Douglas Dynamics, Inc. — Q2 2013 Form 10-Q Summary
Reporting period: Quarterly and year-to-date periods ended June 30, 2013; filed August 6, 2013. Interim financial statements are unaudited. Douglas Dynamics operates as a single business unit focused on snow and ice control equipment, parts and accessories. Results are highly seasonal, with the second and third quarters typically generating the majority of annual sales.
Financial Performance and Position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $55.2 million | $65.5 million | $69.3 million | $74.1 million |
| Gross profit | $18.9 million | $23.1 million | $23.2 million | $24.9 million |
| Gross margin | 34.2% | 35.2% | 33.5% | 33.6% |
| Income from operations | $11.4 million | $16.1 million | $7.9 million | $11.9 million |
| Net income | $5.9 million | $9.0 million | $2.5 million | $4.7 million |
| Net margin | 10.7% | 13.8% | 3.6% | 6.3% |
| Diluted EPS | $0.26 | $0.40 | $0.11 | $0.21 |
| Adjusted EBITDA | $14.4 million | $19.6 million | $14.6 million | $17.7 million |
| Free cash flow | $(5.3) million | $(7.6) million | $(13.3) million | $(18.1) million |
- Equipment unit sales declined 17.1% in the quarter and 12.8% year to date. Management attributed the decline primarily to delayed shipments associated with a record number of new product launches.
- Parts and accessories sales increased 16.9% in the quarter and 48.6% year to date, supported by late and slightly above-average snowfall during the six-month snow season ended March 31, 2013.
- Q2 selling, general and administrative expense increased 6.9% including intangibles amortization; year-to-date expense increased 13.6%. Drivers included Trynex-related expenses, acquisition costs and higher stock-based compensation.
- Interest expense declined modestly to $2.1 million in Q2 and $4.1 million year to date.
- Cash and cash equivalents were $2.1 million at June 30, 2013, versus $24.1 million at December 31, 2012. Total liquidity was $28.7 million, consisting of cash and $26.7 million of revolving-credit availability.
- Accounts receivable increased to $38.5 million and inventories to $42.4 million, from $25.4 million and $30.3 million, respectively, at December 31, 2012, reflecting seasonal working-capital requirements.
Material Changes Versus the Prior Comparable Period
- Q2 sales decreased 15.8% and year-to-date sales decreased 6.4%; net income declined 34.1% in Q2 and 46.8% year to date.
- Operating margin fell to 20.6% from 24.5% in Q2 and to 11.3% from 16.1% year to date.
- The company acquired substantially all assets of Trynex, Inc. on May 6, 2013, for $26.7 million, financed with $28.0 million of revolver borrowings. Trynex contributed $0.8 million of revenue and a $0.7 million pretax operating loss from acquisition through June 30.
- Trynex added approximately $6.8 million of goodwill and $11.9 million of intangible assets in the preliminary purchase-price allocation. The acquisition also generated $1.2 million of transaction expenses and includes contingent earnout consideration capped at $7.0 million.
- The company recorded a $0.6 million impairment charge on the Johnson City, Tennessee, assets held for sale during the first quarter.
- Financing cash flow improved by $35.6 million year to date because of the $28.0 million revolver draw; this was offset by the acquisition outlay and dividends of $9.3 million.
Debt, Liquidity, Outlook and Risks
- At June 30, 2013, term-loan debt was $111.5 million and revolver borrowings were $28.0 million. Revolver availability was $26.7 million. The company was in compliance with its debt covenants and was not required to make an excess-cash-flow payment.
- The company expects cash on hand, operating cash flow and available credit to provide adequate funding for at least the next 12 months. However, liquidity declined substantially from year-end after funding the Trynex acquisition.
- The company estimates a 2013 annual effective tax rate of approximately 38%. The filing does not provide formal revenue or earnings guidance.
- Key risks include snowfall levels and timing, distributor relationships and financing, steel and fuel costs, supplier performance, demand forecasting, competition, product liability and intellectual-property litigation, interest-rate volatility, dividend restrictions and the ability to realize projected Trynex performance.
- The company uses an interest-rate swap on $50.0 million of term-loan principal through December 2014. Borrowings remain exposed to variable interest rates, and the company does not hedge steel-price risk.
- Ordinary-course product-liability and intellectual-property litigation is pending, but management does not believe current matters are material. No environmental claims were reported, and no material off-balance-sheet arrangements were identified.
- Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting.
Investor Verification Points
- Verify the timing and magnitude of delayed equipment shipments and whether new product launches convert into sales in the second half of 2013.
- Monitor Trynex integration, profitability, purchase-price allocation changes and potential earnout payments.
- Assess liquidity after the acquisition, seasonal working-capital investment, dividends and revolver availability requirements.
- Reconcile non-GAAP Adjusted EBITDA and free cash flow to GAAP results and consider the impact of acquisition, legal, impairment and stock-compensation adjustments.
- Track snowfall trends, distributor inventory levels, steel pricing and the company’s ability to pass through material-cost increases.
- Review covenant compliance, variable-rate exposure and the December 2014 expiration of the interest-rate swap.