 2020 | Balance at Beginning of Period | Additions | Deductions | Balance at End of Period | |||||||
Contract liabilities | $ | | $ | | $ | ( | $ | | |||
Six Months Ended June 30, 2019 | Balance at Beginning of Period | Additions | Deductions | Balance at End of Period | |||||||
Contract liabilities | $ | | $ | | $ | ( | $ | |
12
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
The Company recognized revenue of $
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, caused an increase to the allowance for credit losses of approximately $
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 pandemic. 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 pandemic. Therefore, as of June 30, 2020, no additional reserve related to the COVID-19 pandemic was deemed necessary. As of June 30, 2020 the Company had an allowance for credit losses on its trade accounts receivable of $
13