Douglas Dynamics(PLOW) - 2021 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This part details Douglas Dynamics, Inc.'s unaudited condensed consolidated financial statements and management's discussion and analysis for the three months ended March 31, 2021 Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Douglas Dynamics, Inc., including balance sheets, statements of operations and comprehensive income (loss), cash flows, and shareholders' equity, along with detailed notes explaining the accounting policies and specific financial line items Unaudited Condensed Consolidated Balance Sheets The balance sheet shows a decrease in total assets and stockholders' equity from December 31, 2020, to March 31, 2021, primarily driven by a reduction in cash and accounts receivable, partially offset by an increase in inventories Unaudited Condensed Consolidated Balance Sheets (in thousands) | Metric | March 31, 2021 (unaudited) | December 31, 2020 (unaudited) | | :-------------------------------- | :--------------------------- | :---------------------------- | | Total assets | $556,602 | $579,202 | | Total current assets | $197,867 | $217,187 | | Cash and cash equivalents | $35,524 | $41,030 | | Accounts receivable, net | $45,149 | $83,195 | | Inventories | $99,873 | $79,482 | | Total liabilities | $359,975 | $378,998 | | Total stockholders' equity | $196,627 | $200,204 | Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) For the three months ended March 31, 2021, the company reported a significant turnaround from a net loss to net income, driven by a substantial increase in net sales and gross profit, alongside reduced interest expense Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Net sales | $103,342 | $68,190 | | Cost of sales | $77,090 | $56,500 | | Gross profit | $26,252 | $11,690 | | Income (loss) from operations | $3,648 | $(8,197) | | Interest expense, net | $(2,975) | $(5,040) | | Net income (loss) | $742 | $(10,086) | | Basic EPS | $0.03 | $(0.44) | | Diluted EPS | $0.03 | $(0.44) | | Cash dividends declared and paid per share | $0.29 | $0.28 | Unaudited Condensed Consolidated Statements of Cash Flows Operating activities generated significant cash in Q1 2021, a reversal from cash usage in Q1 2020, primarily due to improved net income and favorable working capital changes. Financing activities used substantial cash in Q1 2021, mainly for debt repayment Unaudited Condensed Consolidated Statements of Cash Flows (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net cash provided by (used in) operating activities | $24,149 | $(9,080) | | Net cash used in investing activities | $(2,177) | $(2,304) | | Net cash provided by (used in) financing activities | $(27,478) | $2,860 | | Change in cash and cash equivalents | $(5,506) | $(8,524) | | Cash and cash equivalents at end of period | $35,524 | $27,141 | Unaudited Condensed Consolidated Statements of Shareholders' Equity Shareholders' equity decreased slightly from December 31, 2020, to March 31, 2021, primarily due to dividends paid, partially offset by net income and stock-based compensation Unaudited Condensed Consolidated Statements of Shareholders' Equity (in thousands) | Metric | March 31, 2021 | December 31, 2020 | | :-------------------------------- | :------------- | :---------------- | | Total Stockholders' Equity | $196,627 | $200,204 | | Common Stock Shares Outstanding | 22,955,472 | 22,857,457 | | Retained Earnings | $41,664 | $47,712 | | Accumulated Other Comprehensive Loss | $(4,989) | $(5,495) | Notes to Unaudited Condensed Consolidated Financial Statements These notes provide detailed disclosures on the company's accounting policies, revenue recognition, credit losses, fair value measurements, inventory, property, plant and equipment, leases, intangible assets, long-term debt, accrued liabilities, warranty, earnings per share, employee stock plans, commitments, contingencies, segment information, income taxes, and changes in accumulated other comprehensive loss Note 1. Basis of Presentation The financial statements are prepared in accordance with GAAP for interim information. The company operates in two segments: Work Truck Attachments (seasonal) and Work Truck Solutions. COVID-19 significantly impacted Q1 2020 results, leading to facility closures and a CARES Act benefit - The company operates in two segments: Work Truck Attachments (commercial snow and ice management) and Work Truck Solutions (municipal snow and ice control, truck up-fitting)[17][18] - The Work Truck Attachments segment is seasonal, with greatest sales volume in Q2 and Q3, and lowest in Q1, due to pre-season sales programs and snowfall patterns[20][21] - COVID-19 pandemic significantly impacted Q1 2020 operations, including a preventative facility closure and a $1,152 thousand CARES Act benefit[22][23] Note 2. Revenue Recognition Revenue is recognized when control of goods or services transfers to the customer. The Work Truck Attachments segment recognizes revenue upon shipment, while Work Truck Solutions recognizes revenue upon delivery for upfit vehicles (point in time) or over time for customer-owned vehicles. Contract liabilities increased from $2,746 thousand to $3,741 thousand in Q1 2021 - Work Truck Attachments revenue is recognized upon shipment, with discounts and incentives recorded as a reduction of net sales[25][27][28] - Work Truck Solutions revenue for upfits is recognized net of the truck chassis value, as the company acts as an agent for the chassis. Revenue is recognized at a point in time upon delivery for non-customer owned vehicles and over time for customer-owned vehicles[31][32][35] Revenue by Customer Type and Timing of Recognition (in thousands) | Revenue by Customer Type (Three Months Ended March 31, 2021) | Work Truck Attachments | Work Truck Solutions | Total Revenue | | :--------------------------------------------------- | :--------------------- | :------------------- | :------------ | | Independent dealer | $41,981 | $33,648 | $75,629 | | Government | - | $12,450 | $12,450 | | Fleet | - | $11,345 | $11,345 | | Other | - | $3,918 | $3,918 | | Total revenue | $41,981 | $61,361 | $103,342 | | Revenue by Timing of Recognition (Three Months Ended March 31, 2021) | Work Truck Attachments | Work Truck Solutions | Total Revenue | | :--------------------------------------------------- | :--------------------- | :------------------- | :------------ | | Point in time | $41,981 | $40,710 | $82,691 | | Over time | - | $20,651 | $20,651 | | Total revenue | $41,981 | $61,361 | $103,342 | Contract Liabilities (in thousands) | Contract Liabilities | Balance at Beginning of Period | Additions | Deductions | Balance at End of Period | | :------------------- | :----------------------------- | :-------- | :--------- | :----------------------- | | March 31, 2021 | $2,746 | $3,165 | $(2,170) | $3,741 | | March 31, 2020 | $2,187 | $1,637 | $(1,789) | $2,035 | Note 3. Credit Losses The company adopted the CECL model for credit losses in 2020, increasing the allowance for credit losses. As of March 31, 2021, the total allowance for credit losses on trade accounts receivable was $3,046 thousand, an increase from $2,929 thousand at December 31, 2020 - Effective January 1, 2020, the company adopted the CECL model, increasing the allowance for credit losses by approximately $750 thousand ($400k for Work Truck Attachments, $350k for Work Truck Solutions)[43] Allowance for Credit Losses on Trade Accounts Receivable (in thousands) | Allowance for Credit Losses on Trade Accounts Receivable | March 31, 2021 | December 31, 2020 | | :--------------------------------------------------- | :------------- | :---------------- | | Work Truck Attachments | $1,582 | $1,480 | | Work Truck Solutions | $1,464 | $1,449 | | Total | $3,046 | $2,929 | Note 4. Fair Value The company measures certain financial assets and liabilities at fair value, primarily non-qualified benefit plan assets and interest rate swaps, using Level 2 inputs. Long-term debt fair value is also estimated using Level 2 inputs Fair Value (in thousands) | Fair Value (in thousands) | March 31, 2021 | December 31, 2020 | | :------------------------ | :------------- | :---------------- | | Non-qualified benefit plan assets | $9,376 | $9,041 | | Interest rate swaps (liability) | $10,871 | $13,073 | | Long-term debt (fair value) | $217,936 | $241,278 | - Fair value measurements are categorized into Level 1, 2, or 3. Non-qualified benefit plan assets, interest rate swaps, and long-term debt fair values are determined using Level 2 inputs (observable market inputs)[47][51][52][53] Note 5. Inventories Total inventories increased significantly from December 31, 2020, to March 31, 2021, primarily driven by an increase in finished goods. Truck chassis inventory financed through floor plan agreements also increased Inventories (in thousands) | Inventories (in thousands) | March 31, 2021 | December 31, 2020 | | :------------------------- | :------------- | :---------------- | | Finished goods | $61,379 | $39,496 | | Work-in-process | $7,156 | $8,253 | | Raw material and supplies | $31,338 | $31,733 | | Total inventories | $99,873 | $79,482 | | Truck chassis inventory | $12,112 | $8,146 | | Related floor plan obligations | $12,029 | $7,885 | Note 6. Property, Plant and Equipment Net property, plant and equipment remained relatively stable from December 31, 2020, to March 31, 2021, with minor increases in machinery and equipment and construction-in-process Property, Plant and Equipment (in thousands) | Property, Plant and Equipment (in thousands) | March 31, 2021 | December 31, 2020 | | :------------------------------------------- | :------------- | :---------------- | | Total property, plant and equipment | $140,553 | $138,762 | | Less accumulated depreciation | $(76,151) | $(74,442) | | Net property, plant and equipment | $64,402 | $64,320 | Note 7. Leases The company has operating leases for various assets, with lease expense increasing slightly in Q1 2021 compared to Q1 2020. The weighted average remaining lease term is 64 months with a discount rate of 5.16% Lease Expense (in thousands) | Lease Expense (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--------------------------- | :-------------------------------- | :-------------------------------- | | Operating lease expense | $1,371 | $1,311 | | Short term lease cost | $115 | $39 | | Total lease cost | $1,486 | $1,350 | Lease Metrics (in thousands, except for term and rate) | Lease Metrics | March 31, 2021 | December 31, 2020 | | :-------------------------------- | :------------- | :---------------- | | Operating lease right-of-use assets | $20,404 | $21,441 | | Total operating lease liabilities | $20,739 | $21,760 | | Weighted Average Remaining Lease Term | 64 months | 67 months | | Weighted Average Discount Rate | 5.16% | 5.16% | Note 8. Other Intangible Assets Net other intangible assets decreased slightly from December 31, 2020, to March 31, 2021, primarily due to amortization. Trademark and tradenames remain the largest indefinite-lived intangible asset Other Intangible Assets (in thousands) | Other Intangible Assets (in thousands) | March 31, 2021 (Net Carrying Amount) | December 31, 2020 (Net Carrying Amount) | | :------------------------------------- | :----------------------------------- | :------------------------------------ | | Trademark and tradenames | $77,600 | $77,600 | | Dealer network | $12,000 | $13,000 | | Customer relationships | $52,439 | $53,724 | | Patents | $6,338 | $6,652 | | Noncompete agreements | $81 | $163 | | Trademarks | $1,628 | $1,652 | | Total | $150,086 | $152,791 | | Amortization expense (Q1) | $2,705 | $2,738 | Note 9. Long-Term Debt Long-term debt decreased from $236,676 thousand at December 31, 2020, to $216,588 thousand at March 31, 2021, primarily due to a voluntary payment of $20,000 thousand. The company's interest rate swap was dedesignated as ineffective in Q1 2020, leading to mark-to-market adjustments through interest expense Long-Term Debt (in thousands) | Long-Term Debt (in thousands) | March 31, 2021 | December 31, 2020 | | :---------------------------- | :------------- | :---------------- | | Term Loan, net | $219,583 | $240,078 | | Less current maturities | $1,459 | $1,666 | | Deferred financing costs, net | $1,536 | $1,736 | | Long-term debt, net | $216,588 | $236,676 | | Revolving Credit Agreement borrowings | $0 | $0 | | Remaining borrowing availability | $98,058 | $99,050 | - The company made a voluntary payment of $20,000 thousand on its debt on March 31, 2021[63] - The interest rate swap was dedesignated as ineffective on March 19, 2020. A mark-to-market adjustment of $(2,202) thousand was recorded as Interest expense in Q1 2021, compared to a $1,413 thousand loss in Q1 2020[64] Note 10. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities decreased from $30,831 thousand at December 31, 2020, to $27,363 thousand at March 31, 2021, primarily due to a decrease in payroll and related costs Accrued Expenses and Other Current Liabilities (in thousands) | Accrued Expenses and Other Current Liabilities (in thousands) | March 31, 2021 | December 31, 2020 | | :---------------------------------------------------------- | :------------- | :---------------- | | Payroll and related costs | $7,019 | $10,240 | | Employee benefits | $8,592 | $7,642 | | Accrued warranty | $2,800 | $3,392 | | Interest rate swaps | $4,074 | $4,075 | | Other | $4,878 | $5,482 | | Total | $27,363 | $30,831 | Note 11. Warranty Liability The warranty liability decreased from $5,812 thousand at December 31, 2020, to $4,677 thousand at March 31, 2021, due to claims paid exceeding new provisions Warranty Liability Rollforward (in thousands) | Warranty Liability Rollforward (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Balance at the beginning of the period | $5,812 | $6,541 | | Warranty provision | $970 | $549 | | Claims paid/settlements | $(2,105) | $(1,888) | | Balance at the end of the period | $4,677 | $5,202 | - The company accrues for estimated warranty costs based on historical warranty expense and management's judgment, with warranties typically lasting one to two years[68] Note 12. Earnings (Loss) per Share Basic and diluted EPS significantly improved to $0.03 in Q1 2021 from a loss of $(0.44) in Q1 2020, reflecting the company's return to profitability Earnings (Loss) per Common Share (in thousands, except per share data) | Earnings (Loss) per Common Share | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------------------- | :-------------------------------- | :-------------------------------- | | Net income (loss) allocated to common shareholders | $731 | $(10,086) | | Weighted average common shares outstanding | 22,881,416 | 22,813,256 | | Basic EPS | $0.03 | $(0.44) | | Weighted average common shares assuming dilution | 22,901,979 | 22,813,256 | | Diluted EPS | $0.03 | $(0.44) | Note 13. Employee Stock Plans The company grants performance share units (PSUs) and restricted stock units (RSUs) under its 2010 Stock Incentive Plan. Compensation expense for PSUs was $811 thousand and for RSUs was $1,154 thousand in Q1 2021, both higher than the prior year - The 2010 Stock Incentive Plan allows for various equity awards, with a maximum of 2,130,000 shares of common stock[72] - Compensation expense for performance share unit awards was $811 thousand in Q1 2021, up from $484 thousand in Q1 2020[74] - Compensation expense for restricted stock unit awards was $1,154 thousand in Q1 2021, up from $884 thousand in Q1 2020[78] Note 14. Commitments and Contingencies The company is involved in various litigation matters in the ordinary course of business, primarily product liability and intellectual property disputes, but management does not believe any pending litigation will have a material adverse effect on its financial position - The company is engaged in various litigation, including product liability and intellectual property disputes, but management does not believe these will have a material adverse effect[80] Note 15. Segments Both Work Truck Attachments and Work Truck Solutions segments showed significant improvements in net sales and Adjusted EBITDA in Q1 2021 compared to Q1 2020, reflecting recovery from prior year's pandemic impacts and favorable snowfall Segment Performance (in thousands) | Segment Performance (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Net Sales: | | | | Work Truck Attachments | $41,981 | $19,120 | | Work Truck Solutions | $61,361 | $49,070 | | Total Net Sales | $103,342 | $68,190 | | Adjusted EBITDA: | | | | Work Truck Attachments | $8,239 | $(2,076) | | Work Truck Solutions | $2,419 | $361 | | Total Adjusted EBITDA | $10,658 | $(1,715) | - Segment performance is evaluated based on net sales and Adjusted EBITDA, with all corporate costs allocated to the segments[83] Note 16. Income Taxes The effective tax rate was (11.6%) in Q1 2021, lower than (24.4%) in Q1 2020, primarily due to a discrete tax benefit from excess tax benefits from stock compensation Income Tax Metrics | Income Tax Metrics | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :----------------- | :-------------------------------- | :-------------------------------- | | Effective tax rate | (11.6)% | (24.4)% | | Discrete tax benefit from stock compensation | $274 | $93 | - Deferred income taxes reflect temporary differences, with the largest item being the difference in book and tax amortization of goodwill and other intangibles[87] Note 17. Changes in Accumulated Other Comprehensive Loss by Component Accumulated other comprehensive loss improved from $(5,495) thousand at December 31, 2020, to $(4,989) thousand at March 31, 2021, mainly due to reclassifications related to interest rate swaps and postretirement benefit items Accumulated Other Comprehensive Loss (in thousands) | Accumulated Other Comprehensive Loss (in thousands) | Balance at December 31, 2020 | Balance at March 31, 2021 | | :------------------------------------------------ | :--------------------------- | :------------------------ | | Unrealized Net Loss on Interest Rate Swap | $(7,608) | $(7,044) | | Retiree Health Benefit Obligation | $2,113 | $2,055 | | Total | $(5,495) | $(4,989) | - Reclassifications from accumulated other comprehensive loss to earnings included $777 thousand (net of tax) from interest rate swaps and $(58) thousand (net of tax) from postretirement benefit items in Q1 2021[88] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance and condition for the three months ended March 31, 2021, compared to the prior year. It highlights significant improvements in sales and profitability, recovery from COVID-19 impacts, and details on liquidity, capital resources, and non-GAAP financial measures Forward-Looking Statements The report contains forward-looking statements regarding future events, financial performance, and strategies, which are subject to known and unknown risks, including weather conditions, economic factors, supply chain issues, and regulatory changes - Forward-looking statements are identified by words like 'anticipate,' 'believe,' 'intend,' 'expect,' and similar expressions[94] - Key risk factors include weather conditions (snowfall levels), general economic conditions (including COVID-19 impacts), relationships with OEMs and distributors, material price increases (steel), and ability to develop new products[94] Results of Operations Overview The company's Q1 2021 results show a strong recovery from Q1 2020, with net sales increasing by 51.5% and a shift from a net loss to net income. This improvement is attributed to increased sales volumes, favorable snowfall, and reduced impacts from COVID-19 related shutdowns Results of Operations Overview (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change ($) | Change (%) | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Net sales | $103,342 | $68,190 | $35,152 | 51.5% | | Gross profit | $26,252 | $11,690 | $14,562 | 124.6% | | Income (loss) from operations | $3,648 | $(8,197) | $11,845 | - | | Net income (loss) | $742 | $(10,086) | $10,828 | - | Results of Operations Overview (as % of Net Sales) | Metric (as % of Net Sales) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Gross profit | 25.4% | 17.1% | | Income (loss) from operations | 3.5% | (12.0)% | | Net income (loss) | 0.7% | (14.6)% | - The Work Truck Attachments segment is seasonal, and its results can vary significantly quarter-to-quarter and year-to-year[97] - COVID-19 pandemic impacted Q1 2020 results due to facility shutdowns, but the company returned to full production by the end of Q2 2020[99][100] Net Sales Net sales increased by $35.1 million (51.5%) to $103.3 million in Q1 2021, primarily due to higher volumes from favorable snowfall timing and location, and the recovery from reduced shipments in Q1 2020 caused by COVID-19 shutdowns Segment Net Sales (in thousands) | Segment Net Sales (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change ($) | Change (%) | | :------------------------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Work Truck Attachments | $41,981 | $19,120 | $22,861 | 119.6% | | Work Truck Solutions | $61,361 | $49,070 | $12,291 | 25.0% | | Total Net Sales | $103,342 | $68,190 | $35,152 | 51.5% | - Work Truck Attachments sales increased due to snowfall levels in Q1 2021 (7% below 10-year average vs. 25% below in Q1 2020) and deferred sales from 2020[104] - Work Truck Solutions sales increased due to improved class 4-6 chassis availability and recovery from Q1 2020 facility shutdowns[105] Cost of Sales Cost of sales increased by $20.6 million (36.5%) to $77.1 million in Q1 2021, driven by higher sales volumes. As a percentage of sales, cost of sales decreased from 82.9% to 74.6%, reflecting improved efficiency and the absence of prior year's shutdown expenses Cost of Sales (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change ($) | Change (%) | | :----------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Cost of sales | $77,090 | $56,500 | $20,590 | 36.5% | | % of Net Sales | 74.6% | 82.9% | -8.3% | - | - The decrease in cost of sales as a percentage of sales is due to higher sales volumes and the absence of shutdown expenses (e.g., continuation of wages, fixed overhead) incurred in Q1 2020 due to COVID-119[106] Gross Profit Gross profit more than doubled, increasing by $14.6 million (124.8%) to $26.3 million in Q1 2021. Gross profit margin improved significantly from 17.1% to 25.4%, reflecting the higher sales volumes and better cost management compared to the prior year's pandemic-affected period Gross Profit (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change ($) | Change (%) | | :----------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Gross profit | $26,252 | $11,690 | $14,562 | 124.8% | | % of Net Sales | 25.4% | 17.1% | 8.3% | - | - The improvement in gross profit margin is attributed to the same factors driving changes in cost of sales as a percentage of sales, primarily higher sales volumes and reduced shutdown expenses[107] Selling, General and Administrative Expense Selling, general and administrative expenses, including intangibles amortization, increased by $2.7 million (13.6%) to $22.6 million in Q1 2021, mainly due to higher employee compensation, including incentive-based and stock-based compensation, reflecting improved operating results Selling, General and Administrative Expense (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change ($) | Change (%) | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Selling, general and administrative expenses | $19,899 | $17,149 | $2,750 | 16.0% | | Intangibles amortization | $2,705 | $2,738 | $(33) | -1.2% | | Total SG&A (incl. amortization) | $22,604 | $19,887 | $2,717 | 13.7% | - The increase in SG&A was primarily due to $1.7 million in incentive-based compensation and $0.6 million in stock-based compensation, reflecting improved operating results[108] Interest Expense Net interest expense decreased from $5.0 million in Q1 2020 to $3.0 million in Q1 2021. This reduction was primarily driven by a $1.5 million non-cash gain on an interest rate swap in the current year, compared to a $1.4 million loss in the prior year, partially offset by higher interest paid on the term loan due to refinancing Interest Expense (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change ($) | Change (%) | | :------------------ | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Interest expense, net | $2,975 | $5,040 | $(2,065) | -41.0% | - The decrease in interest expense was mainly due to a ($1.5) million gain from mark-to-market and amortization adjustments on an interest rate swap in Q1 2021, compared to a $1.4 million loss in Q1 2020[109] Income Taxes The effective tax rate was (11.6%) in Q1 2021, compared to (24.4%) in Q1 2020, primarily due to a discrete tax benefit related to excess tax benefits from stock compensation Income Tax Metrics (in thousands, except for rate) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :----------------- | :-------------------------------- | :-------------------------------- | | Income tax benefit | $(77) | $(3,262) | | Effective tax rate | (11.6)% | (24.4)% | - The lower effective tax rate in Q1 2021 was due to a $0.3 million discrete tax benefit from stock compensation, compared to $0.1 million in Q1 2020[110] Net Income (Loss) The company achieved net income of $0.7 million in Q1 2021, a significant improvement from a net loss of $(10.1) million in Q1 2020. This turnaround was driven by increased sales, improved gross profit margins, and lower interest expense Net Income (Loss) (in thousands) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change ($) | Change (%) | | :----------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Net income (loss) | $742 | $(10,086) | $10,828 | - | | % of Net Sales | 0.7% | (14.6)% | 15.3% | - | Discussion of Critical Accounting Policies There have been no material changes to the company's critical accounting policies previously disclosed in its Form 10-K, other than those described in the current report - No material changes to critical accounting policies were reported, other than those specifically mentioned in the 10-Q[113] Liquidity and Capital Resources The company's liquidity decreased slightly to $133.6 million at March 31, 2021, from $140.1 million at December 31, 2020, primarily due to business seasonality. Cash from operations and available credit are expected to provide adequate funds for the foreseeable future - Principal sources of cash are operations and borrowings under senior credit facilities; primary uses are working capital, debt service, capital expenditures, and dividends[113][114] Liquidity (in thousands) | Liquidity (in thousands) | March 31, 2021 | December 31, 2020 | | :----------------------- | :------------- | :---------------- | | Cash and cash equivalents | $35,524 | $41,030 | | Revolving credit facility availability | $98,058 | $99,050 | | Total liquidity | $133,582 | $140,080 | Cash Flows (in thousands) | Cash Flows (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change ($) | Change (%) | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Net cash provided by (used in) operating activities | $24,149 | $(9,080) | $33,229 | -366.0% | | Net cash used in investing activities | $(2,177) | $(2,304) | $127 | -5.5% | | Net cash provided by (used in) financing activities | $(27,478) | $2,860 | $(30,338) | -1060.8% | | Change in cash | $(5,506) | $(8,524) | $3,018 | 35.4% | - The increase in cash from operating activities was due to a $10.3 million increase in net income (loss) and $22.9 million in favorable working capital changes, including a decrease in inventory[121][122] - Net cash used in financing activities increased due to $30.0 million in revolving credit facility borrowings in Q1 2020, compared to $0.0 million in Q1 2021[123] Free Cash Flow (Non-GAAP) Free cash flow significantly improved to $22.0 million in Q1 2021 from $(11.4) million in Q1 2020, primarily driven by higher cash provided by operating activities Free Cash Flow (in thousands) | Free Cash Flow (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :---------------------------- | :-------------------------------- | :-------------------------------- | | Net cash provided by (used in) operations | $24,149 | $(9,080) | | Acquisition of property and equipment | $(2,177) | $(2,304) | | Free cash flow | $21,972 | $(11,384) | - Free cash flow is a non-GAAP measure defined as net cash provided by (used in) operating activities less capital expenditures, used to assess the ability to generate additional cash flow[126] Adjusted EBITDA (Non-GAAP) Adjusted EBITDA increased significantly to $10.7 million in Q1 2021 from $(1.7) million in Q1 2020, reflecting higher volumes and reduced COVID-19 related costs and inefficiencies in both segments Adjusted EBITDA (in thousands) | Adjusted EBITDA (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :----------------------------- | :-------------------------------- | :-------------------------------- | | Net income (loss) | $742 | $(10,086) | | EBITDA | $8,653 | $(3,414) | | Stock-based compensation expense | $1,965 | $1,368 | | COVID-19 related costs | $40 | $317 | | Adjusted EBITDA | $10,658 | $(1,715) | Adjusted EBITDA by Segment (in thousands) | Adjusted EBITDA by Segment (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :---------------------------------------- | :-------------------------------- | :-------------------------------- | | Work Truck Attachments | $8,239 | $(2,076) | | Work Truck Solutions | $2,419 | $361 | | Total Adjusted EBITDA | $10,658 | $(1,715) | - Adjusted EBITDA is a non-GAAP measure that excludes interest, taxes, depreciation, amortization, stock-based compensation, COVID-19 costs, and other charges, providing a consistent view of core operations[129] Adjusted Net Income (Loss) and Adjusted Earnings (Loss) Per Share (Non-GAAP) Adjusted net income (loss) improved to $1.2 million in Q1 2021 from a loss of $(7.8) million in Q1 2020, resulting in Adjusted diluted EPS of $0.04, up from $(0.34). These non-GAAP measures exclude non-recurring or non-operational items to better reflect underlying business performance Adjusted Net Income (Loss) and EPS (in thousands, except per share data) | Adjusted Net Income (Loss) and EPS (in thousands, except per share data) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :------------------------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Net income (loss) (GAAP) | $742 | $(10,086) | | Adjustments (pre-tax) | $551 | $3,112 | | Tax effect on adjustments | $(138) | $(778) | | Adjusted net income (loss) (non-GAAP) | $1,155 | $(7,752) | | GAAP diluted earnings (loss) per share | $0.03 | $(0.44) | | Adjustments net of income taxes (per share) | $0.01 | $0.10 | | Adjusted diluted earnings (loss) per share (non-GAAP) | $0.04 | $(0.34) | - Adjustments include stock-based compensation, COVID-19 costs, purchase accounting adjustments, and derivative adjustments not classified as hedges, net of their income tax impact[136] Contractual Obligations There have been no material changes to the company's contractual obligations during the three months ended March 31, 2021 - No material changes to contractual obligations were reported in Q1 2021[140] Off-Balance Sheet Arrangements The company is not party to any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on its financial condition or results of operations - The company has no material off-balance sheet arrangements[141] Seasonality and Year-to-Year Variability The Work Truck Attachments segment experiences significant seasonality and year-to-year variability driven by snowfall levels, impacting sales and working capital. The company manages this through pre-season sales programs, a variable cost structure, lean manufacturing, and a vertically integrated model - Work Truck Attachments segment is highly seasonal, with sales heavily influenced by prior season's snowfall levels and timing[142][143] - Pre-season sales programs in Q2 and Q3 incentivize distributors with favorable pricing and payment deferrals, leading to the highest sales volume for the Work Truck Attachments segment during these quarters[144] - Working capital needs are highest in Q2 and Q3 due to rising accounts receivable from pre-season sales, declining in Q4 as payments are received[148] - Management strategies to mitigate seasonality include a variable cost structure, lean manufacturing, pre-season order programs, and a vertically integrated business model[149] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are changes in interest rates on its variable-rate debt and fluctuations in steel prices. It uses interest rate swaps to mitigate interest rate risk but does not use derivatives for commodity price risk Interest Rate Risk The company is exposed to interest rate risk due to variable-rate borrowings, primarily its term loan. A portion of this risk is mitigated by an interest rate swap, though the swap was deemed ineffective in Q1 2020 - The company's borrowings, including its term loan and revolving borrowings, are at variable interest rates, exposing it to interest rate risk[152] - An interest rate swap agreement is used to reduce exposure to interest rate volatility, but it was dedesignated as ineffective in Q1 2020[155][156] - As of March 31, 2021, outstanding term loan borrowings were $219.6 million, with no outstanding revolving credit facility borrowings[153][157] Commodity Price Risk The company is exposed to market risk from steel price fluctuations, as steel is a primary commodity for manufacturing. Steel purchases represented 12.7% of revenue in Q1 2021. The company does not use derivatives to manage this risk and may not always be able to pass increased costs to distributors Steel Purchases as a Percentage of Revenue | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Steel purchases as a percentage of revenue | 12.7% | 16.9% | - The company is exposed to market risk from steel price fluctuations, as steel is a primary commodity for manufacturing[158] - The company does not use derivative or hedging instruments to manage steel price risk and may not always be able to mitigate increased costs through price increases or surcharges[158] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2021. There were no material changes in internal control over financial reporting during the period - The CEO and CFO concluded that disclosure controls and procedures were effective as of March 31, 2021[159] - No material changes in internal control over financial reporting occurred during the period[160] PART II. OTHER INFORMATION This part covers legal proceedings, risk factors, equity sales, defaults, mine safety, other information, exhibits, and signatures for Douglas Dynamics, Inc.'s quarterly report Item 1. Legal Proceedings The company is involved in various ordinary course litigation matters, primarily product liability and intellectual property disputes, but management does not believe any current litigation is material to its operations or financial position - The company is engaged in various litigation, including product liability and intellectual property disputes, but management does not believe these are material[162] Item 1A. Risk Factors There have been no significant changes in the company's risk factors from those described in its Annual Report on Form 10-K for the year ended December 31, 2020 - No significant changes to risk factors were reported compared to the prior Annual Report on Form 10-K[164] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the three months ended March 31, 2021, the company did not sell any unregistered equity securities or purchase any of its own equity securities. Dividend payments are subject to restrictions under senior credit facilities - No unregistered sales of equity securities occurred in Q1 2021[165] - No purchases of equity securities were made by the company in Q1 2021[166] - Dividend payments are subject to restrictions outlined in the company's senior credit facilities[167] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities reported during the period - No defaults upon senior securities were reported[168] Item 4. Mine Safety Disclosures No mine safety disclosures were reported - No mine safety disclosures were reported[169] Item 5. Other Information No other information was reported in this section - No other information was reported[170] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including certifications (Sarbanes-Oxley Act Sections 302 and 906) and XBRL financial statements - Exhibits include certifications by the CEO and CFO (Sections 302 and 906 of Sarbanes-Oxley Act) and XBRL financial statements[172] Signatures The report is duly signed on behalf of Douglas Dynamics, Inc. by its Chief Financial Officer, Sarah Lauber, on May 3, 2021 - The report was signed by Sarah Lauber, Chief Financial Officer, on May 3, 2021[175]