Miller Industries, Inc. — Q1 2016 Form 10-Q
Business and period: The company manufactures vehicle towing and recovery equipment. This unaudited report covers the three months ended March 31, 2016; financial amounts below are in thousands of dollars except per-share data.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Net sales | $148,815 | $126,788 |
| Gross profit | $12,970 | $11,952 |
| Gross margin | 8.7% | 9.4% |
| Net income | $3,360 | $3,064 |
| Diluted EPS | $0.30 | $0.27 |
| Operating cash flow | $(7,691) in cash-flow statement | $3,057 |
| Cash and temporary investments | $33,346 at March 31 | $38,449 at December 31, 2015 |
| Credit-facility borrowings | $10,000 | None at December 31, 2015 |
| Current assets / current liabilities | $240,223 / $108,515 | $219,265 / $94,494 at December 31, 2015 |
Sales increased 17.4% year over year, while net income rose 9.7%. Costs of operations grew 18.3%, increasing to 91.3% of sales from 90.6% and reducing gross margin. SG&A rose to $8,010 from $7,440, but declined as a share of sales to 5.4% from 5.9%. Interest expense increased to $198 from $163. A $341 foreign-currency transaction gain compared with a $56 loss in Q1 2015; the effective tax rate was 34.2% versus 28.6%.
Cash used in investing was $5,749, primarily for property, plant and equipment purchases, versus $1,415 in Q1 2015. Financing provided $8,071, including $10,000 of credit-facility borrowings, partly offset by $1,929 in dividends. The cash-flow statement reports operating cash use of $7,691; MD&A states $7,693, so the filing contains a small discrepancy. Working-capital movements included a $19,735 use from receivables and a $5,362 use from inventory, partly offset by a $14,400 source from accounts payable.
Material changes, outlook, and risks
Management attributed higher revenue primarily to stronger domestic demand and increased production amid recovering economic conditions and improving consumer sentiment. It cited the fixed nature of certain SG&A costs and cost-control efforts for the lower SG&A ratio. The company expects cash, operating cash flow, and available credit to be sufficient for cash needs during 2016 and the next several years, subject to operating performance and other factors; no specific earnings or sales guidance was provided.
The unsecured revolving credit facility totals $30,000 and matures March 31, 2018. Borrowings bear interest at LIBOR plus 1.50%; the reported rate was 1.93% at quarter-end. The company said a 1% rate change would not materially affect results at the quarter-end borrowing level. Cash held by foreign subsidiaries was $21,180 and is generally subject to U.S. income tax upon repatriation.
Capital projects include Pennsylvania manufacturing consolidation and expansion, estimated at $23,712 total, with $11,972 incurred by March 31 and the remainder expected in 2016. Additional Tennessee facility projects are estimated at $15,233 through year-end, with $1,270 incurred. Property and equipment commitments were approximately $13,549; project timing and costs may change. The company reported a maximum potential customer-product repurchase obligation of approximately $39,281, mitigated by the value of the products; the related liability was considered not material and not probable. Ordinary-course litigation is disclosed, with management expecting no material adverse effect beyond accruals and insurance. The filing says there were no material changes to the prior annual report’s risk factors. Key risks include industry cyclicality, customer access to financing, raw-material and transportation costs, foreign exchange, suppliers, competition, skilled labor, and product liability. A $0.17-per-share dividend was declared May 2, payable June 20, 2016.
Important facts for investors to verify
- Reconcile the $2 difference between operating cash use in the cash-flow statement and MD&A, and assess whether working-capital demands persist.
- Track gross-margin pressure as costs of operations grew faster than sales, and confirm whether demand and production levels remain strong.
- Monitor execution, remaining costs, and timing for the Pennsylvania and Tennessee capital projects.
- Review credit-facility headroom, covenant compliance, and the impact of foreign-held cash and potential repatriation taxes.
- Assess customer repurchase exposure, ordinary-course litigation, and the company’s sensitivity to raw-material costs, currency movements, and customer financing availability.