Miller Industries, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Financial statement amounts are in thousands of dollars, except per-share data. Miller Industries manufactures vehicle towing and recovery equipment through domestic and international operations.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $153,363 | $147,597 | $455,385 | $452,525 |
| Gross profit | $15,650 | $17,116 | $48,648 | $49,123 |
| Gross margin | 10.2% | 11.6% | 10.7% | 10.9% |
| Net income | $4,456 | $5,522 | $13,720 | $15,469 |
| Diluted EPS | $0.39 | $0.49 | $1.21 | $1.36 |
- Q3 sales rose 3.9%, while gross profit fell 8.6% and net income fell 19.3%. Management attributed the higher cost of operations as a share of sales primarily to rising employee benefit costs and product mix.
- Nine-month sales increased 0.6%; gross profit declined 1.0% and net income declined 11.3%. North American sales were $403.2 million, down from $405.9 million; foreign sales were $52.2 million, up from $46.6 million.
- Q3 SG&A was $8.6 million, or 5.6% of sales, versus $8.5 million, or 5.8%. Nine-month SG&A increased to $26.7 million from $24.8 million, primarily due to personnel and benefit costs.
- Net interest expense increased to $469,000 in Q3 and $1.162 million year to date, mainly reflecting credit-facility borrowings and, year to date, distributor floor-plan and chassis-purchase interest.
Cash, debt, and liquidity
- Cash and temporary investments were $33.5 million at September 30, 2017, compared with $31.1 million at December 31, 2016. Current assets were $236.7 million and current liabilities $105.0 million, for a current ratio of approximately 2.3.
- Nine-month operating cash flow was $8.6 million, versus cash used of $1.2 million in 2016. Capital spending was $19.2 million; cash used in investing activities was $17.9 million.
- Financing activities provided $9.0 million, including $15.0 million of net credit-facility borrowings, partly offset by $6.1 million of dividends. Cash increased by $2.4 million over the period.
- Credit-facility borrowings were $20.0 million, up from $5.0 million at year-end, under a $50 million unsecured revolver maturing May 31, 2019. The company reported $30.0 million of unused availability. Borrowings bear interest at LIBOR plus 1.50%; the reported rate was 2.73%. The company said it complied with covenants and expected continued compliance.
- Cash dividends declared were $0.18 per share for Q3. The board declared another $0.18 quarterly dividend payable December 11, 2017.
Changes, outlook, and risks
- Capital investment continued on the Pennsylvania manufacturing consolidation and expansion, estimated at $24.7 million, with $23.7 million incurred by September 30. The company expected the remaining costs in Q4; it sold the remaining Pennsylvania plant in June and recorded a $601,000 gain.
- Tennessee facility projects were estimated at $21.1 million, with $19.4 million incurred by September 30 and the remainder expected in Q4. An Ooltewah administrative building was estimated at $4.2 million, with $700,000 incurred and completion spending expected by March 2018. Project costs and timing may change.
- Management expected cash, operating cash flow, and available credit to meet needs in Q4 2017 and for the next several years, while noting this depends on operating performance and other factors beyond its control. No earnings or revenue guidance was provided.
- Key exposures include cyclical industry demand, customer access to financing, raw-material and transportation costs, skilled-labor availability, foreign currency, variable-rate debt, product liability and warranty claims, and operational disruption. Management reported no material change to the risk factors in its 2016 Form 10-K.
- At September 30, the company had approximately $14.6 million in property and equipment commitments and $50.9 million of potential customer-product repurchase exposure under lender arrangements; management said the related liability was not material or probable, with product value mitigating risk. Litigation was described as arising in the ordinary course, with no expected material adverse effect beyond accruals and insurance.
- Unrecognized tax benefits were approximately $1.16 million, with associated penalty and interest liabilities of $259,000 and $20,000; settlement timing was uncertain. Adoption of the new revenue standard was expected not to materially affect revenue amount or timing.
Important facts for investors to verify
- Whether sales growth can translate into margin recovery given personnel costs and product mix.
- Completion timing, total cost, and expected operating benefits of the Pennsylvania and Tennessee capital projects.
- Cash generation, borrowing needs, and covenant headroom as capital spending and dividends continue.
- Exposure to raw-material prices, customer financing conditions, foreign exchange, warranty claims, and potential repurchases of repossessed products.
- Whether tax uncertainties or project cost changes result in material future cash requirements.