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 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
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incorporation or organization) | Identification No.) |
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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.
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Non-accelerated filer ◻ | Smaller reporting company | |
Emerging growth company |
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Number of shares of registrant’s common shares outstanding as of May 5, 2020 was
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)
March 31, | 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 | - | | ||||
Short term borrowings | | - | ||||
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.
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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 |
| $ | |
| $ | | |
Cost of sales | | | |||||
Gross profit | | | |||||
Selling, general, and administrative expense | | | |||||
Intangibles amortization | | | |||||
Income (loss) from operations | ( | | |||||
Interest expense, net | ( | ( | |||||
Other expense, net | ( | ( | |||||
Loss before taxes | ( | ( | |||||
Income tax benefit | ( | ( | |||||
Net loss | $ | ( | $ | ( | |||
Weighted average number of common shares outstanding: | |||||||
Basic | | | |||||
Diluted | | | |||||
Loss per common share: | |||||||
Basic | $ | ( | $ | ( | |||
Diluted | $ | ( | $ | ( | |||
Cash dividends declared and paid per share | $ | | $ | | |||
Comprehensive loss | $ | ( | $ | ( | |||
See the accompanying notes to condensed consolidated financial statements.
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Douglas Dynamics, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
Three Months Ended | ||||||
March 31, | March 31, | |||||
2020 | 2019 | |||||
(unaudited) | ||||||
Operating activities | ||||||
Net loss |
| $ | ( |
| $ | ( |
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||
Depreciation and amortization | | | ||||
Amortization of deferred financing costs and debt discount | | | ||||
Stock-based compensation | | | ||||
Mark-to-market adjustments on derivatives not classified as hedges | | - | ||||
Provision for losses on accounts receivable | | | ||||
Deferred income taxes | ( | | ||||
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 | ( | ( | ||||
Dividends paid | ( | ( | ||||
Net revolver borrowings | | | ||||
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.
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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 | | $ | | $ | | $ | | $ | ( | $ | | ||||||||
Net loss | — | — | — | ( | — | ( | |||||||||||||
Dividends paid | — | — | — | ( | — | ( | |||||||||||||
Impact due to adoption of ASC 2016-13 (credit losses), net of tax of $ | — | — | — | ( | — | ( | |||||||||||||
Adjustment for 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 March 31, 2020 | | $ | | $ | | $ | | $ | ( | $ | | ||||||||
Three Months Ended March 31, 2019 | |||||||||||||||||||
Balance at December 31, 2018 | | $ | | $ | | $ | | $ | ( | $ | | ||||||||
Net loss | — | — | — | ( | — | ( | |||||||||||||
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 March 31, 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 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 $
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 $
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
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
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 $
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 | $ | $ | $ |
Government | - | | |
Fleet | - | | |
Other | - | | |
Total revenue | $ | $ | $ |
Three Months Ended March 31, 2019 | Work Truck Attachments | Work Truck Solutions | Total Revenue |
Independent dealer | $ | $ | $ |
Government | - | | |
Fleet | - | | |
Other | - | | |
Total revenue | $ | $ | $ |
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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 | $ | $ | $ |
Over time | - | | |
Total revenue | $ | $ | $ |
Three Months Ended March 31, 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 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 | $ | | $ | | $ | ( | $ | | |||
Three Months Ended March 31, 2019 | Balance at Beginning of Period | Additions | Deductions | Balance at End of Period | |||||||
Contract liabilities | $ | | $ | | $ | ( | $ | | |||
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,
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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 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 $
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 | $ | | $ | | $ | | $ | - | $ | | $ | | ||||||
Work Truck Solutions | | | | - | ( | | ||||||||||||
Total | $ | | $ | | $ | | $ | - | $ | ( | $ | | ||||||
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) |
| $ | |
| $ | |
Total Assets | $ | | $ | | ||
Liabilities: | ||||||
Interest rate swaps (b) | $ | | $ | | ||
Long-term debt (c) | | | ||||
Earnout - Dejana (d) | | | ||||
Total Liabilities | $ | | $ | | ||
(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 $
(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 $
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5.Inventories
Inventories consist of the following:
March 31, | December 31, | |||||
2020 | 2019 | |||||
Finished goods |
| $ | |
| $ | |
Work-in-process | | | ||||
Raw material and supplies | | | ||||
$ | | $ | | |||
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 $
6. | Property, plant and equipment |
Property, plant and equipment are summarized as follows:
March 31, | December 31, | |||||
2020 | 2019 | |||||
Land | $ | $ | | |||
Land improvements | ||||||
Leasehold improvements | ||||||
Buildings | ||||||
Machinery and equipment | ||||||
Furniture and fixtures | ||||||
Mobile equipment and other | ||||||
Construction-in-process | | |||||
Total property, plant and equipment | ||||||
Less accumulated depreciation | ( | ( | ||||
Net property, plant and equipment | $ | $ | ||||
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
14
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 | $ | $ | |||||
Short term lease cost | $ | $ | |||||
Total lease cost | $ | $ |
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 | $ | $ | |
Non-cash lease expense - right-of-use assets | $ | $ | |
Right-of-use assets obtained in exchange for operating lease obligations | $ | $ |
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 | $ | $ | ||
Other current liabilities | | | ||
Operating lease liabilities | | | ||
Total operating lease liabilities | $ | $ | ||
Weighted Average Remaining Lease Term | ||||
Operating leases | months | months | ||
Weighted Average Discount Rate | ||||
Operating leases |
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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) | $ | |
2021 | | |
2022 | | |
2023 | | |
2024 | | |
Thereafter | | |
Total Lease Payments | | |
Less: imputed interest | ( | |
Total | $ |
l
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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 | $ | $ | - | $ | |||||
Amortizable intangibles: | |||||||||
Dealer network | |||||||||
Customer relationships | |||||||||
Patents | |||||||||
Noncompete agreements | |||||||||
Trademarks | |||||||||
Backlog | | - | |||||||
License | - | ||||||||
Amortizable intangibles, net | |||||||||
Total | $ | $ | $ | ||||||
Gross | Less | Net | |||||||
Carrying | Accumulated | Carrying | |||||||
Amount | Amortization | Amount | |||||||
December 31, 2019 | |||||||||
Indefinite-lived intangibles: | |||||||||
Trademark and tradenames | $ | $ | - | $ | |||||
Amortizable intangibles: | |||||||||
Dealer network | |||||||||
Customer relationships | |||||||||
Patents | |||||||||
Noncompete agreements | |||||||||
Trademarks | |||||||||
Backlog | | - | |||||||
License | - | ||||||||
Amortizable intangibles, net | |||||||||
Total | $ | $ | $ | ||||||
Amortization expense for intangible assets was $
2020 |
| $ | |
2021 | |||
2022 | |||
2023 | |||
2024 | |||
2025 |
6.
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9.Long-Term Debt
Long-term debt is summarized below:
l | ||||||
March 31, | December 31, | |||||
2020 | 2019 | |||||
Term Loan, net of debt discount of $ | $ | $ | ||||
Less current maturities | | | ||||
Long-term debt before deferred financing costs | ||||||
Deferred financing costs, net | | | ||||
Long-term debt, net | $ | | $ | | ||
At March 31, 2020, the Company had outstanding borrowings under its term loan credit agreement of $
In accordance with the senior credit facilities, the Company is required to make additional principal prepayments over the above scheduled payments under certain conditions. This includes, in the case of the term loan facility,
On June 13, 2019 the Company entered into an interest rate swap agreement to reduce its exposure to interest rate volatility. The interest rate swap has a notional amount of $
The interest rate swap’s negative fair value at March 31, 2020 was $
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10.Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities are summarized as follows:
March 31, | December 31, | |||||
2020 | 2019 | |||||
Payroll and related costs | $ | $ | ||||
Employee benefits | ||||||
Accrued warranty | ||||||
Interest rate swaps | ||||||
Other | ||||||
$ | $ | |||||
11.Warranty Liability
The Company accrues for estimated warranty costs as sales are recognized and periodically assesses the adequacy of its recorded warranty liability and adjusts the amount as necessary. The Company’s warranties generally provide, with respect to its snow and ice control equipment, that all material and workmanship will be free from defect for a period of
The following is a rollforward of the Company’s warranty liability:
Three Months Ended | |||||||
March 31, | March 31, | ||||||
2020 | 2019 | ||||||
Balance at the beginning of the period | $ | | $ | | |||
Warranty provision | | | |||||
Claims paid/settlements | ( | ( | |||||
Balance at the end of the period | $ | | $ | | |||
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12. | Employee Retirement Plans |
The Company sponsored qualified defined-benefit plans, including the Douglas Dynamics, L.L.C Pension Plan for Hourly Employees (“hourly plan”) and the Douglas Dynamics, L.L.C Salaried Pension Plan (“salaried plan”). The salaried plan generally provided pension benefits that were based on the employee’s average earnings and credited service. Such plan was partially frozen as of December 31, 2011 and subsequently was completely frozen as of December 31, 2018. The hourly plan generally provided benefits of stated amounts for each year of service. Such plan was frozen as of December 31, 2011. Consistent with its long term plans, the Company terminated its hourly plan and salaried plan during the fourth quarter of 2019. In October of 2019, lump-sum settlement payments of $
The components of net periodic pension cost consist of the following:
March 31, | |||||
2019 | |||||
Component of net periodic pension cost: | |||||
Service cost | $ | - | |||
Interest cost | | ||||
Expected return on plan assets | ( | ||||
Amortization of net loss | | ||||
Net periodic pension cost | $ | | |||
In conjunction with the termination of the plans, the Company made payments of $
Components of net periodic other postretirement benefit cost consist of the following:
Three Months Ended | |||||||
March 31, | March 31, | ||||||
2020 | 2019 | ||||||
Component of periodic other postretirement benefit cost: | |||||||
Service cost | $ | | $ | | |||
Interest cost | | | |||||
Amortization of net gain | ( | ( | |||||
Net periodic other postretirement benefit cost | $ | | $ | | |||
Service cost is included in Income from operations on the Condensed Consolidated Statement of Operations and Comprehensive Loss. The other components of net periodic pension and postretirement benefit cost are included in Other expense on the Condensed Consolidated Statement of Operations and Comprehensive Loss.
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13.Loss per Share
Basic loss per share of common stock is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted loss per share of common stock is computed by dividing net loss by the weighted average number of common shares, using the two-class method. As the Company has granted RSUs that both participate in dividend equivalents and do not participate in dividend equivalents, the Company has calculated loss per share pursuant to the two-class method, which is a loss allocation formula that determines loss per share for common stock and participating securities according to dividends declared and participation rights in undistributed losses. Under this method, all losses (distributed and undistributed) are allocated to common shares and participating securities based on their respective rights to receive dividends. Diluted net loss per share is calculated by dividing net loss attributable to common stockholders by the weighted average number of common stock and dilutive common stock outstanding during the period. Potential common shares in the diluted net loss per share computation are excluded to the extent that they would be anti-dilutive. Weighted average of potentially dilutive non-participating RSU’s were
Three Months Ended | |||||||
March 31, | March 31, | ||||||
2020 | 2019 | ||||||
Basic loss per common share | |||||||
Net loss | $ | ( | $ | ( | |||
Less loss allocated to participating securities | - | - | |||||
Net loss allocated to common shareholders | $ | ( | $ | ( | |||
Weighted average common shares outstanding | | | |||||
$ | ( | $ | ( | ||||
Loss per common share assuming dilution | |||||||
Net loss | $ | ( | $ | ( | |||
Less loss allocated to participating securities | - | - | |||||
Net loss allocated to common shareholders | $ | ( | $ | ( | |||
Weighted average common shares outstanding | | | |||||
Incremental shares applicable to non-participating RSUs | - | - | |||||
Weighted average common shares assuming dilution | | | |||||
$ | ( | $ | ( | ||||
14.Employee Stock Plans
2010 Stock Incentive Plan
In May 2010, the Company’s Board of Directors and stockholders adopted the 2010 Stock Incentive Plan (the “2010 Plan”). The Company’s Board of Directors approved an amendment and restatement of the 2010 Plan on March 5, 2014, contingent on stockholder approval of the performance goals under the 2010 Plan, and the amendment and restatement became effective upon stockholder approval of the performance goals at the 2014 annual meeting of stockholders held on April 30, 2014. The 2010 Plan provides for the issuance of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock awards and restricted stock units (“RSUs”), any of which may be performance-based, and for incentive bonuses, which may be paid in cash or stock or a combination of both, to eligible employees, officers, non-employee directors and other service providers to the Company and its subsidiaries. A maximum of
Equity awards issued to management include a retirement provision under which members of management who either (1) are age
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months ended March 31, 2020 and 2019, respectively, in additional expense for employees who meet the thresholds of the retirement provision. In 2013, the Company’s nominating and governance committee approved a retirement provision for the RSUs issued to non-employee directors that accelerates the vesting of such awards upon retirement. Such awards are fully expensed immediately upon grant in accordance with ASC 718, as the retirement provision eliminates substantive service conditions associated with the awards.
Performance Share Unit Awards
The Company granted performance share units as performance-based awards under the 2010 Plan in the first quarters of 2020 and 2019 that are subject to performance conditions over a
Restricted Stock Unit Awards
RSUs are granted to both non-employee directors and management. RSUs do not carry voting rights. While all non-employee director RSUs participate in dividend equivalents, there are two classes of management RSUs, one that participates in dividend equivalents, and a second that does not participate in dividend equivalents. Each RSU represents the right to receive
A summary of RSU activity for the three months ended March 31, 2020 is as follows:
Weighted | ||||||||
Weighted | Average | |||||||
Average | Remaining | |||||||
Grant Date | Contractual | |||||||
Shares | Fair value | Term | ||||||
Unvested at December 31, 2019 | $ | years | ||||||
Granted | $ | years | ||||||
Vested | ( | $ | ||||||
Cancelled and forfeited | - | $ | ||||||
Unvested at March 31, 2020 | $ | years | ||||||
Expected to vest in the future at March 31, 2020 | $ | years | ||||||
The Company recognized $
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For 2020 and 2019 grants to non-employee directors, vesting occurs as of the grant date. Vested director RSUs are ‘‘settled’’ by the delivery to the participant or a designated brokerage firm of
15. | Commitments and Contingencies |
In the ordinary course of business, the Company is engaged in various litigation including product liability and intellectual property disputes. However, the Company does not believe that any pending litigation will have a material adverse effect on its consolidated financial position. In addition, the Company is not currently a party to any environmental-related claims or legal matters.
16. Segments
The Company’s
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.
Separate financial information is available for the
Segment performance is evaluated based on segment net sales and Adjusted EBITDA. Segment results include an allocation of all corporate costs.
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All intersegment sales are eliminated in consolidation. Sales between Work Truck Attachments and Work Truck Solutions reflect the Company’s intercompany pricing policy. The following table shows summarized financial information concerning the Company’s reportable segments:
Three Months Ended | Three Months Ended | |||||
March 31, | March 31, | |||||
2020 | 2019 | |||||
Net sales | ||||||
Work Truck Attachments | $ | $ | ||||
Work Truck Solutions | ||||||
$ | $ | |||||
Adjusted EBITDA | ||||||
Work Truck Attachments | $ | ( | $ | |||
Work Truck Solutions | | |||||
$ | ( | $ | | |||
Depreciation and amortization expense | ||||||
Work Truck Attachments | $ | $ | ||||
Work Truck Solutions | ||||||
$ | $ | |||||
Assets | ||||||
Work Truck Attachments | $ | $ | ||||
Work Truck Solutions | ||||||
$ | $ | |||||
Capital Expenditures | ||||||
Work Truck Attachments | $ | $ | ||||
Work Truck Solutions | ||||||
$ | $ | |||||
Adjusted EBITDA | |||||
Work Truck Attachments | $ | ( | $ | ||
Work Truck Solutions | | ||||
Total Adjusted EBITDA | $ | ( | $ | ||
Less items to reconcile Adjusted EBITDA to Loss before taxes: | |||||
Interest expense - net | |||||
Depreciation expense | |||||
Amortization | |||||
Purchase accounting | ( | ( | |||
Stock based compensation | |||||
COVID-19 (1) | - | ||||
Other charges | ( | ||||
Loss before taxes | $ | ( | $ | ( | |
(1) - Reflects incremental costs incurred related to the COVID-19 crisis for the periods presented. |
17. | Income Taxes |
The Company’s effective tax benefit was (
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Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The largest item affecting deferred taxes is the difference between book and tax amortization of goodwill and other intangibles amortization.
18. | Changes in Accumulated Other Comprehensive Loss by Component |
Changes to accumulated other comprehensive loss by component for the three months ended March 31, 2020 are as follows:
Unrealized | ||||||||||
Net Loss | Retiree | |||||||||
on Interest | Health | |||||||||
Rate | Benefit | |||||||||
Swap | Obligation | Total | ||||||||
Balance at December 31, 2019 | $ | ( | $ | | $ | ( | ||||
Other comprehensive loss before reclassifications | ( | — | ( | |||||||
Amounts reclassified from accumulated other comprehensive loss: (1) | | ( | | |||||||
Balance at March 31, 2020 | $ | ( | $ | | $ | ( | ||||
(1) Amounts reclassified from accumulated other comprehensive loss: | ||||||||||
Amortization of Other Postretirement Benefit items: | ||||||||||
Actuarial gains (a) | $ | ( | ||||||||
Tax expense | | |||||||||
Reclassification net of tax | $ | ( | ||||||||
Realized losses on interest rate swaps reclassified to interest expense | $ | | ||||||||
Tax benefit | ( | |||||||||
Reclassification net of tax | $ | | ||||||||
(a) These components are included in the computation of benefit plan costs in Note 12. | ||||||||||
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Changes to accumulated other comprehensive loss by component for the three months ended March 31, 2019 are as follows:
Unrealized | ||||||||||||
Net Loss | Retiree | |||||||||||
on Interest | Health | |||||||||||
Rate | Benefit | Pension | ||||||||||
Swap | Obligation | Obligation | Total | |||||||||
Balance at December 31, 2018 | $ | ( | $ | | $ | ( | $ | ( | ||||
Other comprehensive gain before reclassifications | ( | - | - | ( | ||||||||
Amounts reclassified from accumulated other comprehensive loss: (1) | | ( | | | ||||||||
Balance at March 31, 2019 | $ | ( | $ | | $ | ( | $ | ( | ||||
(1) Amounts reclassified from accumulated other comprehensive loss: | ||||||||||||
Amortization of Other Postretirement Benefit items: | ||||||||||||
Actuarial gains (a) | $ | ( | ||||||||||
Tax expense | | |||||||||||
Reclassification net of tax | $ | ( | ||||||||||
Amortization of pension items: | ||||||||||||
Actuarial losses (a) | $ | | ||||||||||
Tax benefit | ( | |||||||||||
Reclassification net of tax | $ | | ||||||||||
Realized losses on interest rate swaps reclassified to interest expense | $ | | ||||||||||
Tax benefit | ( | |||||||||||
Reclassification net of tax | $ | | ||||||||||
| (a) | These components are included in the computation of benefit plan costs in Note 12. |
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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes which are included in Item 1 of this Quarterly Report on Form 10-Q, as well as the information contained in our Form 10-K (Commission File No. 001-34728) filed with the Securities and Exchange Commission.
In this Quarterly Report on Form 10-Q, unless the context indicates otherwise: “Douglas Dynamics,” the “Company,” “we,” “our,” or “us” refer to Douglas Dynamics, Inc.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements include information relating to future events, product demand, the payment of dividends, future financial performance, strategies, expectations, competitive environment, regulation and availability of financial resources. These statements are often identified by use of words such as “anticipate,” “believe,” “intend,” “estimate,” “expect,” “continue,” “should,” “could,” “may,” “plan,” “project,” “predict,” “will” and similar expressions and include references to assumptions and relate to our future prospects, developments and business strategies. Such statements involve known and unknown risks, uncertainties and other factors that could cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to: (i) weather conditions, particularly lack of or reduced levels of snowfall and the timing of such snowfall, including as a result of global climate change; (ii) our ability to manage general economic, business and geopolitical conditions, including the impacts of natural disasters, pandemics and outbreaks of contagious diseases and other adverse public health developments, such as the COVID-19 pandemic (iii) our inability to maintain good relationships with the original equipment manufacturers (“OEM”) with whom we currently do significant business; (iv) the inability of our suppliers and OEM partners to meet our volume or quality requirements ; (v) increases in the price of steel or other materials, including as a result of tariffs, necessary for the production of our products that cannot be passed on to our distributors; (vi) increases in the price of fuel or freight, (vii) the effects of laws and regulations (including those enacted in response to the COVID-19 crisis) and their interpretations on our business and financial condition; (viii) the potential that we may be required to recognize goodwill impairment attributable to our Work Truck Solutions segment; (ix) a significant decline in economic conditions, including as a result of global health epidemics such as COVID-19; (x) our inability to maintain good relationships with our distributors; (xi) lack of available or favorable financing options for our end-users, distributors or customers; (xii) inaccuracies in our estimates of future demand for our products; (xiii) our inability to protect or continue to build our intellectual property portfolio; (xiv) the effects of laws and regulations and their interpretations on our business and financial condition; (xv) our inability to develop new products or improve upon existing products in response to end-user needs; (xvi) losses due to lawsuits arising out of personal injuries associated with our products; (xvii) factors that could impact the future declaration and payment of dividends; (xviii) our inability to compete effectively against competition; and (xix) our inability to achieve the projected financial performance with the business of Henderson Enterprises Group, Inc. (“Henderson”) which we acquired in 2014 or the assets of Dejana, which we acquired in 2016 and unexpected costs or liabilities related to such acquisitions, as well as those discussed in the sections entitled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q, if any, or in our most recent Annual Report on Form 10-K. Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. In addition, the forward-looking statements in this Quarterly Report on Form 10-Q speak only as of the date hereof and we undertake no obligation, except as required by law, to update or release any revisions to any forward-looking statement, even if new information becomes available in the future.
Results of Operations
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
27
consists of our operations that manufacture and sell snow and ice control products. As described under “Seasonality and Year-To Year Variability,” the Work Truck Attachments Segment is seasonal and, as a result, its results of operations can vary from quarter-to-quarter and from year-to-year.
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.
In addition, segment results include an allocation of all corporate costs to Work Truck Attachments and Work Truck Solutions.
COVID-19
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, our results of operations have been impacted in the three months ended March 31, 2020, and may be significantly impacted in future quarters. See below for further discussion of the impact to our financial statements. We are not able to predict the full impact of the crisis on our future financial results as the situation remains unpredictable, but the crisis has had and is likely to continue to have a material impact on our results of operations for the year ended December 31, 2020. We may have challenges in short-term liquidity which could impact our ability to fund working capital needs. We have taken various steps to preserve liquidity, including reducing discretionary spending and deferring payments where appropriate within existing contractual terms, while remaining committed to long term growth projects. In consideration of the COVID-19 crisis, we expect that cash on hand and cash we generate from operations, as well as available credit under our senior credit facilities will provide adequate funds throughout 2020. We are taking appropriate steps to mitigate the effects of the crisis where possible. We preventatively and voluntarily closed our facilities on March 18, 2020, suspending production and shipments at all of our locations, which negatively impacted sales volumes and profitability for the quarter. Since that time, we have started to slowly ramp up production at various facilities as appropriate. We believe that we have taken all of the necessary safety steps and precautions for employees who have returned to work. As of the date of this filing, we are not yet up to full production levels; however, we have initiated a return to work and are ramping up production. We will continue to monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, suppliers and shareholders.
Overview
The following table sets forth, for the three months ended March 31, 2020 and 2019, the consolidated statements of operations of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. In the table below and throughout this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” consolidated statements of operations data for the three months ended March 31, 2020 and 2019 have been derived from our unaudited consolidated financial statements. The information contained in the table below should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q.
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Three Months Ended | |||||||
March 31, | March 31, | ||||||
2020 | 2019 | ||||||
(unaudited) | |||||||
(in thousands) | |||||||
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) | |||
The following table sets forth for the three months ended March 31, 2020 and 2019, the percentage of certain items in our condensed consolidated statement of operations, relative to net sales:
Three Months Ended | |||||
March 31, | March 31, | ||||
2020 | 2019 | ||||
(unaudited) | |||||
Net sales | 100.0 | % | 100.0 | % | |
Cost of sales | 82.9 | % | 75.4 | % | |
Gross profit | 17.1 | % | 24.6 | % | |
Selling, general, and administrative expense | 25.1 | % | 17.9 | % | |
Intangibles amortization | 4.0 | % | 2.9 | % | |
Income (loss) from operations | (12.0) | % | 3.8 | % | |
Interest expense, net | (7.4) | % | (4.5) | % | |
Other expense, net | - | % | - | % | |
Loss before taxes | (19.4) | % | (0.7) | % | |
Income tax benefit | (4.8) | % | (0.6) | % | |
Net loss | (14.6) | % | (0.1) | % | |
Net Sales
Net sales were $68.2 million for the three months ended March 31, 2020 compared to $93.2 million in the three months ended March 31, 2019, a decrease of $25.0 million, or 26.8%. Sales decreased for the three months ended March 31, 2020 compared to the same period in the prior year due to lower volumes driven by the effect of reduced shipments from our facilities being shut down as a result of the COVID-19 crisis for the last two weeks of the quarter, chassis availability constraints and below average snowfall. See below for a discussion of net sales for each of our segments.
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Three Months Ended | Three Months Ended | |||||
March 31, | March 31, | |||||
2020 | 2019 | |||||
Net sales | ||||||
Work Truck Attachments | $ | 19,120 | $ | 25,817 | ||
Work Truck Solutions | 49,070 | 67,370 | ||||
$ | 68,190 | $ | 93,187 | |||
Net sales at our Work Truck Attachments segment were $19.1 million for the three months ended March 31, 2020 compared to $25.8 million in the three months ended March 31, 2019, a decrease of $6.7 million primarily due to lower volumes resulting from well below average snowfall for the snow season ended March 31, 2020. Snowfall in this most recent snow season was approximately 25% below the ten year average, and was the second below average snowfall season in a row.
Net sales at our Work Truck Solutions segment were $49.1 million for the three months ended March 31, 2020 compared to $67.4 million in the three months ended March 31, 2019, a decrease of $18.3 million due to lower volumes as a result of chassis supply constraints. Sales were also impacted for the three months ended March 31, 2020 when compared to the same period in the prior year as a result of the facilities shutdown associated with the COVID-19 crisis leading to significantly reduced shipments during the last two weeks of the quarter.
Cost of Sales
Cost of sales was $56.5 million for the three months ended March 31, 2020 compared to $70.2 million for the three months ended March 31, 2019, a decrease of $13.7 million, or 19.5%. The decrease in cost of sales was driven by decreased sales as discussed above under “—Net Sales”. Cost of sales as a percentage of sales were 82.9% for the three month period ended March 31, 2020 compared to 75.4% for the three month period ended March 31, 2019. The increase in cost of sales as a percentage of sales for the three month period is due to lower sales volumes due to below average snowfall and reduced shipments related to facility shutdowns, as well as shutdown expenses related to the COVID-19 crisis. Such shutdown expenses include the continuation of wages for employees who were not working during the shutdown, as well as an increase in fixed expenses and overhead, as these costs were not capitalized into inventory for the shutdown period.
Gross Profit
Gross profit was $11.7 million for the three months ended March 31, 2020 compared to $22.9 million for the three months ended March 31, 2019, a decrease of $11.2 million, or 48.9%. The change in gross profit is attributable to the changes in sales as discussed above under “—Net Sales.” As a percentage of net sales, gross profit decreased from 24.6% for the three months ended March 31, 2019 to 17.1% for the corresponding period in 2020. The reasons for the change in gross profit as a percentage of net sales are the same as those relating to the changes in cost of sales as a percentage of sales discussed above under “—Cost of Sales.”
Selling, General and Administrative Expense
Selling, general and administrative expenses, including intangibles amortization, were $19.9 million for the three months ended March 31, 2020, compared to $19.4 million for the three months ended March 31, 2019, an increase of $0.5 million, or 2.6%. The increase was due to an increase in legal fees associated with managing the impacts of the COVID-19 crisis.
Interest Expense
Interest expense was $5.0 million for the three months ended March 31, 2020, which was higher than the $4.2 million incurred in the same period in the prior year. The increase in interest expense for the three months ended March 31, 2020 was due to a $1.4 million mark-to-market adjustment on an interest rate swap not accounted
30
for as a hedge. During the three months ended March 31, 2020, our interest rate swap was determined to be ineffective. As a result, the swap was dedesignated on March 19, 2020, and a mark-to-market adjustment was made through interest expense as of March 31, 2020. This increase in interest expense was somewhat offset by the reduction to the principal balance of the Term Loan Credit Agreement due to a $20.0 million voluntary prepayment made in January 2020.
Income Taxes
The Company’s effective tax benefit was (24.4%) and (60.9%) for the three months ended March 31, 2020 and 2019, respectively. The effective tax benefit for the three months ended March 31, 2020 was lower when compared to the same period in the prior year due to a discrete tax benefit related to excess tax benefits from stock compensation of $0.1 million and $0.3 million in the three months ended March 31, 2020 and 2019, respectively.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The largest item affecting deferred taxes is the difference between book and tax amortization of goodwill and other intangibles amortization.
Net Loss
Net loss for the three months ended March 31, 2020 was ($10.1) million, compared to net loss of ($0.3) million for the corresponding period in 2019, an increase in net loss of $9.8 million. The increase in net loss for the three months ended March 31, 2020 was driven by the factors described above under “— Net Sales,” “—Cost of Sales,” “— Selling, General and Administrative Expense,” and “— Income Taxes.” As a percentage of net sales, net loss was (14.6%) for the three months ended March 31, 2020 compared to (0.1%) for the three months ended March 31, 2019.
Discussion of Critical Accounting Policies
There have been no material changes, other than those described below, to our critical accounting policies previously disclosed in our Form 10-K (Commission File No. 001-34728) filed with the Securities and Exchange Commission, under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operation — Critical Accounting Policies.”
We assessed our reporting units for impariment as of March 31, 2020 as a result of the market volatility around the COVID-19 crisis. Based on current facts and circumstances, we do not believe there to be a triggering event for the quarter ended March 31, 2020. If unfavorable economic conditions extend for a prolonged period of time, the Work Truck Solutions segment goodwill may become impaired.
Liquidity and Capital Resources
Our principal sources of cash have been, and we expect will continue to be, cash from operations and borrowings under our senior credit facilities.
Our primary uses of cash are to provide working capital, meet debt service requirements, finance capital expenditures, pay dividends under our dividend policy and support our growth, including through potential acquisitions, and for other general corporate purposes. For a description of the seasonality of our working capital rates see “—Seasonality and Year-To-Year Variability.” Additionally, as a result of the COVID-19 crisis, we may have challenges in short-term liquidity which could impact our ability to fund working capital and liquidity needs.
Our Board of Directors has adopted a dividend policy that reflects an intention to distribute to our stockholders a regular quarterly cash dividend. The declaration and payment of these dividends to holders of our common stock is at the discretion of our Board of Directors and depends upon many factors, including our financial condition and earnings, legal requirements, taxes and other factors our Board of Directors may deem to be relevant. The terms of our indebtedness may also restrict us from paying cash dividends on our common stock under certain circumstances. As a result of this dividend policy, we may not have significant cash available to meet any large
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unanticipated liquidity requirements. As a result, we may not retain a sufficient amount of cash to fund our operations or to finance unanticipated capital expenditures or growth opportunities, including acquisitions. Our Board of Directors may, however, amend, revoke or suspend our dividend policy at any time and for any reason.
As of March 31, 2020, we had $86.3 million of total liquidity, comprised of $27.1 million in cash and cash equivalents and borrowing availability of $59.2 million under our revolving credit facility, compared with total liquidity as of December 31, 2019 of approximately $135.1 million, comprised of approximately $35.7 million in cash and cash equivalents and borrowing availability of approximately $99.4 million under our revolving credit facility. The decrease in our total liquidity from December 31, 2019 is primarily due to the seasonality of our business. Borrowing availability under our revolving credit facility is governed by a borrowing base, the calculation of which includes cash on hand. Accordingly, use of cash on hand may also result in a reduction in the amount available for borrowing under our revolving credit facility. Furthermore, our revolving credit facility requires us to maintain at least $10.5 million of borrowing availability and 15% of the aggregate revolving commitments at the time of determination. We have taken various steps to preserve liquidity, including reducing discretionary spending and deferring payments where appropriate within existing contractual terms, while remaining committed to long term growth projects. In consideration of the COVID-19 crisis, we expect that cash on hand and cash we generate from operations, as well as available credit under our senior credit facilities, will provide adequate funds for the purposes described above throughout 2020.
The following table shows our cash and cash equivalents and inventories in thousands at March 31, 2020, December 31, 2019 and March 31, 2019.
As of | |||||||||
March 31, | December 31, | March 31, | |||||||
2020 | 2019 | 2019 | |||||||
Cash and cash equivalents | $ | 27,141 | $ | 35,665 | $ | 348 | |||
Inventories | 112,370 | 77,942 | 111,225 | ||||||
We had cash and cash equivalents of $27.1 million at March 31, 2020 compared to cash and cash equivalents of $35.7 million and $0.3 million at December 31, 2019 and March 31, 2019, respectively. The table below sets forth a summary of the significant sources and uses of cash for the periods presented in thousands.
Three Months Ended | ||||||||||||
March 31, | March 31, | % | ||||||||||
Cash Flows (in thousands) | 2020 | 2019 | Change | Change | ||||||||
Net cash used in operating activities | $ | (9,080) | $ | (5,577) | $ | (3,503) | 62.8 | % | ||||
Net cash used in investing activities | (2,304) | (769) | (1,535) | 199.6 | % | |||||||
Net cash provided by (used in) financing activities | 2,860 | (21,126) | 23,986 | (113.5) | % | |||||||
Change in cash | $ | (8,524) | $ | (27,472) | $ | 18,948 | 69.0 | % | ||||
Net cash used in operating activities increased $3.5 million from the three months ended March 31, 2019 to the three months ended March 31, 2020. The increase in cash used in operating activities was due to a $9.9 million increase in net loss adjusted for reconciling items as a result of the higher net loss in the three months ended March 31, 2020, partially offset by favorable changes in working capital of $6.4 million. The largest favorable change in working capital was a decrease in accounts receivable due to entering 2020 with a higher accounts receivable balance when compared to the prior year, as well as lower sales in the three months ended March 31, 2020 compared to the three months ended March 31, 2019.
Net cash used in investing activities increased $1.5 million for the three months ended March 31, 2020 compared to the corresponding period in 2019 due to an increase in capital expenditures.
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Net cash provided by financing activities increased $24.0 million for the three months ended March 31, 2020 as compared to the corresponding period in 2019. The increase was primarily a result of there being $30.0 million in outstanding borrowings under our revolving credit facility at March 31, 2020 compared to $16.0 million in short term borrowings at March 31, 2019. Additionally, we there was a voluntary debt prepayment of $30.0 million during the first quarter of 2019, compared to $20.0 million in the first quarter of 2020.
Free Cash Flow
Free cash flow for the three months ended March 31, 2020 was ($11.4) million compared to ($6.3) million in the corresponding period in 2019, a decrease of $5.1 million. The decrease in free cash flow is primarily a result of higher cash used in operating activities of $3.5 million and an increase in capital expenditures of $1.5 million, as discussed above under “Liquidity and Capital Resources.”
Non-GAAP Financial Measures
This Quarterly Report on Form 10-Q contains financial information calculated other than in accordance with U.S. generally accepted accounting principles (“GAAP”).
These non-GAAP measures include:
| ● | Free cash flow; and |
| ● | Adjusted EBITDA; and |
| ● | Adjusted net income (loss) and earnings (loss) per share. |
These non-GAAP disclosures should not be construed as an alternative to the reported results determined in accordance with GAAP.
Free cash flow is a non-GAAP financial measure which we define as net cash provided by (used in) operating activities less capital expenditures. Free cash flow should be evaluated in addition to, and not considered a substitute for, other financial measures such as net income and cash flow provided by (used in) operations. We believe that free cash flow represents our ability to generate additional cash flow from our business operations.
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The following table reconciles net cash used in operating activities, a GAAP measure, to free cash flow, a non-GAAP measure.
Three Months Ended | |||||||
March 31, | March 31, | ||||||
2020 | 2019 | ||||||
(In Thousands) | |||||||
Net cash used in operating activities | $ | (9,080) | $ | (5,577) | |||
Acquisition of property and equipment | (2,304) | (769) | |||||
Free cash flow | $ | (11,384) | $ | (6,346) | |||
Adjusted EBITDA represents net loss before interest, taxes, depreciation and amortization, as further adjusted for certain charges consisting of unrelated legal and consulting fees, pension termination costs, stock-based compensation, certain purchase accounting expenses, and incremental costs incurred related to the COVID-19 crisis. Such COVID-19 related costs include increased expenses directly related to the pandemic, and do not include either production related overhead inefficiencies or lost or deferred sales. We believe these costs are out of the ordinary, unrelated to our business and not representative of our results. We use, and we believe our investors benefit from the presentation of, Adjusted EBITDA in evaluating our operating performance because it provides us and our investors with additional tools to compare our operating performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our core operations. In addition, we believe that Adjusted EBITDA is useful to investors and other external users of our consolidated financial statements in evaluating our operating performance as compared to that of other companies, because it allows them to measure a company’s operating performance without regard to items such as interest expense, taxes, depreciation and amortization, which can vary substantially from company to company depending upon accounting methods and book value of assets and liabilities, capital structure and the method by which assets were acquired. Our management also uses Adjusted EBITDA for planning purposes, including the preparation of our annual operating budget and financial projections. Management also uses Adjusted EBITDA to evaluate our ability to make certain payments, including dividends, in compliance with our senior credit facilities, which is determined based on a calculation of “Consolidated Adjusted EBITDA” that is substantially similar to Adjusted EBITDA.
Adjusted EBITDA has limitations as an analytical tool. As a result, you should not consider it in isolation, or as a substitute for net income, operating income, cash flow from operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. Some of these limitations are:
| ● | Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; |
| ● | Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
| ● | Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness; |
| ● | Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; |
| ● | Other companies, including other companies in our industry, may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure; and |
| ● | Adjusted EBITDA does not reflect tax obligations whether current or deferred. |
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The following table presents a reconciliation of net loss, the most comparable GAAP financial measure, to Adjusted EBITDA as well as the resulting calculation of Adjusted EBITDA for the three months ended March 31, 2020 and 2019:
Three Months Ended | ||||||
March 31, | March 31, | |||||
2020 | 2019 | |||||
(in thousands) | ||||||
Net loss | $ | (10,086) | $ | (297) | ||
Interest expense, net | 5,040 | 4,150 | ||||
Income tax benefit | (3,262) | (463) | ||||
Depreciation expense | 2,156 | 2,067 | ||||
Amortization | 2,738 | 2,741 | ||||
EBITDA | (3,414) | 8,198 | ||||
Stock-based compensation expense | 1,368 | 1,054 | ||||
COVID-19 (1) | 317 | - | ||||
Purchase accounting (2) | (17) | (217) | ||||
Other charges (3) | 31 | (16) | ||||
Adjusted EBITDA | $ | (1,715) | $ | 9,019 | ||
| (1) | Reflects incremental costs incurred related to the COVID-19 crisis for the periods presented. |
| (2) | Reflects reversal of earn-out compensation acquired in conjunction with the acquisition of Henderson in the periods presented. |
| (3) | Reflects one time, unrelated legal, severance and consulting fees for the periods presented. |
The following table presents Adjusted EBITDA by segment for the three months ended March 31, 2020 and 2019.
Three Months Ended |
| Three Months Ended | |||||
March 31, | March 31, | ||||||
2020 | 2019 | ||||||
Adjusted EBITDA | |||||||
Work Truck Attachments | $ | (2,076) | $ | 2,284 | |||
Work Truck Solutions | 361 | 6,735 | |||||
$ | (1,715) | $ | 9,019 | ||||
Adjusted EBITDA at our Work Truck Attachments segment was ($2.1) million for the three months ended March 31, 2020 compared to $2.3 million in the three months ended March 31, 2019, a decrease of $4.4 million. The change in the three months ended March 31, 2020 from the corresponding period in 2019 is primarily due to lower volumes resulting from well-below average snowfall for the snow season ended March 31, 2020. In addition, Adjusted EBITDA was lower in the current year due to additional costs and inefficiencies related to the COVID-19 crisis.
Adjusted EBITDA at our Work Truck Solutions segment was $0.4 million for the three months ended March 31, 2020 compared to $6.7 million in the three months ended March 31 2019, a decrease of $6.3 million The change in the three months ended March 31, 2020 is primarily due to lower volumes from chassis availability constraints and the effect of the COVID-19 crisis, as well as additional costs and inefficiencies related to the crisis.
Adjusted Net Income (Loss) and Adjusted Earnings (Loss) Per Share (calculated on a diluted basis) represents net income (loss) and earnings (loss) per share (as defined by GAAP), excluding the impact of stock based compensation, pension termination costs, non-cash purchase accounting adjustments, certain charges related
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to unrelated legal fees and consulting fees, incremental costs incurred related to the COVID-19 crisis, and mark-to-market adjustments on derivatives not classified as hedges, net of their income tax impact. Such COVID-19 related costs include increased expenses directly related to the pandemic, and do not include either production related overhead inefficiencies or lost or deferred sales. We believe these costs are out of the ordinary, unrelated to our business and not representative of our results. Mark-to-market adjustments on derivatives not classified as hedges are non-cash and are related to overall financial market conditions; therefore, management believes such costs are unrelated to our business and are not representative of our results. Management believes that Adjusted Net Income (Loss) and Adjusted Earnings (Loss) Per Share are useful in assessing the Company’s financial performance by eliminating expenses and income that are not reflective of the underlying business performance. We believe that the presentation of adjusted net income (loss) for the periods presented allows investors to make meaningful comparisons of our operating performance between periods and to view our business from the same perspective as our management. Because the excluded items are not predictable or consistent, management does not consider them when evaluating our performance or when making decisions regarding allocation of resources.
The following table presents a reconciliation of net loss, the most comparable GAAP financial measure, to Adjusted net income (loss) as well as a reconciliation of diluted earnings (loss) per share, the most comparable GAAP financial measure, to Adjusted diluted earnings (loss) per share for the three months ended March 31, 2020 and 2019:
Three Months Ended | |||||||
March 31, | March 31, | ||||||
2020 | 2019 | ||||||
(in thousands) | |||||||
Net loss (GAAP) | $ | (10,086) | $ | (297) | |||
Adjustments: | |||||||
- Stock-based compensation | 1,368 | 1,054 | |||||
- COVID-19 (1) | 317 | - | |||||
- Purchase accounting (2) | (17) | (217) | |||||
- Other charges (3) | 31 | (16) | |||||
- Mark-to-market adjustment on derivative not classified as hedge (4) | 1,413 | - | |||||
Tax effect on adjustments | (778) | (205) | |||||
Adjusted net income (loss) (non-GAAP) | $ | (7,752) | $ | 319 | |||
Weighted average common shares outstanding assuming dilution | 22,813,256 | 22,729,084 | |||||
Adjusted earnings (loss) per common share - dilutive | $ | (0.34) | $ | 0.01 | |||
GAAP diluted loss per share | $ | (0.44) | $ | (0.01) | |||
Adjustments net of income taxes: | |||||||
- Stock-based compensation | 0.04 | 0.03 | |||||
- COVID-19 (1) | 0.01 | (0.01) | |||||
- Purchase accounting (2) | - | - | |||||
- Other charges (3) | - | - | |||||
- Mark-to-market adjustment on derivative not classified as hedge (4) | 0.05 | - | |||||
Adjusted diluted earnings (loss) per share (non-GAAP) | $ | (0.34) | $ | 0.01 | |||
| (1) | Reflects incremental costs incurred related to the COVID-19 crisis for the periods presented. |
| (2) | Reflects reversal of earn-out compensation acquired in conjunction with the acquisition of Henderson in the periods presented. |
| (3) | Reflects one time, unrelated legal, severance and consulting fees for the periods presented. |
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| (4) | Reflects mark-to-market adjustments on an interest rate swap not classified as a hedge for the periods presented. |
Contractual Obligations
There have been no material changes to our contractual obligations in the three months ended March 31, 2020.
Off-Balance Sheet Arrangements
We are not party to any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.
Seasonality and Year-to-Year Variability
While our Work Truck Solutions segment has limited seasonality and variability, our Work Truck Attachments segment is seasonal and also varies from year-to-year. Consequently, our results of operations and financial condition for this segment vary from quarter-to-quarter and from year-to-year as well. In addition, because of this seasonality and variability, the results of operations for our Work Truck Attachments segment and our consolidated results of operations 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. That being the case, while snowfall levels vary within a given year and from year-to-year, snowfall, and the corresponding replacement cycle of snow and ice control equipment manufactured and sold by our Work Truck Attachments segment, is relatively consistent over multi-year periods.
Sales of our Work Truck Attachments products are significantly impacted by the level, timing and location of snowfall, with sales in any given year and region most heavily influenced by snowfall levels in the prior snow season (which we consider to begin in October and end in March) in that region. This is due to the fact that end-user demand for our Work Truck Attachments products is driven primarily by the condition of their snow and ice control equipment, and in the case of professional snowplowers, by their financial ability to purchase new or replacement snow and ice control equipment, both of which are significantly affected by snowfall levels. Heavy snowfall during a given winter causes usage of our Work Truck Attachments products to increase, resulting in greater wear and tear to our products and a shortening of their life cycles, thereby creating a need for replacement commercial snow and ice control equipment and related parts and accessories. In addition, when there is a heavy snowfall in a given winter, the increased income our professional snowplowers generate from their professional snowplow activities provides them with increased purchasing power to purchase replacement commercial snow and ice control equipment prior to the following winter. To a lesser extent, sales of our Work Truck Attachments products are influenced by the timing of snowfall in a given winter. Because an early snowfall can be viewed as a sign of a heavy upcoming snow season, our end-users may respond to an early snowfall by purchasing replacement snow and ice control equipment during the current season rather than delaying purchases until after the season is over when most purchases are typically made by end-users.
We attempt to manage the seasonal impact of snowfall on our revenues in part through our pre-season sales program, which involves actively soliciting and encouraging pre-season distributor orders in the second and third quarters by offering our Work Truck Attachments distributors a combination of pricing, payment and freight incentives during this period. These pre-season sales incentives encourage our Work Truck Attachments distributors to re-stock their inventory during the second and third quarters in anticipation of the peak fourth quarter retail sales period by offering pre-season pricing and payment deferral until the fourth quarter. As a result, we tend to generate our greatest volume of sales (an average of over two-thirds over the last ten years) for the Work Truck Attachments segment during the second and third quarters, providing us with manufacturing visibility for the remainder of the year. By contrast, our revenue and operating results for the Work Truck Attachments segment tend to be lowest during the first quarter, as management believes our end-users prefer to wait until the beginning of a snow season to purchase new equipment and as our distributors sell off inventory and wait for our pre-season sales incentive period to re-stock inventory. Fourth quarter sales for the Work Truck Attachments segment 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 our
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fourth quarter sales and shipments for the Work Truck Attachments segment consist of re-orders by distributors seeking to restock inventory to meet immediate customer needs caused by snowfall during the winter months.
Because of the seasonality of our sales of Work Truck Attachments products, we experience seasonality in our working capital needs as well. In the first quarter, we typically require capital as we are generally required to build our inventory for the Work Truck Attachments segment in anticipation of our second and third quarter pre-season sales. During the second and third quarters, our working capital requirements rise as our accounts receivable for the Work Truck Attachments segment increase as a result of the sale and shipment of products ordered through our pre-season sales program and we continue to build inventory. Working capital requirements peak towards the end of the third quarter and then begin to decline through the fourth quarter through a reduction in accounts receivable for the Work Truck Attachments segment when we receive the majority of the payments for pre-season shipped products.
We also attempt to manage the impact of seasonality and year-to-year variability on our business costs through the effective management of our assets. Our asset management and profit focus strategies include:
| ● | the employment of a highly variable cost structure facilitated by a core group of workers that we supplement with a temporary workforce as sales volumes dictate, which allows us to adjust costs on an as-needed basis in response to changing demand; |
| ● | our enterprise-wide lean concept, which allows us to adjust production levels up or down to meet demand; |
| ● | the pre-season order program described above, which incentivizes distributors to place orders prior to the retail selling season; and |
| ● | a vertically integrated business model. |
These asset management and profit focus strategies, among other management tools, allow us to adjust fixed overhead and sales, general and administrative expenditures to account for the year-to-year variability of our sales volumes.
Additionally, although modest, our annual capital expenditure requirements can be temporarily reduced by up to approximately 40% in response to actual or anticipated decreases in sales volumes. If we are unsuccessful in our asset management initiatives, the seasonality and year-to-year variability effects on our business may be compounded and in turn our results of operations and financial condition may suffer.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
We do not use financial instruments for speculative trading purposes, and do not hold any derivative financial instruments that could expose us to significant market risk. Our primary market risk exposures are changes in interest rates and steel price fluctuations.
Interest Rate Risk
We are exposed to market risk primarily from changes in interest rates. Our borrowings, including our term loan and any revolving borrowings under our senior credit facilities, are at variable rates of interest and expose us to interest rate risk. A portion of our interest rate risk associated with our term loan is mitigated through interest rate swaps. In addition, the interest rate on any revolving borrowings is subject to an increase in the interest rate based on our average daily availability under our revolving credit facility.
As of March 31, 2020, we had outstanding borrowings under our term loan of $225.3 million. A hypothetical interest rate change of 1%, 1.5% and 2% on our term loan would have changed interest incurred for the three months ended March 31, 2020 by $0.1 million, $0.2 million and $0.3 million, respectively.
The Company is party to an interest rate swap agreement to reduce its exposure to interest rate volatility. During the three months ended March 31, 2020, the swap was determined to be ineffective. As a result, the swap was dedesignated on March 19, 2020, and the remaining losses currently included in Accumulated other comprehensive loss on the Condensed Consolidated Balance Sheets will be amortized into interest expense on a straight line basis through the life of the swap. A mark-to-market adjustment was recorded in earnings on March 31,
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2020. See Note 9 to our Unaudited Condensed Consolidated Financial Statements for additional details on our interest rate swap agreement.
As of March 31, 2020, we had $30.0 million in outstanding borrowings under our revolving credit facility. A hypothetical interest rate change of 1%, 1.5% and 2% on our revolving credit facility would have changed interest incurred for the three months ended March 31, 2020 by $0.0 million, $0.0 million and $0.1 million, respectively.
Commodity Price Risk
In the normal course of business, we are exposed to market risk related to our purchase of steel, the primary commodity upon which our manufacturing depends. Our steel purchases as a percentage of revenue were 16.9%for the three months ended March 31, 2020 compared to 16.1% for the three months ended March 31, 2019. While steel is typically available from numerous suppliers, the price of steel is a commodity subject to fluctuations that apply across broad spectrums of the steel market. We do not use any derivative or hedging instruments to manage steel price risk. If the price of steel increases, our variable costs could also increase. While historically we have successfully mitigated these increased costs through the implementation of either permanent price increases and/or temporary invoice surcharges, in the future we may not be able to successfully mitigate these costs, which could cause our gross margins to decline. If our costs for steel were to increase by $1.00 in a period where we are not able to pass any of this increase onto our distributors, our gross margins would decline by $1.00 in the period in which such inventory was sold.
Item 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this Quarterly Report our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that the information required to be disclosed by us in such reports is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting, other than those identified below.
Effective January 1, 2020, we adopted A 2016-13, “Financial Instruments – Credit Losses.” As a result, we have implemented changes to our controls related to credit losses. These controls were designed to provide reasonable assurance of the fair presentation of our financial statements and related disclosures.
PART II. OTHER INFORMATION
Item 1.Legal Proceedings
In the ordinary course of business, we are engaged in various litigation matters primarily including product liability and intellectual property disputes. However, management does not believe that any current litigation is material to our operations or financial position. In addition, we are not currently party to any environmental-related claims or legal matters.
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Item 1A.Risk Factors
There have been no significant changes in our risk factors from those described in our Annual Report on Form 10-K for the year ended December 31, 2019, other than those discussed below.
The recent COVID-19 pandemic could have an adverse effect on our business, financial condition, results of operations and cash flows
As a result of the COVID-19 crisis, and the market volatility and other economic implications associated with it, our business, financial condition, results of operations and cash flows have been adversely impacted in the three months ended March 31, 2020, and may be significantly impacted in future quarters. It may be more difficult to collect from customers as a result of customer bankruptcy or other hardships. Supply chains may be disrupted which could raise prices and impact our ability to obtain inventory timely.
The COVID-19 outbreak has impacted, and may continue to impact, our office locations and our manufacturing and servicing facilities, as well as those of our third party vendors, including the effects of facility closures, reductions in operating hours and other social distancing efforts. For example, we have enacted temporary shutdown of certain of our facilities to protect the health and safety of its employees, customers, partners and the surrounding communities. Although our operations are generally viewed as essential services in the geographies in which we operate, we can give no assurance that our operations will continue to be classified as essential in each of the jurisdictions in which we operate. If we are unable to reopen our facilities in a timely manner, our results of operations may be adversely affected.
We may have challenges in short-term liquidity which could impact our ability to fund working capital needs. If our access to capital were to become significantly constrained or if costs of capital increased significantly due the impact of COVID-19, including volatility in the capital markets, a reduction in our credit ratings or other factors, results of operations and cash flows could be adversely affected.
We are not able to predict the full impact of the crisis on our future financial results as the situation remains unpredictable. The extent to which the COVID-19 outbreak impacts our financial condition will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of COVID-19, the longevity of COVID-19, the impact of COVID-19 on economic activity, and the actions to contain its impacts on public health and the global economy. The impact of COVID-19 may also exacerbate other risks discussed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019, any of which could have a material effect on our financial condition, results of operations and cash flows.
We have taken steps to promote the health and well-being of our workforce, including shutting down facilities and providing necessary safety equipment employees who are working. We will continue to monitor the situation as it unfolds and will make adjustments as deemed necessary.
If economic conditions in the United States deteriorate, or if spending by governmental agencies is limited or reduced, our results of operations, financial condition and ability to generate cash flow may be adversely affected.
Historically, demand for snow and ice control equipment for light and heavy duty trucks as well as upfitted vehicles has been influenced by general economic conditions in the United States, as well as local economic conditions in the snow-belt regions in North America.
The global outbreak of COVID-19 has severely restricted the level of economic activity in North America. In response to this outbreak, the governments of many countries, states, cities and other geographic regions have taken preventative or protective actions, such as imposing restrictions on travel and business operations. These measures have and are expected to continue to have significant adverse impacts on domestic and foreign economies of uncertain severity and duration. It is likely that the current outbreak and continued spread of COVID-19 will cause an economic slowdown, and it is possible that it could cause a global recession.
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Weakened economic conditions and limited or reduced government spending (including as a result of the COVID-19 pandemic) may cause both our Work Truck Attachments and Work Truck Solutions end-users to delay purchases of replacement snow and ice control equipment and upfit vehicles and instead repair their existing equipment and vehicles, leading to a decrease in our sales of new equipment and upfitted vehicles. Weakened economic conditions and limited or reduced governmental spending may also cause our end-users to delay their purchases of new light and heavy duty trucks. Because our end-users tend to purchase new snow and ice control equipment concurrent with their purchase of new light or heavy duty trucks, their delay in purchasing new light or heavy duty trucks can also result in the deferral of their purchases of new snow and ice control equipment. The deferral of new equipment purchases during periods of weak economic conditions or limited or reduced government spending may negatively affect our results of operations, financial condition and ability to generate cash flow.
Weakened economic conditions or limited or reduced government spending may also cause both our Work Truck Attachments and Work Truck Solutions end-users to consider price more carefully in selecting new snow and ice control equipment and upfit vehicles, respectively. Historically, considerations of quality and service have outweighed considerations of price, but in a weak economy, or an environment of constrained government spending, price may become a more important factor. Any refocus away from quality in favor of cheaper equipment could cause end-users to shift away from our products to less expensive competitor products, or to shift away from our more profitable products to our less profitable products, which in turn would adversely affect our results of operations and our ability to generate cash flow.
See the section titled “–Results of Operations” above for further discussion on the impact the COVID-19 crisis has had on our results of operations for the three months ended March 31, 2020.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Unregistered Sales of Equity Securities
During the three months ended March 31, 2020, the Company did not sell any securities that were not registered under the Securities Act of 1933, as amended.
Purchase of Equity Securities
In March 2020, the Company withheld approximately 1,756 shares of the Company’s common stock from employees to satisfy minimum tax withholding obligations that arose upon vesting of restricted stock granted pursuant to the Company’s shareholder-approved equity incentive plan.
Dividend Payment Restrictions
The Company’s senior credit facilities include certain restrictions on its ability to pay dividends. The senior credit facilities also restrict the Company’s subsidiaries from paying dividends and otherwise transferring assets to Douglas Dynamics, Inc. For additional detail regarding these restrictions, see Note 9 to the Unaudited Consolidated Financial Statements.
Item 3.Defaults Upon Senior Securities
None.
Item 4.Mine Safety Disclosures
None.
Item 5.Other Information
None.
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Item 6.Exhibits
The following documents are filed as Exhibits to this Quarterly Report on Form 10-Q:
Exhibit | Description | ||||
31.1* | |||||
31.2* | |||||
32.1* | |||||
101* | The following financial statements from the quarterly report on Form 10-Q of Douglas Dynamics, Inc. for the quarter ended March 31, 2020, filed on May 5, 2020, formatted in inline XBRL: (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations and Comprehensive Loss; (iii) the Consolidated Statements of Cash Flows; (iv) the Consolidated Statements of Shareholders’ Equity; and (v) the Notes to the Consolidated Financial Statements. | ||||
104* | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101). |
*Filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DOUGLAS DYNAMICS, INC. | ||
By: | /s/ SARAH LAUBER | |
Sarah Lauber | ||
Chief Financial Officer | ||
(Principal Financial Officer and Authorized Signatory) | ||
Dated: May 5, 2020 | ||
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