UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________________ to ________________

 

Commission File Number: 001-38089

 

ASV HOLDINGS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

82-1501649

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

840 Lily Lane

Grand Rapids, MN

55744

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (218) 327-3434

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  ☐

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.     Yes      No  

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.001 per share

 

ASV

 

NASDAQ Capital Market

 

As of April 29, 2019, the registrant had 9,897,208 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

 

Item 1.

 

Financial Statements (Unaudited)

3

 

Condensed Balance Sheets

3

 

Condensed Statements of Operations

4

 

Statement of Stockholders’ Equity

5

 

Condensed Statements of Cash Flows

6

 

Notes to Unaudited Condensed Financial Statements

7

Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

20

Item 4.

Controls and Procedures

21

 

PART II.

 

OTHER INFORMATION

 

Item 1.

Legal Proceedings

21

Item 1A.

Risk Factors

22

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

22

Item 3.

Defaults upon Senior Securities

22

Item 4.

Mine Safety Procedures

22

Item 5.

Other Information

22

Item 6.

Exhibits

23

Signatures

 

24

 

 

 

 

 

2

 


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

ASV Holdings, Inc.

Condensed Balance Sheets

(In thousands, except par value)

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

Unaudited

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

Cash

 

$

1,232

 

 

$

2

 

Accounts receivable, net

 

 

18,044

 

 

 

18,462

 

Receivables from affiliates

 

 

23

 

 

 

7

 

Income tax receivable

 

 

840

 

 

 

840

 

Inventory, net

 

 

37,969

 

 

 

34,055

 

Prepaid income tax

 

 

43

 

 

 

43

 

Prepaid expenses and other

 

 

437

 

 

 

593

 

Total current assets

 

 

58,588

 

 

 

54,002

 

Property, plant and equipment, net

 

 

12,298

 

 

 

12,662

 

Operating lease assets, net

 

 

977

 

 

 

 

Intangible assets, net

 

 

20,094

 

 

 

20,730

 

Other long-term assets

 

 

339

 

 

 

237

 

Total assets

 

$

92,296

 

 

$

87,631

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

Notes payable - current portion

 

$

2,991

 

 

$

2,991

 

Trade accounts payable

 

 

17,825

 

 

 

18,834

 

Payables to affiliates

 

 

416

 

 

 

480

 

Accrued compensation and benefits

 

 

903

 

 

 

1,394

 

Accrued warranties

 

 

1,489

 

 

 

1,584

 

Operating lease liability- current portion

 

 

238

 

 

 

 

Accrued other current liabilities

 

 

1,163

 

 

 

1,405

 

Total current liabilities

 

 

25,025

 

 

 

26,688

 

Revolving loan facility

 

 

22,707

 

 

 

16,026

 

Notes payable - long term, net

 

 

9,621

 

 

 

10,159

 

Operating lease liability- long term

 

 

796

 

 

 

 

Other long-term liabilities

 

 

644

 

 

 

727

 

Total liabilities

 

 

58,793

 

 

 

53,600

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, 5,000 authorized, none outstanding at March 31, 2019 and December 31, 2018, respectively

 

 

 

 

 

 

Common stock, $0.001 par value, 50,000 authorized, 9,897 and 9,851 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively

 

 

10

 

 

 

10

 

Additional paid-in capital

 

 

66,003

 

 

 

65,794

 

Accumulated deficit

 

 

(32,510

)

 

 

(31,773

)

Total Stockholders' Equity

 

 

33,503

 

 

 

34,031

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

92,296

 

 

$

87,631

 

The accompanying notes are an integral part of these condensed financial statements.

3

 


 

ASV Holdings, Inc.

Condensed Statements of Operations

(In thousands, except par value and per share data)

 

 

 

 

For the Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

Unaudited

 

 

Unaudited

 

Net sales

 

$

27,338

 

 

$

29,870

 

Cost of goods sold

 

 

23,903

 

 

 

25,928

 

Gross profit

 

 

3,435

 

 

 

3,942

 

Research and development costs

 

 

493

 

 

 

471

 

Selling, general and administrative expense

 

 

3,136

 

 

 

3,407

 

Operating (loss) income

 

 

(194

)

 

 

64

 

Other income (expense)

 

 

 

 

 

 

 

 

Interest expense

 

 

(551

)

 

 

(458

)

Other income (expense)

 

 

8

 

 

 

6

 

Total other expense

 

 

(543

)

 

 

(452

)

Loss before income taxes

 

 

(737

)

 

 

(388

)

Income tax expense (benefit)

 

 

 

 

 

(81

)

Net loss

 

$

(737

)

 

$

(307

)

Earnings per share:

 

 

 

 

 

 

 

 

Basic net loss per share of common stock

 

$

(0.07

)

 

$

(0.03

)

Diluted net loss per share of common stock

 

$

(0.07

)

 

$

(0.03

)

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

 

9,863

 

 

 

9,816

 

Diluted weighted average common shares outstanding

 

 

9,863

 

 

 

9,816

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4

 


 

ASV Holdings, Inc.

Statements of Stockholders’ Equity

(Unaudited)

(In thousands, except per share data)

 

 

 

 

Common Stock

 

 

Additional Paid-in

 

 

 

 

 

 

Total Stockholders'

 

 

 

Shares

 

 

Amounts

 

 

Capital

 

 

Retained Earnings

 

 

Equity

 

Balances, December 31, 2017

 

 

9,806

 

 

 

10

 

 

 

65,434

 

 

 

357

 

 

 

65,801

 

Stock-based compensation expense

 

 

-

 

 

 

-

 

 

 

196

 

 

 

-

 

 

 

196

 

Incentive plan grant

 

 

18

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Repurchase to satisfy withholding and cancelled

 

 

(6

)

 

 

-

 

 

 

(52

)

 

 

-

 

 

 

(52

)

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(307

)

 

 

(307

)

Balances, March 31, 2018

 

 

9,818

 

 

 

10

 

 

 

65,578

 

 

 

50

 

 

 

65,638

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional Paid-in

 

 

 

 

 

 

Total Stockholders'

 

 

 

Shares

 

 

Amounts

 

 

Capital

 

 

Accumulated Deficit

 

 

Equity

 

Balances, December 31, 2018

 

 

9,851

 

 

 

10

 

 

 

65,794

 

 

 

(31,773

)

 

 

34,031

 

Stock-based compensation expense

 

 

-

 

 

 

-

 

 

 

218

 

 

 

-

 

 

 

218

 

Incentive plan grant

 

 

49

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Repurchase to satisfy withholding and cancelled

 

 

(3

)

 

 

-

 

 

 

(9

)

 

 

-

 

 

 

(9

)

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(737

)

 

 

(737

)

Balances, March 31, 2019

 

 

9,897

 

 

 

10

 

 

 

66,003

 

 

 

(32,510

)

 

 

33,503

 

 

 

 

The accompanying notes are an integral part of these condensed financial statements.

 

 

 

 

 

 

 

 

 

 

 

5

 


 

ASV Holdings, Inc.

Condensed Statements of Cash Flows

(In thousands)

 

 

 

 

For the Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

Unaudited

 

 

Unaudited

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net loss

 

$

(737

)

 

$

(307

)

Adjustments to reconcile to net income to net cash

 

 

 

 

 

 

 

 

provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

579

 

 

 

547

 

Amortization

 

 

637

 

 

 

637

 

Share-based compensation

 

 

136

 

 

 

149

 

Loss on sale of fixed assets

 

 

1

 

 

 

35

 

Amortization of deferred finance cost

 

 

42

 

 

 

 

Bad debt expense

 

 

3

 

 

 

37

 

Inventory Reserves

 

 

 

 

 

93

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

415

 

 

 

1,195

 

Net accounts receivable/payable from affiliates

 

 

(79

)

 

 

180

 

Inventory

 

 

(3,943

)

 

 

(1,464

)

Prepaid income tax

 

 

 

 

 

 

Prepaid expenses

 

 

156

 

 

 

165

 

Operating lease asset and liabilities

 

 

56

 

 

 

 

Trade accounts payable

 

 

(1,009

)

 

 

(574

)

Accrued expenses

 

 

(747

)

 

 

(844

)

Tax payable

 

 

 

 

 

 

Other long-term liabilities

 

 

(85

)

 

 

(50

)

 

 

 

 

 

 

 

 

 

Net cash used in operating activities

 

 

(4,575

)

 

 

(201

)

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(185

)

 

 

(330

)

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

 

(185

)

 

 

(330

)

 

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Principal payments on term debt

 

 

(502

)

 

 

(500

)

Debt issuance costs incurred

 

 

(180

)

 

 

 

Shares repurchased for income tax withholding on share-based compensation

 

 

(9

)

 

 

(51

)

Net borrowings (payments) on revolving credit facilities

 

 

6,681

 

 

 

1,083

 

 

 

 

 

 

 

 

 

 

Net cash provided by financing activities

 

 

5,990

 

 

 

532

 

 

 

 

 

 

 

 

 

 

NET CHANGE IN CASH

 

 

1,230

 

 

 

1

 

 

 

 

 

 

 

 

 

 

Cash at beginning of period

 

 

2

 

 

 

3

 

 

 

 

 

 

 

 

 

 

Cash at end of period

 

$

1,232

 

 

$

4

 

 

The accompanying notes are an integral part of these condensed financial statements.

 

 

 

6

 


 

ASV Holdings, Inc.

Notes to Unaudited Condensed Financial Statements

(In thousands, except par value and per share data)

 

Note 1. Business Description

Nature of Operations

ASV Holdings, Inc. (the “Company” or “ASV”) primarily designs, manufactures and markets compact track loaders and skid steer loaders as well as related parts for use primarily in the construction, landscaping, and agricultural industries. The Company’s headquarters and manufacturing facility is located in Grand Rapids, Minnesota. Products are marketed and sold in North America, Australia, New Zealand and Latin America.

 

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The unaudited financial statements, included herein, have been prepared by the Company pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Pursuant to these rules and regulations, the financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and have been consistently applied. These unaudited financial statements should be read in conjunction with the Company’s audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.  

The unaudited financial statements include all adjustments of a normal, recurring nature considered necessary for a fair presentation of our financial position as of March 31, 2019 and the results of operations for the three months ended March 31, 2019 and 2018. Results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ended December 31, 2019.

 

Critical Accounting Policies and Estimates 

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States, which require the Company to make estimates, judgments and assumptions that affect the reported amounts of certain assets, liabilities, revenues, expenses and related disclosures and contingencies. The Company evaluates estimates used in preparation of the accompanying financial statements on a continual basis. We describe our significant accounting policies in Note 2, “Summary of Significant Accounting Policies,” of the audited financial statements for the year ended December 31, 2018 included in the Annual Report on Form 10-K.

 

Recent Accounting Pronouncements

Recent accounting pronouncements are described in Note 11, “Recent Accounting Pronouncements.” 

 

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in its existing accounts receivable. The Company determines the allowance based on individual customer review and current economic conditions. The Company reviews its allowance for doubtful accounts at least quarterly. Individual balances exceeding a threshold amount that are over 90 days past due are reviewed individually for collectability. All other balances are reviewed on a pooled basis by type of receivable. Account balances are charged off against the allowance when the Company determines it is probable the receivable will not be recovered.

The balance of the allowance for doubtful accounts was $112 and $109 at March 31, 2019 and December 31, 2018, respectively.

Revenue Recognition

The Company’s revenues result from the sale of goods or services and reflect the consideration to which the Company expects to be entitled. The Company records revenue based on a five-step model in accordance with ASC 606, Revenue from Contracts with

7

 


 

Customers ("ASC 606"). For its customer contracts, the Company identifies the performance obligations (goods or services), determines the transaction price, allocates the contract transaction price to the performance obligations, and recognizes the revenue when (or as) the performance obligation is satisfied. A good or service is transferred when the customer obtains control of that good or service. The Company principally generates revenue from the sale of equipment and parts to dealers, distributors and Original Equipment Manufacturer (“OEM”) customers and recognizes revenue at a point in time when control transfers. The Company recognizes revenue for each distinct good or service when control of the good or service has transferred to the customer. Transfer of control is generally determined based on the shipping terms of the contract, with most of our sales recognized F.O.B. shipping point, as that is the time we have a present right to payment, the customer takes possession of the goods, and the customer has the risks and reward of ownership. For most of our contracts, the customer takes legal title upon shipment; however, under the terms of our contract with certain international distributors, title does not transfer until we are paid for the goods. We retain title solely to maintain a security interest in the assets and have concluded that such right is protective in nature and that control transfers at the time of shipment based on the other control indicators. Generally, there is no-post shipment obligation on product sold other than standard assurance-type warranty obligations in the normal and ordinary course of business, typically a twelve to eighteen-month warranty period. Payment terms range from 0-60 days for domestic sales and 0-180 days for international sales.

Provisions for sales program incentives (such as wholesale subsidies, retail subsidies and customer cash), product returns, and discounts and allowances are variable consideration and are accounted for as a reduction of revenue and establishment of a liability (or contra asset receivable as appropriate) using the expected value method. The Company considers historical data in determining its best estimates of variable consideration. These estimates are reviewed regularly for appropriateness, considering also whether the estimates should be constrained in order to avoid a significant reversal of revenue recognition in a future period. Typically, all qualifying machine sales to distributors or dealers provide for program incentives that are accrued at the time of sales. If updated information or actual amounts are different from previous estimates of variable consideration, the revisions are included in the results for the period in which they become known through a cumulative effect adjustment to revenue. In addition, the Company’s contracts with customers generally do not include significant financing components or noncash consideration. The Company expenses incremental costs of obtaining a contract (primarily sales commissions) as selling, general and administrative expense in the Condensed Statements of Operations, because the amortization period would be less than one year.

The Company disaggregates revenue from contracts with customers by geographic location and major customer (see Concentrations of Business and Credit Risk) as we believe this best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.

Accrued Warranties

The Company records accruals for potential warranty claims based on its claim experience. The Company’s products are typically sold with a standard warranty covering defects that arise during a fixed period.

A liability for estimated warranty claims is accrued at the time of sale. The liability is established using historical warranty claim experience for each product sold. Historical claim experience may be adjusted for known design improvements or for the impact of unusual product quality issues. Warranty reserves are reviewed quarterly to ensure critical assumptions are updated for known events that may affect the potential warranty liability.

Litigation Claims

In determining whether liabilities should be recorded for pending litigation claims, the Company must assess the allegations and the likelihood that it will successfully defend itself. When the Company believes it is probable that it will not prevail in a particular matter, it will then record an estimate of the amount of liability based, in part, on advice of outside legal counsel.

Income Taxes

The Company’s provision for income taxes consists of federal and state taxes, as applicable, in amounts necessary to align the Company’s year-to-date tax provision with the effective rate that it expects to achieve for the full year. Each quarter the Company updates its estimate of the annual effective tax rate and records cumulative adjustments as necessary.

 

The Company is estimating an annual effective tax rate of 18.3% (excluding discrete items) for the year ending December 31, 2019. Our effective tax rate is affected by recurring items such as state and local taxes, a reduced federal tax rate for foreign derived intangible income and federal research and development credits.

 

For the three months ended March 31, 2019, the Company did not record an income tax benefit on its pre-tax loss of $(737) pursuant to the authoritative accounting literature prescribed in ASC 740-27-30-30 through 33.

8

 


 

 

For the three months ended March 31, 2018, the Company recorded an income tax benefit of $(81),  which consists of a federal and state income tax benefit on its pre-tax loss of $(388).

 

At March 31, 2019, the Company did not have any uncertain tax positions.  The Company records interest and penalties related to uncertain tax positions in the provision for income taxes in the accompanying Statement of Income.

Concentrations of Business and Credit Risk

Caterpillar Inc., an OEM customer, and CEG Distributions PTY Ltd., the Company’s Australian master distributor, accounted for 24% and 26% of the Company’s Net Sales for the three months ended March 31, 2019 and 2018 respectively, as well as 56% of the Company’s Accounts Receivable at March 31, 2019.

Sales by major customer consisted of the following for the three months ended March 31, 2019 and 2018:

 

 

 

For the Three Months Ended March 31,

 

 

For the Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

Percent

 

 

 

 

 

 

Percent

 

 

 

 

 

 

 

of Total

 

 

Amount

 

 

of Total

 

 

Amount

 

Caterpillar

 

17%

 

 

$

4,665

 

 

16%

 

 

$

4,822

 

CEG Distributions PTY Ltd.

 

7%

 

 

 

1,836

 

 

10%

 

 

 

2,895

 

Other

 

76%

 

 

 

20,837

 

 

74%

 

 

 

22,153

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

100%

 

 

$

27,338

 

 

100%

 

 

$

29,870

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Any disruptions to these two customer relationships could have adverse effects on the Company’s financial results. The Company manages dealer and OEM concentration risk by evaluating in advance the financial condition and creditworthiness of its dealers and OEM customers. The Company establishes an allowance for doubtful accounts receivable, if needed, based upon expected collectability.  Any reserves established for doubtful accounts is re-evaluated on a case-by-case basis when it is believed the payment of specific amounts owed to us is unlikely to occur. The Company has secured a credit insurance policy for certain accounts with a policy limit of liability of not more than $8,600.

Revenue by geographic area consisted of the following for the three months ended March 31, 2019 and 2018:

 

 

 

For the Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

Percent

 

 

 

 

 

 

Percent

 

 

 

 

 

 

 

of Total

 

 

Amount

 

 

of Total

 

 

Amount

 

United States

 

84%

 

 

$

22,950

 

 

79%

 

 

$

23,627

 

Australia

 

10%

 

 

 

2,633

 

 

11%

 

 

 

3,361

 

Other

 

6%

 

 

 

1,755

 

 

10%

 

 

 

2,882

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

100%

 

 

$

27,338

 

 

100%

 

 

$

29,870

 

 

 

Note 3. Inventory

Inventory consisted of the following as of March 31, 2019 and December 31, 2018:

 

9

 


 

 

 

March 31, 2019

 

 

December 31, 2018

 

Raw materials and supplies

 

$

22,348

 

 

$

20,897

 

Work in process

 

 

54

 

 

 

36

 

Finished equipment and replacement parts

 

 

15,567

 

 

 

13,122

 

 

 

 

 

 

 

 

 

 

 

 

$

37,969

 

 

$

34,055

 

 

Note 4. Intangible Assets

 

Intangible assets, net comprised the following as of March 31, 2019:

 

 

 

Weighted

 

 

Gross

 

 

 

 

 

 

Net

 

 

 

Average Life

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

 

(In Years)

 

 

Amount

 

 

Amortization

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patents and unpatented technology

 

 

10

 

 

$

8,000

 

 

$

(3,593

)

 

$

4,407

 

Tradename and trademarks

 

 

25

 

 

 

7,000

 

 

 

(1,198

)

 

 

5,802

 

Customer relationships

 

 

11

 

 

 

16,000

 

 

 

(6,115

)

 

 

9,885

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12

 

 

$

31,000

 

 

$

(10,906

)

 

$

20,094

 

 

Intangible assets, net comprised the following as of December 31, 2018:

 

 

 

Weighted

 

 

Gross

 

 

 

 

 

 

Net

 

 

 

Average Life

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

.

 

(In Years)

 

 

Amount

 

 

Amortization

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patents and unpatented technology

 

 

10

 

 

$

8,000

 

 

$

(3,227

)

 

$

4,773

 

Tradename and trademarks

 

 

25

 

 

 

7,000

 

 

 

(1,128

)

 

 

5,872

 

Customer relationships

 

 

11

 

 

 

16,000

 

 

 

(5,915

)

 

 

10,085

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12

 

 

$

31,000

 

 

$

(10,270

)

 

$

20,730

 

 

Amortization of other intangible assets for the three months ended March 31, 2019 and 2018 was $637.

 

Note 5. Accrued Warranties

The following table provides the changes in the Company’s product warranties:

 

 

 

Three Months Ended March 31,

 

 

Three Months Ended December 31,

 

 

 

2019

 

 

2018

 

Product warranty accrual balance, beginning of period

 

$

1,584

 

 

$

1,600

 

Liabilities accrued for warranties during the period

 

 

254

 

 

 

292

 

Warranty claims paid during the period

 

 

(381

)

 

 

(355

)

Changes in estimates

 

 

32

 

 

 

47

 

Product warranty accrual balance, end of period

 

$

1,489

 

 

$

1,584

 

 

Note 6. Debt

Loan Facilities

On March 28, 2019, the Company entered into a Second Amendment (the “Second Amendment”) to the Amended and Restated Credit

Agreement with PNC Bank, National Association, as administrative agent (“PNC”). The principal modification to the Amended and

10

 


 

Restated Credit Agreement resulting from the Second Amendment replaces the maximum leverage ratio requirements for 2019 with a minimum EBITDA covenant and beginning in March of 2020, removes the minimum EBITDA covenant and reverts to a leverage ratio requirement of 2.75 to 1.00, which shall step down to 2.25 to 1.00 by September 30, 2020. In addition, the applicable margin for each advance under the credit agreement was increased by 50 basis points for the period from March 28, 2019 until the first business day following receipt by PNC of the Company’s certificate of compliance with the applicable leverage ratio for the quarter ended March 31, 2020 and the inventory sub-limit was increased to $18 million.

 

Revolving Loan Facility with PNC

 

The Company’s $35,000 revolving loan facility with PNC includes two sub-facilities: (i) a $2,000 letter of credit sub-facility, and (ii) a $3,500 swing loan sub-facility, each of which is fully reserved against availability under the revolving loan facility. The facility matures on December 27, 2022.

 

The $35,000 revolving loan facility is a secured financing facility under which borrowing availability is limited to existing collateral as defined in the agreement.  The maximum amount available is limited to (i) the sum of (a) up to 85% of Eligible Receivables, plus (b) 90% of Eligible Insured Foreign Receivables, plus (c) the lesser of (I) 95% of Eligible CAT Receivables, or $8,600 plus (ii) the lesser of (A) the sum of (I) up to 65% of the value of the Eligible Inventory (other than Eligible Inventory consisting of finished goods machines and service parts that are current), plus (II) 80% of the value of Eligible inventory consisting of finished goods machines, plus (III) 75% of the value of Eligible Inventory consisting of service parts that are current) or, (B) up to 90% of the appraised net orderly liquidation value of Eligible Inventory. Inventory collateral is capped at $18,000 less outstanding letters of credit and any reasonable reserves as established by the bank.  At March 31, 2019, the maximum the Company could borrow based on available collateral was capped at $26,640.  

 

At March 31, 2019, the Company had drawn $22,707 under the $35,000 revolving loan facility. The Company can opt to pay interest on the revolving credit facility at either a domestic rate plus a spread, or a LIBOR rate plus a spread.  The domestic rate spread is initially fixed at 1.00% for revolving loan advances until delivery of certain reporting documents with respect to fiscal quarter ending March 31, 2018, at which point it ranges from 1.00% to 1.5% depending on the Average Undrawn Availability (as defined in the Amended and Restated Credit Agreement).  The LIBOR spread is initially fixed at 2.00% for revolving loan advances until delivery of the same reporting documents, at which point it ranges from 2.00% to 2.5% depending on the Average Undrawn Availability.   Funds borrowed under the LIBOR options can set the borrowing rate for periods of one, two, or three months. The weighted average interest rate for the period ended March 31, 2019 was 5.5%.  Additionally, the bank assesses a 0.25% unused line fee that is payable quarterly.

Term Loan C with PNC

On December 27, 2017 the Company entered into a $15,000 term loan (“Term Loan C”) facility, with PNC as the administrative agent.

 

At March 31, 2019, the Company had an outstanding balance of $12,500, less $304 debt issuance costs, for net term loan debt of $12,196.  The Company can opt to pay interest on the Term Loan C facility at either a domestic rate plus a spread, or a LIBOR rate plus a spread.  For term loan advances the domestic rate spread is fixed at 3.75%, and the LIBOR spread is fixed at 4.75%.  Funds borrowed under the LIBOR options can set the borrowing rate for periods of one, two, or three months. The weighted average interest rate for the period ending March 31, 2019 was 7.7%.

 

The Company is obligated to make quarterly principal payments of $500, which commenced on January 1, 2018. If the term loan is prepaid in full or in part prior to the maturity date, the Company will be required to pay a prepayment penalty.  If paid prior to December 27, 2019 the prepayment penalty will be equal to 2.0% of the prepayment.  The prepayment penalty percentage reduces to 1% on or after December 27, 2020, and no penalty if on or after the December 27, 2021.  There will be no prepayment obligation in the event that the prepayment of the obligation in full is funded in connection with a refinancing for which PNC is the administrative agent.  Any unpaid principal is due on maturity, which is December 27, 2022.   Interest is payable monthly beginning on January 1, 2018.

Loan Agreements with State Agencies

In October 2017, the Company entered into two loan agreements with the State of Minnesota related to the establishment of a new parts distribution center in Grand Rapids, Minnesota.  The first loan agreement is a $300 loan with a ten-year term at an interest rate of 3%, with loan forgiveness if certain criteria is met. The lender will forgive $150 of principal and all accrued interest should the Company attain and maintain agreed upon employment levels on the fifth anniversary date of the loan (and not otherwise be in

11

 


 

default) and will forgive the remaining $150 of principal and all accrued interest should the Company attain and maintain employment levels at the tenth anniversary of the loan. Should the Company not attain or maintain the agreed upon levels of employment, $150 in principal plus accrued interest will be due on the fifth anniversary of the closing date with the remaining balance being due and payable on the due date of the loan. The second loan agreement is a $125 no interest loan with a seventy-five-month term that includes partial forgiveness if certain criteria are met. The lender will forgive up to $50 of the $125 loan should ASV attain and maintain job creation goals and wage level commitments. The zero-interest loan is to be paid back through monthly payments over the term of the loan. The establishment of the parts distribution center was completed, and loan proceeds disbursed during 2018.

 

Covenants

 

The Company’s indebtedness is collateralized by substantially all of the Company’s assets. The facilities contain customary limitations including, but not limited to, limitations on additional indebtedness, acquisitions, and payment of dividends. The Company is also required to comply with certain financial covenants as defined in the Amended and Restated Credit Agreement. The Company is limited to capital expenditures not to exceed $2,000 in any fiscal year. The revolving credit facility and the term loans require the Company to maintain a Minimum Fixed Charge Coverage ratio of not less than 1.20 to 1.0.  Additionally, the term loans require, as per the Second Amendment, as described above, the Company attains a minimum EBITDA covenant. The Company was in compliance with all covenants when required to be measured during the quarter ended March 31, 2019.

 

Note 7. Equity

2017 Equity Incentive Plan

On May 11, 2017, the Company adopted the ASV Holdings, Inc. 2017 Equity Incentive Plan (the “2017 Plan”). The maximum number of shares of common stock reserved for issuance under the 2017 Plan is 1,250 shares. The total number of shares reserved for issuance however, can be adjusted to reflect certain corporate transactions or changes in the Company’s capital structure. The Company’s employees and members of the board of directors who are not the Company’s employees or employees of the Company’s affliliates are eligible to participate in the 2017 Plan. The 2017 Plan is administered by the compensation committee of the Company’s board of directors. The 2017 Plan provides that the committee has the authority to, among other things, select plan participants, determine the type and amount of rewards, determine the award terms, fix all other conditions of any awards, interpret the plan and any plan awards. Under the 2017 Plan, the committee can grant stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares and performance units. The 2017 Plan requires that the exercise price for stock options and stock appreciation rights be not less then fair market value of the Company’s common stock on date of grant.

The Company awarded a total of 100 restricted stock units to directors and employees under the 2017 Plan during the quarter ended March 31, 2019. The restricted stock units are subject to the same conditions as the restricted stock awards except the restricted stock units will not have voting rights and the common stock will not be issued until the vesting criteria are satisfied.  

The following table contains information regarding restricted stock units:

 

March 31, 2019

 

Outstanding on December 31, 2018

 

77

 

Units granted during the period

 

100

 

Vested and issued, net of repurchase for income tax withholding

 

(46

)

Outstanding on March 31, 2019

 

131

 

 

On January 10, 2019, the Company granted an aggregate of 60 restricted stock units to employees pursuant to the 2017 Plan. Restricted stock units of 20, 20, and 20 vest in 2020, 2021 and 2022, respectively.

On March 11, 2019, the Company granted 39 restricted stock units to directors pursuant to the 2017 Plan. These stock units immediately vested.

On March 11, 2019, the Company granted an aggregate of 1 restricted stock unit to employees pursuant to the 2017 Plan. This stock unit immediately vested.

The value of the restricted stock is being charged to compensation expense over the vesting period and the Company has elected to account for foreitures as they occur. Compensation expense includes expense related to restricted stock units of $136 and $149 for the quarter ended March 31, 2019 and 2018, respectively. Unrecognized compensation expense related to non-vested restricted stock units will be recognized as follows: $274, $238, and $62 for the remainder of 2019, 2020, and 2021, respectively.

 

12

 


 

Note 8. Commitments and Contingencies

The Company is involved in various legal proceedings, including product liability, general liability, workers’ compensation liability, and employment litigation, which have arisen in the normal course of operations. The Company is insured for product liability, general liability, workers’ compensation, employer’s liability, property damage and other insurable risk required by law or contract, with retained liability or deductibles. The Company has recorded and maintains an estimated liability in the amount of management’s estimate of the Company’s aggregate exposure for such retained liabilities and deductibles. For such retained liabilities and deductibles, the Company determines its exposure based on probable loss estimations, which requires such losses to be both probable and the amount or range of probable loss to be estimable. The Company believes it has made appropriate and adequate reserves and accruals for its current contingencies.

 

 

Note 9. Leases

The Company has operating leases for its distribution center, research and development facilities, automobiles, and certain equipment. The leases have remaining lease terms of 1 year to 16 years, some of which include options to extend the leases for up to 6 years. The distribution center lease agreement includes both lease (e.g., fixed payments including rent, taxes, and insurance costs) and non-lease components (e.g., common-area or other maintenance costs) which can be accounted for as a single lease component. The Company has not elected the practical expedient to group lease and non-lease components for applicable leases.

Leases may include one or more options to renew. The exercise of lease renewal options is typically at our sole discretion. Renewals to extend the lease terms for the distribution center are included in our Right of Use (“ROU”) operating lease assets and lease liabilities as they are reasonably certain of exercise. The renewal options are evaluated with each lease and when they are reasonably certain of exercise, the renewal period is included in our lease term.

As most of our leases do not provide an implicit rate, we use an incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments.

 

Certain operating leases for vehicles contain residual value guarantee provisions which would generally become due at the expiration of the operating lease agreement if the fair value of the leased vehicles is less than the guaranteed residual value. The aggregate residual value guarantee related to these leases was approximately $29. We believe the likelihood of funding the guarantee obligation under any provision of the operating lease agreements is remote. To the extent our fleet contains vehicles we estimate will settle at a gain, such gains on these vehicles will be recognized when we sell the vehicle.

 

The components of lease expense were as follows for the quarter ended March 31, 2019:

 

 

 

 

 

 

Total Operating Lease Cost

 

Operating lease cost

 

$

62.2

 

 

Maturities for all operating lease liabilities are as follows as of March 31, 2019:

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

2019

$

176

 

2020

237

 

2021

222

 

2022

214

 

2023

163

 

2024 and thereafter

160

 

Total lease payments

$

1,172

 

Less: Interest

 

(138

)

Present value of lease liabilities

$

1,034

 

 

The weighted average remaining lease terms and discount rates for all operating lease were as follows as of March 31, 2019:

13

 


 

 

Remaining lease term and discount rate:

 

 

 

Weighted average remaining lease term (years)

 

 

 

    Leased facilities, equipment and vehicles

3.64

 

 

 

 

 

Weighted average discount rate

 

 

 

    Leased facilities, equipment and vehicles

5.18%

 

 

 

 

 

Supplemental cash flow information related to the Company’s operating leases was as follows for the quarter ended March 31, 2019:

 

 

Three Month Period

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

Operating cash outflow from operating leases

$

59

 

 

 

Note 10. Related Party Transactions

 

Included in the Company’s Condensed Statements of Operations are sales to Terex of $28 and $31 for the three months ended March 31, 2019 and 2018, respectively.  Also included are sales to Manitex of $1 and $0 for the three months ended March 31, 2019 and 2018, respectively. The Company recorded purchases from Terex of $1,542 and $2,182 for the three months ended March 31, 2019 and 2018, respectively, which are primarily for shared freight services. The Company also expensed $300 and $242 under a Terex Cross Marketing Agreement and Terex Services Agreement respectively, for the three-month period ended March 31, 2018.

 

Receivables from affiliates include $22 due from Terex March 31, 2019, and $30 due from Terex and $3 due from Manitex (total $33) at December 31, 2018.  

 

Payables to affiliates includes $416 due to Terex March 31, 2019, and $1,200 due to Terex at December 31, 2018.

 

Note 11. Recent Accounting Pronouncements

 

Effective January 1, 2019, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02, Leases, which requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The original guidance required application on a modified retrospective basis with the earliest period presented. In August 2018, the FASB issued ASU 2018-11, Targeted Improvements to ASC 842, which included an option to not restate comparative periods in transition and elect to use the effective date of ASC 842, Leases, as the date of initial application of transition, which we elected. As a result of the adoption of ASC 842 on January 1, 2019, the Company recorded both operating lease right-of-use (“ROU”) assets of $1.0 million and lease liabilities of $1.0 million. The adoption of ASC 842 had an immaterial impact on our Condensed Statements of Operations and Condensed Statements of Cash Flows for the three-month period ended March 31, 2019. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard which allowed us to carry forward the historical lease classification.

Additional information and disclosures required by the new standard are contained in Note 9, Leases.

January 1, 2019, the Company adopted the FASB ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments (Topic 230): Statement of Cash Flows” (“ASU 2016-15”), which clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. ASU 2016-15 also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. ASU 2016-15 is effective for fiscal years and interim periods beginning after December 15, 2018, for emerging growth companies. This had no effect on the Company’s financial statements.

 

January 1, 2019, the Company adopted the FASB ASU No. 2017-09, “Compensation – Stock Compensation: Scope of Modification Accounting.”  This ASU is intended to provide guidance about which changes to the terms or conditions on a share-based payment

14

 


 

award require an entity to apply modification accounting.   This new standard is effective for reporting periods beginning after December 15, 2018, and interim periods within that reporting period, for emerging growth companies, with early adoption permitted.  This had no effect on the Company’s financial statements.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes to those statements included in this Quarterly Report on Form 10-Q. This discussion and analysis may contain forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, such as those set forth under the caption “Risk Factors,” in our 2018 Annual Report on Form 10-K for the fiscal year ended December 31, 2018, in the section entitled “Item 1A. Risk Factors”.

Cautionary Statement Regarding Non-GAAP Measures

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section contains references to “EBITDA”. EBITDA is defined for the purposes of this Quarterly Report on Form 10-Q as net income or loss before interest, income taxes, depreciation and amortization. Management believes that EBITDA is a useful supplemental measure of our operating performance and provides meaningful measures of overall corporate performance exclusive of our capital structure and the method and timing of expenditures associated with building and placing our products. EBITDA is also presented because management believes that it is frequently used by investment analysts, investors and other interested parties as a measure of financial performance.

However, EBITDA is not a recognized earnings measure under generally accepted accounting principles of the United States (“U.S. GAAP”) and does not have a standardized meaning prescribed by U.S. GAAP. Therefore, EBITDA may not be comparable to similar measures presented by other issuers. Investors are cautioned that EBITDA should not be construed as an alternative to net income or loss or other income statement data (which are determined in accordance with U.S. GAAP) as an indicator of our performance or as a measure of liquidity and cash flows. Management’s method of calculating EBITDA may differ materially from the method used by other companies and accordingly, may not be comparable to similarly titled measures used by other companies.

Overview

ASV Holdings, Inc. (“ASV” the “Company,” “we,” “our” and/or “us”) designs and manufactures a broad range of high-quality compact track loader (“CTL”) and skid steer loader (“SSL”) equipment, marketed through a distribution network in North America, Australia and New Zealand under the ASV brand. We also serve as a private label original equipment manufacturer (“OEM”) for several manufacturers.  Our products are used principally in the construction, agricultural and forestry industries. As a full-service manufacturer, we provide pre- and post-sale dealer support, after-sale technical support and replacement parts supplied from our dedicated logistics center. We also supply a limited version of our assembled undercarriage sets that exclude the suspension to Caterpillar for three versions of Caterpillar’s multi-terrain CTL machines marketed under the CAT brand under a supply contract with Caterpillar.

Business Outlook

A number of economic indicators that we believe are relevant to our industry and products have largely been trending favorably, although housing starts slowed over the last three quarters raising concerns over the effect of higher interest rates and higher prices. A primary driver of demand for our CTL and SSL products is the United States housing market, where the level of new housing starts continues to be below pre-2007 levels. Since 2009, according to the U.S. Census Bureau, new housing starts have incrementally increased to a seasonally adjusted annual rate of 1.1 million units in March 2019 from approximately 0.5 million in October 2009.  The preliminary March 2019 rate of 1.1 million was 14.2% below the March 2018 rate.

Construction spending in the United States is also experiencing growth. The U.S. Census Bureau reported on April 1, 2019 that total construction spending during February 2019 was estimated at a seasonally adjusted annual rate of $1.3 trillion, 1.1% above the February 2018 estimate. For the first two months of 2019, construction spending was 1.4% above the same period in 2018.

The rental sector is another important market for our products and is recording positive growth that is expected to continue. The five-year forecast from the ARA Rental Market Monitor, updated in February 2019, predicted total rental revenue in the U.S. is expected to grow by 5.0% in 2019 to reach $43.5 billion, 4.5% in 2020, 4.7% in 2021 and 4.4% in 2022. This is a sector of the economy that we are actively targeting with our products.

15

 


 

Outside North America, our largest market is Australia. The Australian Bureau of Statistics in March 2019 reported GDP growth of 2.3% in 2018, which however, reflected a slowing to 0.2% in the December 2018 quarter. The lower rate of growth in the final quarter was influenced by soft household spending and a decline in dwelling investment.

The economies of the markets to which we sell our products have for the past few years operated with interest rates at historically low levels. Interest rate changes affect overall economic growth, which affects demand for residential and nonresidential structures which in turn affects sales of our products that serve these activities. Interest rate changes also affect the ability of dealers to finance machine purchases, can change the optimal time to keep machines in a fleet and can impact the ability of our suppliers to finance the production of parts and components necessary to manufacture and support our products. In the United States, during 2017 and 2018, the Federal Reserve continued increasing interest rates from their historically low levels. In 2018, the Federal Reserve increased its benchmark rate four times, in March, June, September and December.  The rate is now at a range of 2.25% to 2.5%. Increases in interest rates could negatively impact our sales and create supply chain inefficiencies.

The prices the Company paid for raw materials used in manufacturing products have been impacted by tariffs. See “Commodities Risk” for the impact of tariffs on the Company.

Factors Affecting Revenues and Gross Profit

We derive most of our revenue from purchase orders from dealers and distributors. The demand for our products depends upon the general economic conditions of the markets in which we compete, residential housing starts, general construction activity and upon dealer and end-user replacement or repair cycles. Adverse economic conditions may cause dealers or end-users to forego or postpone new purchases in favor of repairing existing machinery. In addition to the United States, we sell to dealers in Canada, Australia and New Zealand. All of our sales are denominated in U.S. dollars. The strengthening of the U.S. dollar against these other currencies may have a negative impact on sales volume and sales prices to dealers outside of the United States.

Factors that affect gross profit include product mix – variations between sales of larger and smaller machines and between machine sale and sales of parts and OEM undercarriages, production levels and cost of raw materials. Margins tend to increase when sales are skewed towards larger, tracked machines and replacement parts. As a consequence, gross profit margins can vary from period to period. Replacement parts generally command higher margins than product sales.

Results of Operations

Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

For the three months ended March 31, 2019, the Company had a net loss of $(0.7) million compared to a net loss of $(0.3) million for the three months ended March 31, 2018.

For the three months ended March 31, 2019, the net loss of $(0.7) million consisted of revenue of $27.3 million, cost of sales of $23.9 million, research and development costs of $0.5 million, selling, general and administrative (“SG&A”) expenses of $3.1 million, and interest expense of $0.6 million.

For the three months ended March 31, 2018, the net loss of $(0.3) million consisted of revenue of $29.9 million, cost of sales of $25.9 million, research and development costs of $0.5 million, SG&A expenses of $3.4 million, interest expense of $0.5 million, and an income tax benefit of $0.1 million.

Net Sales: For the three months ended March 31, 2019, net sales were $27.3 million, a decrease of approximately $2.5 million or 8.5% of net sales of $29.9 million for the same period in 2018.  The decrease in net sales is attributable to a decrease in sales of machines of $2.5 million, and a decrease in sales of undercarriages to Caterpillar of $0.6 million, offset by an increase in aftermarket parts and other sales of $0.6 million.

Total machine sales revenues declined 12% from the prior period, a combination of lower unit volumes and higher price.  Adverse weather conditions across the United States and continued engine supply constraints, which limited production of certain models, impacted our shipments into North America.  Sales to Australia, where economic growth has recently slowed, were also down for the period, accounting for approximately 32.8% of the year over year volume reduction.

 

We benefited from favorable pricing and product mix in the period, which partially offset the volume decline.  Price increases effective January 1, 2019, combined with the continued steel surcharge pricing implemented in May of 2018, provided a pricing benefit of approximately $1.4 million in the period. Favorable product mix provided a benefit of approximately $1.6 million in the period.

16

 


 

 

We added a net seven North America dealer and rental locations during the period, bringing the overall number to 293, compared to 248 locations at the end of the same period in 2018. Same store sales for the quarter were down 9.6%.

Parts and other sales for the three months ended March 31, 2019 increased $0.6 million compared to the same period in 2018. Parts as a percentage of total sales was 24.7% and 20.3%, for the three months ended March 31, 2019 and 2018, respectively.

 

Gross Profit: For the three months ended March 31, 2019, our gross profit was $3.4 million or 12.6% of net sales compared to $3.9 million or 13.2% of net sales for the same period in 2018. Under absorption of costs and plant inefficiencies, primarily as a result of lower volume and continued engine supply constraints combined with favorable benefits realized during first quarter 2018 negatively impacted gross profit in the period.  Favorable machine pricing of $1.4 million, combined with both the positive and negative volume impacts of parts, undercarriages and machine sales offset the estimated $1.0 million in year over year increased input costs during the period.  Cost reduction projects implemented in quarter one of 2019 contributed approximately $0.3 million in margin benefit for the period as well as the 2018 period being adversely impacted by $0.6 million of costs associated with the re-location of our aftermarket parts distribution center.  

Research and Development: Research and development expense was $0.5 million or 1.8% of net sales for the three months ended March 31, 2019, compared to $0.5 million or 1.7% of net sales for the same period in 2018.

 

Selling, general and administrative expense: SG&A expense for the three months ended March 31, 2019 was $3.1 million or 11.5% of net sales, compared to $3.4 million, or 11.4% of net sales, for the comparable period in 2018, a decrease of approximately $0.27 million or 8.0%, respectively. The primary contributing factor to the decrease was the elimination of selling expenses for aftermarket parts paid to Terex during the same period in 2018 following the relocation of that activity to our own facility. This benefit was partially offset by increases in marketing and advertising, including the introduction from the start of 2019 of a co-op advertising program for our dealer network to promote the brand.

Operating Income: For the three months ended March 31, 2019, our operating loss was $(0.2) million or (0.7)% of net sales, compared to operating income of $0.1 million or 0.3% of net sales for the same period in 2018. Operating income decreased due to the explanations above.

Interest expense: Interest expense, including amortization of debt issuance costs, for the three months ended March 31, 2019, was $0.6 million compared to $0.5 million for the same period in 2018.

Tax: For the three months ended March 31, 2019, the Company recorded no tax. For the three months ended March 31, 2018, a tax benefit of $0.1 million was recorded.  

Net loss: For the three months ended March 31, 2019, our net loss was $(0.7) million compared to a net loss of $(0.3) million for the same period in 2018.

EBITDA: EBITDA totaled $1.0 million or 3.7% of net sales for the three months ended March 31, 2019 compared to $1.2 million or 4.2% of net sales for the same period in 2018.

The decrease in EBITDA for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 resulted from an increased net loss of $0.4 million, which included the effects of increased interest charges of $0.1 million and a reduced tax benefit of $0.1 million.

17

 


 

The table below sets forth a reconciliation of net income to EBITDA (in thousands of dollars) :

 

 

 

 

 

 

 

 

For the Three Months Ended March 31,

 

 

 

 

2019

 

 

2018

 

 

Net income

 

$

(738

)

 

$

(307

)

 

Interest expense

 

 

551

 

 

 

458

 

 

Depreciation & amortization

 

 

1,216

 

 

 

1,184

 

 

Other (income) expense

 

 

(8

)

 

 

(6

)

 

Income tax (benefit) expense

 

 

-

 

 

 

(81

)

 

EBITDA (1)

 

$

1,021

 

 

$

1,248

 

 

% of Sales

 

 

3.7

%

 

 

4.2

%

 

 

(1)

EBITDA is defined as income or loss before interest, income taxes, depreciation and amortization. EBITDA is not a recognized measure under U.S. GAAP and does not have a standardized meaning prescribed by U.S. GAAP. Therefore, EBITDA may not be comparable to similar measures presented by other companies. The table above reconciles net income to EBITDA. See “—Cautionary Statements Regarding Non-GAAP Measures” for further information regarding EBITDA.

Liquidity and Capital Resources

 

We fund our business activities by utilizing a revolving credit facility, a term loan for financing, and cash generated from operations. In connection with our revolving credit facility, in October 2018 the Company entered into an amendment which included revisions to the definition of EBITDA, an increase in the allowance of certain foreign receivables and a change to the required leverage ratio. On March 28, 2019, the Company entered into a Second Amendment (the “Second Amendment”) to the Amended and Restated Credit Agreement with PNC Bank, National Association, as administrative agent (“PNC”), described in Note 6, “Debt”. The principal modification to the Amended and Restated Credit Agreement resulting from the Second Amendment replaces the maximum leverage ratio requirements for 2019 with a minimum EBITDA covenant and beginning in March of 2020, removes the minimum EBITDA covenant and reverts to a leverage ratio requirement of 2.75 to 1.00, which shall step down to 2.25 to 1.00 by September 30, 2020. In addition, the applicable margin for each advance under the credit agreement was increased by 50 basis points for the period from March 28, 2019 until the first business day following receipt by PNC of the Company’s certificate of compliance with the applicable leverage ratio for the quarter ended March 31, 2020 and the inventory sub-limit was increased to $18 million.

We use our capital resources to:

 

 

 

fund operating costs;

 

 

 

fund capital requirements, including capital expenditures;