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PLOW > SEC Filings for PLOW > Form 10-Q on 6-Nov-2012All Recent SEC Filings

Show all filings for DOUGLAS DYNAMICS, INC

Form 10-Q for DOUGLAS DYNAMICS, INC


6-Nov-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 September 30, 2012 and 2011, we sold 9,518 and 13,824 units of snow and ice control equipment, respectively, and during the nine months ended September 30, 2012 and 2011 we sold 27,618 and 35,835 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 nine months ended September 30, 2012 and 2011.

                             Three months ended               Nine months ended
                        September 30,   September 30,   September 30,   September 30,
                            2012            2011            2012            2011
Equipment                          91 %            89 %            89 %            84 %

Parts and accessories               9 %            11 %            11 %            16 %

The following table sets forth, for the three and nine months ended September 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 nine months ended September 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                    Nine Months Ended
                             September 30,      September 30,      September 30,      September 30,
                                 2012               2011               2012               2011
                                       (unaudited)                           (unaudited)
                                      (in thousands)                        (in thousands)

Net sales                   $        37,774    $        53,495    $       111,833    $       148,541
Cost of sales                        26,208             37,001             75,387             96,639
Gross profit                         11,566             16,494             36,446             51,902

Selling, general, and
administrative expense                5,051              6,546             15,388             19,232
Intangibles amortization              1,300              1,300              3,901              3,901

Income from operations                5,215              8,648             17,157             28,769

Interest expense, net                (2,080 )           (2,332 )           (6,304 )           (6,678 )
Loss on extinguishment
of debt                                   -                  -                  -               (673 )
Other expense, net                      (44 )              (25 )             (277 )             (202 )
Income before taxes                   3,091              6,291             10,576             21,216

Income tax expense                      745              2,324              3,525              8,326

Net income                  $         2,346    $         3,967    $         7,051    $        12,890


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

                                   Three Months Ended                Nine Months Ended
                             September 30,    September 30,    September 30,    September 30,
                                 2012             2011             2012             2011
                                      (unaudited)                       (unaudited)

Net sales                            100.0 %          100.0 %          100.0 %          100.0 %
Cost of sales                         69.4 %           69.2 %           67.4 %           65.1 %
Gross profit                          30.6 %           30.8 %           32.6 %           34.9 %

Selling, general, and
administrative expense                13.4 %           12.2 %           13.8 %           12.9 %
Intangibles amortization               3.4 %            2.4 %            3.5 %            2.6 %

Income from operations                13.8 %           16.2 %           15.3 %           19.4 %

Interest expense, net                 (5.5 )%          (4.4 )%          (5.6 )%          (4.5 )%
Loss on extinguishment of
debt                                   0.0 %            0.0 %            0.0 %           (0.5 )%
Other expense, net                    (0.1 )%          (0.0 )%          (0.2 )%          (0.1 )%
Income before taxes                    8.2 %           11.8 %            9.5 %           14.3 %

Income tax expense                     2.0 %            4.3 %            3.2 %            5.6 %

Net income                             6.2 %            7.5 %            6.3 %            8.7 %

Net Sales

Net sales were $37.8 million for the three months ended September 30, 2012 compared to $53.5 million in the three months ended September 30, 2011, a decrease of $15.7 million, or 29.3%. Net sales were $111.8 million for the nine months ended September 30, 2012 compared to $148.5 million in the nine months ended September 30, 2011, a decrease of $36.7 million, or 24.7%. The decrease in net sales for the three and nine months ended September 30, 2012 was driven by a 31.1% and 22.9% 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 nine months ended September 30, 2012 compared to the corresponding period in 2011 of 42.3% and 48.6%, 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 $26.2 million for the three months ended September 30, 2012 compared to $37.0 million for the three months ended September 30, 2011, a decrease of $10.8 million, or 29.2%. Cost of sales was $75.4 million for the nine months ended September 30, 2012 compared to $96.6 million in the nine months ended September 30, 2011, a decrease of $21.2 million, or 21.9%. The decreases in cost of sales for the three and nine months ended September 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 69.4% for the three months ended September 30, 2012 compared to 69.2% for the three-month period ended September 30, 2011. The Company also experienced higher cost of sales as a percentage of sales of 67.4% compared to 65.1% for the nine-month periods ending September 30, 2012 and September 30, 2011, respectively. The increase in cost of sales as a percentage of net sales for both the three and nine month periods was due to lower units sold which contributed to higher fixed costs per unit sold. Positive performance variances and cost reductions slightly offset increased fixed costs per unit. As a percentage of cost of sales, fixed and variable costs were approximately 18% and 82%, respectively, for the three months ended September 30, 2012 versus approximately 16% and 84%, respectively for the three months ended September 30, 2011, and approximately 17% and 83%, respectively, for the nine months ended September 30, 2012 versus approximately 15% and 85%, respectively, for the nine months ended September 30, 2011.

Gross Profit

Gross profit was $11.6 million for the three months ended September 30, 2012 compared to $16.5 million for the three months ended September 30, 2011, a decrease of $4.9 million, or 29.7%. Gross profit was $36.4 million for the nine months ended September 30, 2012 compared to $51.9 million in the nine months ended September 30, 2011, a decrease of $15.5 million, or 29.9%. The decrease in gross profit for the three and nine months ended September 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 30.8% for the three months ended September 30, 2011 to 30.6% for the corresponding period in 2012 and decreased from 34.9% for the nine months ended September 30, 2011 to 32.6% 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 $6.4 million for the three months ended September 30, 2012, compared to $7.8 million for the three months ended September 30, 2011, a decrease of $1.4 million, or 17.9%. This decrease was partially due to a $1.0 million litigation settlement the Company received in the three months ended September 30, 2012 that reduced expenses for the period. Additionally, performance based incentive compensation was $0.6 million lower in the three months ended September 30, 2012 compared to the three months ended September 30, 2011. Selling, general and administrative expenses, including intangibles amortization, were $19.3 million for the nine months ended September 30, 2012, compared to $23.1 million for the nine months ended September 30, 2011, a decrease of $3.8 million, or 16.5%. In addition to the $1.0 million litigation settlement referenced above, the Company experienced a $1.4 million decrease in expenses due to lower performance based incentive compensation expense in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. For the nine month period ended September 30, 2011, the Company recognized $1.1 million in secondary offering expenses which were not incurred in the same period of 2012. 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 $2.1 million for the three months ended September 30, 2012 compared to $2.3 million for the three months ended September 30, 2011, a decrease of $0.2 million, or 8.7%. Interest expense was $6.3 million for the nine months ended September 30, 2012 which was lower than the $6.7 million interest expense in the same period in the prior year. Decreases in interest expense for the three and nine months ended September 30, 2012 as compared to the prior year were due to a voluntary $10 million payment made on the term loan in January 2012.

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 24.1% and 36.9% for the three months ended September 30, 2012 and 2011, respectively. The Company's effective tax rate for the nine months ended September 30, 2012 and 2011 was 33.3% and 39.2%, respectively. The effective tax rate for the three months ended September 30, 2012 was lower than the corresponding quarter 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 Company also recognized an additional benefit related to 2011 Federal tax credits in the third quarter of 2012 with the filing of the Company's 2011 Federal tax return. The effective tax rate for the nine months ended September 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 September 30, 2012 was $2.3 million compared to net income of $4.0 million for the corresponding period in 2011, a decrease in net income of $1.7 million. Net income for the nine months ended September 30, 2012 was $7.1 million compared to net income of $12.9 million for the corresponding period in 2011, a decrease in net income of $5.8 million.
This decrease in net income was driven by the factors described above under "-Net Sales" and "-Cost of Sales," partially offset by resduction in selling, general and administrative expense. As a percentage of net sales, net income was 6.2% for the three months ended September 30, 2012 compared to 7.5% for the three months ended September 30, 2011. As a percentage of net sales, net income was 6.3% for the nine months ended September 30, 2012 compared to 8.7% for the nine months ended September 30, 2011.

Adjusted EBITDA

Adjusted EBITDA (as defined below) for the three months ended September 30, 2012 was $7.8 million compared to $12.1 million in the corresponding period in 2011, a decrease of $4.3 million, or 35.5%. Adjusted EBITDA for the nine months ended September 30, 2012 was $25.5 million compared to $38.1 million in the corresponding period in 2011, a decrease of $12.6 million, or 33.1%. As a percentage of net sales, Adjusted EBITDA decreased from 22.6% for the three months ended September 30, 2011 to 20.7% for the three months ended September 30, 2012, and decreased from 25.6% for the nine months ended September 30, 2011 to 22.8% for the nine months ended September 30, 2012. For the three and nine-month period ending September 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 sales 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 2012.

Free Cash Flow

Free cash flow (as defined below) for the three months ended September 30, 2012 was ($18.1) million compared to ($16.1) million in the corresponding period in 2011, an increase in cash used of $2.0 million, or 12.4%. Free cash flow for the nine months ended September 30, 2012 was ($36.2) million compared to ($19.8) million in the corresponding period in 2011, an increase in cash used of $16.4 million, or 82.8%. For the three month period, the increase in cash used is primarily a result of $2.7 million more cash used by operating activities, slightly offset by a $0.7 million decrease in acquisition of property and equipment, while for the nine month period, the increase in cash used is primarily a result of $16.9 million more cash used by operating activities, slightly offset by a $0.5 million decrease in acquisition of property and equipment, each as discussed below under Liquidity and Capital Resources.


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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 used in 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 used in operating activities, a GAAP measure, to free cash flow, a non-GAAP measure.

                                         Three months ended                    Nine months ended
                                  September 30,      September 30,      September 30,      September 30,
                                      2012               2011               2012               2011
                                           (In Thousands)                        (In Thousands)
Net cash used in operating
activities                       $       (18,049 )  $       (15,323 )  $       (35,093 )  $       (18,190 )
Acquisition of property and
equipment                                    (67 )             (745 )           (1,083 )           (1,585 )

Free cash flow                   $       (18,116 )  $       (16,068 )  $       (36,176 )  $       (19,775 )

Adjusted net income represents net income as determined under GAAP, excluding a loss on extinguishment of debt incurred in 2011, costs incurred to pursue potential acquisitions in 2011 and certain expenses incurred at the time of our secondary offerings in 2011. We believe that the presentation of adjusted net income for the three and nine months ended September 30, 2012 and September 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 nine months ended September 30, 2012 and September 30, 2011.

                                     Three months ended                    Nine months ended
                              September 30,      September 30,      September 30,      September 30,
(in millions)                     2012               2011               2012               2011
Net income - (GAAP)          $           2.3    $           4.0    $           7.1    $          12.9
Addback expenses, net of
tax at 37.0% for 2011:
- Loss on extinguishment
of debt                                    -                  -                  -                0.4
- Acquisition costs                        -                0.5                  -                0.5
- Offering costs                           -                  -                  -                0.7
Adjusted net income -
(Non-GAAP)                   $           2.3    $           4.5    $           7.1    $          14.5

Adjusted EBITDA represents net income before interest, taxes, depreciation and amortization, as further adjusted for certain charges consisting of unrelated 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 nine months ended September 30, 2012 and 2011 (in thousands):

                                  Three months ended                    Nine months ended
                           September 30,      September 30,      September 30,      September 30,
                               2012               2011               2012               2011

Net income                $         2,346    $         3,967    $         7,051    $        12,890

Interest expense - net              2,080              2,332              6,304              6,678
Income taxes                          745              2,324              3,525              8,326
Depreciation Expense                  695                744              2,097              2,245
Amortization                        1,300              1,300              3,901              3,901
EBITDA                              7,166             10,667             22,878             34,040

Management fees                         -                 11                  -                 37
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