Summary of Significant Accounting Policies
|12 Months Ended
Dec. 31, 2017
|Summary of Significant Accounting Policies
|Summary of Significant Accounting Policies
2. Summary of Significant Accounting Policies
Principles of consolidation
The accompanying consolidated financial statements include the accounts of Douglas Dynamics, Inc. and its direct wholly‑owned subsidiary, Douglas Dynamics, L.L.C., and its wholly‑owned subsidiaries, Douglas Dynamics Finance Company (an inactive subsidiary), Fisher, LLC, Henderson Enterprises Group, Inc., Henderson Products, Inc. and Dejana Truck & Utility Equipment Company, LLC (hereinafter collectively referred to as the “Company”). All intercompany balances and transactions have been eliminated in consolidation.
Use of estimates
The preparation of the financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Accordingly, actual results could differ from those estimates.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents are carried at cost, which approximates fair value.
Accounts receivable and allowance for doubtful accounts
The Company carries its accounts receivable at their face amount less an allowance for doubtful accounts. 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. On a periodic basis, the Company evaluates its accounts receivable and establishes the allowance for doubtful accounts based on a combination of specific customer circumstances and credit conditions based on a history of write‑offs and collections. 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 is party to a financing program in which certain distributors may elect to finance their purchases from the Company through a third party financing company. The Company provides the third party financing company recourse against the Company regarding the collectability of the receivable under the program due to the fact that if the third party financing company is unable to collect from the distributor the amounts due in respect of the product financed, the Company would be obligated to repurchase any remaining inventory related to the product financed and reimburse any legal fees incurred by the financing company. During the years ended December 31, 2017, 2016 and 2015, distributors financed purchases of $7,115, $7,578 and $7,584 through this financing program, respectively. At both December 31, 2017 and December 31, 2016, there were no uncollectible outstanding receivables related to sales financed under the financing program. The amount owed by distributors to the third party financing company under this program at December 31, 2017 and 2016 was $3,436 and $6,767, respectively. The Company was required to repurchase repossessed inventory of $0, $0, and $13 for the years ended December 31, 2017, 2016 and 2015, respectively.
In the past, minimal losses have been incurred under this agreement. However, an adverse change in distributor retail sales could cause this situation to change and thereby require the Company to repurchase repossessed units. Any repossessed units are inspected to ensure they are current, unused product and are restocked and resold.
Interest Rate Swap
The Company is a counterparty to interest-rate swap agreements to hedge against the potential impact on earnings from increases in market interest rates. The Company entered into three interest rate swap agreements during the first quarter of 2015 with notional amounts of $45,000, $90,000 and $135,000 effective for the periods December 31, 2015 through March 29, 2018, March 29, 2018 through March 31, 2020 and March 31, 2020 through June 30, 2021, respectively. All three interest rate swap agreements are accounted for as cash flow hedges. Under the interest rate swap agreement, effective as of December 31, 2015 the Company will either receive or make payments on a monthly basis based on the differential between 6.105% and LIBOR plus 3.00% (with a LIBOR floor of 1.0%). Under the interest rate swap agreement, effective as of March 29, 2018 the Company will either receive or make payments on a monthly basis based on the differential between 6.916% and LIBOR plus 3.00% (with a LIBOR floor of 1.0%). Under the interest rate swap agreement effective as of March 31, 2020 the Company will either receive or make payments on a monthly basis based on the differential between 7.168% and LIBOR plus 3.00% (with a LIBOR floor of 1.0%). The negative fair value of the interest rate swap, net of tax, of ($1,328) and ($1,195) at December 31, 2017 and December 31, 2016, respectively, is included in Accumulated other comprehensive loss on the balance sheet. This fair value was determined using Level 2 inputs as defined in Accounting Standards Codification Topic (“ASC”) 820 - Fair Value Measurements and Disclosures.
Inventories are stated at the lower of cost or market. Market is determined based on estimated realizable values. Inventory costs are primarily determined by the first‑in, first‑out (FIFO) method. The Company periodically reviews its inventory for slow moving, damaged and discontinued items and provides reserves to reduce such items identified to their recoverable amounts.
The Company records inventories to include truck chassis inventory financed through a floor plan financing agreement as discussed in Note 7. The Company takes title to truck chassis upon receipt of the inventory through their floor plan agreement and performs upfitting 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 December 31, 2017 and 2016, the Company had $7,711 and $3,939 of chassis inventory and related floor plan financing obligation, respectively. The Company recognizes revenue associated with upfitting and service installations net of the truck chassis.
The Company receives, on consignment, truck chassis on which it performs upfitting service installations under “bailment pool” arrangements with major truck manufacturers. The Company never receives title to the truck chassis. The aggregate value of all bailment pool chassis on hand as of December 31, 2017 and 2016 was $17,447 and $22,420, respectively. The Company is responsible to the manufacturer for interest on chassis held for upfitting. The Company recognizes revenue associated with upfitting and service installations net of the truck chassis.
As of December 31, 2017, fifteen of the Company’s upfit and distribution centers were subject to a lease agreement.
All of the Company’s current leases are considered operating leases, and are not recorded on the Company’s balance sheet. Rent expense is recognized on a straight-line basis over the expected lease term. The Company leases buildings in which it operates from both related party and third party lessors. See Note 14 for further details.
Property, plant and equipment
Property, plant and equipment are recorded at cost, less accumulated depreciation. Depreciation is computed using straight‑line methods over the estimated useful lives for financial statement purposes and an accelerated method for income tax reporting purposes. The estimated useful lives of the assets are as follows:
Depreciation expense was $7,183, $6,146, and $4,919 for the years ended December 31, 2017, 2016 and 2015, respectively.
Expenditures for renewals and improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. Expenditures for maintenance and repairs are charged to operations when incurred. Repairs and maintenance expenses amounted to $5,222, $5,060 and $5,272 for the years ended December 31, 2017, 2016 and 2015, respectively. When assets are sold or retired, the cost of the asset and the related accumulated depreciation are eliminated from the accounts and any gain or loss is recognized in results of operations.
Impairment of long‑lived assets
Long‑lived assets are reviewed for potential impairment when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying value of such assets to the undiscounted future cash flows expected to be generated by the assets. If the carrying value of an asset exceeds its estimated undiscounted future cash flows, an impairment provision is recognized to the extent that the carrying amount of the asset exceeds its fair value. Assets to be disposed of are reported at the lower of the carrying amount or the fair value of the asset, less costs of disposition. Management of the Company considers such factors as current results, trends and future prospects, current market value, and other economic and regulatory factors in performing these analyses. The Company determined that no long‑lived assets were impaired as of December 31, 2017 and 2016.
Goodwill and other intangible assets
Goodwill and indefinite‑lived intangible assets are tested for impairment annually as of December 31, or sooner if impairment indicators arise. The fair value of indefinite‑lived intangible assets is estimated based upon an income and market approach. In reviewing goodwill for impairment, potential impairment is identified by comparing the estimated fair value of the reporting units to its carrying value. The Company has determined it has three reporting units. When the fair value is less than the carrying value of the net assets of the reporting unit, including goodwill, an impairment loss may be recognized. The Company has determined that goodwill and indefinite lived assets were not impaired as of December 31, 2017 and 2016. The Company had goodwill of $241,006 and $238,286 at December 31, 2017 and 2016, respectively, of which $160,932 relates to goodwill associated with the Work Truck Attachments segment at both December 31, 2017 and 2016 and $80,074 and $77,354 relates to the Work Truck Solutions segment at December 31, 2017 and 2016, respectively.
Intangible assets with estimable useful lives are amortized over their respective estimated useful lives and are reviewed for potential impairment when events or circumstances indicate that the carrying amount of the asset may not be recoverable. The Company amortizes its distribution network intangible over periods ranging from 15 to 20 years, trademarks over 7 to 25 years, patents over 7 to 20 years, customer relationships over 15 to 19.5 years and noncompete agreements over 4 to 5 years. The Company acquired backlogs in conjunction with the Dejana and Henderson acquisitions on July 15, 2016 and December 31, 2014, respectively. The Dejana backlog was amortized in the same quarter as the acquisition. Meanwhile, the Henderson backlog was amortized in the first half of 2015. There were no indicators of impairment during the years ended December 31, 2017 and 2016. The Company had gross intangible assets and accumulated amortization of $275,675 and $89,525, respectively, for the year ended December 31, 2017, of which $195,175 and $81,336 relate to the Work Truck Attachments segment, and $80,500 and $8,189 relate to the Work Truck Solutions segment, respectively. The Company had gross intangible assets and accumulated amortization of $272,975 and $78,124, respectively for the year ended December 31, 2016, of which $195,175 and $74,432 relate to the Work Truck Attachments segment, and $77,800 and $3,692 relate to the Work Truck Solutions segment, respectively.
Deferred income taxes are accounted for under the asset and liability method whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates. Deferred income tax provisions or benefits are based on the change in the deferred tax assets and liabilities from period to period. Deferred income tax assets are reduced by a valuation allowance if it is more likely than not that some portion of the deferred income tax asset will not be realized. Additionally, when applicable, the Company would classify interest and penalties related to uncertain tax positions in income tax expense.
Deferred financing costs
The costs of obtaining financing are capitalized and amortized over the term of the related financing on a basis that approximates the effective interest method. The changes in deferred financing costs are as follows:
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).
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:
Concentration of credit risk
The Company’s cash is deposited with multiple financial institutions. At times, deposits in these institutions exceed the amount of insurance provided on such deposits. The Company has not experienced any losses in such accounts and believes that it is not exposed to any significant risk on these balances.
No distributor represented more than 10% of the Company’s net sales or accounts receivable during the years ended December 31, 2017, 2016 and 2015.
Work Truck Attachments Segment Revenue Recognition
The Company recognizes revenues upon shipment of equipment to the customer, which is when risk of loss passes and all of the following conditions are satisfied: (i) persuasive evidence of an arrangement exists; (ii) the price is fixed or determinable; (iii) collectability is reasonably assured; and (iv) the product has been shipped and the Company has no further obligations. Customers have no right of return privileges. Historically, product returns have not been material and are permitted on an exception basis only. Revenues from the sales of the Work Truck Attachments segment equipment are generally recognized on a gross basis.
Additionally, within the Work Truck Attachments segment, the Company performs upfitting services. Upfitting services are recognized as revenue when risk of loss passes and all of the following conditions are satisfied: (i) persuasive evidence of an arrangement exists; (ii) the price is fixed or determinable; (iii) collectability is reasonably assured; and (iv) the product has been either delivered or picked up by the customer and the Company has no further obligations. Customers have no right of return privileges. Historically, product returns have not been material and are permitted on an exception basis only. Additionally, customers are billed separately for the truck chassis by the chassis manufacturer. The Company only records sales for the net amount of the upfit, excluding the truck chassis. The company acts as a garage keeper and never takes ownership or title to the truck chassis and does not pay interest associated with the truck chassis on its premises within the Work Truck Attachments segment.
Within the Work Truck Attachments segment, the Company offers a variety of discounts and sales incentives to its distributors. The estimated liability for sales discounts and allowances is 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.
Work Truck Solutions Segment Revenue Recognition
Within the Work Truck Solutions segment, the Company performs upfitting services. Upfitting services are recognized as revenue when risk of loss passes and all of the following conditions are satisfied: (i) persuasive evidence of an arrangement exists; (ii) the price is fixed or determinable; (iii) collectability is reasonably assured; and (iv) the product has been either delivered or picked up by the customer and the Company has no further obligations. Customers have no right of return privileges. Historically, product returns have not been material and are permitted on an exception basis only. Additionally, customers are billed separately for the truck chassis by the chassis manufacturer. The Company only records sales for the net amount of the upfit, excluding the truck chassis. The Company obtains the truck chassis from the truck chassis manufacturer through either its floor plan agreement with a financial institution or bailment pool agreement with the truck chassis manufacturer. 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 upfit. Conversely, under the bailment pool agreement, the Company does not take title to the truck chassis, but rather only holds the truck chassis on consignment. The Company pays interest on both of these arrangements as discussed below in Note 7. 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.
Revenues from the sales of the Work Truck Solutions products are generally recognized net of the truck chassis with the selling price to the customer recorded as sales and the manufacturing and upfit cost of the product recorded as cost of sales. The Company also sells certain products within the Work Truck Solutions segment for which it acts as an agent. Products in this category include the sale of third-party products. 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.
Cost of sales
Cost of sales includes all costs associated with the manufacture of the Company’s products, including raw materials, purchased parts, freight, plant operating expenses, property insurance and taxes, and plant depreciation. All payroll costs and employee benefits for the hourly workforce, manufacturing management, and engineering costs are included in cost of sales.
Related party transactions
As a result of the Dejana acquisition, the Company entered into related party leases. See Note 14 for further details.
During 2016, one of the Company’s non-employee directors, served as the Chief Executive Officer of Fleetpride, Inc., an independent distributor of parts for heavy duty trucks and trailers. During 2016, the Company purchased parts from Fleetpride, Inc. for use in Henderson Products, Inc. trucks. The total amount of these purchases during 2016 was $242. There were no related party purchases during 2017.
Warranty cost recognition
The Company accrues for estimated warranty costs as revenue is recognized. See Note 9 for further details.
Defined benefit plans
The Company has noncontributory, defined benefit retirement plans and postretirement benefit plans covering certain employees. Management reviews underlying assumptions on an annual basis. Refer to Note 11.
Advertising expenses include costs for the production of marketing media, literature, CD‑ROM, and displays. The Company participates in trade shows and advertises in the yellow pages and billboards. Advertising expenses amounted to $4,471, $4,269 and $4,511 for the years ended December 31, 2017, 2016 and 2015, respectively. The Company also provides its distributors with pre‑approved, cooperative advertising programs, which are recorded as advertising expense in selling, general and administrative expense. All costs associated with the Company’s advertising programs are expensed as incurred.
Research and development expenses
Research and development expenses include costs to develop new technologies to enhance existing products and to expand the range of product offerings. Research and development expenses amounted to $2,926, $3,132 and $2,950 for the years ended December 31, 2017, 2016 and 2015, respectively.
Shipping and handling costs
Generally, shipping and handling costs are paid directly by the customer to the shipping agent. Those shipping and handling costs billed by the Company are recorded as a component of sales with the corresponding costs included in cost of sales.
The Company applies the guidance codified in ASC 718, Compensation—Stock Compensation. This standard requires the measurement of the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award at the grant date and recognition of the compensation expense over the period during which an employee is required to provide service in exchange for the award (generally the vesting period).
Comprehensive loss is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non‑owner resources and is comprised of net income or loss and “other comprehensive loss”. The Company’s other comprehensive loss is comprised of the adjustments for pension and postretirement benefit liabilities as well as the impact of its interest rate swaps. See Note 18 for the components of accumulated other comprehensive loss.
As a result of the Dejana acquisition which closed on July 15, 2016, the Company operates through two operating segments for which separate financial information is available, and for which operating results are evaluated regularly by the Company's chief operating decision maker in determining resource allocation and assessing performance. Prior to the acquisition of Dejana, the Company operated one operating segment and one reportable business segment which consisted of the manufacture and sale of snow and ice control products. The Company’s two current reportable business segments are described below.
Work Truck Attachments. The Work Truck Attachments segment includes snow and ice management attachments sold under the FISHER®, WESTERN®, HENDERSON® and SNOWEX® brands. This segment consists of the Company’s operations that, prior to the Company’s acquisition of Dejana, were a single operating segment, consisting of the manufacture and sale of snow and ice control products.
Work Truck Solutions. The Work Truck Solutions segment, which was created as a result of the Dejana acquisition, includes the upfit of market leading attachments and storage solutions for commercial work vehicles under the DEJANA® brand and its related sub-brands.
Segment performance is evaluated based on segment net sales, gross margin and operating income. Items not allocated to segment operating income include corporate administrative expenses and certain other amounts that include various support functions, such as information technology, corporate finance, legal, executive administration and human resources. No single customer’s revenues amounted to 10% or more of the Company’s total revenue. Sales are primarily within the United States and substantially all assets are located within the United States.