Douglas Dynamics, Inc. — Q3 2023 Form 10-Q Summary
Business Context and Reporting Period
Douglas Dynamics manufactures and sells snow and ice control equipment and work-truck upfit solutions through two segments: Work Truck Attachments and Work Truck Solutions. This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods.
Work Truck Attachments is highly seasonal, with sales concentrated in the second and third quarters and fourth-quarter demand dependent largely on snowfall. Work Truck Solutions has more limited seasonality and includes municipal equipment and vehicle upfitting under the Henderson, Dejana, Fisher, Western and SnowEx brands.
Financial Performance and Key Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net sales | $144.1 million | $166.1 million | $433.9 million | $456.3 million |
| Gross profit | $32.1 million | $41.3 million | $104.8 million | $113.6 million |
| Gross margin | 22.3% | 24.8% | 24.1% | 24.9% |
| Income from operations | $11.5 million | $19.5 million | $32.3 million | $42.1 million |
| Net income | $5.8 million | $13.3 million | $16.6 million | $27.1 million |
| Diluted EPS | $0.24 | $0.56 | $0.69 | $1.14 |
| Adjusted EBITDA | $17.3 million | $25.1 million | $53.2 million | $63.9 million |
| Free cash flow | $(0.4) million | $(19.6) million | $(71.9) million | $(83.4) million |
Work Truck Attachments sales declined 29.9% in Q3 and 16.9% year to date, primarily because of lower preseason orders, weaker reorder activity and low snowfall in core markets. Work Truck Solutions sales increased 17.9% in Q3 and 14.9% year to date, reflecting improved chassis availability, higher volumes, pricing realization and improved efficiencies.
Interest expense increased to $4.6 million in Q3 and $11.2 million for the first nine months, compared with $3.3 million and $7.9 million, respectively, in the prior-year periods. The increases primarily reflected higher revolver borrowings, higher interest rates on the term loan and higher floor-plan interest.
Liquidity, Cash Flow and Debt
- Cash and cash equivalents were $11.1 million at September 30, 2023, compared with $20.7 million at December 31, 2022.
- Total liquidity was approximately $59.6 million, consisting of cash of $11.1 million and revolver availability of $48.5 million, versus approximately $120.2 million at year-end 2022.
- Net cash used in operating activities was $64.1 million for the first nine months, an improvement from $74.5 million used in the prior-year period. Working-capital improvements partially offset lower earnings.
- Capital expenditures were $7.7 million, compared with $8.9 million in the prior-year period.
- Debt included $189.4 million outstanding under the term loan and $101.0 million under the revolving facility. Total outstanding borrowings were approximately $290.4 million before considering cash.
- The revolving facility was increased to $150.0 million in January 2023. The credit agreement matures June 9, 2026.
- The Company made a voluntary $10.0 million debt principal prepayment during the three and nine months ended September 30, 2023.
- The Company was in compliance with its maximum 3.50-to-1.00 leverage covenant and minimum 3.00-to-1.00 interest coverage covenant at September 30, 2023.
- Cash dividends paid were $20.7 million during the first nine months, and quarterly dividends declared and paid were $0.30 per share in Q3.
Material Changes Versus the Prior Comparable Period
- Q3 net sales decreased 13.2%, and nine-month sales decreased 4.9%, driven by the decline in Work Truck Attachments.
- Q3 net income fell 56.4% and nine-month net income fell 38.6%.
- Q3 gross margin declined 250 basis points to 22.3%, primarily because of lower volumes and product mix. Nine-month gross margin declined 80 basis points to 24.1%.
- Q3 Adjusted EBITDA declined 31.1%; nine-month Adjusted EBITDA declined 16.7%. Work Truck Attachments drove the decline, while Work Truck Solutions Adjusted EBITDA increased.
- Accounts receivable increased to $165.3 million from $86.8 million at December 31, 2022, reflecting seasonal preseason sales and payment timing. Inventories increased to $147.2 million from $136.5 million.
- Revolver borrowings increased from zero at December 31, 2022 to $101.0 million at September 30, 2023, reflecting seasonal working-capital needs.
- No share repurchases occurred during the first nine months of 2023, compared with $6.0 million in the prior-year period. Approximately $44.0 million remained available under the repurchase authorization at September 30, 2023.
Outlook, Risks and Unusual Items
Management expects cash on hand, operating cash flow and available credit to provide adequate funds for foreseeable needs. The filing does not provide a specific quantitative earnings or revenue forecast.
- Snowfall levels, timing and geography are major drivers of Work Truck Attachments demand. The snow season ending March 2023 was approximately 14% below the 10-year average, with especially low snowfall in several East Coast metropolitan areas.
- Inflation in materials and labor materially affected profitability. Management expects inflationary pressures to continue affecting profitability during the remainder of 2023, although pricing actions are expected to offset much of the impact with possible timing delays.
- Key risks include steel, fuel and freight costs; supplier, OEM and chassis availability; labor shortages; economic and geopolitical conditions; financing availability for customers; distributor relationships; weather variability; product liability and intellectual-property litigation; and interest-rate exposure.
- Variable-rate debt creates interest-rate risk. At September 30, 2023, the Company had interest-rate swaps with a combined notional amount of $300.0 million, including a $175.0 million swap effective through May 2024 and a $125.0 million swap effective from May 2024 through June 2026.
- The Company reported ordinary-course product-liability and intellectual-property litigation but does not believe pending matters will materially affect its financial position. No environmental claims were reported.
- The warranty reserve was $8.2 million at September 30, 2023, compared with $7.9 million at year-end 2022.
- Management reported no significant changes to previously disclosed risk factors and concluded that disclosure controls and procedures were effective.
Important Facts for Investors to Verify
- Whether snowfall and distributor reorder activity support a recovery in Work Truck Attachments sales during the fourth quarter.
- Whether Work Truck Solutions growth and operating efficiencies continue to offset weakness in Attachments.
- The pace of accounts-receivable collections and inventory reduction following the seasonal peak.
- Revolver utilization, interest expense and compliance with leverage and interest-coverage covenants.
- Whether pricing actions fully offset steel, labor, freight and other inflationary costs without further margin compression.
- The sustainability of dividends and any future share repurchases given negative year-to-date free cash flow and reduced liquidity.