Douglas Dynamics, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2014; filed August 5, 2014. Financial statements are unaudited except for the December 31, 2013 balance sheet. Douglas Dynamics operates as a single business unit focused on snow and ice control equipment, parts and accessories. Results are highly seasonal, with sales concentrated in the second and third quarters and fourth-quarter demand influenced by snowfall.
Key Financial Metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $88.2 million vs. $55.2 million | $124.6 million vs. $69.3 million |
| Gross profit | $34.4 million vs. $18.9 million | $48.5 million vs. $23.2 million |
| Gross margin | 39.0% vs. 34.2% | 39.0% vs. 33.5% |
| Income from operations | $24.5 million vs. $11.4 million | $28.8 million vs. $7.9 million |
| Net income | $14.6 million vs. $5.9 million | $16.2 million vs. $2.5 million |
| Diluted EPS | $0.64 vs. $0.26 | $0.71 vs. $0.11 |
| Adjusted EBITDA | $27.8 million vs. $14.4 million | $36.1 million vs. $14.6 million |
| Free cash flow | $0.7 million vs. negative $5.3 million | $9.7 million vs. negative $13.3 million |
Six-month operating cash flow was $12.3 million, compared with negative $11.8 million in the prior-year period. Capital expenditures were $2.6 million versus $1.5 million. Cash declined to $7.1 million from $19.9 million at December 31, 2013, primarily after $9.8 million of dividends, $13.0 million of revolver repayment and $0.6 million of term-loan repayment.
At June 30, 2014, total assets were $365.2 million and stockholders’ equity was $163.2 million. Long-term debt, including current maturities, was approximately $110.5 million. The company had no revolver borrowings and reported $62.4 million of remaining revolver availability, producing total liquidity of approximately $69.5 million.
Material Changes Versus Prior Comparable Period
- Net sales increased 59.8% for the quarter and 79.8% for the six-month period. Equipment unit sales increased 51.3% and 72.2%, respectively, driven by higher-than-average North American snowfall during the October 2013–March 2014 season.
- Parts and accessories sales increased 63.6% for the quarter and 101.0% year to date.
- TrynEx products, following the May 2013 acquisition, contributed $4.3 million of quarterly sales and $8.7 million of year-to-date sales, compared with $0.8 million in each prior-year period.
- Gross margin expanded because higher volume reduced unit costs. SG&A and amortization increased, reflecting TrynEx expenses and higher performance-based compensation, but grew more slowly than gross profit.
- Interest expense declined modestly to $2.0 million for the quarter and $4.0 million year to date.
- The company repaid $13.0 million of revolver borrowings during the first six months of 2014. In the comparable 2013 period, it borrowed $28.0 million, primarily to fund the TrynEx acquisition.
- The Johnson City, Tennessee property was sold on April 30, 2014 for $1.1 million, with an approximately $0.1 million loss. This compares with a $0.6 million impairment recorded in the first half of 2013.
Guidance, Outlook, Risks and Unusual Items
- Management estimated an approximately 35% annual effective tax rate for 2014. The six-month effective rate was 34.7%, compared with 32.6% in 2013, partly because the federal research and development credit was not being applied for 2014 pending legislation.
- Management expected cash on hand, operating cash flow and available credit to provide adequate funding for at least the next 12 months.
- The business is dependent on snowfall levels, timing and geographic distribution. Fourth-quarter sales may vary significantly based on winter weather, while pre-season distributor incentives shift substantial sales into the second and third quarters.
- Other principal risks include distributor relationships, end-user and distributor financing, steel and fuel costs, supplier performance, product development, competition, intellectual property, product liability litigation and the ability to realize projected TrynEx performance.
- The company had a $50.0 million interest-rate swap expiring in December 2014. The swap hedged part of the variable-rate term loan; its negative fair value was $0.1 million.
- Senior credit facilities impose dividend, capital expenditure and other operating restrictions. The company was in compliance with its covenants and was not required to make an excess-cash-flow payment at June 30, 2014.
- Warranty liability was $3.6 million at June 30, 2014. Management did not believe pending product liability or intellectual property litigation would have a material adverse effect, and reported no environmental claims.
- ASU 2014-09, Revenue from Contracts with Customers, becomes effective for the company January 1, 2017. Management had begun evaluating its impact and had not yet determined the effect on the financial statements.
Investor Verification Priorities
- Verify whether strong equipment volumes and margins were sustained after the unusually favorable 2013–2014 snowfall season.
- Reconcile liquidity by considering the reduction in cash, borrowing-base mechanics, the minimum required revolver availability and dividend restrictions.
- Monitor variable-rate debt exposure and the December 2014 expiration of the interest-rate swap.
- Assess TrynEx integration, earnout obligations and whether projected TrynEx financial performance is being achieved.
- Review working-capital needs, particularly the increases in accounts receivable and inventories associated with the pre-season sales program.
- Evaluate exposure to steel costs and the company’s ability to pass commodity-cost increases through to distributors.