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PLOW > SEC Filings for PLOW > Form 10-Q on 7-Aug-2012All Recent SEC Filings

Show all filings for DOUGLAS DYNAMICS, INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for DOUGLAS DYNAMICS, INC


7-Aug-2012

Quarterly Report


Item 2. 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 should be read in conjunction with our consolidated financial statements and related notes which are included in Item 1 of this Quarterly Report on Form 10-Q, as well as the information contained in our Form 10-K (Commission File No. 001-34728) filed with the Securities and Exchange Commission.

In this Quarterly Report on Form 10-Q, unless the context indicates otherwise:
"Douglas Dynamics," the "Company," "we," "our," or "us" refer to Douglas Dynamics, Inc.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements include information relating to future events, product demand, the payment of dividends, future financial performance, strategies, expectations, competitive environment, regulation and availability of financial resources. These statements are often identified by use of words such as "anticipate," "believe," "intend," "estimate," "expect," "continue," "should," "could," "may," "plan," "project," "predict," "will" and similar expressions and include references to assumptions and relate to our future prospects, developments and business strategies. Such statements involve known and unknown risks, uncertainties and other factors that could cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to: (i) weather conditions, particularly lack of or reduced levels of snowfall or the timing of such snowfall; (ii) a significant decline in economic conditions or the speed of the economic recovery ; (iii) our inability to maintain good relationships with our distributors; (iv) lack of available or favorable financing options for our end-users or distributors; (v) increases in the price of steel or other materials necessary for the production of our products that cannot be passed on to our distributors; (vi) increases in the price of fuel; (vii) the inability of our suppliers to meet our volume or quality requirements; (viii) inaccuracies in our estimates of future demand for our products; (ix)our inability to protect or continue to build our intellectual property portfolio; (x) our inability to develop new products or improve upon existing products in response to end-user needs; (xi) losses due to lawsuits arising out of personal injuries associated with our products; (xii) factors that could impact the future declaration and payment of dividends; and (xii) our inability to compete effectively against competition, as well as those discussed in the section entitled "Risk Factors," set forth in Part I, Item 1A of our Annual Report on Form 10-K for the Year Ended December 31, 2011. Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. These forward-looking statements do not include the potential impact of any acquisition that may be subsequently announced and/or completed. In addition, the forward-looking statements in this Quarterly Report on Form 10-Q speak only as of the date hereof and we undertake no obligation, except as required by law, to update or release any revisions to any forward-looking statement, even if new information becomes available in the future.


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Results of Operations

Overview

During the three months ended June 30, 2012 and 2011, we sold 16,486 and 18,063 units of snow and ice control equipment, respectively, and during the six months ended June 30, 2012 and 2011 we sold 18,100 and 22,011 units of snow and ice control equipment, respectively. The following table shows our sales of snow and ice control equipment and related parts and accessories as a percentage of net sales for the three and six months ended June 30, 2012 and 2011.

                             Three months ended               Six months ended
                        June 30, 2012   June 30, 2011   June 30, 2012   June 30, 2011
Equipment                          91 %            89 %            89 %            82 %

Parts and accessories               9 %            11 %            11 %            18 %

The following table sets forth, for the three and six months ended June 30, 2012 and 2011, the consolidated statements of operations 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 operations data for the three and six months ended June 30, 2012 and 2011 have been derived from our unaudited 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 Quarterly Report on Form 10-Q.

                                    Three Months Ended                     Six Months Ended
                             June 30, 2012      June 30, 2011      June 30, 2012      June 30, 2011
                                       (unaudited)                           (unaudited)
                                      (in thousands)                        (in thousands)

Net sales                   $        65,499    $        71,557    $        74,059    $        95,047
Cost of sales                        42,439             45,219             49,180             59,638
Gross profit                         23,060             26,338             24,879             35,409

Selling, general, and
administrative expense                5,707              6,751             10,337             12,687
Intangibles amortization              1,301              1,300              2,601              2,600

Income from operations               16,052             18,287             11,941             20,122

Interest expense, net                (2,178 )           (2,142 )           (4,223 )           (4,347 )
Loss on extinguishment
of debt                                   -               (673 )                -               (673 )
Other expense, net                     (155 )              (74 )             (233 )             (187 )
Income before taxes                  13,719             15,398              7,485             14,915

Income tax expense                    4,747              5,666              2,780              5,992

Net income                  $         8,972    $         9,732    $         4,705    $         8,923


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The following table sets forth for the three and six months ended June 30, 2012 and 2011, the percentage of certain items in our consolidated statement of operations, relative to net sales:

                         June 30, 2012    June 30, 2011    June 30, 2012    June 30, 2011
                                  (unaudited)                       (unaudited)

Net sales                        100.0 %          100.0 %          100.0 %          100.0 %
Cost of sales                     64.8 %           63.2 %           66.4 %           62.7 %
Gross profit                      35.2 %           36.8 %           33.6 %           37.3 %

Selling, general, and
administrative expense             8.7 %            9.4 %           14.0 %           13.3 %
Intangibles
amortization                       2.0 %            1.8 %            3.5 %            2.7 %

Income from operations            24.5 %           25.6 %           16.1 %           21.3 %

Interest expense, net             (3.3 )%          (3.0 )%          (5.7 )%          (4.6 )%
Loss on extinguishment
of debt                            0.0 %           (0.9 )%           0.0 %           (0.7 )%
Other expense, net                (0.2 )%          (0.1 )%          (0.3 )%          (0.2 )%
Income before taxes               21.0 %           21.6 %           10.1 %           15.8 %

Income tax expense                 7.2 %            7.9 %            3.8 %            6.3 %

Net income                        13.8 %           13.7 %            6.3 %            9.5 %

Net Sales

Net sales were $65.5 million for the three months ended June 30, 2012 compared to $71.6 million in the three months ended June 30, 2011, a decrease of $6.1 million, or 8.5%. Net sales were $74.1 million for the six months ended June 30, 2012 compared to $95.0 million in the six months ended June 30, 2011, a decrease of $20.9 million, or 22.0%. The decrease in net sales for the three and six months ended June 30, 2012 was driven by a 8.7% and 17.8% decrease in unit sales of snow and ice control equipment, respectively. In addition to the decrease in unit sales of snow and ice control equipment there was a decrease in parts and accessories sales for the three and six months ended June 30, 2012 compared to the corresponding period in 2011 of 28.5%, and 50.9%, respectively. The Company attributes the decreases in both equipment and parts and accessories to the significantly below average snowfall during the October 1, 2011 to March 31, 2012 snow season.

Cost of Sales

Cost of sales was $42.4 million for the three months ended June 30, 2012 compared to $45.2 million for the three months ended June 30, 2011, a decrease of $2.8 million, or 6.2%. Cost of sales was $49.2 million for the six months ended June 30, 2012 compared to $59.6 million in the six months ended June 30, 2011, a decrease of $10.4 million, or 17.4%. The decreases in cost of sales for the three and six months ended June 30, 2012 compared to the corresponding periods in 2011 were primarily driven by decreases in volume as discussed above under "-Net Sales". In addition, the Company experienced slightly higher cost of sales as a percentage of sales of 64.8% for the three months ended June 30, 2012 compared to 63.2% for the three-month period ended June 30, 2011. The Company also experienced higher cost of sales as a percentage of sales of 66.4% compared to 62.7% for the six-month periods ending June 30, 2012 and June 30, 2011, respectively. The increase in cost of sales as a percentage of net sales for both the three and six month periods was due to lower units sold which contributed to higher fixed costs per unit sold. Slightly offsetting increased fixed costs per unit, the Company experienced favorability from positive performance variances and cost reduction efforts. As a percentage of cost of sales, fixed and variable costs were approximately 14% and 86%, respectively, for the three months ended June 30, 2012 versus approximately 13% and 87%, respectively for the three months ended June 30, 2011, and approximately 16% and 84%, respectively, for the six months ended June 30, 2012 versus approximately 15% and 85%, respectively, for the six months ended June 30, 2011.

Gross Profit

Gross profit was $23.1 million for the three months ended June 30, 2012 compared to $26.3 million in the three months ended June 30, 2011, a decrease of $3.2 million, or 12.2%. Gross profit was $24.9 million for the six months ended June 30, 2012 compared to $35.4 million in the six months ended June 30, 2011, a decrease of $10.5 million, or 29.7%. The decrease in gross profit for the three and six months ended June 30, 2012 was due primarily to the decreased unit sales of snow and ice control equipment described above under "-Net Sales." As a percentage of net sales, gross profit decreased from 36.8% for the three months ended June 30, 2011 to 35.2% for the corresponding period in 2012 and decreased from 37.3% for the six months ended June 30, 2011 to 33.6% for the corresponding period in 2012, primarily as a result of the factors discussed above under "-Net Sales" and "-Cost of Sales."


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Selling, General and Administrative Expense

Selling, general and administrative expenses, including intangibles amortization, were $7.0 million for the three months ended June 30, 2012, compared to $8.1 million for the three months ended June 30, 2011, a decrease of $1.1 million, or 13.6%. This decrease was partially due to $1.0 million in secondary offering expenses incurred in the second quarter of 2011. Additionally, there were $0.4 million lower performance based incentive compensation expense in the three months ended June 30, 2012 compared to the three months ended June 30, 2011. These decreases were partially offset by $0.7 million of legal expenses recorded in the three months ended June 30, 2012 related to legal settlements. Selling, general and administrative expenses, including intangibles amortization, were $12.9 million for the six months ended June 30, 2012, compared to $15.3 million for the six months ended June 30, 2011, a decrease of $2.4 million, or 15.7%. In addition to the $1.0 million in secondary offering expenses incurred in 2011 and the $0.7 million related to the Northern Star settlement in the second quarter of 2012, the Company experienced a $0.9 million decrease due to lower performance based incentive compensation expenses in the six months ended June 30, 2012 compared to the six months ended June 30, 2011. The remainder of the decrease was due to cost saving measures taken by the Company to right-size capacity to the decline in volume.

Interest Expense

Interest expense was $2.2 million for the three months ended June 30, 2012 essentially unchanged from the same period in the prior year. Interest expense was $4.2 million for the six months ended June 30, which was slightly less than the $4.3 million in the same period in the prior year.

Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The largest item affecting deferred taxes is the difference between book and tax amortization of goodwill and other intangibles amortization. The Company estimates that the combined federal and state tax rate for 2012 will be approximately 37%. The Company's effective tax rate was 34.6% and 36.8% for the three months ended June 30, 2012 and 2011, respectively. The Company's effective tax rate for the six months ended June 30, 2012 and 2011 was 37.1% and 40.2%, respectively. The effective tax rate for both the three months ended June 30, 2012 was lower than the corresponding period in 2011 due to the Company recognizing less income slightly offset by a decreased domestic productions activities deduction in the current period as compared to the prior year's corresponding period. The effective tax rate for the six months ended June 30, 2012 was lower than the corresponding period in 2011 due to the Company recognizing less income slightly offset by a decreased domestic productions activities deduction in the current year along with the Company adjusting the prior year's net deferred tax liabilities to a higher federal rate for 2011 compared to the actual rate incurred in 2010.

Net Income

Net income for the three months ended June 30, 2012 was $9.0 million compared to net income of $9.7 million for the corresponding period in 2011, a decrease in net income of $0.7 million. Net income for the six months ended June 30, 2012 was $4.7 million compared to net income of $8.9 million for the corresponding period in 2011, a decrease in net income of $4.2 million. This decrease in net income was driven by the factors described above under "-Net Sales" and "-Cost of Sales." As a percentage of net sales, net income was 13.8% for the three months ended June 30, 2012 compared to 13.7% for the three months ended June 30, 2011. As a percentage of net sales, net income was 6.3% for the six months ended June 30, 2012 compared to 9.5% for the six months ended June 30, 2011.

Adjusted EBITDA

Adjusted EBITDA (as defined below) for the three months ended June 30, 2012 was $19.6 million compared to $21.9 million in the corresponding period in 2011, a decrease of $2.3 million, or 10.5%. Adjusted EBITDA for the six months ended June 30, 2012 was $17.7 million compared to $26.0 million in the corresponding period in 2011, a decrease of $8.3 million, or 31.9%. As a percentage of net sales, Adjusted EBITDA decreased from 30.6% for the three months ended June 30, 2011 to 29.8% for the three months ended June 30, 2012, and decreased from 27.3% for the six months ended June 30, 2011 to 24.0% for the six months ended June 30, 2012. For the three-month period ended June 30, 2012 Adjusted EBITDA remained relatively constant compared to the three-month period ending June 30, 2011. For the six-month period ending June 30, 2012, the decrease in Adjusted EBITDA is primarily attributable to decreased unit sales of snow and ice control equipment in addition to decreases in parts and accessories compared to the corresponding period of 2011. The below average snowfall in the October 1, 2011 to March 31, 2012 snow season drove the decrease in pre-season orders in the second quarter of 2012.

Free Cash Flow

Free cash flow (as defined below) for the three months ended June 30, 2012 was ($7.6) million compared to ($15.2) million in the corresponding period in 2011, a decrease in cash used of $7.6 million, or 50.0%. Free cash flow for the six months ended June 30, 2012 was ($18.1) million compared to ($3.7) million in the corresponding period in 2011, an increase in cash used of $14.4 million, or 389.2%. For the three month period, the decrease in cash used is primarily a result of $7.6 million less cash used by operating activities, while for the six month period, the increase in cash used is primarily a result of $14.2 million more cash used by operating activities, each as discussed below under Liquidity and Capital Resources. While cash used by operating activities declined in the three month period, capital expenditures remained relatively constant at $0.6 million for both the three month periods ending June 30, 2012 and 2011 and increased slightly by $0.2 million for the six-month period ending June 30, 2012 compared to the corresponding period in 2011.


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Non-GAAP Financial Measures

This Quarterly Report on Form 10-Q contains financial information calculated other than in accordance with U.S. generally accepted accounting principles ("GAAP").

These non-GAAP measures include:

Free cash flows;

Adjusted net income; and

Adjusted EBITDA.

These non-GAAP disclosures should not be construed as an alternative to the reported results determined in accordance with GAAP.

Free cash flow is a non-GAAP financial measure, which we define as net cash used in operating activities less capital expenditures. Free cash flow should be evaluated in addition to, and not considered a substitute for, other financial measures such as net income and cash flow provided by operations. We believe that free cash flow represents our ability to generate additional cash flow from our business operations.

The following table reconciles net cash provided by operating activities, a GAAP measure, to free cash flow, a non-GAAP measure.

                                   Three months ended                     Six months ended
                            June 30, 2012      June 30, 2011      June 30, 2012      June 30, 2011
                                     (In Thousands)                        (In Thousands)
Net cash used in
operating activities       $        (7,015 )  $       (14,632 )  $       (17,044 )  $        (2,867 )
Acquisition of property
and equipment                         (579 )             (573 )           (1,016 )             (840 )

Free cash flow             $        (7,594 )  $       (15,205 )  $       (18,060 )  $        (3,707 )

Adjusted net income represents net income as determined under GAAP, excluding certain expenses incurred at the time of our secondary offering in 2011 and a loss on extinguishment of debt incurred in 2011. We believe that the presentation of adjusted net income for the three and six months ended June 30, 2012 and June 30, 2011 allows investors to make meaningful comparisons of our operating performance between periods and to view our business from the same perspective as our management. Because the excluded items are not predictable or consistent, management does not consider them when evaluating our performance or when making decisions regarding allocation of resources.

The following table presents a reconciliation of net income, the most comparable GAAP financial measure, to adjusted net income for the three and six months ended June 30, 2012 and June 30, 2011.

                                      Three months ended             Six months ended
                                   June 30,       June 30,       June 30,       June 30,
(in millions)                        2012           2011           2012           2011
Net income - (GAAP)               $       9.0    $       9.7    $       4.7    $       8.9
Addback expenses, net of tax at
37.0% for 2012 and 2011:
-Loss on extinguishment of debt             -            0.4              -            0.4
- Offering costs                            -            0.6              -            0.6
Adjusted net income -
(Non-GAAP)                        $       9.0    $      10.7    $       4.7    $       9.9

Adjusted EBITDA represents net income before interest, taxes, depreciation and amortization, as further adjusted for certain non-recurring charges related to certain non-recurring legal and consulting fees, as well as management fees paid by us to affiliates of our former principal stockholders, stock based compensation, loss on extinguishment of debt and offering costs. 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


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companies, because it allows them to measure a company's operating performance without regard to items such as interest expense, taxes, depreciation and amortization, which can vary substantially from company to company depending upon accounting methods and book value of assets and liabilities, capital structure and the method by which assets were acquired. Our management also uses Adjusted EBITDA for planning purposes, including the preparation of our annual operating budget and financial projections. Management also uses Adjusted EBITDA to evaluate our ability to make certain payments, including dividends, in compliance with our senior credit facilities, which is determined based on a calculation of "Consolidated Adjusted EBITDA" that is substantially similar to Adjusted EBITDA.

Adjusted EBITDA has limitations as an analytical tool. As a result, you should not consider it in isolation, or as a substitute for net income, operating income, cash flow from operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. Some of these limitations are:

Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness;

Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;

Other companies, including other companies in our industry, may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure; and

Adjusted EBITDA does not reflect tax obligations whether current or deferred.

The following table presents a reconciliation of net income, the most comparable GAAP financial measure, to Adjusted EBITDA as well as the resulting calculation of Adjusted EBITDA for the three and six months ended June 30, 2012 and 2011 (in thousands):

                                  Three months ended                     Six months ended
                           June 30, 2012      June 30, 2011      June 30, 2012      June 30, 2011
Net income                $         8,972    $         9,723    $         4,705    $         8,923

Interest Expense - Net              2,178              2,142              4,223              4,347
Income Taxes                        4,747              5,666              2,780              5,992
Depreciation Expense                  701                754              1,402              1,502
Amortization                        1,301              1,300              2,601              2,600
EBITDA                             17,899             19,585             15,711             23,364

Management Fees                         -                  9                  -                 26
Stock based
compensation                          541                481                906                746
Loss on extinguishment
of debt                                 -                673                  -                673
Offering costs                          -              1,036                  -              1,036
Other non-recurring
charges (1)                         1,110                122              1,122                124

Adjusted EBITDA           $        19,550    $        21,906    $        17,739    $        25,969



(1) - Reflects $1,110 and $122 of legal and consulting fees for the three months ended June 30, 2012 and 2011, respectively, and $1,122 and $124 for the six months ended June 30, 2012 and 2011 respectively.

Discussion of Critical Accounting Policies

For a discussion of our critical accounting policies, please see the disclosure included in our Form 10-K (Commission File No. 001-34728) filed with the Securities and Exchange Commission , under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operation - Critical Accounting Policies".

New Accounting Pronouncements

. . .

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