Miller Industries, Inc. — Q3 2015 Form 10-Q
Business and period: Miller Industries manufactures towing and recovery equipment. This unaudited quarterly report covers the three and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods unless noted. Dollar amounts below are in millions, except per-share data.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $126.2 | $118.4 | $404.5 | $345.0 |
| Gross profit | $12.8 | $13.0 | $42.3 | $36.4 |
| Income before taxes | $5.1 | $5.5 | $18.8 | $14.5 |
| Net income attributable to Miller Industries | $3.2 | $3.5 | $12.1 | $9.2 |
| Diluted earnings per share | $0.28 | $0.31 | $1.07 | $0.82 |
- Sales rose 6.6% in Q3 and 17.3% for the first nine months, primarily on stronger domestic demand and higher production. Foreign sales declined for the nine-month period, from $59.4 million to $56.1 million.
- Gross margin was approximately 10.1% in Q3 versus 11.0% a year earlier, and 10.5% for nine months versus 10.6%. Costs of operations grew slightly faster than sales in both comparisons. SG&A as a share of sales improved to 6.0% from 6.1% in Q3 and to 5.6% from 6.2% for nine months.
- Q3 net income fell despite higher sales; nine-month net income increased. Interest expense rose to $0.7 million for nine months from $0.4 million, primarily due to interest on distributor floor-plan financing and chassis purchases. Nine-month other expense included a $0.2 million foreign-currency transaction loss.
- Nine-month operating cash flow was $13.8 million, versus $2.4 million in 2014. Investing cash outflow was $5.9 million, including capital expenditures of $5.9 million; financing cash outflow was $5.1 million, mainly dividends. Cash increased by $1.4 million to $41.0 million.
Financial position and liquidity
- At September 30, 2015, current assets were $227.4 million and current liabilities $98.9 million; the current ratio was approximately 2.3. Cash was $41.0 million, and inventory was $64.5 million, up from $56.5 million at year-end 2014.
- The company had no borrowings under its unsecured revolving credit facility. In June 2015, the facility was increased from $25 million to $30 million and extended to March 31, 2018. Borrowings carry a variable rate; the stated rate was 1.69% at quarter-end. Non-cancelable operating lease obligations were approximately $1.7 million.
- Cash dividends declared per share were $0.16 in Q3 2015, versus $0.15 in Q3 2014. The board declared another $0.16 quarterly dividend on November 2, 2015, payable December 14, 2015.
Changes, outlook, and risks
- Management attributed growth to recovering economic conditions, improving consumer sentiment, and increased domestic demand. It also noted the cyclical nature of the industry and continued sensitivity to customer financing availability, raw-material prices, and other operating costs.
- Management expected cash on hand, operating cash flow, and available credit to meet cash needs during 2015 and for the next several years, subject to operating performance and broader economic and business factors. No specific earnings or sales guidance was provided.
- The Pennsylvania manufacturing consolidation and expansion is estimated to cost $22.7 million; $4.7 million had been incurred by September 30, and approximately $14.4 million of property and equipment commitments remained. Further spending was expected in late 2015 and 2016. The company also planned approximately $10 million of capital projects at its Tennessee facility over the following year. Project timing and costs may change.
- Customer-default repurchase arrangements had a maximum potential repurchase amount of approximately $40.0 million, mitigated by the value of the products; management said the related liability was not material and not probable. The company reported ordinary-course litigation and believed excess exposure beyond accruals and insurance would not materially affect results or financial position.
- Foreign-currency translation reduced accumulated other comprehensive income by $2.3 million in the first nine months. Nearly $19.9 million of cash was held by foreign subsidiaries and may be subject to U.S. tax upon repatriation. The company reported no material change to its prior annual-report risk factors and no outstanding currency contracts at quarter-end.
Important facts for investors to verify
- Whether rising sales translate into improved gross margins, given Q3 margin compression.
- Cash conversion and working-capital trends, particularly inventory growth and the effects of extended customer collection and supplier payment terms.
- Capital-project spending, commitments, execution, and the impact of the Pennsylvania consolidation on capacity and efficiency.
- Exposure to customer floor-plan financing, chassis-related interest costs, foreign-exchange movements, and potential repurchase obligations.
- Credit-facility covenant compliance and the sustainability of dividends alongside planned capital expenditures.