For two years in a row, winters haven't been as harsh in key metropolitan areas as they've been on average. That's been bad news for Douglas Dynamics (PLOW +2.80%), whose business depends on selling work-truck attachments and equipment for snow and ice removal and other road maintenance applications.
Coming into Monday's first-quarter financial report, Douglas Dynamics investors knew full well that a mild winter would be problematic, but they weren't quite prepared for the extent of the losses that the company posted. Nevertheless, Douglas Dynamics is excited about the potential for a recovery going forward. Let's take a closer look at Douglas Dynamics and how it's trying to respond to changing conditions in the industry.
Image source: Douglas Dynamics.
Douglas Dynamics gets stuck in the mud
Douglas Dynamics' first-quarter results showed the challenges that Mother Nature presented to the company. Revenue jumped by 48% to $72.2 million, largely because of the acquisition of the company's work truck solutions business, Dejana. However, that figure was far below the 60% growth rate that investors were looking to see. Moreover, Douglas lost $3.3 million, which worked out to $0.14 per share, and that was worse than the consensus forecast for a loss of $0.05 per share among those following the stock.
Looking more closely at Douglas Dynamics, the impact of the mild winter was clearer from looking at segment results. The work truck attachments business saw revenue decline by more than 10% to $43.6 million, and operating income plunged by two-thirds to just under $2 million. Meanwhile, the work truck solutions segment posted sales of $29.7 million, and that was enough to help the unit post a modest operating profit of $818,000.
A couple of additional factors also weighed on results. First, the company had higher interest expense, which almost doubled from year-ago levels. That increase came about because Douglas Dynamics borrowed $130 million under its term loan arrangement to finance its acquisition of Dejana. Also on the financing front, the company made a decision to amend its term loan credit agreement, which resulted in a one-time additional cost but should result in lower ongoing interest payments in the future. Second, Douglas Dynamics made a change to its accounting standards on share-based compensation, and that pushed income tax liability higher for the quarter.
CEO James Janik was able to sum up Douglas Dynamics' results succinctly. "The lack of snowfall across our core markets in January and February certainly impacted the business," Janik said. "However, the late season storms in March helped end the season on a positive note and moved the below average season snowfall totals closer to average." The CEO also noted that demand for the work truck solutions segment improved throughout the quarter.
Can Douglas Dynamics do better next year?
Going forward, Douglas Dynamics is optimistic. In particular, the work truck solutions business has solid growth prospects that could help drive the overall company forward during the warmer months of the year. At the same time, the company believes that a return to more typical levels of shipments of equipment, parts, and accessories for commercial snow and ice products should lead to natural improvement going forward.
A couple of things emphasize Douglas Dynamics' confidence. Even with the sluggish results, Douglas Dynamics still thinks that it can achieve its full-year 2017 guidance targets. The company reaffirmed its expectations for between $470 million and $530 million in revenue, and it still sees earnings coming in between $1.20 and $1.80 per share. Also, Douglas boosted its dividend during the past quarter, with a 2% boost to $0.24 per share on a quarterly basis.
Nevertheless, Douglas Dynamics investors didn't entirely share the company's enthusiasm, and the stock fell 3% in after-hours trading following the announcement. With winter now firmly in the past, Douglas Dynamics will have to wait until the end of the year before it can prove its ability to bounce back fully from two tough winters in a row.
