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PLOW > SEC Filings for PLOW > Form 10-K on 11-Mar-2014All Recent SEC Filings

Show all filings for DOUGLAS DYNAMICS, INC

Form 10-K for DOUGLAS DYNAMICS, INC


11-Mar-2014

Annual Report


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, 2011, 2012 and 2013 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

Overview

In assessing our results of operations in a given period, one of the primary factors we consider is the level of snowfall experienced within the prior snow season. 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 2013. During this period, snowfall averaged 3,008 inches, with the low in such period being 1,794 inches and the high being 4,502 inches.

During the six-month snow season ended March 31, 2013 snowfall was 3,274 inches which was 9.0% higher than average. Meanwhile, during the six-month snow seasons ended March 31, 2012, we experienced historically below average snowfall (approximately 40% below average). During the six-month snow season ended March 31, 2011, we experienced above average snowfall (approximately 39% above average). In addition to the severity of the low snowfall of snow season ended March 31, 2012, management believes that the timing of the snowfall in the snow season ended March 31, 2013, despite being slightly above average in amount, negatively impacted our pre-season business in 2013. As the timing of the snowfall was predominantly in the second half of the snow season ended March 31, 2013, management believes end users were more likely to repair existing equipment rather than replacing equipment. Consequently we believe our distributors entered the 2013 pre-season period with higher inventory levels than desired. As a result, we believe distributors ordered less equipment in the pre-season period in 2013. While we believe the historically low snowfall levels for the six-month snow season ended March 31, 2012, and slow start to the March 31, 2013 snow season and continued macro-economic uncertainty negatively impacted our business in 2013, we believe that other factors had a positive impact. These additional factors included the timing, amount, and location of snowfall in the fourth quarter of 2013, positively trending light truck sales in 2013 and a large number of new products launched in 2013.

Sales of parts and accessories for 2013 and 2012 were $29.9 million and $16.7 million, respectively, or approximately 31% higher than and 27% below average annual parts and accessories sales over the preceding ten years, respectively. Sales of equipment unit sales for 2013 and 2012 were $164.5 million and $123.3 million, respectively. In 2013, equipment unit sales increased 32.2% as we sold 45,560 equipment units in 2013 as compared to 34,457 equipment units in 2012. We believe that the increase of both parts and accessories sales and equipment unit sales in 2013 as compared to the prior calendar year is a direct result of the historically low snowfall of 2012. Meanwhile, we believe that pent up demand due to deferred new equipment purchases still exists in the marketplace and could be released in or following a year of average or better snowfall that is accompanied by stronger macro-economic conditions. We believe this deferral of new equipment purchases could result in an elevated multi-year replacement cycle as the economy recovers.


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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 periods indicated. During the years ended December 31, 2011, 2012 and 2013, we sold 50,801, 34,457 and 45,560 units of snow and ice control equipment, respectively.

                                                  Year Ended
                                                 December 31,
                                             2011    2012    2013
                     Equipment                  85 %    88 %    85 %
                     Parts and accessories      15 %    12 %    15 %

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, 2011, 2012 and 2013 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,
                                                    2011           2012        2013
                                                            (in thousands)
 Net sales                                       $   208,798     $ 140,033   $ 194,320
 Cost of sales                                       136,981        96,070     128,670


 Gross profit                                         71,817        43,963      65,650
 Selling, general, and administrative expense         26,435        19,895      31,872
 Intangibles amortization                              5,201         5,199       5,625
 Impairment of assets held for sale                        -             -         647


 Income from operations                               40,181        18,869      27,506
 Interest expense, net                                (8,918 )      (8,393 )    (8,328 )
 Loss on extinguishment of debt                         (673 )           -           -
 Other expense, net                                     (218 )        (320 )      (161 )


 Income before taxes                                  30,372        10,156      19,017
 Income tax expense                                   11,332         4,144       7,378


 Net income                                      $    19,040     $   6,012   $  11,639


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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,
                                                     2011       2012       2013
                                                           (in thousands)
     Net sales                                        100.0 %    100.0 %    100.0 %
     Cost of sales                                     65.6 %     68.6 %     66.2 %


     Gross profit                                      34.4 %     31.4 %     33.8 %
     Selling, general, and administrative expense      12.7 %     14.2 %     16.4 %
     Intangibles amortization                           2.5 %      3.7 %      2.9 %
     Impairment of assets held for sale                 0.0 %      0.0 %      0.3 %


     Income from operations                            19.2 %     13.5 %     14.2 %
     Interest expense, net                             (4.3 )%    (6.0 )%    (4.3 )%
     Loss on extinguishment of debt                    (0.3 )%     0.0 %      0.0 %
     Other expense, net                                (0.1 )%    (0.2 )%    (0.1 )%


     Income before taxes                               14.5 %      7.3 %      9.8 %
     Income tax expense                                 5.4 %      3.0 %      3.8 %


     Net income                                         9.1 %      4.3 %      6.0 %

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Net Sales. Net sales were $194.3 million for the year ended December 31, 2013 compared to $140.0 million in 2012, an increase of $54.3 million, or 38.8%. This increase was driven by increases of $41.2 million in sales of snow and ice control equipment and $13.1 million in parts and accessories sales. The increase in sales of snow and ice control equipment for the year ended December 31, 2013 was attributable to an increase in sales volume of snow and ice control equipment of $39.7 million, or 32.2%, as compared to the prior year, and by price increases that we implemented beginning in the third and fourth quarters of 2012 and an additional price increase that was effective in the third and fourth quarters of 2013. The increase in sales volume was largely a result of the timing of late snowfall for the snow season ending March 31, 2013 causing the snow season to be slightly above average in most of the markets we serve. Net sales of parts and accessories increased in the year ended December 31, 2013 from the year ended December 31, 2012 by 78.5%, from $16.7 million to $29.9 million. Net sales of parts and accessories remained comparatively high in 2013, above the preceding ten-year average by approximately 31.1%. As discussed above, the comparatively higher sales of parts and accessories were due in large part to the timing of snowfall in the markets in which our products are sold. Additionally, equipment sales were lower (5% below the immediately preceding ten-year average), mainly due to the timing of snowfall. Sales related to TrynEx products of $12.9 million for the year ended December 31, 2013 also contributed to the increase in net sales for the period.

Cost of Sales. Cost of sales was $128.7 million for the year ended December 31, 2013 compared to $96.1 million in 2012, an increase of $32.6 million, or 33.9%. This increase was driven primarily by increased volume. Cost of sales as a percentage of net sales decreased from 68.6% for the year ended December 31, 2012 to 66.2% for the year ended December 31, 2013 as a result of higher volumes to absorb fixed spending in the year ending December 31, 2013 as compared to the year ending December 31, 2012. Additionally, in 2013, inflationary commodity experience was slightly positive. As a


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percentage of cost of sales, fixed and variable costs were approximately 18% and 82%, respectively, for both of the years ended December 31, 2013 and December 31, 2012.

Gross Profit. Gross profit was $65.7 million for the year ended December 31, 2013 compared to $44.0 million in 2012, an increase of $21.7 million, or 49.3%, due to the increase in net sales volume described above under "-Net Sales" and "-Cost of Sales." As a percentage of net sales, gross profit increased from 31.4% for the year ended December 31, 2012 to 33.8% for the corresponding period in 2013, as a result of the factors discussed above under "-Net Sales" and "-Cost of Sales."

Selling, General and Administrative Expense. Selling, general and administrative expenses, including intangible asset amortization, were $37.5 million for the year ended December 31, 2013 compared to $25.1 million for the year ended December 31, 2012, an increase of $12.4 million, or 49.4%, driven by higher incentive based compensation of $3.2 million due to better operating results. Additionally in 2013 we recorded $4.0 million of earnout compensation expense related to the TrynEx acquisition and $2.2 million in selling, general and administrative expenses related to TrynEx after the date of acquisition. The remaining increase in 2013 is a result of management returning to normal discretionary spending which was significantly cut back in 2012 in order to preserve profitability in a low sales volume year. As a percentage of net sales, selling, general and administrative expenses, including intangibles amortization, increased from 17.9% for the year ended December 31, 2012 to 19.3% for the corresponding period in 2013 due to items discussed above.

Impairment of Assets Held for Sale. We recorded assets held for sale on our balance sheet in conjunction with the closure of the Johnson City, Tennessee location in 2010. The land and building have been held for sale since the closure. In an effort to stimulate sales activity, we lowered the listed sale price which caused us to reassess the fair value of the assets held for sale. Consequently, we recorded an impairment charge of $0.6 million in the year ended December 31, 2013. On February 26, 2014, the Company entered into an agreement for the sale of the land and building, which the Company anticipates closing within seventy-five days of the sale agreement, subject to closing conditions.

Interest Expense. Interest expense was $8.3 million for the year ended December 31, 2013 compared to $8.4 million in the corresponding period in 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. Our effective combined federal and state tax rate for 2013 was 38.8% compared to 40.8% for 2012. The effective tax rate for the year ended December 31, 2013 is lower than 2012 due to the 2012 and 2013 Federal research and development credit recognition in 2013 due to retroactive legislation passed in January 2013.

Net Income. Net income for the year ended December 31, 2013 was $11.6 million compared to net income of $6.0 million for the corresponding period in 2012, an increase of $5.6 million. This increase was driven by the factors described above.

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Net Sales. Net sales were $140.0 million for the year ended December 31, 2012 compared to $208.8 million in 2011, a decrease of $68.8 million, or 33.0%. This decrease was driven by decreases of $54.5 million in sales of snow and ice control equipment and $14.3 million in parts and accessories sales. The decrease in sales of snow and ice control equipment for the year ended December 31, 2012 was attributable to a decrease in sales volume of snow and ice control equipment of $57.2 million, or 32.2%, as compared to the prior year, slightly offset by price increases that we implemented in the


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fourth quarter of 2011 and that extended throughout the remainder of 2011 and 2012 and an additional price increase that was effective in the third and fourth quarters of 2012. The decrease in sales volume was largely a result of the below average snow season ending March 31, 2012. Net sales of parts and accessories decreased in the year ended December 31, 2012 from the year ended December 31, 2011 by 46.0%, from $31.0 million to $16.7 million. Net sales of parts and accessories remained comparatively low in 2012, below the preceding ten-year average by approximately 21.2%. As discussed above, the comparatively lower sales of parts and accessories was due in large part to below average snowfall resulting in decreased equipment usage. Additionally, equipment sales were lower (30% below the immediately preceding ten-year average), mainly attributable to lack of snowfall.

Cost of Sales. Cost of sales was $96.1 million for the year ended December 31, 2012 compared to $137.0 million in 2011, a decrease of $40.9 million, or 29.9%. This decrease was driven primarily by decreased volume. Cost of sales as a percentage of net sales increased from 65.6% for the year ended December 31, 2011 to 68.6% for the year ended December 31, 2012 as a result of lower volumes to absorb fixed spending. In 2012, inflationary commodity experience was cost neutral as compared to negative inflationary commodity experience throughout 2011. The favorability of inflation experienced in 2012 was more than offset by negative fixed cost absorption resulting from decreases in volume of equipment units and parts and accessories. As a percentage of cost of sales, fixed and variable costs were approximately 18% and 82%, respectively, for the year ended December 31, 2012 versus approximately 15% and 85%, respectively for the year ended December 31, 2011.

Gross Profit. Gross profit was $44.0 million for the year ended December 31, 2012 compared to $71.8 million in 2011, a decrease of $27.8 million, or 38.7%, due to the decrease in net sales volume described above under "-Net Sales" and "-Cost of Sales." As a percentage of net sales, gross profit decreased from 34.4% for the year ended December 31, 2011 to 31.4% for the corresponding period in 2012, as a result of the factors discussed above under "-Net Sales" and "-Cost of Sales."

Selling, General and Administrative Expense. Selling, general and administrative expenses, including intangible asset amortization and management fees, were $25.1 million for the year ended December 31, 2012 compared to $31.6 million for the year ended December 31, 2011, a decrease of $6.5 million, or 20.6%, driven by lower incentive based compensation of $3.4 million due to lower operating results. We spent $1.3 million in 2011 on offering costs to allow our former principal stockholders to dispose of their remaining holdings in our common stock while we did not incur any offering costs in 2012. The remaining decrease in 2012 is a result of management pulling back on discretionary spending in order to preserve profitability in a low sales volume year. As a percentage of net sales, selling, general and administrative expenses, including intangibles amortization and management fees, increased from 15.2% for the year ended December 31, 2011 to 17.9% for the corresponding period in 2012 due to items discussed above.

Interest Expense. Interest expense was $8.4 million for the year ended December 31, 2012 compared to $8.9 million in the corresponding period in 2011. The decrease in interest expense for the year ended December 31, 2012 as compared to the prior year was due to a voluntary $10 million payment made on the term loan in January 2012.

Loss on Extinguishment of Debt. Loss on extinguishment of debt was zero for the year ended December 31, 2012 compared to a total of $0.7 million for the year ended December 31, 2011. The loss on extinguishment of debt in 2011 was entirely driven by our entry into a new term loan facility resulting in a significant modification of our debt which resulted in the write off of unamortized capitalized deferred financing costs of $0.3 million and write off of unamortized debt discount of $0.3 million.


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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. Our effective combined federal and state tax rate for 2012 was 40.8% compared to 37.3% for 2011. The effective tax rate for the year ended December 31, 2012 is higher than 2011 as we were in a taxable loss position in 2012 and thus unable to utilize the domestic production activities deduction while we were in a taxable income position in 2011 and able to utilize the domestic production activities deduction.

Net Income. Net income for the year ended December 31, 2012 was $6.0 million compared to net income of $19.0 million for the corresponding period in 2011, a decrease of $13.0 million. This decrease was driven by the factors described above.

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:


Free cash flow;


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 (as defined below) for the year ended December 31, 2013 was $29.5 million compared to $14.2 million in 2012, an increase in free cash flow of $15.3 million, or 107.7%. The increase in free cash flow is primarily a result of $16.6 million more cash provided by operating activities, as discussed below under Liquidity and Capital Resources. In addition to the changes in cash provided by operating activities, capital expenditures increased by $1.3 million. In 2013, there were higher capital expenditures due to reduced spending in 2012 to preserve cash flow following a low snowfall season ending March 2012.

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 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.

                                                  For the year ended December 31,
                                                  2011            2012         2013
                                                          (in thousands)
  Net cash provided by operating activities    $    47,728     $    15,619   $ 32,248
  Acquisition of property and equipment             (2,373 )        (1,446 )   (2,775 )


  Free cash flow                               $    45,355     $    14,173   $ 29,473

Adjusted net income represents net income as determined under GAAP, excluding loss on extinguishment of debt incurred in 2011, costs incurred to pursue potential acquisitions in 2011, certain expenses incurred at the time of our secondary offerings in 2011 and a loss recognized on impairment


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of assets held for sale in 2013. We believe that the presentation of adjusted net income for the years ended December 31, 2011, December 31, 2012 and December 31, 2013 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 years ending December 31, 2011, December 31, 2012 and December 31, 2013.

                                                           Years Ended
                                          December 31,    December 31,     December 31,
(in millions)                                 2011            2012             2013
Net income-(GAAP)                          $       19.0     $       6.0     $       11.6
Addback non-recurring expenses, net of
tax at 37.0% and 38.8% for 2011 and
2013, respectively:
-
Loss on extinguishment of debt                      0.4               -                -
-
Loss recognized on impairment of
assets held for sale                                  -               -              0.4
-
Acquisition costs                                   0.6               -                -
-
Offering costs                                      0.8               -                -


Adjusted net income-(non-GAAP)             $       20.8     $       6.0     $       12.0

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, payment of cash bonuses under our liquidity bonus plan, loss on extinguishment of debt, impairment on assets held for sale, certain purchase accounting expenses 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 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;


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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 . . .

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