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 the
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, adverse developments affecting the banking
and financial services industries, 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 assets of Dejana, which we acquired in 2016 and
unexpected costs or liabilities related to such acquisition, 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-
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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, as well as our vertically integrated products. 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.
Market Pressures and COVID-19
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 months ended
Overview
The following table sets forth, for the three months ended
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Three Months Ended
March 31, March 31,
2023 2022
(unaudited)
(in thousands)
Net sales $ 82,545 $ 102,601
Cost of sales 71,270 81,537
Gross profit 11,275 21,064
Selling, general, and administrative expense 22,442 21,373
Intangibles amortization 2,630 2,630
Loss from operations (13,797 ) (2,939 )
Interest expense, net (2,864 ) (2,113 )
Other income, net 35 127
Loss before taxes (16,626 ) (4,925 )
Income tax benefit (3,516 ) (1,017 )
Net loss $ (13,110 ) $ (3,908 ) The following table sets forth for the three months ended
Three Months Ended
March 31, March 31,
2023 2022
(unaudited)
Net sales 100.0 % 100.0 %
Cost of sales 86.3 % 79.5 %
Gross profit 13.7 % 20.5 %
Selling, general, and administrative expense 27.2 % 20.8 %
Intangibles amortization 3.2 % 2.6 %
Loss from operations (16.7 )% (2.9 )%
Interest expense, net (3.5 )% (2.1 )%
Other income, net - % - %
Loss before taxes (20.2 )% (5.0 )%
Income tax benefit (4.3 )% (1.0 )%
Net loss (15.9 )% (4.0 )%
Net Sales
Net sales were
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Three Months Ended Three Months Ended
March 31, March 31,
2023 2022
Net sales
Work Truck Attachments $ 19,246 $ 45,776
Work Truck Solutions 63,299 56,825
$ 82,545 $ 102,601
Net sales at our Work Truck Attachments segment were
Net sales at our Work Truck Solutions segment were
Cost of Sales
Cost of sales was
Gross Profit
Gross profit was
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Selling, General and Administrative Expense
Selling, general and administrative expenses, including intangibles
amortization, were
Interest Expense
Interest expense was
Income Taxes
The Company's effective tax rate was 21.1% and 20.6% for the three months
ended
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 Loss
Net loss for the three months ended
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.
On
As of
The following table shows our cash and cash equivalents, net accounts receivable and inventories in thousands atMarch 31, 2023 ,December 31, 2022 andMarch 31, 2022 . As of March 31, December 31, March 31, 2023 2022 2022 Cash and cash equivalents$ 2,900 $ 20,670 $ 8,212 Accounts receivable, net 48,223 86,765 43,058 Inventories 184,583 136,501 143,839 33
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We had cash and cash equivalents of
Three Months Ended
March 31, March 31, %
Cash Flows (in thousands) 2023 2022 Change Change
Net cash used in operating activities
41,894 (561 ) 42,455 (7567.7 )%
Change in cash $ (17,770 ) $ (28,752 ) $ 10,982 (38.2 )%
Net cash used in operating activities increased
Net cash used in investing activities increased
Net cash provided by (used in) financing activities increased
Free Cash Flow
Free cash flow for the three months ended
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 used in operating activities, a GAAP measure, to free cash flow, a non-GAAP measure.
Three Months Ended
March 31 , March 31,
2023 2022
(In Thousands)
Net cash used in operating activities
$ (59,664 ) $ (28,191 )
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 in 2022 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 cash
requirements 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 loss, the most comparable
GAAP financial measure, to Adjusted EBITDA as well as the resulting calculation
of Adjusted EBITDA for the three months ended
Three Months Ended
March 31, March 31,
2023 2022
(in thousands)
Net loss $ (13,110 ) $ (3,908 )
Interest expense, net 2,864 2,113
Income tax benefit (3,516 ) (1,017 )
Depreciation expense 2,727 2,559
Amortization 2,630 2,630
EBITDA (8,405 ) 2,377
Stock-based compensation expense 957 1,900
Other charges (1) 74 359
Adjusted EBITDA $ (7,374 ) $ 4,636 (1) Reflects unrelated legal, severance, restructuring, consulting fees, and
incremental costs incurred related to the COVID-19 pandemic for the periods
presented.
The following table presents Adjusted EBITDA by segment for the three months
ended
Three Months Ended Three Months Ended
March 31, March 31,
2023 2022
Adjusted EBITDA
Work Truck Attachments $ (10,231 ) $ 3,044
Work Truck Solutions 2,857 1,592
$ (7,374 ) $ 4,636
Adjusted EBITDA at our Work Truck Attachments segment was
Adjusted EBITDA at our Work Truck Solutions segment was
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Adjusted Net Income (Loss) and Adjusted Earnings (Loss) Per Share (calculated on a diluted basis) represents net income (loss) and earnings (loss) 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 in 2022 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 (Loss) and Adjusted Earnings (Loss) 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 (loss) 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 loss, the most comparable
GAAP financial measure, to Adjusted net loss as well as a reconciliation of
diluted loss per share, the most comparable GAAP financial measure, to Adjusted
diluted loss per share for the three months ended
Three Months Ended
March 31, March 31,
2023 2022
(in thousands)
Net loss (GAAP) $ (13,110 ) $ (3,908 )
Adjustments:
- Stock-based compensation 957 1,900
- Adjustments on derivative not classified as hedge (1) (172 ) (172 )
- Other charges (2) 74 359
Tax effect on adjustments (215 ) (522 )
Adjusted net loss (non-GAAP) $ (12,466 ) $ (2,343 ) Weighted average common shares outstanding assuming dilution 22,906,845 22,982,538
Adjusted loss per common share - dilutive$ (0.55 ) $ (0.11 ) GAAP diluted loss per share$ (0.58 ) $ (0.18 ) Adjustments net of income taxes: - Stock-based compensation 0.03 0.06 - Adjustments on derivative not classified as hedge (1) - - - Other charges (2) - 0.01 Adjusted diluted loss per share (non-GAAP) (0.55 ) (0.11 )
(1) Reflects mark-to-market and amortization adjustments on an interest rate swap
not classified as a hedge for the periods presented.
(2) Reflects unrelated legal, severance, restructuring, consulting fees, and
incremental costs incurred related to the COVID-19 pandemic 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 months ended
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 temporary workforce 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 our annual capital expenditures are modest, they 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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