Douglas Dynamics, Inc. — Q1 2021 Form 10-Q Summary
Business context and reporting period
Douglas Dynamics manufactures and sells snow and ice control equipment and provides work-truck upfitting and storage solutions. Its reportable segments are Work Truck Attachments, including FISHER, WESTERN and SNOWEX products, and Work Truck Solutions, including HENDERSON and DEJANA products. The filing covers the unaudited three months ended March 31, 2021, compared with the three months ended March 31, 2020. Amounts are in thousands except per-share data.
The Work Truck Attachments business is highly seasonal, with typically lower first-quarter sales and greater activity in the second and third quarters. First-quarter 2021 results also benefited from comparison with the 2020 period, when facilities were voluntarily closed for several weeks due to COVID-19.
Financial performance and key metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $103,342 | $68,190 | +51.5% |
| Gross profit | $26,252 | $11,690 | +124.8% |
| Gross margin | 25.4% | 17.1% | +830 bps |
| Income (loss) from operations | $3,648 | $(8,197) | Improved |
| Net income (loss) | $742 | $(10,086) | Improved |
| Diluted EPS | $0.03 | $(0.44) | Improved |
| Adjusted EBITDA | $10,658 | $(1,715) | Improved |
| Operating cash flow | $24,149 | $(9,080) | Improved |
| Free cash flow | $21,972 | $(11,384) | Improved |
Work Truck Attachments revenue was $41,981, up from $19,120, and segment Adjusted EBITDA was $8,239 versus $(2,076). Work Truck Solutions revenue was $61,361, up from $49,070, and segment Adjusted EBITDA was $2,419 versus $361.
Cost of sales declined to 74.6% of sales from 82.9%, reflecting higher volumes, the absence of 2020 shutdown-related costs and improved operating leverage. Selling, general and administrative expense increased 13.6% to $19,899, primarily because of higher employee and incentive-based compensation and stock-based compensation. Net interest expense declined to $2,975 from $5,040, helped by favorable non-cash interest-rate-swap adjustments.
Balance sheet, debt and liquidity
| Balance-sheet item | March 31, 2021 | December 31, 2020 |
|---|---|---|
| Cash and cash equivalents | $35,524 | $41,030 |
| Total assets | $556,602 | $579,202 |
| Term loan borrowings | $219,583 | $240,078 |
| Net long-term debt | $216,588 | $236,676 |
| Revolving credit borrowings | $0 | $0 |
| Revolver availability | $98,058 | $99,050 |
| Total liquidity | $133,582 | Approximately $140,080 |
The company made a voluntary $20,000 term-loan repayment on March 31, 2021. It had no required excess-cash-flow payment for fiscal 2021 as of the reporting date. Inventories increased to $99,873 from $79,482, while accounts receivable declined to $45,149 from $83,195. The company paid $6,790 in dividends, or $0.29 per share, during the quarter.
Operating cash flow was supported by a $37,867 reduction in accounts receivable, partially offset by a $20,213 inventory investment. Capital expenditures were $2,177. Financing cash outflows included $20,688 of debt repayment and $6,790 of dividends.
Material changes versus the prior comparable period
- Revenue increased 51.5%, driven by better snowfall conditions, deferred dealer purchases from 2020, improved chassis availability and the absence of COVID-19 shutdown-related shipment reductions.
- Snowfall for the snow season ended March 2021 was approximately 7% below the ten-year average, compared with approximately 25% below average in the prior season.
- The company returned to full production by the end of the second quarter of 2020 and remained fully operational during the current quarter.
- The company moved from a net loss to net income and from negative to positive Adjusted EBITDA and free cash flow.
- Debt declined by approximately $20.5 million from year-end 2020, primarily due to the voluntary term-loan repayment.
- The interest-rate swap was previously designated as a cash-flow hedge but was dedesignated in March 2020 after being deemed ineffective. It had a negative fair value of $10,871 at March 31, 2021, and ongoing mark-to-market adjustments affect earnings.
Outlook, commentary, risks and unusual items
Management stated that cash on hand, operating cash flow and available credit are expected to provide adequate funds throughout 2021 and for the foreseeable future. The filing does not provide specific revenue, earnings or Adjusted EBITDA guidance.
Management cautioned that the COVID-19 pandemic may continue to materially affect 2021 results, including through supply-chain constraints involving truck chassis and other components. Key risks include snowfall levels and timing, economic conditions, supplier and OEM performance, steel and freight costs, distributor and customer financing, competition, product liability and intellectual-property litigation, and the company’s ability to maintain dividend payments under its debt agreements.
COVID-19-related costs were $40 in Q1 2021 compared with $317 in Q1 2020. The company also recorded a $1,454 favorable adjustment related to derivatives not classified as hedges, versus a $1,413 unfavorable adjustment in the prior-year period. The 2020 period included $1,152 of CARES Act Employee Retention Credit benefits.
Pending litigation is described as ordinary-course product liability and intellectual-property matters, and management does not believe it will materially affect consolidated financial position. The company reported no environmental claims, material off-balance-sheet arrangements or significant changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the strong year-over-year improvement is sustained after normalizing for the 2020 COVID-19 shutdown and unusually weak snowfall comparison.
- Snowfall, dealer ordering patterns and the timing of the seasonal pre-season sales program, particularly in the second and third quarters.
- Supply-chain availability and pricing for chassis, steel and other components, and the company’s ability to pass cost increases to customers.
- Term-loan amortization, covenant compliance, required excess-cash-flow payments and the availability of the revolving credit facility.
- The future earnings impact of the dedesignated interest-rate swap, including approximately $2,991 expected to be amortized from accumulated other comprehensive loss into earnings over the next twelve months.
- The sustainability of the $0.29 quarterly dividend given debt restrictions, seasonal working-capital needs and the company’s stated limited retained cash flexibility.
- The effect of customer credit quality and the $3,046 allowance for credit losses on trade receivables at March 31, 2021.