Douglas Dynamics, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2021; filed August 3, 2021. Financial statements are unaudited and amounts are in thousands except per-share data. Douglas Dynamics operates through Work Truck Attachments, including FISHER, WESTERN and SNOWEX products, and Work Truck Solutions, including HENDERSON and DEJANA products and vehicle upfitting.
Financial Performance
| Metric | Three months 2021 | Three months 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $157,530 | $120,043 | $260,872 | $188,233 |
| Gross profit | $48,798 | $32,075 | $75,050 | $43,765 |
| Gross margin | 31.0% | 26.7% | 28.8% | 23.3% |
| Income from operations | $24,111 | $(112,394) | $27,759 | $(120,591) |
| Net income (loss) | $14,103 | $(103,859) | $14,845 | $(113,945) |
| Diluted EPS | $0.60 | $(4.55) | $0.63 | $(5.00) |
| Adjusted EBITDA | $33,491 | $20,332 | $44,149 | $18,617 |
- Three-month sales increased 31.3%; six-month sales increased 38.6% year over year.
- Work Truck Attachments sales were $104.6 million for the quarter and $146.6 million year to date, while Work Truck Solutions sales were $52.9 million and $114.3 million, respectively.
- Six-month operating cash flow was $13,141, compared with $(6,024) in the prior-year period. Free cash flow was $8,555 versus $(11,072).
- Quarterly free cash flow was $(13,417), reflecting seasonal working-capital investment.
- Capital expenditures were $4,586 for the six months. Dividends paid were $13,254, or $0.57 per share.
Liquidity, Debt and Balance Sheet
- Cash and equivalents were $15,175 at June 30, 2021, down from $41,030 at December 31, 2020.
- Total liquidity was approximately $114.3 million, consisting of cash of $15.2 million and approximately $99.1 million of unused revolving-credit availability.
- Total debt was approximately $224.4 million, including $11.1 million classified as current. The company had no revolving-credit borrowings outstanding.
- On June 9, 2021, the company entered into a new senior secured credit agreement with a $225.0 million term loan and a $100.0 million revolving facility, maturing June 9, 2026. The refinancing generated a $4,936 loss on extinguishment of debt.
- The credit agreement requires a leverage ratio of no more than 3.50 to 1.00 and an interest coverage ratio of at least 3.00 to 1.00. Management stated that the company was in compliance at June 30, 2021.
- Inventories increased to $93,947 from $79,482 at year-end, while accounts receivable increased to $92,127 from $83,195, consistent with seasonal sales and working-capital requirements.
Material Changes Versus Prior Period
- Results benefited from improved snowfall during the snow season ended March 31, 2021, release of pandemic-related dealer conservatism, and comparison with facility shutdowns in 2020. Snowfall was approximately 7% below the ten-year average in the latest season versus approximately 25% below average in the prior season.
- Gross margin improved by 430 basis points in the quarter and 550 basis points year to date, primarily because of higher volumes and the absence of 2020 COVID-19 shutdown inefficiencies.
- Work Truck Attachments Adjusted EBITDA increased to $32.2 million from $20.4 million for the quarter and to $40.4 million from $18.4 million year to date. Work Truck Solutions Adjusted EBITDA increased to $1.3 million from $(0.1) million for the quarter and to $3.7 million from $0.2 million year to date.
- The prior-year periods included $127,872 of goodwill impairment charges related to the Municipal and Dejana reporting units. No impairment charges were recorded in 2021.
- SG&A, including intangibles amortization, increased 48.8% in the quarter and 29.6% year to date, driven partly by higher stock-based and incentive compensation and the normalization of discretionary spending from pandemic-reduced 2020 levels.
Outlook, Risks and Unusual Items
- The filing does not provide specific numerical earnings or sales guidance. Management expects cash on hand, operating cash flow and available credit to provide adequate funds for the foreseeable future.
- Management cautions that COVID-19 may continue to affect 2021 results and that supply-chain constraints, including chassis and component availability, could materially affect future quarters.
- The Work Truck Attachments business is highly seasonal and dependent on the level, timing and location of snowfall. The second and third quarters generally have the greatest sales and working-capital needs, while fourth-quarter demand depends heavily on winter weather.
- Other principal risks include steel, freight and fuel inflation; the ability to pass cost increases to distributors; OEM, supplier and distributor relationships; customer financing; competition; product liability and intellectual-property litigation; and the ability to meet acquisition-related expectations.
- The company re-designated its $175.0 million interest-rate swap as a cash-flow hedge in connection with the refinancing. Its negative fair value was $10,170 at June 30, 2021, and approximately $687 is expected to be amortized from accumulated other comprehensive loss into earnings over the next twelve months.
- A favorable state tax-audit result produced a discrete tax benefit of $2,739 and contributed to unusually low effective tax rates of 5.5% for the quarter and 4.7% year to date.
- Pending litigation consists primarily of ordinary-course product-liability and intellectual-property matters; management does not believe current matters will have a material adverse effect. No environmental claims were reported.
Investor Verification Points
- Verify whether post-pandemic sales growth and margin improvement are sustainable after the favorable comparison with 2020 shutdown conditions.
- Monitor snowfall, distributor inventory, pre-season orders and seasonal working-capital requirements.
- Review chassis and component availability, steel costs, freight inflation and the company’s ability to implement price increases or surcharges.
- Assess leverage and covenant compliance under the new credit agreement, including variable-rate exposure and refinancing terms.
- Separate GAAP earnings from Adjusted EBITDA and other non-GAAP measures, particularly the effects of stock compensation, refinancing costs, tax benefits and derivative adjustments.
- Evaluate dividend sustainability in light of seasonal cash usage, debt restrictions and the board’s discretion to amend or suspend the dividend policy.