Douglas Dynamics, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and nine months ended September 30, 2020; all financial statement amounts are in thousands unless otherwise noted. Douglas Dynamics operates through Work Truck Attachments, which includes FISHER, WESTERN and SNOWEX snow and ice products, and Work Truck Solutions, which includes HENDERSON and DEJANA municipal equipment and vehicle upfitting.
The Work Truck Attachments business is seasonal, with substantial sales in the second and third quarters and fourth-quarter demand dependent on snowfall. The filing states that COVID-19, facility shutdowns, chassis availability constraints and below-average snowfall materially affected 2020 results.
Key Financial Metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net sales | $133,761 | $141,869 | $321,994 | $411,412 |
| Gross profit | $36,728 | $39,939 | $80,493 | $122,478 |
| Gross margin | 27.5% | 28.2% | 25.0% | 29.8% |
| Income from operations | $17,563 | $19,933 | $(103,028) | $61,581 |
| Net income (loss) | $9,230 | $12,429 | $(104,715) | $37,606 |
| Diluted EPS | $0.39 | $0.53 | $(4.60) | $1.61 |
| Adjusted EBITDA | $23,072 | $25,066 | $41,689 | $78,195 |
| Free cash flow | $(25,475) | $(23,199) | $(36,547) | $(28,970) |
Q3 2020 operating margin was 13.2%, compared with 14.1% in Q3 2019. Nine-month operating margin was negative 32.0%, primarily because of $127,872 of goodwill impairment charges.
- Q3 Work Truck Attachments sales increased to $76,903 from $75,632; Work Truck Solutions sales decreased to $56,858 from $66,237.
- Q3 Adjusted EBITDA was $20,155 for Work Truck Attachments and $2,917 for Work Truck Solutions, compared with $18,673 and $6,393, respectively, in the prior-year quarter.
- Cash and cash equivalents were $14,285 at September 30, 2020, compared with $35,665 at December 31, 2019.
- Total liquidity was $93.9 million, consisting of cash of $14.3 million and $79.6 million of revolving-credit availability.
- Debt consisted primarily of $269,886 of term-loan borrowings and $12,000 of revolving borrowings. Long-term debt, net of current portion and deferred financing costs, was $265,920.
- Capital expenditures were $9,465 for the first nine months, compared with $7,801 in the prior-year period.
- Dividends paid were $19,411 for the first nine months, or $0.84 per share.
Material Changes Versus the Prior Comparable Period
- Nine-month sales declined 21.7%, driven by below-average snowfall, COVID-19-related facility shutdowns and class 4-6 chassis supply constraints.
- Nine-month gross margin declined to 25.0% from 29.8%, reflecting lower volume, shutdown-related fixed-cost inefficiencies and COVID-19 costs.
- The company recorded $127.9 million of goodwill impairment charges in Q2 2020: $47.8 million for the Municipal reporting unit and $80.1 million for Dejana. No comparable impairment was recorded in 2019.
- Nine-month Adjusted EBITDA fell 46.7% to $41.7 million. Work Truck Attachments declined by $20.9 million, while Work Truck Solutions declined by $15.6 million.
- Operating cash use increased to $27.1 million from $21.2 million, while free cash flow declined to negative $36.5 million from negative $29.0 million.
- On June 8, 2020, the company refinanced its senior credit facilities with a $275.0 million term loan and a $100.0 million revolving facility. Debt modification expense was $3.4 million for the nine months.
- The interest-rate swap was dedesignated as a cash-flow hedge in March 2020 after becoming ineffective. Its negative fair value was $14.1 million at September 30, 2020, and $3.1 million of related mark-to-market and amortization adjustments were recorded in nine-month interest expense.
- The company adopted the current expected credit loss standard, resulting in a $557 reduction to opening retained earnings. The ending allowance for trade receivable credit losses was $2,955.
Guidance, Outlook, Risks and Unusual Items
Management did not provide a specific quantitative revenue or earnings forecast in the filing. Management stated that cash on hand, operating cash generation and available credit were expected to provide adequate funds for the foreseeable future, while also acknowledging potential short-term liquidity challenges from COVID-19 and seasonal working-capital needs.
- Facilities returned to full production by the end of Q2 and remained fully operational during Q3, but additional closures or operating restrictions remain possible.
- Principal risks include the duration and severity of COVID-19, customer credit deterioration, supply-chain disruptions, chassis availability, economic weakness, reduced government spending, snowfall levels and timing, steel and freight costs, and interest-rate volatility.
- Senior credit facilities are secured by substantially all company assets and contain dividend and other covenant restrictions. The company reported compliance with its covenants at September 30, 2020.
- The revolving facility has a $100.0 million commitment, of which $12.0 million was drawn and $79.6 million remained available at quarter-end.
- Warranty liability was $5,750 at September 30, 2020. The company reported ordinary-course product-liability and intellectual-property litigation but did not expect pending matters to materially affect its financial position.
- The CARES Act provided a $1,152 benefit to cost of sales and SG&A during the first nine months. COVID-19-specific costs included in Adjusted EBITDA were $1,322, excluding lost sales and production inefficiencies.
Investor Verification Checklist
- Verify the sustainability of Work Truck Attachments demand, including distributor inventory levels and the timing and geographic distribution of snowfall.
- Monitor class 4-6 chassis availability and its effects on Work Truck Solutions sales, margins and backlog.
- Reconcile reported GAAP earnings and cash flow with management’s non-GAAP Adjusted EBITDA and Adjusted net income measures.
- Assess liquidity after seasonal working-capital requirements, dividends, capital expenditures and debt service.
- Review the refinancing terms, variable-rate exposure, interest-rate swap accounting and covenant requirements.
- Evaluate the assumptions supporting the Municipal and Dejana goodwill impairment charges and any risk of additional impairment.
- Track COVID-19 effects on facilities, suppliers, customers, receivable collections and future liquidity.