Douglas Dynamics, Inc. — Q1 2017 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2017, compared with the three months ended March 31, 2016. Douglas Dynamics operates through Work Truck Attachments, which includes snow and ice management equipment, and Work Truck Solutions, which includes commercial vehicle upfitting and storage solutions acquired through Dejana in July 2016. The Work Truck Attachments business is highly seasonal, with typically lower first-quarter sales and stronger second- and third-quarter activity.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $72.2 million | $48.8 million | Up 48.0% |
| Gross profit | $17.2 million | $14.1 million | Up 22.0% |
| Gross margin | 23.8% | 29.0% | Down 5.2 percentage points |
| Operating income (loss) | $(0.6) million | $1.5 million | Declined $2.1 million |
| Net income (loss) | $(3.3) million | $5.3 million | Declined $8.6 million |
| Diluted EPS | $(0.14) | $0.23 | Declined $0.37 |
| Adjusted EBITDA | $5.2 million | $6.3 million | Down $1.0 million |
| Free cash flow | $3.0 million | $17.4 million | Down $14.4 million |
Work Truck Attachments sales were $43.6 million, down from $48.6 million, primarily because of below-average snowfall. Work Truck Solutions contributed $29.7 million of sales and $0.8 million of operating income. Work Truck Attachments operating income fell to $2.0 million from $6.0 million.
Cost of sales increased to 76.2% of sales from 71.0%, reflecting lower Work Truck Attachments volume and the higher cost structure of Work Truck Solutions. Selling, general and administrative expense increased to $15.1 million from $10.9 million, while intangible amortization increased to $2.7 million from $1.7 million due to the Dejana acquisition.
Net cash provided by operating activities was $4.3 million, compared with $18.6 million in the prior-year quarter. Capital expenditures were $1.3 million. Cash declined by $10.7 million during the quarter to $8.0 million, compared with $18.6 million at December 31, 2016 and $48.4 million at March 31, 2016.
Total debt was approximately $309.1 million net of debt discount and deferred financing costs, including $312.9 million of term-loan borrowings before those costs. The term loan matures on December 31, 2021. The company had no revolving-credit borrowings and $57.6 million of remaining revolver availability at March 31, 2017. Total liquidity was $65.6 million, consisting of cash and revolver availability.
The quarterly dividend remained $0.24 per share. The company paid $5.5 million of dividends during the quarter.
Material changes versus the prior comparable period
- Consolidated sales increased primarily because Q1 2017 included a full quarter of Dejana-related Work Truck Solutions revenue; the prior-year quarter did not include that segment.
- Work Truck Attachments sales and operating income declined because of weak snowfall, reducing production volume and margins.
- Gross margin contracted from 29.0% to 23.8%, and the company reported an operating loss.
- Interest expense rose to $5.3 million from $2.9 million, primarily because of the additional $130.0 million of term-loan borrowings used to finance the Dejana acquisition. The company also expensed approximately $0.9 million of costs related to the February 2017 debt amendment.
- Q1 2016 included a nonrecurring $10.1 million litigation settlement. No litigation proceeds were recognized in Q1 2017.
- Operating cash flow declined because of lower earnings and unfavorable working-capital changes, including a higher income-tax receivable and a $27.5 million increase in inventories from year-end.
- The company paid $5.5 million of the Dejana earnout during the quarter. The remaining Dejana earnout liability was $4.9 million at March 31, 2017.
Outlook, commentary, risks and unusual items
The filing does not provide a clear quantitative revenue or earnings forecast. Management expects available cash, operating cash flow and senior-credit-facility availability to provide adequate funds for at least the next 12 months, but liquidity is affected by the seasonal buildup of inventory and working capital.
Management emphasized that quarterly results may not be indicative of full-year performance because Work Truck Attachments sales are driven by snowfall levels, timing and geography. The company expects its pre-season sales program to support distributor restocking during the second and third quarters, which historically generate the majority of Work Truck Attachments sales.
- Key risks include insufficient snowfall, economic weakness, competition, customer and distributor financing availability, steel and fuel price increases, supplier constraints, product liability, intellectual-property disputes and integration or performance risks associated with Dejana and Henderson.
- Variable-rate debt creates interest-rate exposure. Interest-rate swaps partially mitigate this risk; the swaps had a negative fair value of $2.2 million at March 31, 2017.
- Credit facilities impose dividend, capital-expenditure and other operating restrictions. The company was in compliance with its covenants at quarter-end and was not required to make an excess-cash-flow debt payment.
- The company amended its term-loan facility in February 2017, reducing applicable interest-rate margins from 3.25% to 2.50% for ABR loans and from 4.25% to 3.50% for Eurodollar loans.
- On May 1, 2017, after quarter-end, the company acquired substantially all assets of Arrowhead Equipment for approximately $7.7 million, funded with cash and short-term revolver borrowings. The acquisition expands the geographic footprint of Work Truck Solutions.
- Pending litigation is described as ordinary-course product-liability and intellectual-property litigation; management does not believe it is material. No environmental claims were reported.
Important facts for investors to verify
- Whether snowfall and the second- and third-quarter pre-season program restore Work Truck Attachments volume and gross margins.
- The pace and profitability of Work Truck Solutions growth, including the integration of Dejana and Arrowhead.
- Debt reduction, interest expense, revolver availability and compliance with dividend and other credit-facility restrictions.
- Working-capital requirements, inventory levels and the sustainability of operating cash flow and free cash flow.
- The final working-capital adjustment and accounting for the Arrowhead acquisition.
- The ultimate amount and timing of remaining Dejana contingent consideration, which can be as high as the filing’s stated maximum outcome of $21.5 million before the $5.5 million payment made in Q1 2017.
- The effect of steel-price changes, interest-rate movements and weather variability on future margins and earnings.