Miller Industries, Inc. — Q3 2016 Form 10-Q
Business and period: Miller Industries manufactures towing and vehicle recovery equipment. This unaudited report covers the quarter and nine months ended September 30, 2016; comparisons are with the same 2015 periods. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $147.6 | $126.2 | $452.5 | $404.5 |
| Gross profit | $17.1 | $12.8 | $49.1 | $42.3 |
| Gross margin | 11.6% | 10.1% | 10.9% | 10.5% |
| Net income | $5.5 | $3.2 | $15.5 | $12.1 |
| Diluted EPS | $0.49 | $0.28 | $1.36 | $1.07 |
| Dividends declared per share | $0.17 | $0.16 | $0.51 | $0.48 |
Quarterly sales increased 17.0%; nine-month sales rose 11.9%. Management attributed growth primarily to strong domestic demand, positive consumer sentiment, and higher production. North American sales increased to $132.6 million in Q3 and $405.9 million year to date, while foreign sales declined to $15.0 million and $46.6 million, respectively.
Costs of operations fell as a share of sales, supporting improved gross margins; management cited product mix. SG&A increased in dollars with staffing, but declined as a percentage of sales. Interest expense rose to $0.4 million for Q3 and $0.8 million year to date. Effective tax rates were 35.0% for Q3 and 35.4% for the nine months.
Cash flow, liquidity and debt
- Operating cash flow was negative $0.6 million for the first nine months, versus positive $13.8 million in 2015. Higher accounts receivable, principally associated with sales growth, was the main factor noted by management.
- Investing cash outflow was $19.8 million, including $19.2 million of property, plant and equipment purchases. Financing provided $14.2 million, including $20.0 million of net credit-facility borrowings and $5.8 million of dividends paid.
- Cash was $32.8 million at September 30, down from $38.4 million at year-end 2015. The company reported $30.0 million of unused capacity on its $50.0 million unsecured revolving facility. Borrowings were $20.0 million, compared with none at year-end; the facility matures March 31, 2018 and bears variable interest at LIBOR plus 1.50%.
- Total assets were $297.4 million; shareholders’ equity was $183.8 million. Current assets of $230.0 million exceeded current liabilities of $91.1 million. Property, plant and equipment, net, increased to $55.2 million from $39.5 million at year-end.
Material changes, outlook and risks
- Capital spending is substantial: the Pennsylvania consolidation and expansion project is estimated at $24.7 million, with $20.6 million incurred by quarter-end. Other Tennessee facility projects are estimated at $20.7 million, with $4.6 million incurred; a planned Ooltewah administrative building is estimated at $4.0 million. The filing identifies $14.6 million of commitments for construction and equipment as of September 30. Costs and timing may change.
- Management expects cash, operating cash flow and available credit to meet cash needs during 2016 and for the next several years, subject to operating performance and economic conditions. The filing provides no specific revenue or earnings guidance.
- Management describes the industry as cyclical and highlights risks from economic and consumer conditions, customer access to credit and floor-plan financing, raw-material and transport costs, suppliers, competition, foreign exchange, regulation, skilled labor, and manufacturing disruption.
- Foreign currency transaction gains were $0.2 million in Q3 and $0.5 million year to date, versus gains of $0.1 million and a loss of $0.2 million in the prior-year periods. Q3 foreign-currency translation reduced comprehensive income by $0.8 million; management cited U.S. dollar strength against certain currencies, including the British pound after the Brexit vote.
- Potential customer-default repurchase obligations had a maximum stated amount of approximately $47.0 million; the company said collateral value mitigates exposure and the related liability was neither material nor probable. Litigation arises in the ordinary course; management did not expect any uncovered liability to materially affect financial position or results.
Investor facts to verify
- Whether receivables convert to cash as expected, given the sharp increase in accounts receivable and negative operating cash flow.
- Actual spending, project completion timing, and expected operating benefits from the Pennsylvania and Tennessee capital projects.
- Credit-facility covenant headroom, variable-rate exposure, and the company’s ability to sustain dividends alongside investment spending.
- Whether domestic demand remains strong and whether declining foreign sales, currency movements, or raw-material costs affect future margins.