Douglas Dynamics, Inc. — Form 10-Q Summary
Business context and reporting period
Filed May 7, 2019, for the quarter ended March 31, 2019. Douglas Dynamics manufactures and sells commercial and municipal snow and ice control equipment, truck attachments, and work-truck upfit solutions. Reportable segments were reorganized during the quarter into Work Truck Attachments and Work Truck Solutions; prior-period segment data was recast.
Results are seasonal. Work Truck Attachments generally has its lowest revenue and operating results in the first quarter, while the second and third quarters benefit from the pre-season sales program.
Financial performance and key metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $93.2 million | $84.0 million | 11.0% increase |
| Gross profit | $22.9 million | $20.0 million | 14.5% increase |
| Gross margin | 24.6% | 23.9% | 70 basis-point increase |
| Income from operations | $3.6 million | $1.0 million | Increase of $2.6 million |
| Net loss | $0.3 million | $1.9 million | Loss decreased by $1.6 million |
| Diluted loss per share | $0.01 loss | $0.08 loss | Improved |
| Adjusted EBITDA | $9.0 million | $7.1 million | 27.2% increase |
| Free cash flow | $6.3 million use | $13.0 million source | Declined $19.3 million |
Work Truck Attachments revenue increased to $25.8 million from $24.6 million, primarily from stronger snowfall, parts and accessories demand, and higher pricing. Work Truck Solutions revenue increased to $67.4 million from $59.4 million, driven by higher demand and pricing and improved chassis availability.
Work Truck Attachments Adjusted EBITDA declined to $2.3 million from $4.4 million due to higher variable compensation and benefits, inflation, business investments, and planned unfavorable intersegment pricing. Work Truck Solutions Adjusted EBITDA increased to $6.7 million from $2.7 million due to higher volumes and planned favorable intersegment pricing.
- Operating expenses included $16.6 million of selling, general and administrative expense and $2.7 million of intangible amortization.
- Net interest expense increased to $4.2 million from $3.9 million due to less favorable variable interest rates.
- The company reported a $0.5 million income tax benefit, including a $0.3 million discrete benefit from excess tax benefits related to stock compensation.
- Adjusted net income was $0.3 million, or $0.01 per diluted share, versus an adjusted loss of $0.7 million, or $0.03 per share, in the prior-year quarter.
Cash flow, liquidity, debt, and balance sheet
- Cash used in operating activities was $5.6 million, compared with $14.3 million of operating cash flow in Q1 2018. The deterioration was principally due to working-capital investment, including higher receivables and inventory.
- Inventory increased to $111.2 million from $82.0 million at December 31, 2018. Management attributed the build partly to preparation for potential tariff-related price increases.
- Capital expenditures were $0.8 million, compared with $1.3 million in the prior-year quarter.
- Cash dividends paid were $6.3 million, or $0.27 per share, unchanged from Q1 2018.
- Cash and cash equivalents were $0.3 million at March 31, 2019, down from $27.8 million at December 31, 2018.
- Total liquidity was approximately $54.9 million, comprising $0.3 million of cash and $54.6 million of revolving-credit availability, compared with approximately $122.4 million at year-end.
- Term-loan borrowings were $247.4 million and revolving-credit borrowings were $16.0 million at March 31, 2019. The company made a voluntary $30.0 million term-loan repayment in February.
- Remaining revolving-credit availability was $54.6 million. The facility requires minimum borrowing availability of $10.5 million and 15% of aggregate revolving commitments.
- Operating lease right-of-use assets and liabilities of approximately $21.6 million were recognized upon adoption of ASC 842; the adoption did not affect reported operating results.
Material changes, outlook, and risks
Management stated that cash on hand, expected operating cash flow, and available credit are expected to provide adequate funds for at least the next 12 months. The filing does not provide specific full-year revenue, earnings, or EBITDA guidance.
- The primary near-term liquidity pressure is seasonal working-capital investment, particularly inventory and receivables ahead of pre-season sales.
- Demand for Work Truck Attachments depends heavily on the level, timing, and geographic distribution of snowfall. Quarterly results may not indicate full-year performance.
- Key risks include steel and other material inflation, tariffs, fuel and freight costs, interest-rate increases, supplier or original-equipment-manufacturer disruptions, distributor relationships, economic conditions, and demand-estimation errors.
- The company has variable-rate debt, partially hedged through interest-rate swaps. It reported a $3.5 million negative fair value for the swaps at March 31, 2019.
- Management identified potential goodwill impairment risk for Work Truck Solutions and risks associated with the Dejana and Arrowhead acquisitions.
- Ordinary-course product-liability and intellectual-property litigation is ongoing, but management does not believe pending matters will materially affect consolidated financial position. No environmental claims were reported.
- Senior credit facilities restrict dividends under certain circumstances. The board may amend, suspend, or revoke the dividend policy.
Important facts for investors to verify
- Whether seasonal demand and snowfall support the expected second- and third-quarter pre-season sales cycle.
- Whether elevated inventory converts to sales without material markdowns, obsolescence, or working-capital strain.
- Available revolver capacity after applying borrowing-base and minimum-availability requirements.
- Compliance with debt covenants and the ability to continue quarterly dividends while cash balances remain low.
- Whether steel, tariff, freight, and labor costs can be recovered through pricing without compressing margins.
- Potential goodwill impairment indicators in Work Truck Solutions and the ultimate value of acquisition-related earnouts.
- The effect of future interest-rate changes on variable-rate debt and interest-rate swap settlements.