DOUGLAS DYNAMICS, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes which are included in Item 1 of this Quarterly Report on Form 10-Q, as well as the information contained in our Form 10-K (Commission File No. 001-34728) filed with theSecurities and Exchange Commission .
In this Quarterly Report on Form 10-Q, unless the context indicates otherwise:
"
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). These statements include information relating to
future events, product demand, the payment of dividends, future financial
performance, strategies, expectations, competitive environment, regulation and
availability of financial resources. These statements are often identified by
use of words such as "anticipate," "believe," "intend," "estimate," "expect,"
"continue," "should," "could," "may," "plan," "project," "predict," "will" and
similar expressions and include references to assumptions and relate to our
future prospects, developments and business strategies. Such statements involve
known and unknown risks, uncertainties and other factors that could cause our
actual results, performance or achievements to be materially different from any
future results, performance or achievements expressed or implied by these
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to: (i) weather conditions,
particularly lack of or reduced levels of snowfall and the timing of such
snowfall, including as a result of global climate change; (ii) our ability to
manage general economic, business and geopolitical conditions, including the
impacts of natural disasters, pandemics and outbreaks of contagious diseases and
other adverse public health developments, such as the COVID-19 pandemic (iii)
our inability to maintain good relationships with the original equipment
manufacturers ("OEM") with whom we currently do significant business; (iv) the
inability of our suppliers and OEM partners to meet our volume or quality
requirements; (v) increases in the price of steel or other materials, including
as a result of tariffs or inflationary conditions, necessary for the production
of our products that cannot be passed on to our distributors; (vi) increases in
the price of fuel or freight, (vii) the effects of laws and regulations
(including those enacted in response to the COVID-19 pandemic) and their
interpretations on our business and financial condition, including policy or
regulatory changes related to climate change; (viii) a significant decline in
economic conditions, including as a result of global health epidemics such as
COVID-19; (ix) our inability to maintain good relationships with our
distributors; (x) lack of available or favorable financing options for our
end-users, distributors or customers; (xi) inaccuracies in our estimates of
future demand for our products; (xii) our inability to protect or continue to
build our intellectual property portfolio; (xiii) the effects of laws and
regulations and their interpretations on our business and financial condition;
(xiv) our inability to develop new products or improve upon existing products in
response to end-user needs; (xv) losses due to lawsuits arising out of personal
injuries associated with our products; (xvi) factors that could impact the
future declaration and payment of dividends or our ability to execute
repurchases under our stock repurchase program; (xvii) our inability to compete
effectively against competition; (xviii) our inability to successfully execute
our acquisition strategy; and (xix) our inability to achieve the projected
financial performance with the business of Henderson Enterprises Group, Inc.
("Henderson") which we acquired in 2014 or the assets of Dejana, which we
acquired in 2016 and unexpected costs or liabilities related to such
acquisitions, as well as those discussed in the sections entitled "Risk Factors"
in Part II, Item 1A of this Quarterly Report on Form 10-Q, if any, or in our
most recent Annual Report on Form 10-K. Given these risks and uncertainties,
you should not place undue reliance on these forward-looking statements. In
addition, the forward-looking statements in this Quarterly Report on Form 10-Q
speak only as of the date hereof and we undertake no obligation, except as
required by law, to update or release any revisions to any forward-looking
statement, even if new information becomes available in the future.
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Table of Contents Results of Operations
The Company's two reportable business segments are as follows:
Work Truck Attachments. The Work Truck Attachments segment includes commercial snow and ice management attachments sold under the FISHER®, WESTERN® and SNOWEX® brands. This segment consists of our operations that manufacture and sell snow and ice control products. As described under "Seasonality and Year-To-Year Variability," the Work Truck Attachments Segment is seasonal and, as a result, its results of operations can vary from quarter-to-quarter and from year-to-year. Work Truck Solutions. The Work Truck Solutions segment includes manufactured municipal snow and ice control products under the HENDERSON® brand and the up-fit of market leading attachments and storage solutions under the HENDERSON® brand, and the DEJANA® brand and its related sub-brands.
In addition, segment results include an allocation of all corporate costs to Work Truck Attachments and Work Truck Solutions.
COVID-19 and Other Market Pressures
As a result of the COVID-19 pandemic, including the market volatility, labor shortages, inflationary pressures, especially around the price of steel, and other economic implications associated with the pandemic and the economic and regulatory measures enacted to contain its spread, our results of operations were impacted in the three and six months endedJune 30, 2022 and 2021, and may be significantly impacted in future quarters. See below for further discussion of the impact to our financial statements. We are not able to predict the full impact of the pandemic and related market conditions and pressures on our future financial results as the situation remains unpredictable, but the pandemic has had and is likely to continue to have a material impact on our results of operations for the year endedDecember 31, 2022 . In addition, results may continue to be impacted in future quarters due to supply chain constraints and inflation stemming from the pandemic and other market pressures, including the conflict inUkraine , including constraints around chassis and other component parts, inflation in materials and freight, and labor availability. In consideration of the COVID-19 pandemic and other market pressures, including the conflict inUkraine , we expect that cash on hand and cash we generate from operations, as well as available credit under our senior credit facilities, will provide adequate funds for the foreseeable future. We are taking appropriate steps to mitigate the effects of the pandemic and other market pressures where possible. Throughout 2021, due to supply chain constraints around chassis and other component parts, we implemented temporary rolling shutdowns of certain facilities within our Work Truck Solutions Segment. We will continue to monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, suppliers and shareholders. In the year endedDecember 31, 2021 , we determined that facility leases related to two locations in our Work Truck Solutions segment were impaired. These two facilities are being significantly downsized as part of a restructuring plan, and so it was determined that the carrying value exceeded the fair value of the facilities. As a result, we recorded an impairment of$1.2 million in the year endedDecember 31, 2021 under Impairment charges in the Company's Consolidated Statements of Income (Loss), offset with a reduction to the Operating lease - right of use asset on our Consolidated Balance Sheets. Going forward, we are amortizing the remaining balance of the right of use asset for the impaired leases on a straight-line basis. We continue to amortize the lease liability for the impaired leases over the life of the lease. Overview The following table sets forth, for the three and six months endedJune 30, 2022 and 2021, the consolidated statements of operations of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. In the table below and throughout this "Management's Discussion and Analysis of Financial Condition and Results of Operations," consolidated statements of operations data for the three and six months endedJune 30, 2022 and 2021 have been derived from our unaudited consolidated financial statements. The information contained in the table below should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. 29
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Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2022 2021 2022 2021
(unaudited) (unaudited)
(in thousands) (in thousands)
Net sales $ 187,561 $ 157,530 $ 290,162 $ 260,872
Cost of sales 136,328 108,732 217,865 185,822
Gross profit 51,233 48,798 72,297 75,050
Selling, general, and administrative expense 23,024 21,982 44,397 41,881
Intangibles amortization 2,630 2,705 5,260 5,410
Income from operations 25,579 24,111 22,640 27,759
Interest expense, net (2,473 ) (4,372 ) (4,586 ) (7,347 )
Loss on extinguishment of debt - (4,936 ) - (4,936 )
Other income (expense), net (16 ) 116 111 108
Income before taxes 23,090 14,919 18,165 15,584
Income tax expense 5,365 816 4,348 739
Net income $ 17,725 $ 14,103 $ 13,817 $ 14,845 The following table sets forth for the three and six months ended
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2022 2021 2022 2021
(unaudited) (unaudited)
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 72.7 % 69.0 % 75.1 % 71.2 %
Gross profit 27.3 % 31.0 % 24.9 % 28.8 %
Selling, general, and administrative expense 12.3 % 14.0 % 15.3 % 16.1 %
Intangibles amortization 1.4 % 1.7 % 1.8 % 2.1 %
Income from operations 13.6 % 15.3 % 7.8 % 10.6 %
Interest expense, net (1.3 )% (2.8 )% (1.6 )% (2.8 )%
Loss on extinguishment of debt - % (3.1 )% - % (1.9 )%
Other income (expense), net - % 0.1 % - % 0.1 %
Income before taxes 12.3 % 9.5 % 6.2 % 6.0 %
Income tax expense 2.8 % 0.5 % 1.4 % 0.3 %
Net income 9.5 % 9.0 % 4.8 % 5.7 %
Net Sales
Net sales were $187.6 million for the three months ended June 30, 2022 compared
to $157.5 million in the three months ended June 30, 2021 , an increase of $30.1 ,
or 19.1%. Net sales were $290.2 million for the six months ended June 30, 2022
compared to $260.9 million in the six months ended June 30, 2021 , an increase of
$29.3 million , or 11.2%. The increase in sales for the three and six months
ended June 30, 2022 compared to the same periods in 2021 is a result of pricing
actions in both segments, as well as strong preseason order demand in our Work
Truck Attachments segment leading to increased volumes. See below for a
discussion of net sales for each of our segments.
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Three Three
Months Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2022 2021 2022 2021
Net sales
Work Truck Attachments $ 130,364 $ 104,638 $ 176,140 $ 146,619
Work Truck Solutions 57,197 52,892 114,022 114,253
$ 187,561 $ 157,530 $ 290,162 $ 260,872
Net sales at our Work Truck Attachments segment were $130.4 million for the
three months ended June 30, 2022 compared to $104.6 million in the three months
ended June 30, 2021 , an increase of $25.8 million . Net sales at our Work Truck
Attachments segment were $176.1 million for the six months ended June 30, 2022
compared to $146.6 million in the six months ended June 30, 2021 , an increase of
$29.5 million . The increase in the three and six months ended June 30, 2022 was
primarily due to pricing actions, as well as strong preseason order
demand leading to increased volumes. This increased preseason order volume was
despite snowfall in this most recent snow season ended March 2022 being
approximately 12% below the ten-year average, compared to the prior snow season
ended March 2021 which was approximately 7% below the ten-year average.
Net sales at our Work Truck Solutions segment were $57.2 million for the three
months ended June 30, 2022 compared to $52.9 million in the three months ended
June 30, 2021 , an increase of $4.3 million . Net sales at our Work Truck
Solutions segment were $114.0 million for the six months ended June 30, 2022
compared to $114.3 million in the six months ended June 30, 2021 , a decrease of
$0.3 million . The increase in sales for the three months ended June 30, 2022
compared to the same period in 2021 was a result of price increase realization,
as well as improved municipal volumes related to more stable and predictable
Class 7-8 chassis supply. The decrease in sales for the six months ended June
30, 2022 compared to the same period in 2021 was a result of chassis and
component shortages leading to lower production and deliveries. Somewhat
offsetting this decrease was an increase in sales for the six months ended June
30, 2022 compared to the same periods in the prior year related to price
increase realization.
Cost of Sales
Cost of sales was $136.3 million for the three months ended June 30, 2022
compared to $108.7 million for the three months ended June 30, 2021 , an
increase of $27.6 million or 25.4%. Cost of sales was $217.9 million for the six
months ended June 30, 2022 compared to $185.8 million for the six months ended
June 30, 2021 , an increase of $32.1 million or 17.3%. The increase in cost of
sales for the three and six months ended June 30, 2022 compared to the same
period in the prior year was driven by the higher volumes, as well as material,
labor and freight inflation. Cost of sales as a percentage of sales were
72.7% and 75.1% for the three and six months ended June 30, 2022 , respectively,
compared to 69.0% and 71.2% for the three and six months ended June 30, 2021 ,
respectively. The increase in cost of sales as a percentage of sales for the
periods presented is due to inflation.
Gross Profit
Gross profit was $51.2 million for the three months ended June 30, 2022 compared
to $48.8 million for the three months ended June 30, 2021 , an increase of
$2.4 million , or 4.9%. Gross profit was $72.3 million for the six months ended
June 30, 2022 compared to $75.1 million for the six months ended June 30, 2021 ,
a decrease of $2.8 million , or 3.7%. The change in gross profit is attributable
to the changes in sales as discussed above under "-Net Sales ." As a percentage
of net sales, gross profit decreased from 31.0% for the three months ended June
30, 2021 to 27.3% for the corresponding period in 2022. As a percentage of net
sales, gross profit decreased from 28.8% for the six months ended June 30, 2021
to 24.9% for the corresponding period in 2022. The reasons for the change in
gross profit as a percentage of net sales are the same as those relating to the
changes in cost of sales as a percentage of sales discussed above under "-Cost
of Sales."
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Selling, General and Administrative Expense
Selling, general and administrative expenses, including intangibles amortization, were$25.7 million for the three months endedJune 30, 2022 compared to$24.7 million for the three months endedJune 30, 2021 , an increase of$1.0 million , or 4.0%. Selling, general and administrative expenses, including intangibles amortization, were$49.7 million for the six months endedJune 30, 2022 compared to$47.3 million for the six months endedJune 30, 2021 , an increase of$2.4 million , or 5.1%. The increase in the three and six months endedJune 30, 2022 is related to increased salaries and benefits, advertising and promotions, as well as other discretionary spending as spending was reduced in 2021 as a result of the COVID-19 pandemic. Interest Expense Interest expense was$2.5 million for the three months endedJune 30, 2022 , a decrease compared to the$4.4 million incurred in the same period in the prior year. Interest expense was$4.6 million for the six months endedJune 30, 2022 , a decrease compared to the$7.3 million incurred in the same period in the prior year. The decrease in interest expense for the three months endedJune 30, 2022 was due to lower interest on our term loan of$1.3 million in the three months endedJune 30, 2022 , due to the decrease in principal balance from theJune 9, 2021 refinancing. In addition, the decrease in the three months endedJune 30, 2022 was due to having a$0.2 million gain in non-cash mark-to-market and amortization adjustments on an interest rate swap not accounted for as a hedge, compared to a$0.6 million loss in the three months endedJune 30, 2021 . Somewhat offsetting this decrease is an increase in interest expense on our revolving line of credit of$0.2 million in the three months endedJune 30, 2022 due to having higher revolver borrowings in 2022. The decrease in interest expense for the six months endedJune 30, 2022 was due to lower interest on our term loan of$3.4 million in the six months endedJune 30, 2022 , due to the decrease in principal balance from theJune 9, 2021 refinancing. Somewhat offsetting the decrease in the six months endedJune 30, 2022 was a$0.3 million gain in non-cash mark-to-market and amortization adjustments on an interest rate swap not accounted for as a hedge in the six months endedJune 30, 2022 , compared to a$0.8 million gain in the six months endedJune 30, 2021 . Also somewhat offsetting this decrease is an increase in interest expense on our revolving line of credit of$0.2 million in the six months endedJune 30, 2022 due to having higher revolver borrowings in 2022. See Note 9 to the Unaudited Condensed Consolidated Financial Statements for additional information.
Loss on Extinguishment of Debt
Loss on extinguishment of debt was$4.9 million in the three and six months endedJune 30, 2021 . The loss on extinguishment of debt related to fees incurred in conjunction with the Company'sJune 9, 2021 refinancing of its Credit Agreement. The previous debt was considered extinguished, as all lenders on our previous term loan exited their positions in conjunction with changing from a Term Loan B to a Term Loan A arrangement. Income Taxes The Company's effective tax rate was 23.2% and 5.5% for the three months endedJune 30, 2022 andJune 30, 2021 , respectively. The Company's effective tax rate was 23.9% and 4.7% for the six months endedJune 30, 2022 andJune 30, 2021 , respectively. The effective tax rate for the three and six months endedJune 30, 2022 was higher than the same periods in the prior year due to a discrete tax benefit of$2.7 million recorded in the three and six months endedJune 30, 2021 related to favorable state income tax audit results. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The largest item affecting deferred taxes is the difference between book and tax amortization of goodwill and other intangibles amortization. Net Income Net income for the three months endedJune 30, 2022 was$17.7 million , compared to net income of$14.1 million for the corresponding period in 2021, an increase of$3.6 million . Net income for the six months endedJune 30, 2022 was$13.8 million , compared to net income of$14.8 million for the corresponding period in 2021, a decrease of$1.0 million . The change in net income for the three and six months endedJune 30, 2022 was driven by the factors described above under "-Net Sales ," "- Cost of Sales," "- Selling, General and Administrative Expense," and "- Income Taxes." As a percentage of net sales, net income was 9.5% for the three months endedJune 30, 2022 compared to 9.0% for the three months endedJune 30, 2021 . As a percentage of net sales, net income was 4.8% for the six months endedJune 30, 2022 compared to 5.7% for the six months endedJune 30, 2021 .
Discussion of Critical Accounting Policies and Estimates
There have been no material changes to our critical accounting policies and
estimates previously disclosed in our Form 10-K (Commission File No. 001-34728)
filed with the
Liquidity and Capital Resources
Our principal sources of cash have been, and we expect will continue to be, cash from operations and borrowings under our senior credit facilities.
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Our primary uses of cash are to provide working capital, meet debt service requirements, finance capital expenditures, pay dividends under our dividend policy and support our growth, including through potential acquisitions, and for other general corporate purposes. For a description of the seasonality of our working capital rates see "-Seasonality and Year-To-Year Variability." Our Board of Directors has adopted a dividend policy that reflects an intention to distribute to our stockholders a regular quarterly cash dividend. The declaration and payment of these dividends to holders of our common stock is at the discretion of our Board of Directors and depends upon many factors, including our financial condition and earnings, legal requirements, taxes and other factors our Board of Directors may deem to be relevant. The terms of our indebtedness may also restrict us from paying cash dividends on our common stock under certain circumstances. As a result of this dividend policy, we may not have significant cash available to meet any large unanticipated liquidity requirements. As a result, we may not retain a sufficient amount of cash to fund our operations or to finance unanticipated capital expenditures or growth opportunities, including acquisitions. Our Board of Directors may, however, amend, revoke or suspend our dividend policy at any time and for any reason. OnFebruary 16, 2022 , the Company's Board of Directors authorized the purchase of up to$50 million in shares of common stock at market value. This authorization does not have an expiration date. Repurchases under the program may be made in the open market, in privately negotiated transactions or otherwise, with the amount and timing of repurchases depending on market conditions and corporate needs. The Company may also, from time to time, enter into Rule 10b5-1 trading plans to facilitate repurchases of its shares under this authorization. This program does not obligate the Company to acquire any particular amount of shares and the program may be extended, modified, suspended or discontinued at any time at the Company's discretion. As ofJune 30, 2022 , we had$47.1 million of total liquidity, comprised of$6.0 million in cash and cash equivalents and$41.1 million of borrowing availability under our revolving credit facility, compared with total liquidity as ofDecember 31, 2021 of approximately$136.1 million , comprised of approximately$37.0 million in cash and cash equivalents and borrowing availability of approximately$99.1 million under our revolving credit facility. The change in our total liquidity fromDecember 31, 2021 is primarily due to the seasonality of our business. We have taken various steps to preserve liquidity, including reducing discretionary spending and deferring payments where appropriate within existing contractual terms, while remaining committed to long-term growth projects. We expect that cash on hand and cash we generate from operations, as well as available credit under our senior credit facilities, will provide adequate funds for the primary uses of cash we describe above for the foreseeable future. From time to time, we may seek additional funding through the issuance of debt or equity securities to provide additional liquidity to fund acquisitions aligned with our strategic priorities and for other general corporate purposes.
The following table shows our cash and cash equivalents and inventories in
thousands at
As of
June 30, December 31, June 30,
2022 2021 2021
Cash and cash equivalents $ 6,041 $ 36,964 $ 15,175
Inventories 131,518 104,019 93,947
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We had cash and cash equivalents of$6.0 million atJune 30, 2022 compared to cash and cash equivalents of$37.0 million and$15.2 million atDecember 31, 2021 andJune 30, 2021 , respectively. The table below sets forth a summary of the significant sources and uses of cash for the periods presented in thousands. Six Months Ended June 30, June 30, % Cash Flows (in thousands) 2022 2021 Change Change Net cash provided by (used in) operating activities$ (58,204 ) $ 13,141 $ (71,345 ) (542.9 )% Net cash used in investing activities (5,580 ) (4,586 ) (994 ) 21.7 % Net cash provided by (used in) financing activities 32,861 (34,410 ) 67,271 (195.5 )% Change in cash$ (30,923 ) $ (25,855 ) $ (5,068 ) 19.6 % Net cash provided by operating activities decreased$71.3 million from the six months endedJune 30, 2021 to the six months endedJune 30, 2022 . The decrease in cash provided by operating activities was due to a$5.5 million decrease in net income adjusted for reconciling items as a result of the lower net income in the three months endedJune 30, 2022 from less favorable operating results, as well as unfavorable changes in working capital of$65.8 million . The largest unfavorable changes in working capital were an increase in accounts receivable attributable to the increase in sales compared to the prior year, as well as an increase in inventory due to the pulling forward of purchases in anticipation of inflationary price increases and supply chain disruptions, as well as higher material costs due to inflation. In addition, there was an unfavorable change in working capital related to accounts payable related to the timing of supplier payments. Net cash used in investing activities increased$1.0 million for the six months endedJune 30, 2022 when compared to the corresponding period in 2021 due to a similar level of capital expenditures. Net cash provided by financing activities increased$67.3 million for the three months endedJune 30, 2022 as compared to the corresponding period in 2021. The increase in cash provided was primarily a result of having a voluntary$20.0 million prepayment on our debt in the six months endedJune 30, 2021 and no corresponding payment in 2022. Additionally, the increase in cash provided was related to having$58.0 million in revolver borrowings outstanding atJune 30, 2022 compared to$0.0 million in revolver borrowings outstanding atJune 30, 2021 . See Note 9 to the Unaudited Condensed Consolidated Financial Statements for additional information. Somewhat offsetting this increase in cash provided is an increase related to$6.0 million in stock repurchases executed in the six months endedJune 30, 2022 and no repurchases in the same period in the prior year. Free Cash Flow Free cash flow for the three months endedJune 30, 2022 was($35.6) million compared to($13.4) million in the corresponding period in 2021, a decrease of$22.2 million . Free cash flow for the six months endedJune 30, 2022 was($63.8) million compared to$8.6 million in the corresponding period in 2021, a decrease of$72.4 million . The decreases in free cash flow for the three and six months endedJune 30, 2022 is primarily a result of lower cash provided by operating activities of$71.3 million as discussed above under "Liquidity and Capital Resources." Non-GAAP Financial Measures
This Quarterly Report on Form 10-Q contains financial information calculated
other than in accordance with
These non-GAAP measures include:
? Free cash flow; and ? Adjusted EBITDA; and ? Adjusted net income and earnings per share.
These non-GAAP disclosures should not be construed as an alternative to the reported results determined in accordance with GAAP.
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Free cash flow is a non-GAAP financial measure which we define as net cash provided by (used in) operating activities less capital expenditures. Free cash flow should be evaluated in addition to, and not considered a substitute for, other financial measures such as net income and cash flow provided by (used in) operations. We believe that free cash flow represents our ability to generate additional cash flow from our business operations.
The following table reconciles net cash provided by (used in) operating activities, a GAAP measure, to free cash flow, a non-GAAP measure.
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2022 2021 2022 2021
(In Thousands) (In Thousands)
Net cash provided by (used in) operating
activities $ (32,211 ) $ (11,008 ) $ (58,204 ) $ 13,141
Acquisition of property and equipment (3,382 ) (2,409 ) (5,580 ) (4,586 )
Free cash flow $ (35,593 ) $ (13,417 ) $ (63,784 ) $ 8,555
Adjusted EBITDA represents net income before interest, taxes, depreciation and
amortization, as further adjusted for certain charges consisting of unrelated
legal and consulting fees, severance, restructuring charges, stock-based
compensation, certain non-cash purchase accounting expenses, impairment charges,
expenses related to debt modifications, loss on extinguishment of debt, and
incremental costs incurred related to the COVID-19 pandemic. Such COVID-19
related costs include increased expenses directly related to the pandemic, and
do not include either production related overhead inefficiencies or lost or
deferred sales. We believe these costs are out of the ordinary, unrelated to our
business and not representative of our results. We use, and we believe our
investors benefit from the presentation of, Adjusted EBITDA in evaluating our
operating performance because it provides us and our investors with additional
tools to compare our operating performance on a consistent basis by removing the
impact of certain items that management believes do not directly reflect our
core operations. In addition, we believe that Adjusted EBITDA is useful to
investors and other external users of our consolidated financial statements in
evaluating our operating performance as compared to that of other companies,
because it allows them to measure a company's operating performance without
regard to items such as interest expense, taxes, depreciation and amortization,
which can vary substantially from company to company depending upon accounting
methods and book value of assets and liabilities, capital structure and the
method by which assets were acquired. Our management also uses Adjusted EBITDA
for planning purposes, including the preparation of our annual operating budget
and financial projections. Management also uses Adjusted EBITDA to evaluate our
ability to make certain payments, including dividends, in compliance with our
senior credit facilities, which is determined based on a calculation of
"Consolidated Adjusted EBITDA" that is substantially similar to Adjusted EBITDA.
Adjusted EBITDA has limitations as an analytical tool. As a result, you should
not consider it in isolation, or as a substitute for net income, operating
income, cash flow from operating activities or any other measure of financial
performance or liquidity presented in accordance with GAAP. Some of these
limitations are:
? Adjusted EBITDA does not reflect our cash expenditures or future requirements
for capital expenditures or contractual commitments;
? Adjusted EBITDA does not reflect changes in, or cash requirements for, our
working capital needs;
? Adjusted EBITDA does not reflect the interest expense, or the cashrequirements necessary to service interest or principal payments, on our
indebtedness;
? Although depreciation and amortization are non-cash charges, the assets being
depreciated and amortized will often have to be replaced in the future, and
Adjusted EBITDA does not reflect any cash requirements for such replacements;
? Other companies, including other companies in our industry, may calculate
Adjusted EBITDA differently than we do, limiting its usefulness as a
comparative measure; and
? Adjusted EBITDA does not reflect tax obligations whether current or deferred.
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The following table presents a reconciliation of net income, the most comparable GAAP financial measure, to Adjusted EBITDA as well as the resulting calculation of Adjusted EBITDA for the three and six months endedJune 30, 2022 and 2021: Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2022 2021 2022 2021 (in thousands) (in thousands) Net income$ 17,725 $ 14,103 $ 13,817 $ 14,845 Interest expense, net 2,473 4,372 4,586 7,347 Income tax expense 5,365 816 4,348 739 Depreciation expense 2,574 2,495 5,133 4,803 Amortization 2,630 2,705 5,260 5,410 EBITDA 30,767 24,491 33,144 33,144
Stock-based compensation expense 3,153 4,055 5,053
6,020
Loss on extinguishment of debt - 4,936 - 4,936 COVID-19 (1) 12 15 32 55 Other charges (2) 170 (6 ) 509 (6 ) Adjusted EBITDA$ 34,102 $ 33,491 $ 38,738 $ 44,149
(1) Reflects incremental costs incurred related to the COVID-19 pandemic for the
periods presented. Such COVID-19 related costs include increased expenses
directly related to the pandemic, and do not include either production
related overhead inefficiencies or lost or deferred sales.
(2) Reflects unrelated legal, severance, restructuring, and consulting fees for
the periods presented.
The following table presents Adjusted EBITDA by segment for the three and six
months ended
Three Three
Months Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2022 2021 2022 2021
Adjusted EBITDA
Work Truck Attachments $ 33,589 $ 32,177 $ 36,633 $ 40,416
Work Truck Solutions 513 1,314 2,105 3,733
$ 34,102 $ 33,491 $ 38,738 $ 44,149
Adjusted EBITDA at our Work Truck Attachments segment was $33.6 million for the
three months ended June 30, 2022 compared to $32.2 million in the three months
ended June 30, 2021 , an increase of $1.4 million . Adjusted EBITDA at our Work
Truck Attachments segment was $36.6 million for the six months ended June 30,
2022 compared to $40.4 million in the six months ended June 30, 2021 , a
decrease of $3.8 million . The change in the three months ended June 30, 2022
from the corresponding period in 2021 was due to pricing actions and an increase
in volumes related to strong preseason order demand, somewhat offset by
material, labor and freight inflation. The change in the six months ended June
30, 2022 from the corresponding period in 2021 is primarily due to material,
labor and freight inflation, somewhat offset by pricing actions and higher
volumes.
Adjusted EBITDA at our Work Truck Solutions segment was $0.5 million for the
three months ended June 30, 2022 compared to $1.3 million in the three months
ended June 30, 2021 , a decrease of $0.8 million . Adjusted EBITDA at our Work
Truck Attachments segment was $2.1 million for the six months ended June 30,
2022 compared to $3.7 million in the six months ended June 30, 2021 , a
decrease of $1.6 million . The change in the three and six months ended June 30,
2022 is primarily due to lower volumes as a result of chassis and component
shortages affecting production and deliveries, as well as inflationary
pressures.
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Adjusted Net Income and Adjusted Earnings Per Share (calculated on a diluted basis) represents net income and earnings per share (as defined by GAAP), excluding the impact of stock based compensation, severance, restructuring charges, certain non-cash purchase accounting adjustments, impairment charges, expenses related to debt modifications, loss on extinguishment of debt, certain charges related to unrelated legal fees and consulting fees, incremental costs incurred related to the COVID-19 pandemic, and adjustments on derivatives not classified as hedges, net of their income tax impact. Such COVID-19 related costs include increased expenses directly related to the pandemic, and do not include either production related overhead inefficiencies or lost or deferred sales. We believe these costs are out of the ordinary, unrelated to our business and not representative of our results. Adjustments on derivatives not classified as hedges are non-cash and are related to overall financial market conditions; therefore, management believes such costs are unrelated to our business and are not representative of our results. Management believes that Adjusted Net Income and Adjusted Earnings Per Share are useful in assessing the Company's financial performance by eliminating expenses and income that are not reflective of the underlying business performance. We believe that the presentation of adjusted net income for the periods presented allows investors to make meaningful comparisons of our operating performance between periods and to view our business from the same perspective as our management. Because the excluded items are not predictable or consistent, management does not consider them when evaluating our performance or when making decisions regarding allocation of resources. The following table presents a reconciliation of net income, the most comparable GAAP financial measure, to Adjusted net income as well as a reconciliation of diluted earnings per share, the most comparable GAAP financial measure, to Adjusted diluted earnings per share for the three and six months endedJune 30, 2022 and 2021: Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2022 2021 2022 2021 (in thousands) (in thousands) Net income (GAAP)$ 17,725 $ 14,103 $ 13,817 $ 14,845 Adjustments: - Stock-based compensation 3,153 4,055 5,053 6,020 - Loss on extinguishment of debt - 4,936 - 4,936 - COVID-19 (1) 12 15 32 55 - Purchase accounting (2) - - - - - Adjustments on derivative not classified as hedge (2) (172 ) 605 (344 ) (849 ) - Other charges (3) 170 (6 ) 509 (6 ) Tax effect on adjustments (791 ) (2,401 )
(1,312 ) (2,539 )
Adjusted net income (non-GAAP)$ 20,097 $ 21,307
Weighted average common shares outstanding assuming dilution 22,907,414 22,985,233
22,947,352 22,943,836
Adjusted earnings per common share - dilutive$ 0.85 $ 0.91
GAAP diluted earnings per share$ 0.75 $ 0.60 $ 0.58 $ 0.63 Adjustments net of income taxes: - Stock-based compensation 0.10 0.14 0.17 0.19 - Loss on extinguishment of debt - 0.16 - 0.16 - COVID-19 (1) - - - - - Adjustments on derivative not classified as hedge (2) (0.01 ) 0.01 (0.01 ) (0.03 ) - Other charges (3) 0.01 - 0.01 - Adjusted diluted earnings per share (non-GAAP) 0.85 0.91 0.75 0.95
(1) Reflects incremental costs incurred related to the COVID-19 pandemic for the
periods presented. Such COVID-19 related costs include increased expenses
directly related to the pandemic, and do not include either production
related overhead inefficiencies or lost or deferred sales.
(2) Reflects mark-to-market and amortization adjustments on an interest rate swap
not classified as a hedge for the periods presented.
(3) Reflects unrelated legal, severance, restructuring, and consulting fees for
the periods presented.
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Future Obligations and Commitments
There have been no material changes to our future obligations and commitments in
the three months ended
Impact of Inflation Inflation in materials and labor had a material impact on our profitability in the three and six months endedJune 30, 2022 and we expect ongoing inflationary pressures may also impact our profitability in the remainder of 2022. While we anticipate being able to fully cover this inflation by raising prices, there may be a timing difference of when we incur the increased costs and when we realize the higher prices in our backlog. In 2021 and in previous years, including in 2019, as a result of inflationary pressures due to tariffs, we experienced significant increases in steel costs, but were able or expect to be able to mitigate the effects of these increases through both temporary and permanent steel surcharges; we expect, but cannot be certain, that we will be able to do the same going forward.
Seasonality and Year-to-Year Variability
While our Work Truck Solutions segment has limited seasonality and variability,
our Work Truck Attachments segment is seasonal and also varies from
year-to-year. Consequently, our results of operations and financial condition
for this segment vary from quarter-to-quarter and from year-to-year as well. In
addition, because of this seasonality and variability, the results of operations
for our Work Truck Attachments segment and our consolidated results of
operations for any quarter may not be indicative of results of operations that
may be achieved for a subsequent quarter or the full year, and may not be
similar to results of operations experienced in prior years. That being the
case, while snowfall levels vary within a given year and from year-to-year,
snowfall, and the corresponding replacement cycle of snow and ice control
equipment manufactured and sold by our Work Truck Attachments segment, is
relatively consistent over multi-year periods.
Sales of our Work Truck Attachments products are significantly impacted by the
level, timing and location of snowfall, with sales in any given year and region
most heavily influenced by snowfall levels in the prior snow season (which we
consider to begin in October and end in March) in that region. This is due to
the fact that end-user demand for our Work Truck Attachments products is driven
primarily by the condition of their snow and ice control equipment, and in the
case of professional snowplowers, by their financial ability to purchase new or
replacement snow and ice control equipment, both of which are significantly
affected by snowfall levels. Heavy snowfall during a given winter causes usage
of our Work Truck Attachments products to increase, resulting in greater wear
and tear to our products and a shortening of their life cycles, thereby creating
a need for replacement commercial snow and ice control equipment and related
parts and accessories. In addition, when there is a heavy snowfall in a given
winter, the increased income our professional snowplowers generate from their
professional snowplow activities provides them with increased purchasing power
to purchase replacement commercial snow and ice control equipment prior to the
following winter. To a lesser extent, sales of our Work Truck Attachments
products are influenced by the timing of snowfall in a given winter. Because an
early snowfall can be viewed as a sign of a heavy upcoming snow season, our
end-users may respond to an early snowfall by purchasing replacement snow and
ice control equipment during the current season rather than delaying purchases
until after the season is over when most purchases are typically made by
end-users.
We attempt to manage the seasonal impact of snowfall on our revenues in part
through our pre-season sales program, which involves actively soliciting and
encouraging pre-season distributor orders in the second and third quarters by
offering our Work Truck Attachments distributors a combination of pricing,
payment and freight incentives during this period. These pre-season sales
incentives encourage our Work Truck Attachments distributors to re-stock their
inventory during the second and third quarters in anticipation of the peak
fourth quarter retail sales period by offering pre-season pricing and payment
deferral until the fourth quarter. As a result, we tend to generate our greatest
volume of sales (an average of over two-thirds over the last ten years) for the
Work Truck Attachments segment during the second and third quarters, providing
us with manufacturing visibility for the remainder of the year. By contrast, our
revenue and operating results for the Work Truck Attachments segment tend to be
lowest during the first quarter, as management believes our end-users prefer to
wait until the beginning of a snow season to purchase new equipment and as our
distributors sell off inventory and wait for our pre-season sales incentive
period to re-stock inventory. Fourth quarter sales for the Work Truck
Attachments segment vary from year-to-year as they are primarily driven by the
level, timing and location of snowfall during the quarter. This is because most
of our fourth quarter sales and shipments for the Work Truck Attachments segment
consist of re-orders by distributors seeking to restock inventory to meet
immediate customer needs caused by snowfall during the winter months.
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Because of the seasonality of our sales of Work Truck Attachments products, we
experience seasonality in our working capital needs as well. In the first
quarter, we typically require capital as we are generally required to build our
inventory for the Work Truck Attachments segment in anticipation of our second
and third quarter pre-season sales. During the second and third quarters, our
working capital requirements rise as our accounts receivable for the Work Truck
Attachments segment increase as a result of the sale and shipment of products
ordered through our pre-season sales program and we continue to build inventory.
Working capital requirements peak towards the end of the third quarter and then
begin to decline through the fourth quarter through a reduction in accounts
receivable for the Work Truck Attachments segment when we receive the majority
of the payments for pre-season shipped products.
We also attempt to manage the impact of seasonality and year-to-year variability
on our business costs through the effective management of our assets. Our asset
management and profit focus strategies include:
? the employment of a highly variable cost structure facilitated by a
core group of workers that we supplement with a temporaryworkforce as
sales volumes dictate, which allows us to adjust costs on an as-needed
basis in response to changing demand;
? our enterprise-wide lean concept, which allows us to adjust production
levels up or down to meet demand;
? the pre-season order program described above, which incentivizes
distributors to place orders prior to the retail selling season; and
? a vertically integrated business model.
These asset management and profit focus strategies, among other management tools, allow us to adjust fixed overhead and sales, general and administrative expenditures to account for the year-to-year variability of our sales volumes.
Additionally, although modest, our annual capital expenditure requirements can be temporarily reduced by up to approximately 40% in response to actual or anticipated decreases in sales volumes. If we are unsuccessful in our asset management initiatives, the seasonality and year-to-year variability effects on our business may be compounded and in turn our results of operations and financial condition may suffer.
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