Miller Industries, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Miller Industries manufactures vehicle towing and recovery equipment, selling through domestic and international distributors. Financial amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $153.1 | $156.1 | $302.0 | $304.9 |
| Gross profit | $17.6 | $19.0 | $33.0 | $32.0 |
| Gross margin | 11.5% | 12.2% | 10.9% | 10.5% |
| Net income | $5.4 | $6.6 | $9.3 | $9.9 |
| Diluted EPS | $0.48 | $0.58 | $0.81 | $0.88 |
- Q2 sales declined 1.9%; first-half sales declined 1.0%. First-half North American sales fell to $268.0 million from $273.3 million, while foreign sales rose to $34.0 million from $31.6 million.
- Q2 gross margin decreased as costs of operations rose to 88.5% of sales from 87.8%, primarily due to product mix. First-half gross margin improved, with costs of operations falling to 89.1% of sales from 89.5%, attributed to mix and cost monitoring.
- SG&A increased to $9.1 million in Q2 and $18.1 million for the first half, mainly due to higher personnel and employee-benefit costs. Net interest expense also increased, reflecting distributor floor-plan and chassis costs and higher credit-facility borrowings.
- Six-month operating cash flow was $1.4 million, versus cash use of $12.6 million a year earlier. Investing cash use was $13.0 million, largely for capital expenditures of $14.3 million. Financing provided $11.1 million, including $15.0 million of net credit-facility borrowings and $4.1 million of dividends paid.
- Cash and temporary investments were $32.0 million at June 30, 2017. The company had $20.0 million drawn on its $50.0 million revolving facility, leaving $30.0 million available. Current assets were $238.6 million and current liabilities $107.6 million; the resulting current ratio was approximately 2.2. Total shareholders’ equity was $191.8 million.
Changes, outlook, and notable items
- Borrowings increased from $5.0 million at December 31, 2016 to $20.0 million at June 30, 2017, primarily funding manufacturing-capacity and facility projects. The credit facility was renewed through May 31, 2019; management reported covenant compliance and expected continued compliance during the rest of 2017.
- Capital projects include the Pennsylvania manufacturing consolidation and expansion, estimated at $24.7 million, with about $23.5 million incurred by quarter-end; Tennessee projects estimated at $21.1 million, with about $17.0 million incurred; and a new Ooltewah administrative building estimated at $4.2 million. Remaining spending was expected in 2017, except the administrative building, expected by March 2018. Project timing and costs may change.
- The Pennsylvania property sale generated a $0.6 million gain, partly offset by foreign-currency transaction losses. Foreign-currency translation reduced other comprehensive income by $1.7 million in the first half.
- Management cited solid demand and positive consumer sentiment but noted the industry’s cyclical nature and exposure to economic conditions, customer financing, raw-material costs, fuel and transportation costs, regulation, foreign exchange, and other operational risks. It expected cash on hand, operating cash flow, and facility availability to meet cash needs during 2017 and the next several years, subject to business and economic conditions.
- The board declared a $0.18-per-share quarterly dividend payable September 18, 2017. Potential customer-default repurchase obligations had a maximum stated amount of $53.1 million, but management said the related liability was not material or probable, considering the value of the products. Litigation was described as arising in the ordinary course; management did not expect excess exposure beyond accruals and insurance to materially affect results.
- No material changes to the 2016 Form 10-K risk factors were reported. The company was evaluating the effects of forthcoming revenue-recognition and lease-accounting standards.
Important facts for investors to verify
- Whether sales, product mix, and gross margins improve or weaken in subsequent quarters, particularly in North America.
- Progress, final costs, and operational benefits of the Pennsylvania and Tennessee capital projects, and the remaining committed spending.
- Working-capital movements and operating cash generation relative to capital expenditures, dividends, and increased borrowing.
- Use of the revolving facility, covenant headroom, and exposure to variable interest rates and foreign-currency movements.
- Potential changes in customer repurchase exposures, unrecognized tax benefits, litigation, or product-related claims.