Douglas Dynamics, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the period ended September 30, 2021, filed November 2, 2021. Douglas Dynamics manufactures and sells commercial and municipal snow and ice control equipment, truck attachments, and work-truck upfits through two segments: Work Truck Attachments and Work Truck Solutions. Results are unaudited and are presented in thousands, except per-share data.
The Work Truck Attachments segment is highly seasonal, with significant sales typically occurring in the second and third quarters through the pre-season sales program. Results are affected by snowfall, dealer inventory, chassis availability, supply-chain conditions, commodity prices, freight costs, labor availability, and the continuing effects of COVID-19.
Financial performance and key metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $127.6 million | $133.8 million | $388.5 million | $322.0 million |
| Gross profit | $30.6 million | $36.7 million | $105.7 million | $80.5 million |
| Gross margin | 24.0% | 27.5% | 27.2% | 25.0% |
| Income from operations | $10.4 million | $17.6 million | $38.1 million | $(103.0) million |
| Net income (loss) | $7.0 million | $9.2 million | $21.9 million | $(104.7) million |
| Diluted EPS | $0.30 | $0.39 | $0.92 | $(4.60) |
| Adjusted EBITDA | $15.5 million | $23.1 million | $59.6 million | $41.7 million |
| Free cash flow | $(35.3) million | $(25.5) million | $(26.8) million | $(36.5) million |
Q3 net sales decreased 4.6%, while nine-month sales increased 20.7%. Q3 gross profit declined 16.6% and gross margin contracted by 350 basis points because of lower Work Truck Solutions volumes, material and freight inflation, and timing of price increases. Nine-month gross profit increased 31.3%, benefiting from higher sales volumes and unfavorable COVID-related comparisons in 2020.
- Work Truck Attachments sales were $81.4 million in Q3 and $228.0 million for nine months, compared with $76.9 million and $169.9 million, respectively, in 2020. Nine-month Adjusted EBITDA increased to $55.2 million from $38.5 million, but Q3 Adjusted EBITDA fell to $14.8 million from $20.2 million.
- Work Truck Solutions sales were $46.3 million in Q3 and $160.5 million for nine months, compared with $56.9 million and $152.1 million, respectively. Q3 Adjusted EBITDA declined to $0.7 million from $2.9 million; nine-month Adjusted EBITDA increased to $4.4 million from $3.2 million.
- SG&A expense was $17.6 million in Q3 and $59.5 million for nine months, compared with $16.4 million and $47.4 million in the comparable 2020 periods. Increases reflected higher salaries, benefits, discretionary spending, stock-based compensation, and incentive compensation.
- The effective tax rate was 14.6% in Q3 and 8.2% for nine months, aided by discrete state tax benefits of $0.8 million and $3.5 million, respectively.
Liquidity, cash flow, debt, and capital allocation
- Cash and cash equivalents were $7.3 million at September 30, 2021, versus $41.0 million at December 31, 2020.
- Total liquidity was $69.4 million, consisting of cash of $7.3 million and $62.1 million of revolver availability, versus approximately $140.1 million at December 31, 2020.
- Nine-month operating cash flow was negative $19.5 million, improving from negative $27.1 million in 2020. Working capital consumed cash as accounts receivable increased by $41.5 million and inventories increased by $20.4 million.
- Capital expenditures were $7.3 million, compared with $9.5 million in the prior-year period. Dividends paid were $19.9 million, or $0.86 per share for the nine months.
- At September 30, 2021, the company had $221.7 million of term-loan borrowings, $37.0 million drawn on its revolving facility, and $62.1 million of remaining revolver availability. The senior secured facilities mature June 9, 2026.
- The company entered a new $225.0 million term loan and $100.0 million revolving facility on June 9, 2021. Refinancing resulted in a $4.9 million loss on debt extinguishment and reduced interest expense.
- The company was in compliance with its leverage-ratio and interest-coverage covenants at September 30, 2021. The credit agreement requires leverage of no more than 3.50 to 1.00 and consolidated interest coverage of at least 3.00 to 1.00.
Material changes versus the prior comparable period
- Q3 performance weakened as chassis and component shortages reduced Work Truck Solutions production and deliveries; pricing actions partly offset the volume decline.
- Nine-month results improved substantially because of stronger snowfall in the snow season ended March 2021, released dealer demand, pricing actions, and the comparison with 2020 pandemic shutdowns.
- Material and freight inflation pressured Q3 margins. Steel purchases represented 12.2% of Q3 revenue and 11.4% of nine-month revenue, up from 8.9% and 9.9%, respectively.
- There were no goodwill impairment charges in 2021, compared with $127.9 million in 2020, consisting of $47.8 million for Municipal and $80.1 million for Dejana.
- The company’s interest-rate swap was re-designated as a cash-flow hedge in connection with the June 2021 refinancing. Its negative fair value was $9.1 million at September 30, 2021.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide specific quantitative earnings or revenue guidance. Management expects cash on hand, operating cash flow, and available credit to provide adequate funds for foreseeable needs, but notes that liquidity is affected by seasonal working-capital requirements and dividend payments.
- Management expects COVID-19, supply-chain constraints, chassis and component shortages, inflation in materials and freight, and labor availability to continue affecting results.
- Rolling temporary shutdowns occurred at certain Work Truck Solutions facilities during 2021 because of supply-chain constraints.
- Snowfall levels and timing remain major drivers of demand and fourth-quarter sales for Work Truck Attachments.
- Variable-rate debt creates interest-rate exposure. The company uses an interest-rate swap but remains exposed to changes in borrowing costs.
- Steel-price increases may reduce gross margins if price increases or surcharges cannot be passed through to distributors.
- Ordinary-course litigation, primarily product-liability and intellectual-property matters, is not expected by management to have a material adverse effect. No environmental claims were reported.
- Warranty liability was $6.1 million at September 30, 2021, compared with $5.8 million at December 31, 2020.
- Dividends remain subject to board discretion, financial condition, debt covenants, and other restrictions.
Most important facts for investors to verify
- Whether chassis, component, labor, freight, and steel constraints are easing and whether pricing actions are sufficient to restore margins.
- The sustainability of negative operating cash flow and the decline in total liquidity during the seasonal working-capital build.
- Compliance with the 3.50x leverage and 3.00x interest-coverage covenants after the seasonal fourth-quarter cycle.
- Fourth-quarter snowfall and dealer reordering, which could materially affect Work Truck Attachments revenue.
- The company’s ability to maintain dividends while funding working capital, capital expenditures, and debt service.
- The sensitivity of earnings and cash flow to variable interest rates, the interest-rate swap, and refinancing terms.
- The extent to which 2021 improvements reflect genuine operating recovery versus favorable comparisons with pandemic-affected 2020 results.