DOUGLAS DYNAMICS, INC (PLOW) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations for the years ended December 31, 2021, 2022 and 2023 should be read together with our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10‑K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10‑K, including information with respect to our plans and strategies for our business, includes forward‑looking statements that involve risks and uncertainties. You should review the “Risk Factors” section of this Annual Report on Form 10‑K for a discussion of important factors that could cause actual results to differ materially from the results described in, or implied by, the forward‑looking statements contained in this Annual Report on Form 10‑K.
Results of Operations
Operating Segments
We conduct\ business in two segments: Work Truck Attachments and Work Truck Solutions. Under this reporting structure, our two reportable business segments are as follows:
Work Truck Attachments. The Work Truck Attachments segment includes our operations that manufacture and sell snow and ice control attachments and other products sold under the FISHER®, WESTERN®, and SNOWEX® brands, as well as our vertically integrated 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 upfit of market leading attachments and storage solutions under the HENDERSON® brand, and the DEJANA® brand and its related sub-brands.
See Note 16 to the Consolidated Financial Statements for information concerning individual segment performance for the years ended December 31, 2023, December 31, 2022 and December 31, 2021, respectively.
Macroeconomic Environment
As a result of recent market volatility, supply chain disruptions, labor strikes, labor shortages, inflationary pressures (including around materials, freight, labor and benefits), and other economic trends, our results of operations have been impacted in the years ended December 31, 2023, 2022 and 2021, and may be significantly impacted in future years. See below for further discussion of the impact to our financial statements.
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We may have challenges in short-term liquidity that could impact our ability to fund working capital needs. We have taken various steps to preserve liquidity, including reducing discretionary spending and deferring payments where appropriate within existing contractual terms, while remaining committed to long term growth projects. In addition, as discussed under the section "Liquidity and Capital Resources" below, in January 2023, we expanded the borrowing capacity of our revolving credit facility, and in January 2024, we amended our Credit Agreement to increase the minimum required leverage ratio from December 31, 2023 through June 30, 2024. In consideration of the recent macroeconomic trends, cash on hand and cash we generated from operations, as well as available credit under our senior credit facilities as amended during 2021, provided adequate and incremental funds throughout 2023, and we expect will continue to provide us with adequate funds in the foreseeable future.
In the year ended December 31, 2021, we determined that facility leases related to two locations in our Work Truck Solutions segment were impaired. These two facilities were significantly downsized as part of a restructuring plan, and so it was determined that the carrying value exceeded the fair value of the facilities. As a result, we recorded an impairment of $1.2 million in the year ended December 31, 2021 under Impairment charges in the Company’s Consolidated Statements of Income, offset with a reduction to the Operating lease - right of use asset on our Consolidated Balance Sheets. Going forward, we will amortize the remaining balance of the right of use asset for the impaired leases on a straight line basis. We will continue to amortize the lease liability for the impaired leases over the life of the lease.
Overview
While our Work Truck Solutions operations are not as reliant on snowfall, snowfall is still the primary factor in evaluating our business results due to its significant impact on the results of operations of our Work Truck Attachments segment. We typically compare the snowfall level in a given period both to the snowfall level in the prior season and to those snowfall levels we consider to be average. References to “average snowfall” levels below refer to the aggregate average inches of snowfall recorded in 66 cities in 26 snow‑belt states in the United States during the annual snow season, from October 1 through March 31, from 1980 to 2023. During this period, snowfall averaged 3,004 inches, with the low in such period being 1,794 inches and the high being 4,502 inches. Meanwhile, over the last 10 years, snowfall averaged 2,990 inches for the snow periods ending March 31, 2014 through 2023.
During the six‑month snow season ended March 31, 2023, snowfall was 2,661 inches, which was 11.4% lower than averages from 1980 to 2023. During the six‑month snow season ended March 31, 2022, we experienced snowfall that was 13.3% lower than averages from 1980 to 2022. During the six-month snow season ended March 31, 2021, we experienced snowfall that was 9.4% lower than averages from 1980 to 2021. Snowfall was 11.0% below average during the snow season ended March 31, 2023 when compared to the average over the last 10 years and was the fifth snow season in a row below this average. Snowfall was 14.4% below average during the snow season ended March 31, 2022 when compared to the average over the previous 10 years. Additionally, the timing and location of snowfall can have an impact on our financial results. Specifically, in the snow season ended March 31, 2023, major cities along the I-95 corridor on the East Coast did not see any measurable snowfall. We believe the below-average snowfall in the year ended December 31, 2023 negatively impacted our business in 2023. We believe other factors also had a negative impact, including supply chain constraints. In 2021, 2022 and 2023, we encountered chassis availability issues with certain of our OEM partners, which negatively impacted our business, and which we expect to continue into 2024.
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The following table sets forth, for the periods presented, the consolidated statements of income of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. In the table below and throughout this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” consolidated statements of income data for the years ended December 31, 2021, 2022 and 2023 have been derived from our audited consolidated financial statements. The information contained in the table below should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10‑K.
| For the year ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2022 | 2023 | ||||||||||
| (in thousands) | ||||||||||||
| Net sales | $ | 541,453 | $ | 616,068 | $ | 568,178 | ||||||
| Cost of sales | 399,581 | 464,612 | 433,908 | |||||||||
| Gross profit | 141,872 | 151,456 | 134,270 | |||||||||
| Selling, general, and administrative expense | 78,844 | 82,183 | 78,841 | |||||||||
| Impairment charges | 1,211 | - | - | |||||||||
| Intangibles amortization | 10,682 | 10,520 | 10,520 | |||||||||
| Income from operations | 51,135 | 58,753 | 44,909 | |||||||||
| Interest expense, net | (11,839 | ) | (11,253 | ) | (15,675 | ) | ||||||
| Loss on extinguishment of debt | (4,936 | ) | - | - | ||||||||
| Other income (expense), net | 228 | (139 | ) | - | ||||||||
| Income before taxes | 34,588 | 47,361 | 29,234 | |||||||||
| Income tax expense | 3,897 | 8,752 | 5,511 | |||||||||
| Net income | $ | 30,691 | $ | 38,609 | $ | 23,723 |
The following table sets forth, for the periods indicated, the percentage of certain items in our consolidated statement of income data, relative to net sales:
| For the year ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2022 | 2023 | ||||||||||
| Net sales | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
| Cost of sales | 73.8 | % | 75.4 | % | 76.4 | % | ||||||
| Gross profit | 26.2 | % | 24.6 | % | 23.6 | % | ||||||
| Selling, general, and administrative expense | 14.6 | % | 13.4 | % | 13.9 | % | ||||||
| Impairment charges | 0.2 | % | 0.0 | % | 0.0 | % | ||||||
| Intangibles amortization | 2.0 | % | 1.7 | % | 1.8 | % | ||||||
| Income from operations | 9.4 | % | 9.5 | % | 7.9 | % | ||||||
| Interest expense, net | (2.2 | )% | (1.8 | )% | (2.8 | )% | ||||||
| Loss on extinguishment of debt | (0.9 | )% | 0.0 | % | 0.0 | % | ||||||
| Other income (expense), net | 0.0 | % | (0.0 | )% | 0.0 | % | ||||||
| Income before taxes | 6.3 | % | 7.7 | % | 5.1 | % | ||||||
| Income tax expense | 0.7 | % | 1.4 | % | 0.9 | % | ||||||
| Net income | 5.6 | % | 6.3 | % | 4.2 | % |
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Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
Net Sales. Net sales were $568.2 million for the year ended December 31, 2023 compared to $616.1 million in 2022, a decrease of $47.9 million, or 7.8%. Net sales decreased for the year ended December 31, 2023 primarily due to lower volumes at our Work Truck Attachment segment. See below for a discussion of net sales for each of our segments.
| For the year ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2022 | 2023 | |||||||||
| Net sales | |||||||||||
| Work Truck Attachments | $ | 325,707 | $ | 382,296 | $ | 291,723 | |||||
| Work Truck Solutions | 215,746 | 233,772 | 276,455 | ||||||||
| $ | 541,453 | $ | 616,068 | $ | 568,178 |
Net sales at our Work Truck Attachment segment were $291.7 million for the year ended December 31, 2023 compared to $382.3 million in the year ended December 31, 2022, a decrease of $90.6 million primarily due to low snowfall in our core markets leading to lower volumes in 2023, somewhat offset by pricing actions implemented to offset inflation. The most recent snow season ended March 2023 was approximately 11.0% below the 10-year average. In particular, many large metropolitan areas on the East Coast saw the lowest snowfall levels in decades for the season, which significantly impacted volumes for the segment in 2023.
Net sales at our Work Truck Solutions segment were $276.5 million for the year ended December 31, 2023 compared to $233.8 million in the year ended December 31, 2022, an increase of $42.7 million due primarily to higher volumes on improved chassis availability, higher sales of Company purchased chassis, which are typically sold at cost, as well as price increase realization.
Cost of Sales. Cost of sales was $433.9 million for the year ended December 31, 2023 compared to $464.6 million in 2022, a decrease of $30.7 million, or 6.6%. The decrease in cost of sales for the year ended December 31, 2023 compared to the prior year was driven by the lower volumes. Cost of sales as a percentage of net sales increased from 75.4% for the year ended December 31, 2022 to 76.4% for the year ended December 31, 2023. The increase in cost of sales as a percentage of sales in the year ended December 31, 2023 when compared to the year ended December 31, 2022 was primarily due to the lower volumes and product mix.
Gross Profit. Gross profit was $134.3 million for the year ended December 31, 2023 compared to $151.5 million in 2022, a decrease of $17.2 million, or 11.4%, due to the decrease in net sales described above under “—Net Sales.” As a percentage of net sales, gross profit decreased from 24.6% for the year ended December 31, 2022 to 23.6% for the corresponding period in 2023, as a result of the factors discussed above under “—Cost of Sales.”
Selling, General and Administrative Expense. Selling, general and administrative expenses, including intangible asset amortization, were $89.4 million for the year ended December 31, 2023 compared to $92.7 million for the year ended December 31, 2022, a decrease of $3.3 million, or 3.6%. The decrease compared to the year ended December 31, 2022 was due to lower stock based compensation of $5.8 million and incentive-based compensation of $3.2 million resulting from the decrease in operating performance. The decrease was somewhat offset by increased employee compensation and benefits of $2.7 million as a result of inflation and increased healthcare claims, an increase in bad debt expense of $1.8 million compared to the prior year related to the release of previously recorded reserves in the prior year, and an increase in supplies and other discretionary spending. As a percentage of net sales, selling, general and administrative expenses, including intangibles amortization, increased from 15.1% for the year ended December 31, 2022 to 15.7% for the corresponding period in 2023.
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Interest Expense. Interest expense was $15.7 million for the year ended December 31, 2023 compared to $11.3 million in the corresponding period in 2022. The increase in interest expense for the year ended December 31, 2023 was primarily due to higher interest on our revolver of $3.0 million due to having higher revolver borrowings compared to the prior year. In addition, the increase was due to higher interest on our term loan of $0.5 million related to higher interest rates. See Note 8 to the Consolidated Financial Statements for additional information. The remaining increase relates to an increase in interest on our floor plan agreement of $0.7 million, see Note 5 to the Consolidated Financial Statements for additional information regarding the floor plan agreement.
Income Tax Expense. Our effective combined federal and state tax rate for 2023 was 18.9% compared to 18.5% for 2022. The effective tax rate for the year ended December 31, 2023 was impacted by a tax benefit related to the purchase of investment tax credits included in the annual effective tax rate. The effective tax rate for the year ended December 31, 2022 was lower than historical averages related to higher tax credits and state income tax rate changes.
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 the deferred taxes is the difference between book and tax amortization of goodwill and other intangible amortization.
Net Income. Net income for the year ended December 31, 2023 was $23.7 million compared to net income of $38.6 million for 2022, a decrease of $14.9 million. This decrease was driven by the factors described above.
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Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Net Sales. Net sales were $616.1 million for the year ended December 31, 2022 compared to $541.5 million in 2021, an increase of $74.6 million, or 13.8%. Net sales increased for the year ended December 31, 2022 primarily due to pricing actions in both segments, as well as strong pre-season order demand in our Work Truck Attachments segment leading to increased volumes.
Net sales at our Work Truck Attachment segment were $382.3 million for the year ended December 31, 2022 compared to $325.7 million in the year ended December 31, 2021, an increase of $56.6 million primarily due to pricing actions, as well as strong pre-season order demand leading to increased volumes. This increased pre-season order volume was despite snowfall in this most recent snow season ended March 2022 being approximately 14% below the ten-year average, compared to the prior snow season ended March 2021, which was approximately 8% below the ten-year average.
Net sales at our Work Truck Solutions segment were $233.8 million for the year ended December 31, 2022 compared to $215.7 million in the year ended December 31, 2021, an increase of $18.1 million due primarily to price increase realization, somewhat offset by chassis and component shortages leading to lower production and deliveries.
Cost of Sales. Cost of sales was $464.6 million for the year ended December 31, 2022 compared to $399.6 million in 2021, an increase of $65.0 million, or 16.3%. The increase in cost of sales for the year ended December 31, 2022 compared to the prior year was driven by the higher volumes at Work Truck Attachments, as well as material, labor and freight inflation. Cost of sales as a percentage of net sales increased from 73.8% for the year ended December 31, 2021 to 75.4% for the year ended December 31, 2022. The increase in cost of sales as a percentage of sales in the year ended December 31, 2022 when compared to the year ended December 31, 2021 was primarily due to inflation, slightly offset by product mix and cost savings initiatives.
Gross Profit. Gross profit was $151.5 million for the year ended December 31, 2022 compared to $141.9 million in 2021, an increase of $9.6 million, or 6.8%, due to the increase in net sales described above under “—Net Sales.” As a percentage of net sales, gross profit decreased from 26.2% for the year ended December 31, 2021 to 24.6% for the corresponding period in 2022, as a result of the factors discussed above under “—Cost of Sales.”
Selling, General and Administrative Expense. Selling, general and administrative expenses, including intangible asset amortization, were $92.7 million for the year ended December 31, 2022 compared to $89.5 million for the year ended December 31, 2021, an increase of $3.2 million, or 3.6%. The increase compared to the year ended December 31, 2021 was due to increased salaries and benefits, incentive compensation, travel expenditures, advertising costs, as well as other discretionary spending as spending was reduced in 2021 as a result of the COVID-19 pandemic. This increase was somewhat offset by a decrease in bad debt expense. As a percentage of net sales, selling, general and administrative expenses, including intangibles amortization, decreased from 16.5% for the year ended December 31, 2021 to 15.1% for the corresponding period in 2022.
Impairment Charges. Impairment charges were $0.0 million and $1.2 million for the years ended December 31, 2022 and 2021, respectively. The impairment charges in 2021 relate to impairments recorded on leases for two Work Truck Solutions locations where we are significantly reducing our footprint. See Note 6 for additional information.
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Interest Expense. Interest expense was $11.3 million for the year ended December 31, 2022 compared to $11.8 million in the corresponding period in 2021. The decrease in interest expense for the year ended December 31, 2022 was primarily due to lower interest paid on our term loan of $2.4 million due to the decrease in principal balance from the June 9, 2021 refinancing. Somewhat offsetting this decrease is an increase in interest expense on our revolving line of credit of $1.6 million in the year ended December 31, 2022 due to having higher revolver borrowings during the year, as well as an increase in the variable interest rate in 2022. Also offsetting this decrease in interest expense was having a ($0.7) million gain in non-cash mark-to-market and amortization adjustments on an interest rate swap not accounted for as a hedge in the year ended December 31, 2022, respectively, compared to a ($1.2) million gain in the year ended December 31, 2021. See Note 8 for additional information.
Loss on Extinguishment of Debt. Loss on extinguishment of debt was $4.9 million in the year ended December 31, 2021. The loss on extinguishment of debt in 2021 related to fees incurred in conjunction with our June 9, 2021 refinancing of the Credit Agreement. The previous debt was considered extinguished, as all lenders on our previous term loan exited their positions in conjunction with changing from a Term Loan B to a Term Loan A arrangement.
Income Tax Expense. Our effective combined federal and state tax rate for 2022 was 18.5% compared to 11.3% for 2021. The effective tax rate for the year ended December 31, 2022 was higher than the rate in the prior year due to a discrete tax benefit of $3.3 million in the year ended December 31, 2021 related to favorable income tax audit results in states in which we file. The effective tax rate for the year ended December 31, 2022 was lower than historical averages related to higher tax credits and state income tax rate changes.
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 the deferred taxes is the difference between book and tax amortization of goodwill and other intangible amortization.
Net Income. Net income for the year ended December 31, 2022 was $38.6 million compared to net income of $30.7 million for 2021, an increase of $7.9 million. This increase was driven by the factors described above.
Discussion of Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. These estimates and assumptions are often based on judgments that we believe to be reasonable under the circumstances at the time made, but all such estimates and assumptions are inherently uncertain and unpredictable. Actual results may differ from those estimates and assumptions, and it is possible that other professionals, applying their own judgment to the same facts and circumstances, could develop and support alternative estimates and assumptions that would result in material changes to our operating results and financial condition. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances.
The most significant accounting estimates inherent in the preparation of our financial statements include estimates used in revenue recognition and the impairment assessment of indefinite lived intangible assets and goodwill.
We believe the following are the critical accounting policies and estimates that affect our financial condition and results of operations.
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Revenue Recognition
Work Truck Attachments Segment Revenue Recognition
We recognize revenue upon shipment of equipment to the customer. Within the Work Truck Attachments segment, we offer a variety of discounts and sales incentives to our distributors. The estimated liability for sales discounts and allowances is recorded at the time of sale as a reduction of net sales using the expected value method. The liability is estimated based on the costs of the program, the planned duration of the program and historical experience.
Work Truck Solutions Segment Revenue Recognition
The Work Truck Solutions segment primarily participates in the truck and vehicle upfitting industry in the United States. Customers are billed separately for the truck chassis by the chassis manufacturer. We only record sales for the amount of the upfit, excluding the truck chassis. Generally, we obtain the truck chassis from the truck chassis manufacturer through either our floor plan agreement with a financial institution or bailment pool agreement with the truck chassis manufacturer. Additionally, in some instances we upfit chassis which are owned by the end customer. For truck chassis acquired through the floor plan agreement, we hold title to the vehicle from the time the chassis is received by us until the completion of the up-fit. Under the bailment pool agreement, we do not take title to the truck chassis, but rather only hold the truck chassis on consignment. We pay interest on both of these arrangements. We record revenue in the same manner net of the value of the truck chassis in both our floor plan and bailment pool agreements. We do not set the price for the truck chassis, are not responsible for the billing of the chassis and do not have inventory risk in either the bailment pool or floor plan agreements. The Work Truck Solutions segment also has manufacturing operations of municipal snow and ice control equipment, where revenue is recognized upon shipment of equipment to the customer.
Revenues from the sales of the Work Truck Solutions products are recognized net of the truck chassis with the selling price to the customer recorded as sales and the manufacturing and up-fit cost of the product recorded as cost of sales. In these cases, we act as an agent as we do not have inventory or pricing control over the truck chassis. Within the Work Truck Solutions segment, we also sell certain third-party products for which we act as an agent. These sales do not meet the criteria for gross sales recognition, and thus are recognized on a net basis at the time of sale. Under net sales recognition, the cost paid to the third-party service provider is recorded as a reduction to sales, resulting in net sales being equal to the gross profit on the transaction.
See Note 3 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10‑K for a more detailed description of our revenue recognition policies.
Indefinite Lived Intangible Assets
We perform an annual impairment test for our indefinite lived intangible assets, and more frequently if an event or circumstances indicate that an impairment loss has been incurred. We carry tradenames associated with our reporting units. Conditions that would trigger an impairment assessment include, but are not limited to, a significant adverse change in legal factors or business climate that could affect the value of an asset. The amount of impairment is determined by the amount the carrying value of the intangible asset exceeds its fair value. If the fair value of the tradename is greater than the carrying amount, there is no impairment. If the carrying amount is greater than the fair value, an impairment loss is recognized equal to the difference. Annual impairment tests conducted by us on December 31, 2023, 2022 and 2021 resulted in no adjustment to the carrying value of our indefinite lived intangible assets.
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Our indefinite lived intangible assets could be impaired in future periods. A number of factors, many of which we have no ability to control, could affect our financial condition, operating results and business prospects and could cause actual results to differ from the estimates and assumptions we employed. These factors include:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | a prolonged global economic crisis; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | significant inflation or disruptions in the supply of chassis or component parts, as a result from computer chip shortages, labor strikes or otherwise; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | a decrease in the demand for our products; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | the inability to develop new and enhanced products and services in a timely manner; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | a significant adverse change in legal factors or in the business climate; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | an adverse action or assessment by a regulator; and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | successful efforts by our competitors to gain market share in our markets. |
At December 31, 2023, our Dejana reporting unit had tradenames of $14.0 million and an estimated fair value of $19.7 million. If we are unable to attain the financial projections used in calculating the fair value, or if there are significant market conditions impacting the market approach, including the factors noted above, our Dejana tradenames could be at risk of impairment. If we experience further delays by our supplier and OEM partners in the production and delivery of chassis for a prolonged period of time, which could negatively affect our financial results, the Dejana tradenames may be impaired. The discount rate and royalty rate used in the calculation of the fair value are sensitive and based on our assumptions, and changes to those assumptions could cause the Dejana tradenames to be at risk of impairment. There were no indicators of impairment subsequent to the December 31, 2023 impairment test.
Goodwill
We perform an annual impairment test for goodwill and more frequently if an event or circumstances indicate that an impairment loss has been incurred. Conditions that would trigger an impairment assessment include, but are not limited to, a significant adverse change in legal factors or business climate that could affect the value of an asset. The amount of goodwill impairment is determined by the amount the carrying value of the reporting unit exceeds its fair value. We have determined we have four reporting units, and all significant decisions are made on a company-wide basis by our chief operating decision maker. The fair value of the reporting unit is estimated by using an income and market approach. The estimated fair value is compared with our aggregate carrying value. If our fair value is greater than the carrying amount, there is no impairment. If our carrying amount is greater than the fair value, an impairment loss is recognized equal to the difference. Annual impairment tests conducted by us on December 31, 2023 and 2022 resulted in no adjustment to the carrying value of our goodwill.
The Work Truck Attachments segment consists of two reporting units: Commercial Snow & Ice and Douglas Dynamics Vertical Integration. Only the Commercial Snow & Ice reporting unit has goodwill. The impairment tests performed as of December 31, 2022 and December 31, 2023 indicated no impairment for the Commercial Snow & Ice reporting unit. The Work Truck Solutions consists of two reporting units; Municipal and Dejana. Each of the Municipal and Dejana reporting units had $0 in goodwill at December 31, 2022 and December 31, 2023.
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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.
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 February 16, 2022, our Board of Directors authorized the purchase of up to $50.0 million in shares of common stock at market value. This authorization does not have an expiration date. Repurchases under the program may be made in the open market, in privately negotiated transactions or otherwise, with the amount and timing of repurchases depending on market conditions and corporate needs. We may also, from time to time, enter into Rule 10b5-1 trading plans to facilitate repurchases of its shares under this authorization. This program does not obligate us to acquire any particular amount of shares and the program may be extended, modified, suspended or discontinued at any time at our discretion. We made $0.0 million in share repurchases during the year ended December 31, 2023. We made $6.0 million in share repurchases during the year ended December 31, 2022.
As of December 31, 2023, we had liquidity comprised of approximately $24.2 million in cash and cash equivalents and borrowing availability of approximately $102.5 million under our revolving credit facility. We have taken various steps to preserve liquidity, including reducing discretionary spending and deferring payments where appropriate within existing contractual terms, while remaining committed to long-term growth projects. In consideration of macroeconomic factors facing the Company, we expect that cash on hand, cash generated from operations, as well as available credit under our senior credit facilities will provide adequate funds for the purposes described above for both 12 months from the date of this report, as well as beyond 12 months from the date of this report.
On June 9, 2021, Douglas Dynamics, Inc. (the “Company”), as guarantor, and its wholly-owned subsidiaries, Douglas Dynamics, L.L.C. (“DDI LLC” or the “Term Loan Borrower”), Fisher, LLC (“Fisher”), Trynex International LLC (“Trynex”), Henderson Enterprises Group, Inc. (“Enterprises”), Henderson Products, Inc. (“Products”), and Dejana Truck & Utility Equipment Company, LLC (“Dejana”, together with DDI LLC, Fisher, Trynex, Enterprises and Products, the “Revolving Loan Borrowers”, and together with DDI LLC in its capacity as the Term Loan Borrower, the “Borrowers”), as borrowers, entered into a Credit Agreement (following such time as it was amended by the Amendment No. 1 (as defined below), the “Credit Agreement”) with the banks and financial institutions listed in the Credit Agreement, as lenders, JPMorgan Chase Bank, N.A., as administrative agent, J.P. Morgan Chase Bank, N.A. and CIBC Bank USA, as joint lead arrangers and joint bookrunners, CIBC Bank USA, as syndication agent, and Bank of America, N.A. and Citizens Bank, N.A., as co-documentation agents.
The Credit Agreement provides for a senior secured term loan to the Term Loan Borrower in the amount of $225.0 million and a senior secured revolving credit facility available to the Revolving Loan Borrowers in the amount of $100.0 million, of which $10.0 million will be available in the form of letters of credit and $15.0 million will be available for the issuance of short-term swingline loans. The Credit Agreement also allows the Revolving Loan Borrowers to request increases to the revolving commitments and/or incremental term loans in an aggregate amount not in excess of $175.0 million (the “Revolving Commitment Increase Option”), subject to specified terms and conditions. The final maturity date of the Credit Agreement is June 9, 2026.
On January 5, 2023, the Company entered into that certain Amendment No. 1 to Credit Agreement and Revolving Credit Commitment Increase Supplement (“Amendment No. 1”) by and among the Company, the Borrowers, the financial institutions listed in Amendment No. 1 as lenders, and JPMorgan Chase Bank, N.A., as administrative agent, which amended the Credit Agreement and pursuant to which, among other things, (i) the Revolving Loan Borrowers exercised a portion of the Revolving Commitment Increase Option and increased the revolving commitment under the Credit Agreement by $50.0 million for a total of $150.0 million in the aggregate and (ii) the London Interbank Offered Rate pricing option under the Credit Agreement was replaced with a Term SOFR Rate pricing option. On July 11, 2023, the Company entered into Amendment No. 2 to the Credit Agreement, which allows the Company to take out loans of up to $1.0 million against its corporate-owned life insurance policies.
On January 29, 2024, the Company entered into Amendment No. 3 to the Credit Agreement, which modifies the minimum required Leverage Ratio (as defined in the Credit Agreement) of the Company, which is measured as of the last day of each Reference Period (as defined in the Credit Agreement), from 3.50 to 1.00 for each Reference Period to (i) 3.50 to 1.00 for each Reference Period ending on or prior to September 30, 2023, (ii) 4.25 to 1.00 for the Reference Period ending on December 31, 2023, (iii) 4.00 to 1.00 for each Reference Period ending on March 31, 2024 and June 30, 2024, and (iv) 3.50 to 1.00 for each Reference Period ending on September 30, 2024 and thereafter.
Pursuant to Amendment No. 1, the Credit Agreement provides that the senior secured term loan facility will bear interest at (i) the Term SOFR Rate for the applicable interest period plus (ii) a margin ranging from 1.375% to 2.00%, depending on DDI LLC’s Leverage Ratio. The Credit Agreement provides that the Revolving Loan Borrowers have the option to select whether the senior secured revolving credit facility borrowings will bear interest at either (i)(a) the Term SOFR Rate for the applicable interest period plus (b) 0.10% plus (c) a margin ranging from 1.375% to 2.00%, depending on DDI LLC’s Leverage Ratio, or (ii) a margin ranging from 0.375% to 1.00% per annum, depending on DDI LLC’s Leverage Ratio, plus the greatest of (which if the following would be less than 1.00%, such rate shall be deemed to be 1.00%) (a) the Prime Rate (as defined in the Credit Agreement) in effect on such day, (b) the NYFRB Rate (as defined in the Credit Agreement) plus 0.50% and (c) the Term SOFR Rate for a one month interest plus 0.10% (the “Adjusted Term SOFR Rate”). If the Adjusted Term SOFR Rate for the applicable interest period is less than zero, such rate shall be deemed to be zero for purposes of calculating the foregoing interest rates in the Credit Agreement.
Cash Flow Analysis
Set forth below is summary cash flow information for each of the years ended December 31, 2021, 2022 and 2023.
| Year ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash Flows (in thousands) | 2021 | 2022 | 2023 | |||||||||
| Net cash provided by operating activities | $ | 60,535 | $ | 40,030 | $ | 12,469 | ||||||
| Net cash used in investing activities | (11,208 | ) | (12,047 | ) | (10,521 | ) | ||||||
| Net cash provided by (used in) financing activities | (53,393 | ) | (44,277 | ) | 1,538 | |||||||
| Increase (Decrease) in cash | $ | (4,066 | ) | $ | (16,294 | ) | $ | 3,486 |
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Sources and Uses of Cash
During the three‑year periods described above, net cash provided by operating activities was used for funding capital investment, paying dividends, paying interest on our senior credit facilities, and funding working capital requirements during our pre‑season shipping period.
The following table shows our cash and cash equivalents and inventories at December 31, 2021, 2022 and 2023.
| December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2022 | 2023 | |||||||||
| (in thousands) | |||||||||||
| Cash and cash equivalents | $ | 36,964 | $ | 20,670 | $ | 24,156 | |||||
| Accounts receivable, net | 71,035 | 86,765 | 83,760 | ||||||||
| Inventories | 104,019 | 136,501 | 140,390 |
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
We had cash and cash equivalents of $24.2 million at December 31, 2023 compared to cash and cash equivalents of $20.7 million at December 31, 2022. The table below sets forth a summary of the significant sources and uses of cash for the periods presented.
| Year ended December 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash Flows (in thousands) | 2022 | 2023 | Change | |||||||||||||
| Net cash provided by operating activities | $ | 40,030 | $ | 12,469 | $ | (27,561 | ) | (68.9 | %) | |||||||
| Net cash used in investing activities | (12,047 | ) | (10,521 | ) | 1,526 | 12.7 | % | |||||||||
| Net cash provided by (used in) financing activities | (44,277 | ) | 1,538 | 45,815 | 103.5 | % | ||||||||||
| Increase (Decrease) in cash | $ | (16,294 | ) | $ | 3,486 | $ | 19,780 | 121.4 | % |
Net cash provided by operating activities decreased $27.6 million from the year ended December 31, 2022 to the year ended December 31, 2023. The decrease in cash provided by operating activities was due to a $3.3 million decrease in net income adjusted for reconciling items in the year ended December 31, 2023 and $24.2 million in unfavorable working capital changes. The largest driver negatively impacting working capital was an increase in cash used for accounts payable related to the timing of supplier payments. Somewhat offsetting this unfavorable working capital change was a favorable decrease in cash used for inventory related to a larger increase in inventory in the prior year from pulling forward purchases in anticipation of inflationary price increases and supply chain disruptions, and higher material costs due to inflation, as well as a decrease in cash used for accounts receivable attributable to the decrease in sales compared to the prior year, in particular in the fourth quarter.
Net cash used in investing activities decreased $1.5 million for the year ended December 31, 2023, compared to the corresponding period in 2022 due to a decrease in capital expenditures.
Net cash used in financing activities decreased $45.8 million for the year ended December 31, 2023 as compared to the corresponding period in 2022. The decrease was primarily due to having $47.0 million in revolver borrowings outstanding at December 31, 2023 compared to $0.0 million in revolver borrowings outstanding at December 31, 2022. See Note 8 to the Condensed Consolidated Financial Statements for additional information. In addition, the decrease in cash used in financing activities is related to executing no stock repurchases in the nine months ended September 30, 2023, compared to $6.0 million in repurchases in the same period in the prior year. Somewhat offsetting the decrease in cash used is a $10.0 million increase in the repayment of long-term debt related to a voluntary pre-payment of debt amortization principal payments, see Note 8 to the Condensed Consolidated Financial Statements for additional information.
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Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
We had cash and cash equivalents of $20.7 million at December 31, 2022 compared to cash and cash equivalents of $37.0 million at December 31, 2021. The table below sets forth a summary of the significant sources and uses of cash for the periods presented.
| Year ended December 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash Flows (in thousands) | 2021 | 2022 | Change | |||||||||||||
| Net cash provided by operating activities | $ | 60,535 | $ | 40,030 | $ | (20,505 | ) | (33.9 | %) | |||||||
| Net cash used in investing activities | (11,208 | ) | (12,047 | ) | (839 | ) | (7.5 | %) | ||||||||
| Net cash used in financing activities | (53,393 | ) | (44,277 | ) | 9,116 | 17.1 | % | |||||||||
| Increase (Decrease) in cash | $ | (4,066 | ) | $ | (16,294 | ) | $ | (12,228 | ) | (300.7 | %) |
Net cash provided by operating activities decreased $20.5 million from the year ended December 31, 2021 to the year ended December 31, 2022. The decrease in cash provided by operating activities was due to a $3.4 million decrease in net income adjusted for reconciling items in the year ended December 31, 2022 and $17.1 million in unfavorable working capital changes. The largest drivers negatively impacting working capital were an increase in accounts receivable attributable to the increase in sales compared to the prior year, as well as an increase in inventory due to the pulling forward of purchases in anticipation of inflationary price increases and supply chain disruptions, as well as higher material costs due to inflation, somewhat offset by an increase in accounts payable due to the timing of payments.
Net cash used in investing activities increased $0.8 million for the year ended December 31, 2022, compared to the corresponding period in 2021 due to an increase in capital expenditures.
Net cash used in financing activities decreased $9.1 million for the year ended December 31, 2022 as compared to the corresponding period in 2021. The decrease was primarily a result of making a voluntary $20.0 million prepayment on our debt in the year ended December 31, 2021 and no corresponding payment in 2022. We had no outstanding borrowings under our revolving credit facility at either December 31, 2022 or December 31, 2021. See Note 8 for additional information. Somewhat offsetting this decrease in cash used in financing activities is an increase related to $6.0 million in stock repurchases executed in the year ended December 31, 2022 and no repurchases in the prior year.
Non‑GAAP Financial Measures
This Annual Report on Form 10‑K contains financial information calculated other than in accordance with U.S. generally accepted accounting principles (“GAAP”).
These non‑GAAP measures include:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Free cash flow; and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Adjusted EBITDA; and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | 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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Net cash provided by operating activities was $12.5 million in the year ended December 31, 2023 as compared to $40.0 million in the year ended December 31, 2022. Free cash flow (as defined below) for the year ended December 31, 2023 was $1.9 million compared to $28.0 million in 2022, a decrease in free cash flow of $26.1 million, or 93.2%. The decrease in free cash flow is primarily a result of a decrease in cash provided by operating activities of $27.6 million and a decrease in capital expenditures of $1.5 million, as discussed above under “Liquidity and Capital Resources.” Free cash flow for the year ended December 31, 2022 was $28.0 million compared to $49.3 million in 2021, a decrease in free cash flow of $21.3 million, or 43.2%. The decrease in free cash flow is primarily a result of a decrease in cash provided by operating activities of $20.5 million and an increase in capital expenditures of $0.8 million.
Free cash flow is a non‑GAAP financial measure, which we define as net cash provided by 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 operations. We believe that free cash flow provides investors with a useful tool to evaluate our ability to generate additional cash flow from our business operations.
The following table reconciles net cash provided by operating activities, a GAAP measure, to free cash flow, a non‑GAAP measure.
| For the year ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2022 | 2023 | ||||||||||
| (in thousands) | ||||||||||||
| Net cash provided by operating activities | $ | 60,535 | $ | 40,030 | $ | 12,469 | ||||||
| Acquisition of property and equipment | (11,208 | ) | (12,047 | ) | (10,521 | ) | ||||||
| Free cash flow | $ | 49,327 | $ | 27,983 | $ | 1,948 |
Adjusted EBITDA represents net income (loss) before interest, taxes, depreciation and amortization, as further adjusted for certain charges consisting of unrelated legal and consulting fees, pension termination costs, stock based compensation, severance, restructuring charges, loss on disposal of fixed assets related to facility relocations, litigation proceeds, certain non-cash purchase accounting expenses, impairment charges, expenses related to debt modifications, loss on extinguishment of debt, and in 2020 through 2022, incremental costs related to the COVID-19 pandemic. Such COVID-19 related costs included increased expenses directly related to the pandemic, and did not include either production related overhead inefficiencies or lost or deferred sales. We believe these costs were 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:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
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| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | 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; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Other companies, including other companies in our industry, may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure; and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Adjusted EBITDA does not reflect tax obligations whether current or deferred. |
Adjusted EBITDA for the year ended December 31, 2023 was $68.1 million compared to $86.8 million in 2022, a decrease of $18.7 million, or 21.5%. Adjusted EBITDA for the year ended December 31, 2022 was $86.8 million compared to $79.5 million in 2021, an increase of $7.3 million, or 9.2%. In addition to the specific changes resulting from the adjustments, the changes to Adjusted EBITDA for the periods discussed resulted from factors discussed above under “—Results of Operations.”
The following table presents a reconciliation of net income (loss), the most comparable GAAP financial measure, to Adjusted EBITDA, for each of the periods indicated.
| For the year ended December 31, | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2020 | 2021 | 2022 | 2023 | |||||||||||||||
| (in thousands) | |||||||||||||||||||
| Net income (loss) | $ | 49,166 | $ | (86,553 | ) | $ | 30,691 | $ | 38,609 | $ | 23,723 | ||||||||
| Interest expense—net | 16,782 | 20,238 | 11,839 | 11,253 | 15,675 | ||||||||||||||
| Income tax expense (benefit) | 13,451 | (12,276 | ) | 3,897 | 8,752 | 5,511 | |||||||||||||
| Depreciation expense | 8,256 | 8,806 | 9,634 | 10,418 | 11,142 | ||||||||||||||
| Amortization | 10,956 | 10,931 | 10,682 | 10,520 | 10,520 | ||||||||||||||
| EBITDA | 98,611 | (58,854 | ) | 66,743 | 79,552 | 66,571 | |||||||||||||
| Purchase accounting (1) | (417 | ) | (2,017 | ) | - | - | - | ||||||||||||
| Stock based compensation | 3,239 | 2,830 | 5,794 | 6,730 | 953 | ||||||||||||||
| Impairment charges | - | 127,872 | 1,211 | - | - | ||||||||||||||
| Debt modification expense | - | 3,542 | - | - | - | ||||||||||||||
| Loss on extinguishment of debt | - | - | 4,936 | - | - | ||||||||||||||
| Litigation proceeds | (200 | ) | - | - | - | - | |||||||||||||
| Pension termination | 6,609 | - | - | - | - | ||||||||||||||
| COVID-19 (2) | - | 1,391 | 82 | 48 | - | ||||||||||||||
| Other charges (3) | 263 | 128 | 770 | 450 | 598 | ||||||||||||||
| Adjusted EBITDA | $ | 108,105 | $ | 74,892 | $ | 79,536 | $ | 86,780 | $ | 68,122 |
| Column 1 | Column 2 |
|---|---|
| (1) | Reflects $217 in reversal of earnout compensation related to Henderson, and $200 in reversal of earnout compensation related to Dejana, in the year ended December 31, 2019. Reflects $17 in reversal of earnout compensation related to Henderson, and $2,000 in reversal of earnout compensation related to Dejana, in the year ended December 31, 2020. |
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| Column 1 | Column 2 |
|---|---|
| (2) | Reflects incremental costs incurred related to the COVID-19 pandemic for the periods presented. Such COVID-19 related costs include increased expenses directly related to the pandemic, and do not include either production related overhead inefficiencies or lost or deferred sales. |
| Column 1 | Column 2 |
|---|---|
| (3) | Reflects expenses and accrual reversals for one time, unrelated legal, and consulting fees, severance, restructuring charges, and loss on disposal of fixed assets related to facility relocation for the periods presented. |
The following table presents Adjusted EBITDA by segment for the years ended December 31, 2022 and 2023.
| For the year ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2022 | 2023 | ||||||
| Adjusted EBITDA | |||||||
| Work Truck Attachments | $ | 78,211 | $ | 50,563 | |||
| Work Truck Solutions | 8,569 | 17,559 | |||||
| $ | 86,780 | $ | 68,122 |
Adjusted EBITDA at our Work Truck Attachment segment were $50.6 million for the year ended December 31, 2023 compared to $78.2 million in the year ended December 31, 2022, a decrease of $27.6 million primarily due to low snowfall in our core markets leading to lower volumes. The most recent snow season ended March 2023 was approximately 11.0% below the 10-year average. In particular, many large metropolitan areas on the East Coast saw the lowest snowfall levels in decades for the season, which significantly impacted volumes for the segment in 2023.
Adjusted EBITDA at our Work Truck Solutions segment were $17.6 million for the year ended December 31, 2023 compared to $8.6 million in the year ended December 31, 2022, an increase of $9.0 million due to improved volumes and price increase realization, as well as improved efficiencies.
Adjusted Net Income and Adjusted Earnings 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, pension termination costs, severance, restructuring charges, loss on disposal of fixed assets related to facility relocations litigation proceeds, non-cash purchase accounting adjustments, certain charges related to unrelated legal fees and consulting fees, expenses related to debt modifications, loss on extinguishment of debt, incremental costs incurred in 2020 through 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 included increased expenses directly related to the pandemic, and did not include either production related overhead inefficiencies or lost or deferred sales. We believe these costs were out of the ordinary, unrelated to our business and not representative of our results. Adjustments on derivatives not classified as hedges are non-cash and are related to overall financial market conditions; therefore, management believes such costs are unrelated to our business and are not representative of our results. Management believes that Adjusted Net Income and Adjusted Earnings Per Share are useful in assessing our financial performance by eliminating expenses and income that are not reflective of the underlying business performance. We believe that the presentation of Adjusted Net Income for the periods presented allows investors to make meaningful comparisons of our operating performance between periods and to view our business from the same perspective as our management. Because the excluded items are not predictable or consistent, management does not consider them when evaluating our performance or when making decisions regarding allocation of resources.
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| For the year ended December 31, | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2020 | 2021 | 2022 | 2023 | ||||||||||||||||
| (in thousands, except per share amounts) | ||||||||||||||||||||
| Net income (loss) (GAAP) | $ | 49,166 | $ | (86,553 | ) | $ | 30,691 | $ | 38,609 | $ | 23,723 | |||||||||
| Adjustments: | ||||||||||||||||||||
| - Purchase accounting (1) | (417 | ) | (2,017 | ) | - | - | - | |||||||||||||
| - Stock based compensation | 3,239 | 2,830 | 5,794 | 6,730 | 953 | |||||||||||||||
| - Impairment charges | - | 127,872 | 1,211 | - | - | |||||||||||||||
| - Debt modification expense | - | 3,542 | - | - | - | |||||||||||||||
| - Loss on extinguishment of debt | - | - | 4,936 | - | - | |||||||||||||||
| - Litigation proceeds | (200 | ) | - | - | - | - | ||||||||||||||
| - Pension termination | 6,609 | - | - | - | - | |||||||||||||||
| - COVID-19 (2) | - | 1,391 | 82 | 48 | - | |||||||||||||||
| - Adjustments on derivative not classified as hedge (3) | - | 2,854 | (1,192 | ) | (688 | ) | (688 | ) | ||||||||||||
| - Other charges (4) | 263 | 128 | 770 | 450 | 598 | |||||||||||||||
| Tax effect on adjustments | (2,373 | ) | (22,200 | ) | (2,900 | ) | (1,635 | ) | (216 | ) | ||||||||||
| Adjusted net income (non-GAAP) | $ | 56,287 | $ | 27,847 | $ | 39,392 | $ | 43,514 | $ | 24,370 | ||||||||||
| Weighted average common shares outstanding assuming dilution | 22,813,711 | 22,872,032 | 22,964,732 | 22,916,824 | 22,962,591 | |||||||||||||||
| Adjusted earnings per common share - dilutive (non-GAAP) | $ | 2.42 | $ | 1.18 | $ | 1.67 | $ | 1.84 | $ | 1.01 | ||||||||||
| GAAP diluted earnings (loss) per share | $ | 2.11 | $ | (3.81 | ) | $ | 1.29 | $ | 1.63 | $ | 0.98 | |||||||||
| Adjustments net of income taxes: | ||||||||||||||||||||
| - Purchase accounting (1) | (0.02 | ) | (0.07 | ) | - | - | - | |||||||||||||
| - Stock based compensation | 0.11 | 0.09 | 0.20 | 0.21 | 0.03 | |||||||||||||||
| - Impairment charges | - | 4.72 | 0.04 | - | - | |||||||||||||||
| - Debt modification expense | - | 0.10 | - | - | - | |||||||||||||||
| - Loss on extinguishment of debt | - | - | 0.16 | - | - | |||||||||||||||
| - Litigation proceeds | - | - | - | - | - | |||||||||||||||
| - Pension termination | 0.22 | - | - | - | - | |||||||||||||||
| - COVID-19 (2) | - | 0.05 | - | - | - | |||||||||||||||
| - Adjustments on derivative not classified as hedge (3) | - | 0.09 | (0.04 | ) | (0.02 | ) | (0.02 | ) | ||||||||||||
| - Other charges (4) | - | 0.01 | 0.02 | 0.02 | 0.02 | |||||||||||||||
| Adjusted earnings per common share - dilutive (non-GAAP) | $ | 2.42 | $ | 1.18 | $ | 1.67 | $ | 1.84 | $ | 1.01 |
| Column 1 | Column 2 |
|---|---|
| (1) | Reflects $217 in reversal of earnout compensation related to Henderson, and $200 in reversal of earnout compensation related to Dejana in the year ended December 31, 2019. Reflects $17 in reversal of earnout compensation related to Henderson, and $2,000 in reversal of earnout compensation related to Dejana in the year ended December 31, 2020. |
| Column 1 | Column 2 |
|---|---|
| (2) | Reflects incremental costs incurred related to the COVID-19 pandemic for the periods presented. Such COVID-19 related costs include increased expenses directly related to the pandemic, and do not include either production related overhead inefficiencies or lost or deferred sales. |
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| Column 1 | Column 2 |
|---|---|
| (3) | Reflects non-cash mark-to-market and amortization adjustments on an interest rate swap not classified as a hedge for the periods presented. |
| Column 1 | Column 2 |
|---|---|
| (4) | Reflects expenses and accrual reversals for one time, unrelated legal and consulting fees, severance, restructuring charges, and loss on disposal of fixed assets related to facility relocation for the periods presented. |
Future Obligations and Commitments
Contractual Obligations
We are subject to certain contractual obligations, including long‑term debt and related interest. We have net unrecognized tax benefits of $2.0 million as of December 31, 2023. However, we cannot make a reasonably reliable estimate of the period of potential cash settlement of the underlying liabilities; therefore, we have not included unrecognized tax benefits in calculating the obligations set forth in the following table of significant contractual obligations as of December 31, 2023.
| (Dollars in thousands) | Total | Less than 1 year | 1 - 3 years | 3 - 5 years | More than 5 years | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Long-term debt (1) | $ | 189,413 | $ | 6,875 | $ | 182,538 | $ | - | $ | - | |||||||||
| Operating leases - third parties (2) | 21,463 | 6,244 | 9,808 | 3,562 | 1,849 | ||||||||||||||
| Interest on long-term debt (3) | 34,392 | 14,601 | 19,791 | - | - | ||||||||||||||
| Total contracted cash obligations | $ | 245,268 | $ | 27,720 | $ | 212,137 | $ | 3,562 | $ | 1,849 |
| Column 1 | Column 2 |
|---|---|
| (1) | Long‑term debt obligation is presented net of discount of $0.3 million at December 31, 2023. |
| Column 1 | Column 2 |
|---|---|
| (2) | Relates to real estate and equipment operating leases with third parties, including five operating leases for Henderson upfit and service center locations and eleven operating leases for Dejana locations. |
| Column 1 | Column 2 |
|---|---|
| (3) | Assumes all debt will remain outstanding until maturity. Interest payments were calculated using interest rates in effect as of December 31, 2023. |
Senior Credit Facilities
See Note 8 for a description of our senior credit facilities and other debt.
Deductibility of Intangible and Goodwill Expense
We possess a favorable tax structure where annual tax‑deductible intangible and goodwill amortization expense may be utilized in the event we have sufficient taxable income to utilize such benefit. As we have previously acquired businesses possessing significant intangible assets and goodwill, we have created a favorable tax structure where income tax expense is greater than book amortization expense. We expect the deductibility of intangible assets and goodwill amortization expense to exceed book by approximately $5.2 million in the year ended December 31, 2024 if we have the taxable income to utilize such benefit.
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Impact of Inflation
Inflation in materials, freight and labor had a material impact on our profitability in 2022, and we expect ongoing inflationary pressures may impact our profitability in 2024. While we anticipate being able to fully cover this inflation by raising prices, there may be a timing difference of when we incur the increased costs and when we realize the higher prices in our backlog. In 2023 and in previous years, we experienced significant increases in steel costs, but were able or expect to be able to mitigate the effects of these increases through both temporary and permanent steel surcharges; we expect, but cannot be certain, that we will be able to do the same going forward. See “Risk Factors— The price of steel, a commodity necessary to manufacture our products, is highly variable. If the price of steel increases, our gross margins could decline”.
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 Work Truck Attachments segment results of operations and financial condition vary from quarter‑to‑quarter and from year‑to‑year as well. In addition, because of this seasonality and variability, our Work Truck Attachments segment 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.
Sales of our Work Truck Attachments segment 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 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 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 Work Truck Attachments segment’s 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 Work Truck Attachments segment 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 distributors a combination of pricing, payment and freight incentives during this period. These pre‑season sales incentives encourage our distributors to re‑stock their inventory during the second and third quarters in anticipation of the peak fourth quarter retail sales period by offering favorable 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) during the second and third quarters, providing us with manufacturing visibility for the remainder of the year. By contrast, our revenue and operating results 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 vary from year‑to‑year as they are primarily driven by the level, timing and location of snowfall during the quarter. This is because typically most of our fourth quarter sales and shipments consist of re‑orders by distributors seeking to restock inventory to meet immediate customer needs caused by snowfall during the winter months.
Our Work Truck Attachments segment revenue and operating results tend to be lowest during the first quarter, during which period we typically experience negative earnings as the snow season draws to a close. Our Work Truck Attachments segment first quarter revenue has varied from approximately $19.1 million to approximately $45.8 million between 2018 and 2023. During the last five‑year period, net income (loss) during the first quarter has varied from net income of approximately $1.5 million to a net loss of approximately $13.4 million, with an average net loss of $4.7 million.
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While our Work Truck Attachments monthly working capital has averaged approximately $57.6 million from 2021 to 2023, because of the seasonality of our sales, we experience seasonality in our working capital needs as well. In the first quarter we require capital as we are generally required to build our inventory in anticipation of our second and third quarter sales seasons. During the second and third quarters, our working capital requirements rise as our accounts receivables 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 (reaching an average peak of approximately $64.4 million over the prior three years) and then begin to decline through the fourth quarter through a reduction in accounts receivables (as it is in the fourth quarter that we receive a majority of the payments for previously 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. See “Business—Our Business Strategy—Aggressive Asset Management and Profit Focus.” Our asset management and profit focus strategies include:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | 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; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | our enterprise‑wide lean concept, which allows us to adjust production levels up or down to meet demand; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | the pre‑season order program described above, which incentivizes distributors to place orders prior to the retail selling season; and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | a vertically integrated business model. |
These asset management and profit focus strategies, among other management tools, allow us to adjust fixed overhead and selling, general and administrative expenditures to account for the year‑to‑year variability of our sales volumes. Management currently estimates that consolidated annual fixed overhead expenses generally range from approximately $65.0 million in low sales volume years to approximately $80.0 million in high sales volume years. Further, management currently estimates that consolidated annual sales, general and administrative expenses other than amortization generally approximate $85.0 million, but can be reduced to approximately $70.0 million to maximize cash flow in low sales volume years, and can increase to approximately $95.0 million to maintain customer service and responsiveness in high sales volume years.
Additionally, although modest, our annual capital expenditure requirements, which are normally budgeted around 2-3% of net sales, 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.