Douglas Dynamics(PLOW) - 2022 Q4 - Annual Report

Part I Business Douglas Dynamics manufactures and upfits commercial work truck attachments and equipment across two segments: Work Truck Attachments and Work Truck Solutions Overview The company operates through two segments: Work Truck Attachments for snow and ice control products, and Work Truck Solutions for municipal products and vehicle upfitting - The company operates through two segments: Work Truck Attachments (brands: FISHER®, SNOWEX®, WESTERN®) and Work Truck Solutions (brands: HENDERSON®, DEJANA®)[19] - In 2022, snow and ice control equipment accounted for 85% of net sales in the Work Truck Attachments segment, with parts and accessories comprising the rest[20] - The Work Truck Solutions segment serves approximately 2,800 customers, including governmental agencies and municipalities, as a premier upfitter for Class 3-8 trucks[24] Our Industry Industry demand for Work Truck Attachments is driven by equipment replacement cycles and prior season snowfall, while Work Truck Solutions is influenced by macroeconomic trends and municipal budgets - Demand for snow and ice control equipment is primarily driven by the replacement cycle, with snowplows typically replaced every 9 to 12 years[26] - Annual sales are significantly influenced by the prior snow season's snowfall levels, as heavy snowfall increases equipment wear and tear[27] - The company implemented significant price increases in 2021 and 2022, ranging from mid-single digits to low double-digits, in response to inflation[31] Our Competitive Strengths The company's competitive strengths include strong brand equity, a broad product offering, an extensive distributor network, operational efficiency, robust cash flow, and an experienced management team - Key competitive strengths include strong brand equity, a broad product line, an extensive North American distributor network with approximately 3,100 points of sale, operational efficiency, strong cash flow, and an experienced management team[36][37][39] Our Business Strategy The company's business strategy focuses on maximizing cash flow through product innovation, network optimization, aggressive asset management, and a lean enterprise platform (DDMS) - The core business strategy aims to maximize cash flow for reinvestment, dividends, debt reduction, and stock repurchases[43] - Key strategic pillars include continuous product innovation, optimization of the distributor and customer network, aggressive asset management, and a flexible, lean manufacturing platform (DDMS)[43][44][46] Order Backlog The company's total order backlog increased from $315.4 million in 2021 to $368.7 million in 2022 Order Backlog Comparison | Date | Backlog (in millions) | | :--- | :--- | | December 31, 2022 | $368.7 | | December 31, 2021 | $315.4 | Human Capital Management As of December 31, 2022, Douglas Dynamics employed 1,813 people, emphasizing a culture of integrity, teamwork, and talent development through initiatives like Douglas Dynamics University - As of December 31, 2022, the company employed 1,813 people, with all but 14 based in the US and no union representation[53] - The company promotes talent development through its internal Douglas Dynamics University (DDU), offering a balanced approach of instruction, interaction, and application[59] Risk Factors The company faces significant risks related to snowfall dependency, economic conditions, supply chain disruptions, operational reliance on suppliers and distributors, cybersecurity, debt load, and regulatory compliance Risks Related to Weather and Seasonality The company's financial results, especially for Work Truck Attachments, are highly dependent on snowfall levels, with reduced snowfall potentially leading to lower sales and cash flow - The company's financial results, particularly for the Work Truck Attachments segment, depend primarily on snowfall levels, where a lack of snowfall can adversely affect sales and cash flow[75] Risks Related to Economic Conditions Economic conditions, including potential downturns, reduced government spending, and volatile steel prices (13% of 2022 revenue), pose significant risks to the company's demand and margins - The price of steel poses a significant risk, as raw steel purchases were equivalent to approximately 13% of revenue in 2022, with volatility potentially impacting gross margins[89] - The COVID-19 pandemic has adversely impacted the business through supply chain disruptions and difficulty obtaining chassis, with potential for continued effects[85] Risks Related to Business and Operations Operational risks include dependence on outside suppliers and OEMs for components and chassis, potential cybersecurity breaches, reliance on senior management, and maintaining distributor relationships - The company relies on outside suppliers and OEMs for components and truck chassis, facing difficulties in 2020, 2021, and 2022 due to computer chip shortages that deferred sales[96] - The business depends on its network of distributors, and losing a substantial portion of this base could significantly reduce sales[100] Risks Related to Capital Structure As of December 31, 2022, the company's $207.7 million senior secured indebtedness poses risks to financial flexibility and exposes it to interest rate fluctuations - As of December 31, 2022, the company had approximately $207.7 million of senior secured indebtedness, which could adversely affect operations and cash flow[122] - Borrowings under senior credit facilities are at variable interest rates, exposing the company to interest rate risk that could increase debt service obligations[124] Properties The company's facilities include a leased corporate headquarters in Milwaukee, five owned manufacturing sites, fifteen leased facilities across eight states, and a leased sourcing office in China Key Company Facilities (as of Dec 31, 2022) | Location | Ownership | Function | | :--- | :--- | :--- | | Milwaukee, Wisconsin | Leased | Corporate headquarters | | Milwaukee, Wisconsin | Owned | 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 | Legal Proceedings The company is involved in various litigation, primarily product liability and intellectual property disputes, none of which management deems material to operations or financial position - The company is engaged in various litigation, including product liability and intellectual property disputes, but management does not believe any current litigation is material[131] 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', pays quarterly dividends, and initiated a $50.0 million stock repurchase plan in 2022, with $44.0 million remaining - The company's common stock trades on the NYSE under the symbol "PLOW"[141] 2022 Share Repurchase Activity | Period | Total Shares Purchased | Average Price Paid | Value (in millions) | | :--- | :--- | :--- | :--- | | Year Ended Dec 31, 2022 | 171,088 | $35.07 | $6.0 | | Remaining Authorization | | | $44.0 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, net sales grew 13.8% to $616.1 million, net income increased to $38.6 million, but gross margin declined due to inflation, and operating cash flow decreased to $40.0 million due to working capital changes Results of Operations In 2022, net sales increased 13.8% to $616.1 million and net income grew to $38.6 million, driven by pricing and volume, despite gross margin contraction due to inflation Consolidated Statement of Income (Loss) Summary (in thousands) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net sales | $616,068 | $541,453 | $480,154 | | Gross profit | $151,456 | $141,872 | $128,280 | | Income (loss) from operations | $58,753 | $51,135 | $(75,140) | | Net income (loss) | $38,609 | $30,691 | $(86,553) | Net Sales by Segment (in thousands) | Segment | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Work Truck Attachments | $382,296 | $325,707 | $252,838 | | Work Truck Solutions | $233,772 | $215,746 | $227,316 | | Total | $616,068 | $541,453 | $480,154 | - In 2020, the company recorded a significant goodwill impairment charge of $127.9 million related to its Municipal and Dejana reporting units, primarily due to COVID-19 economic conditions[154][180] Liquidity and Capital Resources The company's liquidity at year-end 2022 included $20.7 million cash and $99.5 million borrowing availability, with operating cash flow decreasing to $40.0 million due to working capital changes Cash Flow Summary (in thousands) | Cash Flow Activity | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $40,030 | $60,535 | $53,366 | | Net cash used in investing activities | $(12,047) | $(11,208) | $(14,490) | | Net cash used in financing activities | $(44,277) | $(53,393) | $(33,511) | - The $17.1 million decrease in 2022 operating cash flow was primarily due to unfavorable working capital changes, including increased accounts receivable and inventory[215] - In January 2023, the company increased its revolving credit facility commitment by $50.0 million to a total of $150.0 million[207] Non-GAAP Financial Measures The company uses non-GAAP measures like Adjusted EBITDA, which increased 9.2% to $86.8 million in 2022, and Adjusted diluted EPS, which rose to $1.84, while free cash flow decreased to $28.0 million Reconciliation of Net Income (Loss) to Adjusted EBITDA (in thousands) | | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net income (loss) | $38,609 | $30,691 | $(86,553) | | Adjustments (Interest, Taxes, D&A, etc.) | $40,943 | $35,952 | $159,655 | | Other Adjustments (Stock Comp, Impairment, etc.) | $7,228 | $12,793 | $1,790 | | Adjusted EBITDA | $86,780 | $79,536 | $74,892 | Adjusted Net Income and EPS | | 2022 | 2021 | | :--- | :--- | | Adjusted net income (non-GAAP, in thousands) | $43,514 | $39,392 | | Adjusted earnings per common share - dilutive (non-GAAP) | $1.84 | $1.67 | - Free cash flow, defined as net cash from operations less capital expenditures, decreased to $28.0 million in 2022 from $49.3 million in 2021[226][229] Future Obligations and Commitments As of December 31, 2022, total contractual cash obligations were $270.1 million, primarily comprising $207.7 million in long-term debt and $41.3 million in interest payments Contractual Obligations as of December 31, 2022 (in thousands) | Obligation Type | Total | Less than 1 year | 1 - 3 years | 3 - 5 years | More than 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Long-term debt | $207,737 | $11,137 | $33,525 | $163,075 | $ - | | Operating leases | $21,038 | $5,678 | $8,800 | $4,383 | $2,177 | | Interest on long-term debt | $41,331 | $12,791 | $23,363 | $5,177 | $ - | | Total | $270,106 | $29,606 | $65,688 | $172,635 | $2,177 | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate fluctuations on variable-rate debt, partially mitigated by swaps, and commodity price risk from steel, which it attempts to offset through price adjustments - The company is exposed to interest rate risk from its variable-rate debt, where a hypothetical 1% change in interest rates would have altered 2022 interest expense by $0.4 million on the term loan[260][262] - The company uses interest rate swap agreements to reduce interest rate volatility, holding swaps with notional amounts of $175.0 million and $125.0 million as of December 31, 2022[263] - The company faces commodity price risk from steel, a primary raw material, attempting to mitigate cost increases through price adjustments, though not always successfully or timely[266] Controls and Procedures As of December 31, 2022, management and the independent auditor concluded that the company's disclosure controls and internal control over financial reporting were effective - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[269] - Management believes the company's internal control over financial reporting was effective as of December 31, 2022, based on the COSO framework[274] Part III Corporate Governance, Compensation, and Other Matters Information for Items 10-14, covering corporate governance, compensation, and related matters, is incorporated by reference from the 2023 Proxy Statement, with 531,267 securities available for future issuance - Information for Items 10-14, covering directors, executive compensation, security ownership, and related transactions, is incorporated by reference from the company's Proxy Statement[279][282][288] Equity Compensation Plan Information (as of Dec 31, 2022) | Plan Category | Securities to be issued upon exercise | Securities remaining available for future issuance | | :--- | :--- | :--- | | Equity Compensation plans approved by security holders | 214,085 | 531,267 | Part IV Exhibits and Financial Statement Schedules This section lists documents filed as part of the Form 10-K, including consolidated financial statements and an Exhibit Index for all filed exhibits - All required financial statement schedules have been omitted as the necessary information is included in the Notes to the Consolidated Financial Statements[290] Financial Statements and Notes Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued unqualified opinions on the company's consolidated financial statements and internal control over financial reporting, identifying Dejana tradename impairment testing as a Critical Audit Matter - Deloitte & Touche LLP issued an unqualified opinion, concluding that the financial statements are presented fairly and internal control over financial reporting is effective[305] - Impairment testing of the Dejana indefinite-lived intangible tradename was identified as a Critical Audit Matter due to the significant auditor judgment required for management's estimates on future revenue, royalty rates, and discount rates[313][314] Consolidated Financial Statements As of December 31, 2022, total assets were $596.9 million and shareholders' equity $237.1 million, with 2022 net sales of $616.1 million and net income of $38.6 million Consolidated Balance Sheet Summary (in thousands) | | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total current assets | $252,921 | $220,431 | | Total assets | $596,891 | $572,476 | | Total current liabilities | $100,431 | $81,916 | | Total long-term debt | $195,299 | $206,058 | | Total shareholders' equity | $237,102 | $214,610 | Consolidated Statement of Income Summary (in thousands) | | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net sales | $616,068 | $541,453 | $480,154 | | Gross profit | $151,456 | $141,872 | $128,280 | | Net income (loss) | $38,609 | $30,691 | $(86,553) | | Diluted EPS | $1.63 | $1.29 | $(3.81) | Notes to Consolidated Financial Statements The notes detail accounting policies and financial data, including the $127.9 million goodwill impairment in 2020, debt structure, segment performance, and stock-based compensation - In 2020, the company recorded goodwill impairment charges totaling $127.9 million ($47.8 million for Municipal and $80.1 million for Dejana) due to the negative business climate from the COVID-19 pandemic and chassis availability issues[365] - On January 5, 2023, the company amended its credit agreement, increasing the revolving credit commitment by $50.0 million to a total of $150.0 million[525] Segment Performance Summary (in thousands) | | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net Sales | | | | | Work Truck Attachments | $382,296 | $325,707 | $252,838 | | Work Truck Solutions | $233,772 | $215,746 | $227,316 | | Adjusted EBITDA | | | | | Work Truck Attachments | $78,211 | $77,369 | $62,532 | | Work Truck Solutions | $8,569 | $2,167 | $12,360 |