Douglas Dynamics(PLOW) - 2020 Q4 - Annual Report

Part I Business Douglas Dynamics is a leading North American manufacturer of commercial work truck attachments and equipment, operating in two core segments - The company operates through two primary segments: Work Truck Attachments and Work Truck Solutions, focusing on snow/ice control and vehicle upfitting respectively[13] Work Truck Attachments Segment Net Sales Breakdown (FY2018-2020) | Category | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Snow and ice control equipment | 86% | 83% | 84% | | Parts and accessories | 14% | 17% | 16% | - The Work Truck Solutions segment serves over 2,500 customers, with approximately half of its revenue from dealers and 40% from fleet sales and governmental entities[17][28] - Key competitive strengths include exceptional brand loyalty, the industry's broadest product offering, an extensive distributor network with 1,900 points of sale, and leadership in operational efficiency through lean manufacturing[31][32][33][35] Order Backlog (as of December 31) | Year | Backlog (in millions) | Change YoY | | :--- | :--- | :--- | | 2020 | $126.4 | +18.0% | | 2019 | $107.1 | | - As of December 31, 2020, the company employed 1,767 people, with all but 13 based in the US, and none of the employees are represented by a union[48] Risk Factors The company faces significant risks from weather dependency, economic downturns, and supply chain vulnerabilities, alongside financial and operational challenges - The Work Truck Attachments segment's results are highly dependent on the level, timing, and location of snowfall, which could adversely affect results and cash flow during a sustained period of reduced snowfall[70][71] - The COVID-19 pandemic has adversely affected the business through economic slowdowns, supply chain disruptions, and temporary facility shutdowns in 2020, with the full future impact remaining uncertain[75][78] - Steel is a significant raw material, accounting for approximately 10% of revenue in 2018, 2019, and 2020, and price volatility could negatively impact gross margins if cost increases cannot be passed on to customers[83] - The company depends on outside suppliers for essential components and OEM partners for truck chassis, where any interruption in supply could result in increased costs, production delays, and lost sales[86] - As of December 31, 2020, the company had approximately $240.1 million of senior secured indebtedness, which could make it difficult to satisfy obligations, fund operations, or pursue growth opportunities[112][113] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - Not applicable[119] Properties As of December 31, 2020, the company operates five owned and fifteen leased facilities across the US and China for manufacturing and upfitting Key Company Facilities (as of Dec 31, 2020) | Location | Ownership | Function | | :--- | :--- | :--- | | Milwaukee, Wisconsin | Owned | Corporate HQ, Work Truck Attachments | | Rockland, Maine | Owned | Work Truck Attachments | | Madison Heights, Michigan | Owned | Work Truck Attachments | | Manchester, Iowa | Owned | Work Truck Solutions | | Huntley, Illinois | Owned | Work Truck Solutions | | Various (NY, MD, PA, etc.) | Leased | Work Truck Solutions, Sourcing | Legal Proceedings The company is involved in various ordinary course legal proceedings, none of which are considered material to its operations or financial position - The company is not party to any litigation that management believes is material to its operations or financial position[121] Mine Safety Disclosures This section is not applicable to the company - Not applicable[122] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE under 'PLOW', with 57 registered holders as of February 2021, and a consistent quarterly dividend policy - The company's common stock is traded on the NYSE under the ticker symbol 'PLOW'[130] - As of February 23, 2021, there were 57 registered holders of the company's Common Stock[130] - The company paid quarterly dividends to common stockholders in both 2019 and 2020[131] Selected Consolidated Financial Data Selected historical consolidated financial data for the five years ended December 31, 2020, show a decrease in total assets and Adjusted EBITDA, alongside an increase in total debt Selected Balance Sheet Data (2018-2020, in thousands) | Account | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $41,030 | $35,665 | $27,820 | | Total assets | $579,202 | $705,695 | $676,193 | | Total debt | $240,078 | $245,787 | $278,081 | | Total shareholders' equity | $200,204 | $313,163 | $282,756 | Selected Other Data (2018-2020, in thousands) | Metric | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Adjusted EBITDA | $74,892 | $108,105 | $96,443 | | Capital expenditures | $14,682 | $11,663 | $9,848 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2020, the company experienced a significant financial downturn with decreased net sales and a net loss, primarily due to a goodwill impairment charge and external market challenges Results of Operations (2020 vs 2019) In 2020, net sales decreased by 16.0% to $480.2 million, resulting in a net loss of $86.6 million primarily due to a $127.9 million goodwill impairment charge Financial Performance Comparison (in thousands) | Metric | 2020 | 2019 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $480,154 | $571,710 | -16.0% | | Gross Profit | $128,280 | $168,817 | -24.0% | | Income (Loss) from Operations | ($75,140) | $86,573 | -186.8% | | Net Income (Loss) | ($86,553) | $49,166 | -275.5% | Net Sales by Segment (in thousands) | Segment | 2020 | 2019 | Change | | :--- | :--- | :--- | :--- | | Work Truck Attachments | $252,838 | $293,630 | -13.9% | | Work Truck Solutions | $227,316 | $278,080 | -18.2% | - A $127.9 million goodwill impairment charge was recorded in 2020, consisting of $47.8 million for the Municipal reporting unit and $80.1 million for the Dejana reporting unit, due to reduced performance and future projections[159] - Cost of sales as a percentage of net sales increased to 73.3% in 2020 from 70.5% in 2019, primarily due to lower sales volumes and uncapitalized shutdown expenses related to COVID-19[156][157] Results of Operations (2019 vs 2018) In 2019, net sales increased 9.1% to $571.7 million, leading to a 12.0% rise in net income to $49.2 million, despite a pension plan termination charge Financial Performance Comparison (in thousands) | Metric | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $571,710 | $524,067 | +9.1% | | Gross Profit | $168,817 | $154,890 | +9.0% | | Income from Operations | $86,573 | $73,460 | +17.8% | | Net Income | $49,166 | $43,905 | +12.0% | Net Sales by Segment (in thousands) | Segment | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | Work Truck Attachments | $293,630 | $275,244 | +6.7% | | Work Truck Solutions | $278,080 | $248,823 | +11.8% | - A one-time pension termination cost of $6.6 million was incurred in 2019 as the company terminated its pension plans[172] Liquidity and Capital Resources As of December 31, 2020, liquidity totaled $140.1 million, with operating cash flow decreasing to $53.4 million due to the net loss, funding capital expenditures and dividends Cash Flow Summary (in thousands) | Cash Flow Activity | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $53,366 | $77,296 | $58,181 | | Net cash used in investing activities | ($14,490) | ($11,533) | ($9,690) | | Net cash used in financing activities | ($33,511) | ($57,918) | ($57,546) | - As of December 31, 2020, the company had $140.1 million liquidity, comprising $41.0 million in cash and $99.1 million available under its revolving credit facility[188] - The decrease in operating cash flow in 2020 was primarily due to a $23.8 million decrease in net income adjusted for non-cash items, including the large goodwill impairment[194] Non-GAAP Financial Measures Non-GAAP measures like Adjusted EBITDA and Free Cash Flow significantly decreased in 2020, reflecting the overall financial downturn Reconciliation to Adjusted EBITDA (in thousands) | Line Item | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net income (loss) | ($86,553) | $49,166 | $43,905 | | Adjustments (Interest, Taxes, D&A, etc.) | $33,681 | $46,989 | $46,034 | | Impairment charges | $127,872 | - | - | | Other Adjustments (Stock comp, etc.) | ($108) | $10,340 | $6,504 | | Adjusted EBITDA | $74,892 | $108,105 | $96,443 | Adjusted EBITDA by Segment (in thousands) | Segment | 2020 | 2019 | | :--- | :--- | :--- | | Work Truck Attachments | $62,532 | $80,747 | | Work Truck Solutions | $12,360 | $27,358 | | Total Adjusted EBITDA | $74,892 | $108,105 | Reconciliation to Free Cash Flow (in thousands) | Line Item | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $53,366 | $77,296 | $58,181 | | Acquisition of property and equipment | ($14,490) | ($11,533) | ($9,690) | | Free cash flow | $38,876 | $65,763 | $48,491 | Seasonality and Year-To-Year Variability The Work Truck Attachments segment experiences high seasonality driven by snowfall, with a pre-season sales program influencing revenue distribution and working capital needs peaking in Q3 - Sales in the Work Truck Attachments segment are most heavily influenced by snowfall levels in the prior snow season[226] - The pre-season sales program, offering incentives to distributors, drives an average of over two-thirds of sales volume during the second and third quarters[227] - Working capital requirements peak towards the end of the third quarter, reaching an average of approximately $93.5 million over the prior three years[230] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate fluctuations on its variable-rate debt, partially mitigated by a LIBOR floor and swap, and commodity price volatility for steel - The company is exposed to interest rate risk on its $240.1 million of variable-rate term loan borrowings; a hypothetical 1% rate increase would have had a minimal impact in 2020 due to the 1.0% LIBOR floor on the loan[234][235] - The company is party to an interest rate swap agreement to reduce exposure to interest rate volatility, which was de-designated as a hedge in March 2020 and had a negative fair value of $13.1 million at December 31, 2020[235][236] - The company is exposed to commodity price risk for steel and historically mitigates cost increases through price adjustments and surcharges, without using derivative instruments for hedging[238] Financial Statements and Supplementary Data This section refers to the company's audited consolidated financial statements and supplementary data, which are included starting on page F-2 - The financial statements are included in the report beginning on page F-2[239] Changes In and Disagreements with Accountants on Accounting and Financial Disclosures The company reports no changes in or disagreements with its accountants regarding accounting and financial disclosures - None[240] Controls and Procedures Management and the independent auditor concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2020 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[242] - Management assessed internal control over financial reporting using the COSO framework and found it to be effective as of December 31, 2020[246] - No material changes were made to internal controls over financial reporting during the last fiscal quarter of 2020[248] Other Information The company reports no other information - None[249] Part III Part III incorporates information by reference from the company's 2021 Proxy Statement, covering directors, executive compensation, security ownership, related party transactions, and accounting fees Directors, Executive Officers and Corporate Governance Information on directors and corporate governance is incorporated by reference from the Proxy Statement, with executive officer details in Part I and a Code of Conduct available online - Information required by this item is incorporated by reference from the company's definitive proxy statement[250] Executive Compensation Information on executive and director compensation, including the Compensation Committee, is incorporated by reference from the Proxy Statement - Information required by this item is incorporated by reference from the company's definitive proxy statement[252] Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters Information on security ownership of beneficial owners and management is incorporated by reference from the Proxy Statement, with 771,135 securities available for future issuance under equity plans - Information required by this item is incorporated by reference from the company's definitive proxy statement[252] Equity Compensation Plan Information (as of Dec 31, 2020) | Plan Category | Securities to be issued upon exercise | Securities remaining available for future issuance | | :--- | :--- | :--- | | Equity Compensation plans approved by security holders | 109,160 | 771,135 | | Equity compensation plans not approved by security holders | - | - | | Total | 109,160 | 771,135 | Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the Proxy Statement - Information required by this item is incorporated by reference from the company's definitive proxy statement[256] Principal Accounting Fees and Services Information on principal accounting fees and services is incorporated by reference from the Proxy Statement under the 'Ratification of Appointment of Independent Registered Public Accounting Firm' caption - Information required by this item is incorporated by reference from the company's definitive proxy statement[256] Part IV Exhibits and Financial Statement Schedules This section refers to the consolidated financial statements starting on page F-1 and the Exhibit Index, with schedules omitted as information is in the Notes - This section refers to the Index to Consolidated Financial Statements on page F-1 and the Exhibit Index[257][258][260] Form 10-K Summary This section is not applicable - Not applicable[259] Financial Statements Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued an unqualified opinion on the financial statements and internal controls, highlighting the goodwill impairment test for Dejana and Municipal units as a Critical Audit Matter - The auditor, Deloitte & Touche LLP, issued an unqualified opinion on the financial statements and the effectiveness of internal control over financial reporting as of December 31, 2020[272] - A Critical Audit Matter was identified related to the goodwill impairment test for the Dejana and Municipal reporting units, due to significant management estimates and assumptions required for fair value calculation, particularly forecasts of future revenues and EBITDA margins, and the selection of discount rates[279][281][283] Consolidated Financial Statements The consolidated financial statements show a significant decrease in total assets and shareholders' equity in 2020, primarily due to goodwill impairment, resulting in a net loss of $86.6 million on $480.2 million in net sales Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Current Assets | $217,187 | $211,528 | | Goodwill | $113,134 | $241,006 | | Total Assets | $579,202 | $705,695 | | Total Current Liabilities | $66,206 | $78,103 | | Long-term debt, less current portion | $236,676 | $222,081 | | Total Shareholders' Equity | $200,204 | $313,163 | Consolidated Statement of Income (Loss) Highlights (in thousands) | Account | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net sales | $480,154 | $571,710 | $524,067 | | Gross profit | $128,280 | $168,817 | $154,890 | | Impairment charges | $127,872 | $0 | $0 | | Net income (loss) | ($86,553) | $49,166 | $43,905 | | Diluted EPS | ($3.81) | $2.11 | $1.89 | Notes to Consolidated Financial Statements The notes detail accounting policies, a $127.9 million goodwill impairment in 2020, new accounting standard adoptions, the June 2020 debt refinancing, and the 2019 pension plan termination - In Q2 2020, a triggering event (COVID-19, chassis availability) led to an impairment test, resulting in a full goodwill impairment charge of $47.8 million for the Municipal reporting unit and $80.1 million for the Dejana reporting unit[323][324] - On June 8, 2020, the company amended and restated its senior credit facilities, establishing a new $275 million term loan facility and a $100 million revolving credit facility[386] - The company terminated its defined-benefit pension plans in Q4 2019 through lump-sum payments and the purchase of annuities, recognizing a non-cash settlement charge of $6.4 million[412][413] Segment Adjusted EBITDA (in thousands) | Segment | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Work Truck Attachments | $62,532 | $80,747 | $80,396 | | Work Truck Solutions | $12,360 | $27,358 | $16,047 | | Total Adjusted EBITDA | $74,892 | $108,105 | $96,443 |