Miller Industries, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; comparative periods ended September 30, 2021. Miller Industries manufactures towing and recovery equipment in the U.S., France, and the U.K. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $205.6 | $164.7 | $622.6 | $515.8 |
| Gross profit | $23.2 | $17.8 | $56.9 | $54.3 |
| Gross margin | 11.3% | 10.8% | 9.1% | 10.5% |
| Net income | $5.2 | $3.8 | $11.1 | $13.5 |
| Diluted EPS | $0.46 | $0.34 | $0.97 | $1.19 |
Q3 sales increased 24.8%, while nine-month sales rose 20.7%. Q3 operating expenses were $14.7 million; nine-month expenses were $39.7 million. Derived operating income (gross profit less SG&A) was $8.5 million for Q3 and $17.2 million year to date, versus $5.8 million and $19.2 million, respectively, in 2021. Net margins were approximately 2.5% for Q3 and 1.8% for the nine months.
For the nine months, cash used in operating activities was $31.6 million, compared with $7.0 million provided in 2021. Investing activities used $25.1 million, including $25.1 million of property, plant and equipment purchases; financing provided $38.8 million, primarily from credit-facility borrowings. Cash declined to $33.2 million from $54.3 million at year-end 2021. Working-capital pressures included a $32.6 million inventory cash use and a $15.1 million receivables cash use.
At September 30, current assets were $351.5 million and current liabilities $137.9 million. The company had $45.0 million outstanding on its credit facility, versus none at December 31, 2021, and reported $5.0 million of additional availability at quarter-end. Total assets were $477.3 million and total liabilities $188.7 million. Capital-expenditure commitments were $5.6 million; software-license commitments were $2.9 million.
Material changes and management commentary
- Q3 revenue growth reflected customer price increases and higher production volume as supply conditions improved. Domestic sales rose to $182.2 million from $142.3 million; foreign sales were $23.3 million versus $22.4 million.
- For the first nine months, domestic sales increased to $562.2 million from $450.9 million, while foreign sales declined to $60.4 million from $64.9 million.
- Costs of operations rose 22.6% year to date, faster than sales. Their share of sales increased to 90.9% from 89.5%, reflecting component costs, shortages, wage inflation, and delayed realization of price increases through the backlog. Q3 cost ratio improved to 88.7% from 89.2%.
- Year-to-date net income fell despite higher sales, with higher costs, SG&A, and interest expense. Net interest expense rose to $2.1 million from $0.9 million; management attributed the increase to facility borrowings and floor-plan interest.
- The stronger U.S. dollar contributed to a $5.6 million nine-month foreign-currency translation loss in other comprehensive income and a $1.1 million transaction loss in earnings.
Outlook, risks, and contingencies
Management cited a strong backlog, implemented price increases and surcharges, and process improvements as supporting better Q3 results. It announced an 8% price increase effective in Q1 2023, but provided no quantified earnings or revenue guidance. Management expected supply constraints and inflation to continue adversely affecting production and net income through the remainder of 2022 and into 2023, with outcomes dependent on supply conditions, the war in Ukraine, recession risks, and other economic factors.
On October 28, 2022, the company amended its revolving credit facility, increasing maximum availability from $50 million to $100 million, with a May 31, 2027 maturity. The amendment adopted one-month Term SOFR as the primary rate index and added an asset-coverage covenant. Management stated that available cash, operating cash flows, and borrowing capacity were expected to meet needs for at least the next year, subject to business and economic conditions.
Potential repurchase obligations under distributor financing arrangements had a maximum collateral amount of $72.9 million, up from $47.9 million at year-end. The company recorded no liability, concluding a loss was not probable and that the value of repossessed products mitigated exposure. The company also reported ordinary-course litigation; management did not expect resulting liabilities beyond accruals and insurance to materially affect results. A major ERP implementation continues; management said identified adjustments were not expected to have a material adverse effect.
Key risks include inflation and rising rates, possible recession and tighter credit, supply-chain and component availability, labor retention, raw-material costs, currency movements, customer financing access, and geopolitical or pandemic-related disruption. The board declared a $0.18-per-share dividend payable December 12, 2022.
Important facts for investors to verify
- Whether pricing actions and surcharges keep pace with component, labor, and other cost inflation, and whether the backlog converts into completed shipments.
- How working-capital needs, inventory levels, receivable collections, and capital spending affect operating cash flow and borrowing requirements.
- Terms and compliance with the amended $100 million facility, including its new asset-coverage covenant, and the effect of variable rates on interest costs.
- Exposure to currency losses, customer concentration (one customer represented about 12% of Q3 sales and 11% of nine-month sales), and distributor-financing repurchase commitments.
- Progress on supply availability, production capacity, ERP implementation, and the announced 2023 price increase.