Douglas Dynamics, Inc. — Q2 2020 Form 10-Q Summary
Business context and reporting period
Douglas Dynamics manufactures and sells snow and ice control equipment and provides work-truck upfitting and related solutions through two segments: Work Truck Attachments and Work Truck Solutions. The filing covers the three and six months ended June 30, 2020; financial statements are unaudited.
Results were materially affected by the COVID-19 pandemic, facility shutdowns, below-average snowfall and chassis availability constraints. The Work Truck Attachments segment is highly seasonal, with sales generally concentrated in the second and third quarters.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $120.0 million | $176.4 million | $188.2 million | $269.5 million |
| Gross profit | $32.1 million | $59.6 million | $43.8 million | $82.5 million |
| Gross margin | 26.7% | 33.8% | 23.3% | 30.6% |
| Operating income (loss) | $(112.4) million | $38.1 million | $(120.6) million | $41.6 million |
| Net income (loss) | $(103.9) million | $25.5 million | $(113.9) million | $25.2 million |
| Diluted EPS | $(4.55) | $1.10 | $(5.00) | $1.08 |
| Adjusted EBITDA | $20.3 million | $44.1 million | $18.6 million | $53.1 million |
| Operating cash flow | $3.1 million | $5.3 million | $(6.0) million | $(0.3) million |
| Free cash flow | $0.3 million | $0.6 million | $(11.1) million | $(5.8) million |
Q2 sales declined 32.0% year over year and six-month sales declined 30.2%. Adjusted EBITDA margin decreased to 16.9% from 25.0% in Q2 and to 9.9% from 19.7% for the six-month period.
- Work Truck Attachments sales were $73.8 million in Q2 and $93.0 million for six months, down from $112.2 million and $138.1 million, respectively. Segment Adjusted EBITDA was $20.4 million in Q2 and $18.4 million for six months.
- Work Truck Solutions sales were $46.2 million in Q2 and $95.3 million for six months, down from $64.1 million and $131.5 million, respectively. Segment Adjusted EBITDA was $(0.1) million in Q2 and $0.2 million for six months.
- Cash and cash equivalents were $34.9 million at June 30, 2020, compared with $35.7 million at December 31, 2019.
- Total liquidity was approximately $126.8 million, consisting of cash and $91.9 million of revolver availability.
- Long-term debt, net, was $266.3 million, including $270.4 million of term-loan borrowings before deferred financing costs and discount. No revolver borrowings were outstanding at quarter-end.
- Inventories increased to $99.8 million from $77.9 million at December 31, 2019, partly reflecting preparation for supply-chain constraints.
- Dividends declared and paid were $0.28 per share in Q2 and $0.56 per share for the first six months.
Material changes versus the prior comparable period
- COVID-19-related shutdowns began March 18, 2020; facilities gradually ramped up during Q2 and had returned to full production by the filing date. Shutdowns reduced shipments and created production inefficiencies and fixed-cost absorption pressure.
- The company recorded $127.9 million of goodwill impairment charges: $47.8 million for the Municipal reporting unit and $80.1 million for Dejana. No impairment was recorded for the Commercial reporting unit.
- Cost of sales as a percentage of sales increased to 73.3% from 66.2% in Q2 and to 76.7% from 69.4% for six months, reducing gross margins.
- Interest expense increased to $5.7 million from $4.2 million in Q2 and to $10.7 million from $8.3 million for six months, primarily because the interest-rate swap was determined to be ineffective and was dedesignated.
- The company refinanced its senior credit facilities on June 8, 2020 with a $275.0 million term loan and a $100.0 million revolving facility. Debt modification expense was $3.2 million.
- Goodwill declined to $113.1 million from $241.0 million at year-end, while total assets declined to $584.9 million from $705.7 million and stockholders’ equity declined to $184.4 million from $313.2 million.
- The company adopted the current expected credit loss standard on January 1, 2020, reducing opening retained earnings by $0.6 million net of tax.
Guidance, outlook, commentary and risks
Management did not provide specific revenue or earnings guidance in the filing. Management stated that the pandemic is likely to have a material impact on 2020 results and that the full effect remains unpredictable. The company expects cash on hand, operating cash flow and available credit to provide adequate funds throughout 2020, while acknowledging potential short-term liquidity challenges.
- Principal risks include continued COVID-19 disruptions, additional facility closures, supply-chain interruptions, chassis shortages, customer financial distress and reduced government spending.
- Demand for Work Truck Attachments depends heavily on snowfall. The latest snow season was approximately 25% below the ten-year average and was the second consecutive below-average season.
- Variable-rate debt creates interest-rate exposure. The interest-rate swap had a negative fair value of $14.8 million at June 30, 2020, and future mark-to-market changes are recorded in earnings.
- Debt agreements contain restrictive covenants, including limitations on dividends. The company was in compliance with its covenants at June 30, 2020.
- Steel prices, freight costs, OEM and distributor relationships, credit availability and the ability to pass cost increases to customers could affect margins and cash flow.
- Warranty reserves were $5.4 million, and the company reported ordinary-course product liability and intellectual property litigation that management did not consider material.
- The company continued paying its quarterly dividend, but stated that the board may amend, suspend or revoke the dividend policy and that debt terms may restrict dividends.
Most important facts for investors to verify
- Whether demand, snowfall patterns and chassis availability improve sufficiently to restore sales and segment profitability.
- Whether the $126.8 million of reported liquidity remains adequate under seasonal working-capital needs and continued pandemic disruption.
- The company’s compliance with debt covenants, revolver borrowing-base availability and future debt-service requirements.
- Whether further goodwill or other asset impairments are required if operating forecasts deteriorate.
- The sustainability of the dividend given negative six-month free cash flow, leverage and contractual dividend restrictions.
- The effect of the dedesignated interest-rate swap, including approximately $3.0 million of accumulated-loss amortization expected to enter earnings over the following twelve months.
- Whether reported Adjusted EBITDA adequately reflects ongoing production inefficiencies and lost or deferred sales, which management excludes from certain non-GAAP measures.