Miller Industries, Inc. — Q1 2020 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2020. Miller Industries manufactures towing and recovery equipment, with operations in the U.S., France and the U.K. Substantially all revenue comes from towing equipment sales. Financial amounts below are in millions of dollars unless noted.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Net sales | $176.1 | $197.2; down 10.7% |
| Gross profit / gross margin | $18.5 / 10.5% | $22.6 / 11.5% |
| Operating income / operating margin | $7.6 / 4.3% | $12.4 / 6.3% |
| Net income | $5.4 | $8.7; down 37.3% |
| Basic earnings per share | $0.48 | $0.76 |
| Cash from operating activities | $(1.9) | $(17.9) |
| Capital expenditures | $3.5 | $3.2 |
| Cash and temporary investments at quarter-end | $43.1 | $26.1 at Dec. 31, 2019 |
| Credit-facility borrowings at quarter-end | $30.0 | $5.0 at Dec. 31, 2019 |
Costs of operations were 89.5% of sales, versus 88.5% a year earlier; SG&A was 6.2% of sales, versus 5.2%. The company reported $25.0 million of net credit-facility proceeds, contributing to a $17.0 million increase in cash. The $50 million unsecured revolving facility matures May 31, 2022; approximately $20 million remained undrawn at quarter-end. Management reported covenant compliance. Current assets were $312.4 million and current liabilities $121.8 million. Total liabilities were $156.5 million, including $30.0 million of credit-facility obligations and $0.3 million of French subsidiary borrowings due within one year. The declared dividend was $0.18 per share, equal to Q1 2019; the board declared another $0.18 dividend on May 4, payable June 15, 2020.
Material changes versus the prior comparable period
- Sales declined in both North America ($143.9 million versus $163.9 million) and foreign markets ($32.2 million versus $33.3 million).
- Management attributed lower sales mainly to COVID-19-related modified production schedules, short shutdowns, canceled trade shows and supply-chain issues; Q1 2019 had benefited from recovery of prior-quarter supply disruptions.
- Lower fixed-cost absorption and workforce-schedule changes contributed to weaker gross margin. SG&A increased, primarily from software licensing and employee-benefit insurance costs.
- Operating cash use improved from $17.9 million to $1.9 million, though the company cited higher finished-goods inventory and delayed shipments. Cash used in investing activities was $3.5 million, versus $3.2 million.
Outlook, risks, contingencies and unusual items
- No numerical earnings or revenue guidance was provided. Management said it expected available cash, operating cash flows and credit-facility capacity to meet needs through the remainder of 2020 and for the next several years, subject to business conditions.
- COVID-19 had a limited impact on Q1 results, but management warned of potentially greater effects in subsequent quarters. Safety measures reduced plant productivity; chassis deliveries were materially curtailed after supplier shutdowns. The duration and financial impact were not predictable.
- The company reported some pandemic-related order cancellations but said its backlog remained healthy. It was considering delaying nonessential capital spending and other scalable cost reductions, and had not applied for or taken CARES Act loans or grants. Cash at April 30 was substantially unchanged from March 31.
- Quarter-end commitments included approximately $3.1 million for property and equipment and $7.9 million in ERP software license fees payable through 2025. The ERP migration is planned in three phases over three years.
- Potential product repurchase obligations tied to distributor financing had a maximum collateral amount of approximately $76.8 million; management said risk was mitigated by the value of the products and the related liability was not probable or material. Management also said ordinary-course litigation, beyond accruals and insurance, was not expected to materially affect results or financial position.
- Foreign-currency transaction losses were $0.1 million; currency translation reduced other comprehensive income by $0.1 million. Management stated a 1% change in variable debt interest rates would not have had a material effect on Q1 results or cash flows.
Important facts for investors to verify
- Whether chassis supply, plant productivity and customer orders recover, and how COVID-19 affects Q2 and later sales, margins and cash generation.
- Whether the $30.0 million credit-facility balance, liquidity needs and covenant headroom remain manageable if operating conditions weaken.
- Inventory growth, shipment timing and the conversion of backlog into revenue and operating cash flow.
- Timing and funding of planned capital spending and ERP commitments, and any changes to the dividend.
- Developments in distributor repurchase exposures, litigation and other contingencies; the filing does not quantify a likely loss for these items.