Douglas Dynamics, Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
Quarter ended March 31, 2020; filed May 5, 2020. Douglas Dynamics manufactures and sells commercial and municipal snow and ice control equipment and provides work-truck upfitting and storage solutions through its Work Truck Attachments and Work Truck Solutions segments. Results are seasonal, with Work Truck Attachments generally generating its lowest revenue in the first quarter.
The quarter was materially affected by below-average snowfall, chassis supply constraints, and the COVID-19 crisis. The Company voluntarily closed its facilities on March 18, 2020 and had only partially resumed production by the filing date.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $68.2 million | $93.2 million | Down 26.8% |
| Gross profit | $11.7 million | $22.9 million | Down 48.9% |
| Gross margin | 17.1% | 24.6% | Down 7.5 percentage points |
| Operating income (loss) | $(8.2) million | $3.6 million | Declined $11.8 million |
| Net income (loss) | $(10.1) million | $(0.3) million | Loss increased $9.8 million |
| Diluted loss per share | $(0.44) | $(0.01) | Unfavorable change |
| Adjusted EBITDA | $(1.7) million | $9.0 million | Down $10.7 million |
| Free cash flow | $(11.4) million | $(6.3) million | Down $5.1 million |
Work Truck Attachments revenue was $19.1 million versus $25.8 million, and Adjusted EBITDA was $(2.1) million versus $2.3 million. Work Truck Solutions revenue was $49.1 million versus $67.4 million, and Adjusted EBITDA was $0.4 million versus $6.7 million.
Net cash used in operating activities was $9.1 million, compared with $5.6 million used in the prior-year quarter. Capital expenditures were $2.3 million versus $0.8 million. Dividends paid were $6.5 million, or $0.28 per share.
At March 31, 2020, cash and cash equivalents were $27.1 million, total liquidity was approximately $86.3 million, and revolver availability was $59.2 million. The Company had $225.3 million of term-loan borrowings and $30.0 million outstanding under its revolving credit facility. It made a voluntary $20.0 million term-loan prepayment in January 2020.
Total assets were $692.5 million and stockholders’ equity was $293.0 million at March 31, 2020. Inventory increased to $112.4 million from $77.9 million at December 31, 2019, consistent with seasonal production and inventory requirements.
Material changes versus the prior comparable period
- Sales declined primarily because snowfall was approximately 25% below the ten-year average, chassis availability was constrained, and facility closures reduced shipments during the final two weeks of the quarter.
- Gross margin fell as lower volumes absorbed fixed manufacturing costs less efficiently and COVID-19 shutdown costs included continuing wages and uncapitalized overhead.
- SG&A and intangibles amortization increased modestly to $19.9 million from $19.4 million, largely due to legal fees associated with managing the COVID-19 response.
- Interest expense increased to $5.0 million from $4.2 million, including a $1.4 million mark-to-market loss on an interest-rate swap after the swap was dedesignated as a hedge.
- The Company adopted the current expected credit loss standard, recording a $557,000 after-tax reduction to opening retained earnings and increasing the trade receivables allowance to $2.4 million at March 31, 2020.
- The Company recorded a $1.2 million CARES Act Employee Retention Credit benefit in cost of sales and SG&A.
Guidance, outlook, risks and unusual items
The filing does not provide a clear numerical full-year revenue, earnings, or cash-flow outlook. Management stated that COVID-19 is likely to have a material impact on 2020 results but that the ultimate effects were not predictable. Management expected cash on hand, operating cash flow, and available credit to provide adequate funding throughout 2020, while acknowledging potential short-term liquidity challenges.
- Production had begun to ramp up but was not yet at full levels as of the filing date.
- COVID-19 risks include additional facility closures, supply-chain disruption, customer payment difficulty or bankruptcy, reduced government spending, delayed equipment purchases, and higher financing costs.
- The Company identified weather and snowfall variability, steel prices, supplier and OEM performance, distributor relationships, interest rates, and economic conditions as material operating risks.
- The interest-rate swap had a negative fair value of $13.9 million at March 31, 2020. Approximately $3.0 million of accumulated swap losses was expected to be amortized into earnings over the following twelve months.
- Management did not identify a goodwill impairment triggering event at quarter-end, but warned that prolonged unfavorable economic conditions could impair Work Truck Solutions goodwill.
- Pending ordinary-course product liability and intellectual-property litigation was not expected to materially affect the Company’s financial position. No environmental claims were reported.
- The quarterly dividend policy remained discretionary and subject to debt-facility restrictions; the filing does not state that the dividend had been suspended.
Important facts for investors to verify
- Subsequent-quarter production levels, facility status, order trends, and the continuing financial impact of COVID-19.
- Whether liquidity remains adequate after considering seasonal inventory buildup, operating cash use, dividend payments, debt service, and revolver borrowing-base restrictions.
- Compliance with senior credit-facility covenants and any restrictions on dividends or required debt repayments.
- Changes in chassis availability, snowfall trends, steel costs, and customer or distributor credit quality.
- The valuation of Work Truck Solutions goodwill and the potential earnings impact of the dedesignated interest-rate swap.
- Whether the Company maintains its quarterly dividend in light of negative free cash flow and increased revolver borrowings.