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Natural Disasters Hit Douglas Dynamics

By Dan Caplinger - Nov 7, 2017 at 9:04AM

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Find out how diversions of key components hurt the work truck equipment manufacturer.

Douglas Dynamics (PLOW -0.30%) has worked hard to broaden out its business, going beyond its traditional winter-oriented snowplows and ice-fighting equipment to incorporate all-season equipment to its lineup. That gives the company a chance to make money during the warmer seasons, but it also adds new challenges to managing the business.

Coming into Monday's third-quarter financial report, Douglas Dynamics investors wanted to see a boost to earnings and revenue. Douglas Dynamics suffered some difficulties because of natural disasters during the quarter, but the company remains optimistic about its ability to keep growing going into the key winter months. Let's take a closer look at Douglas Dynamics to see how it's doing and what's coming next for the work truck attachment specialist.

Douglas Dynamics makes the best of a tough situation

Douglas Dynamics' third-quarter results were solid, even if they didn't live up to the hopes of its shareholders. Revenue climbed just over 1% to $125.3 million, falling short of the 8% growth that investors had wanted to see. Net income climbed 27% to $9.3 million, producing earnings of $0.40 per share. Yet the consensus forecast among those following the stock was $0.45 per share, providing more disappointment.

As one would expect, the work truck attachments segment, which includes the snow and ice-fighting equipment that gets the most traction during the winter months, weighed on performance during the period. Segment revenue fell 2%, resulting in a roughly 4% hit to operating income. In general, results were in line with the company's internal expectations. The main reason for the problems, however, came from a lack of chassis availability, because work trucks were diverted to other areas of the country following the recent natural disasters. Even with that challenge, slightly better results than the company had expected on products focused on commercial snow and ice control were able to mitigate the downward impact on Douglas Dynamics' results. Ongoing stability in the economy, strength in light truck sales, and solid product launches were contributing factors to the segment's success.

The work truck solutions business was much more successful. Segment revenue climbed almost 19%, and the company reversed a year-ago operating loss, bringing in $1.8 million in operating income. The integration of the unit, which was formed upon the acquisition of Dejana Truck and Utility Equipment in July 2016, is largely complete, and Douglas Dynamics expects positive contributions from the business in the immediate future.

Still, overall efficiency suffered from short-term issues. Gross margin dropped by almost a percentage point to 28.8%, with lower overall volumes in work truck attachments weighing on the business. Effective tax rates also rose, hurting profitability slightly.

CEO James Janik took the events in stride. "While we are pleased with the underlying strength of our business and our operational performance this quarter," Janik said, "we did encounter external issues that impacted our results." The CEO noted that even though those impacts will be temporary, there could still be some damage in the near future.

Can Douglas Dynamics recover?

Yet Douglas Dynamics is optimistic about the future. As Janik noted, below-average snowfall in 2015 and 2016 hasn't dampened demand among customers for its commercial snow and ice control products, and the implementation of the proprietary Douglas Dynamics Management System will hopefully boost productivity and help the company make the most of all of its opportunities.

Because of the short-term issues, though, Douglas Dynamics had to cut its outlook. The company now sees sales for the year coming in between $450 million and $500 million, down $20 million from its previous range. Earnings will now be between $1.20 and $1.60 per share, reducing the previous guidance by between $0.10 and $0.15 per share.

Douglas Dynamics investors seemed to take the news in stride, leaving the stock unchanged in after-hours trading following the announcement. Despite the challenges that the company will face in the months ahead, most long-term shareholders seem comfortable with the strategic vision that Douglas Dynamics currently has. As long as that aspect of the business is successful, then Douglas Dynamics will be able to overcome any short-term issues and reward those who share its vision.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends Douglas Dynamics. The Motley Fool has a disclosure policy.

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