Miller Industries, Inc. — 2018 Q3 Form 10-Q
Business context and period. Miller Industries manufactures towing and recovery equipment and sells primarily through independent distributors. This filing covers the three and nine months ended September 30, 2018; financial statement amounts below are in millions of dollars unless noted. Results are unaudited.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $195.7 | $153.4 | $531.7 | $455.4 |
| Gross profit | $21.5 | $15.7 | $61.2 | $48.6 |
| Gross margin | 11.0% | 10.2% | 11.5% | 10.7% |
| Net income | $8.7 | $4.5 | $22.9 | $13.7 |
| Diluted EPS | $0.76 | $0.39 | $2.01 | $1.21 |
| Cash from operations | Not separately presented | Not separately presented | $15.4 | $8.6 |
- Q3 sales increased 27.6%; nine-month sales increased 16.8%. Q3 domestic sales rose to $156.5 million from $135.1 million, and foreign sales rose to $39.2 million from $18.2 million. For the nine-month period, domestic sales were $430.5 million versus $403.2 million and foreign sales were $101.2 million versus $52.2 million.
- Costs of operations declined as a share of sales: 89.0% versus 89.8% for Q3, and 88.5% versus 89.3% for the nine-month period. SG&A also declined as a percentage of sales: 4.8% versus 5.6% for Q3 and 5.4% versus 5.9% year to date.
- At September 30, cash and temporary investments were $18.7 million. Total current assets were $262.1 million and current liabilities $127.6 million. Debt included $10.0 million outstanding on the revolver and $0.9 million on a French subsidiary loan. The $50 million credit facility had $40 million of unused availability and matures May 31, 2020.
- Nine-month investing cash outflow was $12.5 million, mainly capital spending; purchases of property, plant and equipment were $12.7 million. Financing cash outflow was $5.8 million, principally $6.1 million of dividends. Cash declined $3.2 million from year-end 2017.
Material changes and notable items
- Management attributed higher sales to strong domestic and international demand and positive consumer sentiment; recently completed domestic facility projects supported production capacity. The company reported improved cost ratios from product mix, efficiency efforts, and cost monitoring.
- The effective tax rate fell to 24.1% from 33.6% in Q3 and to 26.6% from 35.8% for the nine months, primarily reflecting the Tax Cuts and Jobs Act rate reduction. The company reduced its repatriation-tax expense by $0.7 million in Q3 and reported no remaining repatriation-tax liability at September 30.
- Adoption of the new revenue standard changed the timing of revenue recognition for painting activities until completion and shipment. It increased reported Q3 sales by $1.9 million and net income by $0.2 million; nine-month sales by $1.0 million and net income by $0.1 million. Prior-year comparisons were not restated.
- The board declared a $0.18-per-share quarterly dividend on November 5, 2018, payable December 10 to holders of record December 3.
Outlook, risks and contingencies
- No specific earnings or sales guidance is provided. Management expects cash, operating cash flow, and available credit to meet needs for the remainder of 2018 and the next several years, subject to operating performance and other factors.
- Management cited industry cyclicality, customer access to financing, economic conditions, supplier dependence, and higher raw-material costs as risks. It specifically noted tariffs on European and Canadian steel and aluminum; price increases have been implemented, but their ability to offset costs is uncertain and takes time.
- The company reported compliance with credit-facility covenants and expected continued compliance through the remainder of 2018. The revolver bears interest at LIBOR plus 1.50%; the September 30 rate was 3.76%.
- Potential distributor-lender repurchase obligations had a maximum amount of approximately $54.6 million, mitigated by the value of the products; management said the related liability was not material or probable. Ordinary-course litigation is disclosed; management does not expect any excess liability beyond accruals and insurance to materially affect results or financial position.
Important facts for investors to verify
- Whether strong demand, particularly international sales growth, persists and whether production capacity can continue to meet it.
- Whether pricing and component alternatives sufficiently offset steel, aluminum, and other input-cost and tariff pressures.
- Working-capital trends: receivables and inventory increased from year-end, contributing to operating cash-flow demands despite higher net income.
- Credit-facility availability, covenant compliance, and the effect of variable interest rates; the facility matures in May 2020.
- The impact of revenue-recognition timing changes and the development of extended-service-contract liabilities.
- Potential exposure from repurchase commitments, litigation, product liability, and other disclosed contingencies.